CHAPTER
2 The Recording Process
LEARNING OBJECTIVES
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 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.
2-1
The Account
Learning
Objective 1 An account is an individual accounting
Explain what an record of increases and decreases in a
account is and
how it helps in specific asset, liability, or equity item.
the recording It consists of three parts: (1) a title, (2) a
process.
left or
debit side, and (3) a right or credit side
Account Name
An account can Debit / Dr. Credit / Cr.
be illustrated in a
T-account form.
2-2 LO 1
Debits and Credits
The term debit indicates the left side of an
account, and credit indicates the right side.
They do not mean increase or decrease, as is
commonly thought.
2-3
Debits and Credits
the act of 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.
2-4
Debits and Credits
Learning
DEBIT AND CREDIT PROCEDURES Objective 2
Define debits and
credits and
Double-entry system explain their use
in recording
Each transaction must affect two or more business
transactions.
accounts to keep the basic accounting
equation in balance.
Recording done by debiting at least one account and
crediting at least one other account.
DEBITS must equal CREDITS.
2-5 LO 2
Debits and Credits
If the sum of Debit entries are greater than the sum of
Credit entries, the account will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
Transaction #3 8,000
Balance $15,000
2-6 LO 2
Debits and Credits
If the sum of Credit entries are greater than the sum of
Debit entries, the account will have a credit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
8,000 Transaction #3
Balance $1,000
2-7 LO 2
Debits and Credits
Assets Assets - Debits should exceed
Debit / Dr. Credit / Cr.
credits.
Liabilities – Credits should
Normal Balance
exceed debits.
Normal balance is on the
Chapter
3-23
increase side.
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Chapter
3-24
2-8 LO 2
Debits and Credits
Equity Issuance of share capital and
Debit / Dr. Credit / Cr.
revenues increase equity (credit).
Dividends and expenses decrease
Normal Balance
equity (debit).
Chapter
3-25
Share Capital-Ordinary Retained Earnings Dividends
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
Normal Balance Normal Balance Normal Balance
Chapter Chapter Chapter
3-25 3-25 3-23
2-9 LO 2
Debits and Credits
Revenues The purpose of earning revenues
Debit / Dr. Credit / Cr.
is to benefit the shareholders.
The effect of debits and credits on
Normal Balance
revenue accounts is the same as
Chapter
3-26
their effect on equity.
Expenses have the opposite
Expenses
Debit / Dr. Credit / Cr.
effect: expenses decrease equity.
Normal Balance
Chapter
3-27
2-10 LO 2
Debits and Credits
Liabilities
Normal
Debit / Dr. Credit / Cr.
Normal
Balance Balance
Debit Credit Normal Balance
Assets Chapter
3-24
Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-23
Expenses Chapter
3-25
Revenues
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
2-11
LO 2
Summary of Debit/Credit Rules
Statement of
Financial Position Income Statement
Asset = Liability + Equity Revenue - Expense
Debit
Credit
2-12 LO 2
Summary of Debit/Credit Rules
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.
2-13 LO 2
Summary of Debit/Credit Rules
Question
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and equity.
c. assets, liabilities, and dividends.
d. assets, dividends, and expenses.
2-14 LO 2
Equity
Relationships
Illustration 2-11
Equity relationships
2-15 LO 2
Summary of Debit/Credit Rules
Relationship among the assets, liabilities, and equity of a
business:
Illustration 2-12
Summary of debit/credit rules
The equation must be in balance after every transaction.
Total Debits must equal total Credits.
2-16 LO 2
The Account
Learning
Business documents, such as a sales Objective 3
Identify the basic
receipt, a check, or a bill, provide evidence steps in the
of the transaction. recording
process.
Analyze each transaction Enter transaction in a journal Transfer journal information to
ledger accounts
Illustration 2-13
The recording process
2-17 LO 3
Steps in the Recording Process
Learning
The Journal Objective 4
Explain what a
journal is and
Book of original entry. how it helps in
the recording
Transactions recorded in chronological process.
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.
2-18 LO 4
The journal
Companies may use various kinds of journals,
but every company has the most basic form of
journal, a general journal .
A general journal has spaces for dates, account
titles and explanations, references, and two
amount columns.
2-19
The journal
JOURNALIZING - Entering transaction data
in the journal
A complete entry consists of:
(1) the date of the transaction
(2) the accounts and amounts to be debited and
credited
(3) a brief explanation of the transaction.
2-20
The Journal
Illustration: On September 1, shareholders invested €15,000 cash
in the corporation in exchange for ordinary shares, and Softbyte
purchased computer equipment for €7,000 cash.
Illustration 2-14
GENERAL JOURNAL
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
Share Capital—Ordinary 15,000
Equipment 7,000
Cash 7,000
2-21 LO 4
The Journal
SIMPLE AND COMPOUND ENTRIES
Illustration: On July 1, Tsai Company purchases a delivery truck
costing NT$420,000. It pays NT$240,000 cash now and agrees to
pay the remaining NT$180,000 on account. Illustration 2-15
Compound journal entry
GENERAL JOURNAL
Date Account Title Ref. Debit Credit
July 1 Equipment 420,000
Cash 240,000
Accounts Payable 180,000
2-22 LO 4
Steps in the Recording Process
Learning
Objective 5
The Ledger Explain what a
Companies may use various kinds of ledgers, ledger is and
how it helps in
but every company has a general ledger the recording
General Ledger contains all the asset, liability, process.
and equity accounts.
Illustration 2-16
The general ledger
2-23 LO 5
The Ledger
STANDARD FORM OF ACCOUNT Illustration 2-17
Three-column form
of account
This is called the three-column form of account
2-24 LO 5
Posting
Learning
Objective 6
Explain what
posting is and
how it helps in
the recording
process.
Transferring
journal entries
to the ledger
accounts.
Illustration 2-18
Posting a journal
entry
2-25 Posting should be performed in chronological order. LO 6
Posting
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.
2-26 LO 6
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 ,
Most companies have a chart of accounts.
This chart lists the accounts and the account numbers that
identify their location in the ledger .
2-27 LO 6
Illustration 2-19
Chart of accounts for Yazici Advertising A.S¸ .
2-28 LO 6
The Recording Process Illustrated
Follow these steps:
1. Determine what
type of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.
Illustration 2-20
Investment of cash
by shareholders
2-29 LO 6
Illustration 2-21
2-30 Purchase of office equipment LO 6
Illustration 2-22
Receipt of cash
for future service
2-31 LO 6
2-32 Illustration 2-23
Payment of monthly rent LO 6
Illustration 2-24
Payment for
insurance
2-33 LO 6
2-34 Illustration 2-25
Purchase of supplies on credit LO 6
The Recording Process Illustrated
Illustration 2-26
Hiring of employees
2-35 LO 6
Illustration 2-27
2-36 Declaration and payment of dividend LO 6
Illustration 2-28
2-37
Payment of salaries LO 6
2-38 Illustration 2-29
Receipt of cash for services performed LO 6
2-39 Illustration 2-30 LO 6
General journal entries
Illustration 2-30
General journal entries
2-40 LO 6
Illustration 2-31
General ledger
2-41 LO 6
The Trial Balance
Learning
A trial balance Objective 7
Prepare a trial
is a list of accounts and their balances balance and
explain its
at a given time. purposes.
proves the mathematical equality of debits and credits
after posting.
The steps for preparing a trial balance are:
1. List the account titles and their balances.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.
2-42 LO 7
Trial Balance
Illustration 2-32
A trial balance
2-43 LO 7
Limitations of a Trial Balance
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.
5. Offsetting errors are made in recording the amount of a
transaction.
2-44 LO 7
Locating Errors
Errors in a trial balance generally result from:
1. mathematical mistakes
2. Incorrect postings
3. transcribing data incorrectly
2-45
Locating Errors
Locating Errors steps :
If the error is $1, $10, $100, or $1,000, re-add
the trial balance columns and recompute the
account balances
If the error is divisible by 2, scan the trial
balance to see whether a balance equal to half
the error has been entered in the wrong column.
2-46
Locating Errors
If the error is divisible by 9, retrace the account
balances on the trial balance to see whether
they are incorrectly copied from the ledger. For
example, if a balance was $12 and it was listed
as $21, a $9 error has been made. Reversing
the order of numbers is called a transposition
error
2-47
Locating Errors
If the error is not divisible by 2 or 9, scan the
ledger to see whether an account balance in the
amount of the error has been omitted from the
trial balance, and scan the journal to see
whether a posting of that amount has been
omitted.
2-48
Currency Signs and Underlining
Currency Signs
Do not appear in journals or ledgers.
used only in the trial balance and the financial statements.
Shown only for the first item in the column and for the total
of that column.
Underlining
A single line is placed under the column of figures to be
added or subtracted.
Totals are double-underlined.
2-49 LO 7
> DO IT!
2-50 LO 7
2-51 LO 7
Exercises
BE2-7
BE2-10
E2-4
E2-10
P2-2A
2-52
