This document summarizes key concepts from Chapter 3 of an accounting textbook. It discusses the recording process, including what accounts are, how debits and credits work, the basic steps of journalizing, posting to ledgers, and preparing a trial balance. Specifically, it explains that (1) accounts track increases and decreases in assets, liabilities, and equity, (2) debits indicate assets/expenses and credits indicate liabilities/revenues, and (3) the recording process involves analyzing transactions, recording in journals, and posting to ledgers to eventually prepare a trial balance.
This document summarizes key concepts from Chapter 3 of an accounting textbook. It discusses the recording process, including what accounts are, how debits and credits work, the basic steps of journalizing, posting to ledgers, and preparing a trial balance. Specifically, it explains that (1) accounts track increases and decreases in assets, liabilities, and equity, (2) debits indicate assets/expenses and credits indicate liabilities/revenues, and (3) the recording process involves analyzing transactions, recording in journals, and posting to ledgers to eventually prepare a trial balance.
This document summarizes key concepts from Chapter 3 of an accounting textbook. It discusses the recording process, including what accounts are, how debits and credits work, the basic steps of journalizing, posting to ledgers, and preparing a trial balance. Specifically, it explains that (1) accounts track increases and decreases in assets, liabilities, and equity, (2) debits indicate assets/expenses and credits indicate liabilities/revenues, and (3) the recording process involves analyzing transactions, recording in journals, and posting to ledgers to eventually prepare a trial balance.
This document summarizes key concepts from Chapter 3 of an accounting textbook. It discusses the recording process, including what accounts are, how debits and credits work, the basic steps of journalizing, posting to ledgers, and preparing a trial balance. Specifically, it explains that (1) accounts track increases and decreases in assets, liabilities, and equity, (2) debits indicate assets/expenses and credits indicate liabilities/revenues, and (3) the recording process involves analyzing transactions, recording in journals, and posting to ledgers to eventually prepare a trial balance.
Chapter Objectives: After studying this chapter, you should be able to:
▪ 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.
Source: Accounting Principles; Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel; 13th Edition; John Wiley & Sons, Inc.
S. M. Khaled Hossain, Lecturer, Army Institute of Business Administration,
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An Account An account is an accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. For example, account for Cash, Accounts Receivable, Accounts Payable, Service Revenue, and Salaries Expense. In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account resembles the letter T, we refer to it as a T account.
Classification of Accounts Under Traditional method:
Account
Personal Account Impersonal Account
Debtor Account Creditor Account Real Account Nominal Account
S. M. Khaled Hossain, Lecturer, Army Institute of Business Administration,
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Debits and Credits
The terms debit and credit are directional signals: Debit indicates left, and credit indicates right. They indicate which side of a T account a number will be recorded on. Entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account. All types of expenses and losses are treated as Debit whereas all types of revenues and profits are treated as Credit. We commonly abbreviate debit as Dr. and credit as Cr.
Debit indicates all types of assets, expenses and losses
Whereas, credit indicates all types of liabilities, revenues and profits
Steps in the Recording Process:
In practically every business, there are three basic steps in the recording process:
1. Analyze each transaction for its effects on the accounts.
2. Enter the transaction information in a journal. 3. Transfer the journal information to the appropriate accounts in the ledger.
The recording process begins with the transaction. Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. The company analyzes this evidence to determine the transaction’s effects on specific accounts. The company then enters the transaction in the journal. Finally, it transfers the journal entry to the designated accounts in the ledger. And finally with all the ledger accounts trail balance is prepared.
1. Journal Companies initially record transactions in chronological order (the order in which they occur).Thus, the journal is referred to as the book of original entry. For each transaction the journal shows the debit and credit effects on specific accounts. Companies may use various kinds of journals, but every company has the most basic form of journal, a general journal. Typically, a general journal has spaces for dates, account titles and explanations, references, and two amount columns.
2. Ledger The entire group of accounts maintained by a company is the ledger. The ledger keeps in one place all the information about changes in specific account balances. Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and owner’s equity accounts,
Companies arrange the ledger in the sequence in which they present the accounts in the financial statements, beginning with the balance sheet accounts. First in order are the asset accounts, followed by liability accounts, owner’s capital, owner’s drawing, revenues, and expenses. Each account is numbered for easier identification.
S. M. Khaled Hossain, Lecturer, Army Institute of Business Administration,
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The ledger provides the balance in each of the accounts. For example, the Cash account shows the amount of cash available to meet current obligations. The Accounts Receivable account shows amounts due from customers. Accounts Payable shows amounts owed to creditors.
▪ Standard Form of Account
The simple T-account form used in accounting textbooks is often very useful for illustration purposes. However, in practice, the account forms used in ledgers are much more structured. This format is called the three-column form of account. It has three money columns—debit, credit, and balance. The balance in the account is determined after each transaction. Companies use the explanation space and reference columns to provide special information about the transaction.
▪ Chart of Accounts The number and type of accounts differ for each company. The number of accounts depends on the amount of detail management desires. For example, the management of one company may want a single account for all types of utility expense. Another may keep separate expense accounts for each type of utility, such as gas, electricity, and water.
Most companies have a chart of accounts. This chart lists the accounts and the account numbers that identify their location in the ledger. The numbering system that identifies the accounts usually starts with the balance sheet accounts and follows with the income statement accounts.
3. Trial Balance
A trial balance is a list of accounts and their balances at a given time. Customarily, companies prepare a trial balance at the end of an accounting period. They list accounts in the order in which they appear in the ledger. Debit balances appear in the left column and credit balances in the right column. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. The sum of the debit balances in the trial balance should equal the sum of the credit balances. If the debits and credits do not agree, the company can use the trial balance to uncover errors in journalizing and posting. In addition, the trial balance is useful in preparing financial statements.
Limitations of a Trial Balance
A trial balance does not guarantee freedom from recording errors, however. Numerous errors may exist even though the trial balance columns agree. For example, 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.
S. M. Khaled Hossain, Lecturer, Army Institute of Business Administration,
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As long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits. The trial balance does not prove that the company has recorded all transactions or that the ledger is correct.
Normal Balance of Accounts/ Golden Rules of Accounting
