Chapter

2-1

Chapter

The Recording
Process
Chapter
2-2

Accounting Principles, Ninth Edition

Study
Study Objectives
Objectives
1.

Explain what an account is and how it helps in the

recording process.

2.

Define debits and credits and explain their use in

recording business transactions.

3.

Identify the basic steps in the recording process.

4.

Explain what a journal is and how it helps in the recording

process.

5.

Explain what a ledger is and how it helps in the recording

process.

6.

Explain what posting is and how it helps in the recording

process.

7.

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.

SO 1 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

SO 2 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

SO 2 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

SO 2 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

Owners 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

SO 2

Debits
Debits and
and Credits
Credits Summary
Summary
Balance Sheet

Income Statement

Asset = Liability + Equity

Revenue - Expense

Debit

Credit

Chapter
2-10

SO 2 Define debits and credits and explain their

use in recording business transactions.

Debits
Debits and
and Credits
Credits Summary
Summary

Review Question
Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.

Chapter
2-11

SO 2 Define debits and credits and explain their

use in recording business transactions.

Debits
Debits and
and Credits
Credits Summary
Summary

Discussion Question
Q2-4: Maria Alvarez, a beginning accounting
student, believes debit balances are favorable
and credit balances are unfavorable. Is Maria
correct? Discuss.

See notes page for discussion

Chapter
2-12

SO 2 Define debits and credits and explain their

use in recording business transactions.

Assets
Assets and
and Liabilities
Liabilities
Assets
Debit / Dr.

Credit / Cr.

Normal Balance

Liabilities Credits
should exceed debits.

Chapter
3-23

Liabilities
Debit / Dr.

Assets - Debits should

exceed credits.

Credit / Cr.

The normal balance is on

the increase side.

Normal Balance

Chapter
3-24

Chapter
2-13

SO 2 Define debits and credits and explain their

use in recording business transactions.

Owners
Owners Equity
Equity
Owners investments and
revenues increase owners
equity (credit).

Owners Equity
Debit / Dr.

Credit / Cr.

Owners drawings and expenses

decrease owners equity (debit).

Normal Balance

Chapter
3-25

Owners Capital
Debit / Dr.

Chapter
3-25

Chapter
2-14

Owners Drawing

Credit / Cr.

Debit / Dr.

Normal Balance

Normal Balance

Credit / Cr.

Chapter
3-23

SO 2 Define debits and credits and explain their

use in recording business transactions.

Revenue
Revenue and
and Expense
Expense
Revenue
Debit / Dr.

Credit / Cr.

Normal Balance

Chapter
3-26

Expense
Debit / Dr.

Normal Balance

Chapter
3-27

Chapter
2-15

Credit / Cr.

The purpose of earning

revenues is to benefit the
owner(s).
The effect of debits and
credits on revenue accounts
is the same as their effect
on Owners Capital.
Expenses have the opposite
effect: expenses decrease
owners equity.
SO 2 Define debits and credits and explain their
use in recording business transactions.

Debits
Debits and
and Credits
Credits Summary
Summary

Review Question
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and owners capital.
c. assets, liabilities, and owners drawings.
d. assets, owners drawings, and expenses.

Chapter
2-16

SO 2 Define debits and credits and explain their

use in recording business transactions.

Expansion
Expansion of
of the
the Basic
Basic Equation
Equation
Relationship among the assets, liabilities and
owners equity of a business:
Basic
Equation

Illustration 2-11

Assets = Liabilities +

Owners Equity

Expanded
Basic
Equation

The equation must be in balance after every

transaction. For every Debit there must be a Credit.
Chapter
2-17

SO 2 Define debits and credits and explain their

use in recording business transactions.

Steps
Steps in
in the
the Recording
Recording Process
Process
Illustration 2-12

Analyze each transaction

Enter transaction in a journal

Transfer journal information

to ledger accounts

Business documents, such as a sales slip, a check, a

bill, or a cash register tape, provide evidence of the
transaction.
Chapter
2-18

SO 3 Identify the basic steps in the recording process.

The
The Journal
Journal
Book of original entry.
Transactions recorded in chronological order.
Contributions to the recording process:
1. Discloses the complete effects of a transaction.
2. Provides a chronological record of transactions.
3. Helps to prevent or locate errors because the

debit and credit amounts can be easily compared.

Chapter
2-19

SO 4 Explain what a journal is and how it helps in the recording process.

Journalizing
Journalizing
Journalizing - Entering transaction data in the journal.
Illustration: On September 1, Ray Neal invested $15,000
cash in the business, and Softbyte purchased computer
equipment for $7,000 cash.
Illustration 2-13

General Journal
Sept. 1

Cash

15,000

R. Neal, Capital
Computer equipment
Cash
Chapter
2-20

15,000
7,000
7,000

SO 4 Explain what a journal is and how it helps in the recording process.

Journalizing
Journalizing
Simple and Compound Entries
Illustration: Assume that on July 1, Butler Company
purchases a delivery truck costing $14,000. It pays $8,000
cash now and agrees to pay the remaining $6,000 on account.
Illustration 2-14

General Journal
Sept. 1

Chapter
2-21

Delivery equipment

14,000

Cash

8,000

Accounts payable

6,000

SO 4 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,
owners equity, revenue and expense accounts.
Illustration 2-15

Chapter
2-22

SO 5 Explain what a ledger is and how it helps in the recording process.

Chapter
2-23

SO 5 Explain what a ledger 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.

Illustration 2-16

Chapter
2-24

SO 5 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.

Illustration 2-17

Chapter
2-25

SO 6 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
2-26

SO 6 Explain what posting 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.
Illustration 2-18

Chapter
2-27

SO 6 Explain what posting is and how it helps in the recording process.

The
The Recording
Recording Process
Process Illustrated
Illustrated
Follow these steps:
1. Determine what
type of account
is involved.

Illustration 2-19

2. Determine what
items increased
or decreased
and by how
much.
3. Translate the
increases and
decreases into
debits and
credits.
Chapter
2-28

LO 6 Explain what posting is and how it helps in the recording process.

The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-20

Chapter
2-29

LO 6 Explain what posting is and how it helps in the recording process.

The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-21

Chapter
2-30

The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-22

Chapter
2-31

The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-23

Chapter
2-32

The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-24

Chapter
2-33

The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-25

Chapter
2-34

The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-26

Chapter
2-35

The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-27

Chapter
2-36

The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-28

Chapter
2-37

The
The Trial
Trial Balance
Balance
Illustration 2-31

A list of accounts
and their
balances at a
given time.
Purpose is to
prove that debits
equal credits.

Chapter
2-38

LO 7 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
1.

a transaction is not journalized,

2. a correct journal entry is not posted,

3. a journal entry is posted twice,
4. incorrect accounts are used in journalizing or

posting, or

5. offsetting errors are made in recording the amount

of a transaction.

Chapter
2-39

LO 7 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

Owners Drawing for $1,000 and credited to Cash

for $100.

d. a $450 payment on account is debited to Accounts

Payable for $45 and credited to Cash for $45.

Chapter
2-40

LO 7 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.
See notes page for discussion
Chapter
2-41

LO 7 Prepare a trial balance and explain its purposes.

Chapter
2-42

LO 7 Prepare a trial balance and explain its purposes.

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Chapter
2-43