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CHAPTER 2
THE RECORDING PROCESS
After studying this chapter, you should be able to:
1 Explain what an account is and how it helps
in the recording process.
2 Define debits and credits and explain how
they are used to record 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.
CHAPTER 2
THE RECORDING PROCESS
After studying this chapter, you should be able to:
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 purpose.
Trial Balance
PREVIEW OF CHAPTER 2
The Recording Process
Steps in the
Recording Process
The Account
Journal
Expansion of basic
equation
Ledger
PREVIEW OF CHAPTER 2
The Recording Process
The Recording
Process Illustrated
Summary illustration of
journalizing and posting
Limitations of a trial
balance
Locating errors
STUDY OBJECTIVE 1
Explain
Explain what
what an
an account
account isis and
and how
how itit
helps
helps in
in the
the recording
recording process.
process.
THE ACCOUNT
An account is an individual accounting
record of increases and decreases in a
specific asset, liability, or owners
equity item.
A company will have separate accounts
for such items as cash, salaries
expense, accounts payable, and so on.
STUDY OBJECTIVE 2
Define
Define debits
debits and
and credits
credits and
and explain
explain how
how
they
they are
are used
used to
to record
record business
business transactions.
transactions.
ILLUSTRATION 2-1
BASIC FORM OF ACCOUNT
In its simplest form, an account consists of
1 the title of the account,
2 a left or debit side, and
3 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
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
- 1,700
- 250
600
- 1,300
Cash
$ 8,050
Debit
15,000
1,200
1,500
600
Balance $8,050
(Debit)
Credit
7,000
1,700
250
1,300
DEBITING AN ACCOUNT
Cash
Debits
15,000
Credits
Example:
Example: The
Theowner
ownermakes
makesan
aninitial
initial
investment
investmentof
of$15,000
$15,000to
tostart
start
the
thebusiness.
business. Cash
Cashisisdebited
debitedas
as
the
theowners
ownersCapital
Capitalisiscredited.
credited.
CREDITING AN ACCOUNT
Cash
Debits
Credits
7,000
Example:
Example: Monthly
Monthlyrent
rentof
of$7,000
$7,000isispaid.
paid.
Cash
Cashisiscredited
creditedas
asRent
RentExpense
Expenseisis
debited.
debited.
DEBITING AND
CREDITING AN ACCOUNT
Cash
Debits
15,000
8,000
Credits
7,000
Example:
Example: Cash
Cashisisdebited
debitedfor
for$15,000
$15,000and
and
credited
creditedfor
for$7,000,
$7,000,leaving
leavingaadebit
debit
balance
balanceof
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 2-3
DEBIT AND CREDIT EFFECTS
ASSETS AND LIABILITIES
Debits
Increase assets
Decrease liabilities
Credits
Decrease assets
Increase liabilities
NORMAL BALANCE
Every account classification has a
normal balance, whether it is a debit
or credit.
For that particular account, the
opposite side entries should never
exceed the normal balance.
ILLUSTRATION 2-4
NORMAL BALANCES ASSETS AND LIABILITIES
Assets
Increase
Normal
Decrease
Balance
Liabilities
Debit
Decrease
Increase
Credit
Normal
Balance
ILLUSTRATION 2-5
DEBIT AND CREDIT EFFECTS OWNERS CAPITAL
Debits
Decrease owners capital
Credits
Increase owners capital
ILLUSTRATION 2-6
NORMAL BALANCE OWNERS CAPITAL
Owners Capital
Decrease
Increase
Normal
DebitBalance
Credit
ILLUSTRATION 2-7
DEBIT AND CREDIT EFFECTS OWNERS DRAWING
Debits
Increase owners drawing
Credits
Decrease owners drawing
ILLUSTRATION 2-8
NORMAL BALANCE OWNERS DRAWING
Owners Drawing
Increase
Normal
Balance
Debit
Decrease
Credit
ILLUSTRATION 2-9
DEBIT AND CREDIT EFFECTS REVENUES AND EXPENSES
Debits
Decrease revenues
Increase expenses
Credits
Increase revenues
Decrease expenses
ILLUSTRATION 2-10
NORMAL BALANCES REVENUES AND EXPENSES
Revenues
Decrease
Increase
Normal
Balance
Expenses
IncreaseDebit
Decrease
Credit
Normal
Balance
ILLUSTRATION 2-11
EXPANDED BASIC EQUATION AND DEBIT/CREDIT
RULES AND EFFECTS
Assets
Assets
Dr.
+
Cr.
-
= Liabilities
Liabilities
Dr.
-
Owners Equity
Cr.
+
Owners
Capital
Dr.
-
Cr.
+
Revenues
Dr.
-
Cr.
+
Owners
Drawing
Dr.
+
Cr.
-
Expenses
Dr.
+
Cr.
-
STUDY OBJECTIVE 3
Identify
Identify the
the basic
basic steps
steps in
in the
the recording
recording process.
process.
STEPS IN THE
RECORDING PROCESS
The basic steps in the recording process are:
1 Analyze each transaction for its effect on
the accounts.
2 Enter the transaction information in a
journal (book of original entry).
3 Transfer the journal information to the
appropriate accounts in the ledger (book of
accounts).
ILLUSTRATION 2-12
THE RECORDING
PROCESS
JOURNAL
JOURNAL
LEDGER
STUDY OBJECTIVE 4
Explain
Explain what
what aa journal
journal isis and
and how
how itit helps
helps
in
in the
the recording
recording process.
process.
THE JOURNAL
Transactions are initially recorded in
chronological order in a journal before being
transferred to the accounts.
Every company has a general journal which
contains:
1 spaces for dates,
2 account titles and explanations,
3 references, and
4 two amount columns.
THE JOURNAL
The journal makes several significant contributions to the
recording process:
1 It discloses in one place the complete effect of a
transaction.
2 It provides a chronological record of transactions.
3 It helps to prevent or locate errors because the debit and
credit amounts for each entry can be readily compared.
JOURNALIZING
Entering transaction data in the journal is known
as journalizing.
Separate journal entries are made for each
transaction.
A complete entry consists of:
1 the date of the transaction,
2 the accounts and amounts to be debited and
credited, and
3 a brief explanation of the transaction.
ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
The
Thedate
dateof
ofthe
thetransaction
transactionisisentered
enteredin
inthe
thedate
datecolumn.
column.
ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
The
Thedebit
debitaccount
accounttitle
titleisisentered
enteredat
atthe
theextreme
extremeleft
left
margin
marginof
ofthe
theAccount
AccountTitles
Titlesand
andExplanation
Explanationcolumn.
column.
The
Thecredit
creditaccount
accounttitle
titleisisindented
indentedon
onthe
thenext
nextline.
line.
ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
The
Theamounts
amountsfor
forthe
thedebits
debitsare
arerecorded
recordedin
inthe
theDebit
Debit
column
columnand
andthe
theamounts
amountsfor
forthe
thecredits
creditsare
arerecorded
recordedin
in
the
theCredit
Creditcolumn.
column.
ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
AAbrief
briefexplanation
explanationof
ofthe
thetransaction
transactionisisgiven.
given.
ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
AAspace
spaceisisleft
leftbetween
betweenjournal
journalentries.
entries. The
Theblank
blank
space
spaceseparates
separatesindividual
individualjournal
journalentries
entriesand
andmakes
makes
the
theentire
entirejournal
journaleasier
easierto
toread.
read.
ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
The
Thecolumn
columnentitled
entitledRef.
Ref.isisleft
leftblank
blankat
atthe
thetime
time
journal
journalentry
entryisismade
madeand
andisisused
usedlater
laterwhen
whenthe
the
journal
journalentries
entriesare
aretransferred
transferredto
tothe
theledger
ledgeraccounts.
accounts.
ILLUSTRATION 2-14
1
2
3
STUDY OBJECTIVE 5
Explain
Explain what
what aa ledger
ledger isis and
and how
how itit helps
helps
in
in the
the recording
recording process.
process.
THE LEDGER
The entire group of accounts maintained by a
company is called the ledger.
A general ledger contains all the assets, liabilities,
and owners equity accounts.
GENERAL
LEDGER
ILLUSTRATION 2-15
Individual
Assets
Equipment
Land
Supplies
Cash
Individual
Liabilities
Interest Payable
Salaries Payable
Accounts Payable
Notes Payable
Individual
Owners Equity
Salaries Expense
Fees Earned
J. Lind, Drawing
J. Lind, Capital
STUDY OBJECTIVE 6
Explain
Explain what
what posting
posting isis and
and how
how itit helps
helps
in
in the
the recording
recording process.
process.
ILLUSTRATION 2-17
In the ledger, enter in the appropriate columns of the account(s) debited the date,
journal page, and debit amount shown in the journal.
ILLUSTRATION 2-17
ILLUSTRATION 2-17
ILLUSTRATION 2-17
ILLUSTRATION 2-18
CHART OF
ACCOUNTS
Most
Mostcompanies
companieshave
haveaachart
chartof
ofaccounts
accountsthat
thatlists
liststhe
theaccounts
accountsand
and
the
theaccount
accountnumbers
numberswhich
whichidentify
identifytheir
theirlocation
locationin
inthe
theledger.
ledger.
ILLUSTRATION 2-19
INVESTMENT OF CASH BY OWNER
Transaction
Basic
Analysis
Debit-Credit
Analysis
ILLUSTRATION 2-19
INVESTMENT OF CASH BY OWNER
JOURNAL
JOURNALENTRY
ENTRY
POSTING
POSTING
ILLUSTRATION 2-20
PURCHASE OF OFFICE EQUIPMENT
Transaction
Basic
Analysis
Debit-Credit
Analysis
ILLUSTRATION 2-20
PURCHASE OF OFFICE EQUIPMENT
JOURNAL
JOURNALENTRY
ENTRY
POSTING
POSTING
ILLUSTRATION 2-21
RECEIPT OF CASH FOR FUTURE SERVICE
Transaction
Basic
Analysis
Debit-Credit
Analysis
ILLUSTRATION 2-21
RECEIPT OF CASH FOR FUTURE SERVICE
JOURNAL
JOURNALENTRY
ENTRY
POSTING
POSTING
ILLUSTRATION 2-22
Transaction
Basic
Analysis
Debit-Credit
Analysis
ILLUSTRATION 2-22
POSTING
POSTING
ILLUSTRATION 2-23
Basic
Analysis
Debit-Credit
Analysis
ILLUSTRATION 2-23
POSTING
POSTING
Prepaid Insurance
Oct. 4
600
130
ILLUSTRATION 2-24
PURCHASE OF SUPPLIES ON CREDIT
Transaction
Basic
Analysis
Debit-Credit
Analysis
ILLUSTRATION 2-24
PURCHASE OF SUPPLIES ON CREDIT
JOURNAL
JOURNALENTRY
ENTRY
POSTING
POSTING
ILLUSTRATION 2-25
HIRING OF EMPLOYEES
Transaction
Basic
Analysis
Debit-Credit
Analysis
ILLUSTRATION 2-26
WITHDRAWAL OF CASH BY OWNER
Transaction
Basic
Analysis
Debit-Credit
Analysis
ILLUSTRATION 2-26
WITHDRAWAL OF CASH BY OWNER
JOURNAL
JOURNALENTRY
ENTRY
POSTING
POSTING
ILLUSTRATION 2-27
PAYMENT OF SALARIES
Transaction
Basic
Analysis
Debit-Credit
Analysis
ILLUSTRATION 2-27
PAYMENT OF SALARIES
JOURNAL
JOURNALENTRY
ENTRY
POSTING
POSTING
Salaries Expense
Oct. 26
4,000
726
ILLUSTRATION 2-28
RECEIPT OF CASH FOR FEES EARNED
Transaction
Basic
Analysis
Debit-Credit
Analysis
ILLUSTRATION 2-28
RECEIPT OF CASH FOR FEES EARNED
JOURNAL
JOURNALENTRY
ENTRY
POSTING
POSTING
STUDY OBJECTIVE 7
Prepare
Prepare aa trial
trial balance
balance and
and explain
explain its
its purposes.
purposes.
ILLUSTRATION 2-31
A TRIAL BALANCE