Chapter 2-1 CHAPTER THE RECORDING PROCESS Accounting Principles, Eighth Edition Chapter 2-2 Study Study Objectives Objectives Explain what an account is and how it helps in the recording process Define debits and credits and explain their use in recording business transactions Identify the basic steps in the recording process Explain what a journal is and how it helps in the recording process Explain what a ledger is and how it helps in the recording process Explain what posting is and how it helps in the recording process Prepare a trial balance and explain its purposes Chapter 2-3 The The Recording Recording Process Process The Account Debits and credits Expansion of basic equation Chapter 2-4 Steps in the Recording Process Journal Ledger The Recording Process Illustrated Summary illustration of journalizing and posting The Trial Balance Limitations of a trial balance Locating errors Use of dollar signs The The Account Account Account Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item Debit = “Left” Credit = “Right” An Account can be illustrated in a T-Account form Chapter 2-5 Account Name Debit / Dr Credit / Cr LO Explain what an account is and how it helps in the recording process Debits Debits and and Credits Credits Double-entry accounting system Each transaction must affect two or more accounts to keep the basic accounting equation in balance Recording done by debiting at least one account and crediting another DEBITS must equal CREDITS Chapter 2-6 LO Define debits and credits and explain their use in recording business transactions Debits Debits and and Credits Credits If Debits are greater than Credits, the account will have a debit balance Account Name Debit / Dr Transaction #1 $10,000 Transaction #3 8,000 Balance Chapter 2-7 Credit / Cr $3,000 Transaction #2 $15,000 LO Define debits and credits and explain their use in recording business transactions Debits Debits and and Credits Credits If Credits are greater than Debits, the account will have a credit balance Account Name Debit / Dr Transaction #1 Balance Chapter 2-8 $10,000 Credit / Cr $3,000 Transaction #2 8,000 Transaction #3 $1,000 LO Define debits and credits and explain their use in recording business transactions Debits Debits and and Credits Credits Summary Summary Normal Normal Balance Balance Debit Debit Debit / Dr Normal Normal Balance Balance Credit Credit Assets Credit / Cr Normal Balance Chapter 3-24 Owner’s Equity Credit / Cr Debit / Dr Liabilities Debit / Dr Credit / Cr Normal Balance Normal Balance Chapter 3-23 Expense Debit / Dr Revenue Chapter 3-25 Credit / Cr Debit / Dr Normal Balance Chapter 3-27 Chapter 2-9 Credit / Cr Normal Balance Chapter 3-26 LO Debits Debits and and Credits Credits Summary Summary Balance Sheet Income Statement Asset = Liability + Equity Revenue - Expense Debit Credit Chapter 2-10 LO Define debits and credits and explain their use in recording business transactions Journalizing Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency Oct Sells a house and lot for B Kidman; bills B Kidman $3,200 for realty services provided General Journal Chapter 2-23 LO Explain what a journal is and how it helps in the recording process Journalizing Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency Oct 27 Pays $700 on balance related to transaction of Oct General Journal Chapter 2-24 LO Explain what a journal is and how it helps in the recording process Journalizing Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency Oct 30 Pays the administrative assistant $2,500 salary for Oct General Journal Chapter 2-25 LO Explain what a journal is and how it helps in the recording process Journalizing Journalizing Simple Entry – Two accounts, one debit and one credit Compound Entry – Three or more accounts Example – On June 15, H Burns, purchased equipment for $15,000 by paying cash of $10,000 and the balance on account (to be paid within 30 days) General Journal Chapter 2-26 LO Explain what a journal is and how it helps in the recording process The The Ledger Ledger A General Ledger contains the entire group of accounts maintained by a company The General Ledger includes all the asset, liability, owner’s equity, revenue and expense accounts Chapter 2-27 LO Explain what a ledger is and how it helps in the recording process Chart Chart of of Accounts Accounts Accounts and account numbers arranged in sequence in which they are presented in the financial statements Hanshew Real Estate Agency Chart of Accounts Assets 101 112 126 130 150 158 Cash Accounts receivable Advertising supplies Prepaid insurance Office equipment Accumulated depreciation Owner's Equity 300 306 350 Revenues 400 Liabilities 200 201 209 212 230 Chapter 2-28 Accounts payable Notes payable Unearned revenue Salaries payable Interest payable Hanshew, Capital Hanshew, Drawing Income summary Service revenue Expenses 631 711 722 726 729 905 Advertising supplies expense Depreciation expense Insurance expense Salaries expense Rent expense Interest expense LO Explain what posting is and how it helps in the recording process Standard Standard Form Form of of Account Account T-account form used in accounting textbooks In practice, the account forms used in ledgers are much more structured Cash Date Oct Chapter 2-29 Explanation 27 30 Ref No 101 Debit Credit 15,000 700 2,500 Balance 15,000 14,300 11,800 LO Explain what a ledger is and how it helps in the recording process Posting Posting Posting – the process of transferring amounts from the journal to the ledger accounts General Journal Date Oct Account Title Cash J1 Ref Debit 101 15,000 Hanshew, Capital Credit 15,000 (Owner's investment in business) General Ledger Cash Date Oct Chapter 2-30 Explanation Ref J1 Debit 15,000 Acct No 101 Credit Balance 15,000 LO Explain what posting is and how it helps in the recording process Posting Posting Review Question Posting: a normally occurs before journalizing b transfers ledger transaction data to the journal c is an optional step in the recording process d transfers journal entries to ledger accounts Chapter 2-31 LO Explain what posting is and how it helps in the recording process The The Recording Recording Process Process Illustrated Illustrated Follow these steps: Illustration 2-19 Determine what type of account is involved Determine what items increased or decreased and by how much Translate the increases and decreases into debits and credits Chapter 2-32 LO Explain what posting is and how it helps in the recording process The The Trial Trial Balance Balance A list of accounts and their balances at a given time Purpose is to prove that debits equal credits Chapter 2-33 LO Prepare a trial balance and explain its purposes The The Trial Trial Balance Balance Limitations of a Trial Balance The trial balance may balance even when a transaction is not journalized, a correct journal entry is not posted, a journal entry is posted twice, incorrect accounts are used in journalizing or posting, or offsetting errors are made in recording the amount of a transaction Chapter 2-34 LO Prepare a trial balance and explain its purposes The The Trial Trial Balance Balance Review Question A trial balance will not balance if: a a correct journal entry is posted twice b the purchase of supplies on account is debited to Supplies and credited to Cash c a $100 cash drawing by the owner is debited to Owner’s Drawing for $1,000 and credited to Cash for $100 d a $450 payment on account is debited to Chapter 2-35 Accounts Payable for $45 and credited to Cash for $45 LO Prepare a trial balance and explain its purposes Recording Recording Process Process Discussion Question Q2-19 Jim Benes is confused about how accounting information flows through the accounting system He believes the flow of information is as follows a Debits and credits posted to the ledger b Business transaction occurs c Information entered in the journal d Financial statements are prepared e Trial balance is prepared Is Jim correct? If not, indicate to Jim the proper flow of the information Chapter 2-36 See notes page for discussion LO Prepare a trial balance and explain its purposes Copyright Copyright Copyright © 2008 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 2-37 .. .CHAPTER THE RECORDING PROCESS Accounting Principles, Eighth Edition Chapter 2-2 Study Study Objectives Objectives Explain what an... (debit) Normal Balance Chapter 3-25 Owner’s Capital Debit / Dr Chapter 3-25 Chapter 2-14 Owner’s Drawing Credit / Cr Debit / Dr Normal Balance Normal Balance Credit / Cr Chapter 3-23 LO Define... Debit / Dr Revenue Chapter 3-25 Credit / Cr Debit / Dr Normal Balance Chapter 3-27 Chapter 2-9 Credit / Cr Normal Balance Chapter 3-26 LO Debits Debits and and Credits Credits Summary Summary