Accounting Principles Second Canadian Edition Weygandt · Kieso · Kimmel · Trenholm Prepared by: Carole Bowman, Sheridan College CHAPTER THE RECORDING PROCESS THE ACCOUNT An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on DEBITS AND CREDITS The terms debit and credit mean left and right, respectively The act of entering an amount on the left side of an account is called debiting the account and making an entry on the right side is crediting the account When the debit amounts exceed the credits, an account has a debit balance; when the reverse is true, the account has a credit balance DR CR ILLUSTRATION 2-1 BASIC FORM OF ACCOUNT In its simplest form, an account consists of the title of the account, a left or debit side, and a right or credit side The alignment of these parts resembles the letter T, and therefore the account form is called a T account Title of Account Left or debit side Right or credit side Debit balance Credit balance ILLUSTRATION 2-2 TABULAR SUMMARY COMPARED TO ACCOUNT FORM Tabular Summary Account Form Cash $15,000 - 7,000 1,200 1,500 - 600 - 900 - 200 - 250 600 - 1,300 Cash $8,050 Debit 15,000 1,200 1,500 600 8,050 Balance Credit 7,000 600 900 200 250 1,300 DEBITING AN ACCOUNT Cash 15,000 Example: Example: The The owner owner makes makes an an initial initial investment investment of of $15,000 $15,000 to tostart start the the business business Cash Cash isisdebited debited and andthe the owner’s owner’s Capital Capital account account isis credited credited CREDITING AN ACCOUNT Cash 7,000 Example: Example: Monthly Monthly rent rentof of $7,000 $7,000 isis paid paid Cash Cash isis credited credited and and Rent Rent Expense Expense isis debited debited DEBITING AND CREDITING AN ACCOUNT Cash 15,000 8,000 7,000 Example: Example: Cash Cash isisdebited debitedfor for $15,000 $15,000 and andcredited credited for for $7,000, $7,000, leaving leaving aa debit debit balance balance of of $8,000 $8,000 DOUBLE-ENTRY SYSTEM In a double-entry system, equal debits and credits are made in the accounts for each transaction Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance Assets Liabilities Equity ILLUSTRATION 2-10 TECHNIQUE OF JOURNALIZING The Theamounts amountsfor forthe thedebits debitsare arerecorded recordedin inthe theDebit Debitcolumn columnand and the theamounts amountsfor forthe thecredits creditsare arerecorded recordedin inthe theCredit Creditcolumn column J1 GENERAL JOURNAL Date 2002 Sept 1 Account Titles and Explanation Cash M Doucet, Capital Invested cash in business Equipment Cash Purchased equipment for cash Ref Debit Credit 15,000 15,000 7,000 7,000 ILLUSTRATION 2-10 TECHNIQUE OF JOURNALIZING A A brief brief explanation explanation of of the the transaction transaction isis given given J1 GENERAL JOURNAL Date 2002 Sept 1 Account Titles and Explanation Cash M Doucet, Capital Invested cash in business Equipment Cash Purchased equipment for cash Ref Debit Credit 15,000 15,000 7,000 7,000 ILLUSTRATION 2-10 TECHNIQUE OF JOURNALIZING A A space space isisleft left between between journal journal entries entries The The blank blank space space separates separates individual individual journal journal entries entries and and makes makesthe the journal journal easier easier to to read read J1 GENERAL JOURNAL Date 2002 Sept 1 Account Titles and Explanation Cash M Doucet, Capital Invested cash in business Equipment Cash Purchased equipment for cash Ref Debit Credit 15,000 15,000 7,000 7,000 ILLUSTRATION 2-10 TECHNIQUE OF JOURNALIZING The The column column entitled entitledRef Ref.isisleft leftblank blank at atthe the time time the the journal journal entry entry isismade made and andisis used usedlater later when whenthe the journal journal entries entries are are transferred transferredto tothe the ledger ledger accounts accounts J1 GENERAL JOURNAL Date 2002 Sept 1 Account Titles and Explanation Cash M Doucet, Capital Invested cash in business Equipment Cash Purchased equipment for cash Ref Debit Credit 15,000 15,000 7,000 7,000 SIMPLE AND COMPOUND JOURNAL ENTRIES If If an an entry entry involves involvesonly only two twoaccounts, accounts, one one debit debitand and one one credit, credit, ititisisconsidered considered aa simple simple entry entry J1 GENERAL JOURNAL Date 2002 Oct Account Titles and Explanation Delivery Equipment Cash Purchased truck for cash Ref Debit Credit 14,000 14,000 ILLUSTRATION 2-11 COMPOUND JOURNAL ENTRY When When three three or or more more accounts accounts are are required required in in one one journal journal entry, entry, the the entry entry isis referred referred to toas as aa compound compound entry entry J1 GENERAL JOURNAL Date 2002 Oct 2 Account Titles and Explanation Delivery Equipment Cash Note Payable Purchased truck for cash and note payable Ref Debit Credit 34,000 8,000 26,000 COMPOUND JOURNAL ENTRY This Thisisis the the wrong wrong format; format; all all debits debitsmust must be be listed listed before before the the credits credits are are listed listed J1 GENERAL JOURNAL Date 2002 Oct Account Titles and Explanation Cash Delivery Equipment Note Payable Purchased truck for cash and note payable Ref Debit Credit 8,000 34,000 26,000 THE LEDGER The entire group of accounts maintained by a company is referred to collectively as the ledger A general ledger contains all the assets, liabilities, and owner’s equity accounts GENERAL LEDGER ILLUSTRATION 2-12 THE GENERAL LEDGER Individual Assets Equipment Supplies Accounts Rec Cash Individual Liabilities Interest Payable Salaries Payable Accounts Payable Notes Payable Individual Owner’s Equity Salaries Expense Service Revenue Doucet, Drawings Doucet, Capital ILLUSTRATION 2-14 POSTING A JOURNAL ENTRY General Journal Account Title and Explanation Date 2002 01-Sep Cash M Doucet, Capital Invested cash in business Date 2002 01-Sep Ref 101 301 General Ledger Cash Account Title and Explanation Ref J1 Debit J1 Credit 15,000 Debit 15,000 15,000 Credit 101 Balance 15,000 In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal and the account number to which the journal was posted ILLUSTRATION 2-14 POSTING A JOURNAL ENTRY General Journal Account Title and Explanation Date 2002 01-Sep Cash M Doucet, Capital Invested cash in business General Ledger M Doucet, Capital Date Account Title and Explanation Ref 2002 1-Sep J1 Ref 101 301 Debit Debit J1 Credit 15,000 15,000 Credit 15,000 301 Balance 15,000 In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in the journal and the account number to which the journal was posted THE TRIAL BALANCE A trial balance is a list of accounts and their balances at a given time The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after posting A trial balance also uncovers errors in journalizing and posting The procedures for preparing a trial balance consist of listing the account titles and their balances, totaling the debit and credit columns, and proving the equality of the two columns ILLUSTRATION 2-28 A TRIAL BALANCE PIONEER ADVERTISING AGENCY Trial Balance October 31, 2002 Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue C R Byrd, Capital C R Byrd, Drawings Service Revenue Salaries Expense Rent Expense The total debits must equal the total credits Debit $ 15,200 2,500 600 5,000 Credit $ 5,000 2,500 1,200 10,000 500 10,000 4,000 900 $ 28,700 $ 28,700 LIMITATIONS OF A TRIAL BALANCE A trial balance does not prove that all transactions have been recorded or that the ledger is correct Numerous errors may exist even though the trial balance columns agree 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, offsetting errors are made in recording the amount of the transaction COPYRIGHT Copyright © 2002 John Wiley & Sons Canada, Ltd All rights reserved Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd The purchaser may make back-up copies for his / her own use only and not for distribution or resale The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein .. .CHAPTER THE RECORDING PROCESS THE ACCOUNT An account is an individual accounting record of increases and decreases in a specific... accounts for each transaction Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance Assets Liabilities Equity NORMAL BALANCE Every... transaction isis entered entered in in the the date date column column J1 GENERAL JOURNAL Date 2 002 Sept 1 Account Titles and Explanation Cash M Doucet, Capital Invested cash in business Equipment