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The Recording Process
Accounting Principles
Account Name
Debit / Dr. Credit / Cr.
Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.
Debit = “Left”
Credit = “Right”
Account
An Account can be illustrated in a T-Account form.
The AccountThe Account
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.
Debits and CreditsDebits and Credits
Account Name
Debit / Dr. Credit / Cr.
If Debits are greater than Credits, the account will have a debit balance.
$10,000 Transaction #2$3,000
$15,000
8,000Transaction #3
Balance
Transaction #1
Debits and CreditsDebits and Credits
Account Name
Debit / Dr. Credit / Cr.
If Credits are greater than Debits, the account will have a credit balance.
$10,000 Transaction #2$3,000
Balance
Transaction #1
Debits and CreditsDebits and Credits
$1,000
8,000 Transaction #3
Chapter 3-23
AssetsAssets
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Chapter 3-24
LiabilitiesLiabilities
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owner’s EquityOwner’s Equity
Chapter 3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
Normal Balance Credit
Normal Balance Credit
Normal Balance Debit
Normal Balance Debit
Debits and Credits SummaryDebits and Credits Summary
Balance Sheet Income Statement
= + -Asset Liability Equity Revenue Expense
Debit
Credit
Debits and Credits SummaryDebits and Credits Summary
Assets - Debits should exceed credits.
Liabilities – Credits should exceed debits.
The normal balance is on the increase side.
Assets and LiabilitiesAssets and Liabilities
Chapter 3-23
AssetsAssets
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-24
LiabilitiesLiabilities
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owner’s investments and revenues increase owner’s equity (credit).
Owner’s drawings and expenses decrease owner’s equity (debit).
Owners’ EquityOwners’ Equity
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owner’s CapitalOwner’s Capital
Chapter 3-23
Owner’s DrawingOwner’s Drawing
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owner’s EquityOwner’s Equity
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 Owner’s Capital.
Expenses have the opposite effect: expenses decrease owner’s equity.
Revenue and ExpenseRevenue and Expense
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Chapter 3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
Expansion of the Basic EquationExpansion of the Basic Equation
Relationship among the assets, liabilities and owner’s equity of a business:
The equation must be in balance after every transaction. For every Debit there must be a Credit.
Illustration 2-11Assets Liabilities= Owner’s Equity
Basic Equation
Expanded Basic Equation
+
Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.
Steps in the Recording ProcessSteps in the Recording Process
Illustration 2-12
Analyze each transaction Enter transaction in a journalTransfer journal information to ledger accounts
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.
The JournalThe Journal
Journalizing - Entering transaction data in the journal.
JournalizingJournalizing
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency.
Pete Hanshew begins business as a real estate agent with a cash investment of $15,000.
Oct. 1
Purchases office furniture for $1,900, on account.3
Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.
6
Pays $700 on balance related to transaction of Oct. 3. 27
Pays the administrative assistant $2,500 salary for Oct.30
E2-5 Instructions - Journalize the transactions for E2-4.
Account Title Ref. Debit CreditDate
JournalizingJournalizing
General Journal
E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency.
Pete Hanshew begins business as a real estate agent with a cash investment of $15,000.
Oct. 1
Cash
Hanshew, capital
Oct. 1 15,000
15,000
(Owner’s investment)
JournalizingJournalizing
Purchases office furniture for $1,900, on account.Oct. 3
E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency.
Account Title Ref. Debit CreditDate
General Journal
Office furniture
Accounts payable
Oct. 3 1,900
1,900
(Purchase on account)
JournalizingJournalizing
Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.
Oct. 6
E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency.
Account Title Ref. Debit CreditDate
General Journal
Accounts receivable
Service revenue
Oct. 6 3,200
3,200
(Services provided)
JournalizingJournalizing
Pays $700 on balance related to transaction of Oct. 3.Oct. 27
E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency.
Account Title Ref. Debit CreditDate
General Journal
Accounts payable
Cash
Oct. 27 700
700
(Payment on account)
JournalizingJournalizing
Pays the administrative assistant $2,500 salary for Oct.Oct. 30
E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency.
Account Title Ref. Debit CreditDate
General Journal
Salaries expense
Cash
Oct. 30 2,500
2,500
(Payment for salaries)
Simple Entry – Two accounts, one debit and one credit.
Compound Entry – Three or more accounts.
JournalizingJournalizing
Example – On June 15, H. Burns, purchased equipment for $15,000 by paying cash of $10,000 and the balance on account (to be paid within 30 days).
Account Title Ref. Debit CreditDate
General Journal
Equipment
Cash
Jun. 15 15,000
10,000
(Purchase equipment)
Accounts payable 5,000
A General Ledger contains the entire group of accounts maintained by a company.
The General Ledger includes all the asset, liability, owner’s equity, revenue and expense accounts.
The LedgerThe Ledger
Accounts and account numbers arranged in sequence in which they are presented in the financial statements.
Chart of AccountsChart of Accounts
Hanshew Real Estate AgencyChart of Accounts
101 Cash 300 Hanshew, Capital112 Accounts receivable 306 Hanshew, Drawing126 Advertising supplies 350 Income summary140 Office furniture
150 Equipment158 Accumulated depreciation 400 Service revenue
200 Accounts payable 631 Advertising supplies expense201 Notes payable 711 Depreciation expense209 Unearned revenue 722 Insurance expense212 Salaries payable 726 Salaries expense230 Interest payable 729 Rent expense
905 Interest expense
Liabilities
Assets Owner's Equity
Revenues
Expenses
T-account form used in accounting textbooks.
In practice, the account forms used in ledgers aremuch more structured.
Standard Form of AccountStandard Form of Account
Explanation Ref. Debit CreditOct. 1 15,000 15,000
27 700 14,300 30 2,500 11,800
CashDate
No. 101Balance
Posting – the process of transferring amounts from the journal to the ledger accounts.
Cash Acct. No. 101
Date Explanation Ref. Debit Credit Balance
General Ledger
Account Title Ref. Debit Credit
Oct. 1 Cash 15,000
Hanshew, Capital 15,000
(Owner' s investment in business)
Date
General Journal
Oct. 1 J1 15,000 15,000
101
J1
PostingPosting
Date Explanation Ref. Debit Credit Balance
General Ledger
Date Explanation Ref. Debit Credit Balance
General Ledger
Oct. 1 J1 15,000 15,000
Oct. 1 J1 15,000 15,000
Cash Acct. No. 101
Hanshew, capital Acct. No. 300
101300
J1
PostingPosting
Date Explanation Ref. Debit Credit Balance
General Ledger
Date Explanation Ref. Debit Credit Balance
General LedgerOffice Furniture Acct. No. 140
Accounts Payable Acct. No. 200
PostingPosting
Oct. 3 J1 1,900 1,900
SO 6 Explain what posting is and how it helps in the recording process.
Oct. 3 J1 1,900
140200
J1
1,900
Date Explanation Ref. Debit Credit Balance
General Ledger
Date Explanation Ref. Debit Credit Balance
General LedgerAccounts Receivable Acct. No. 112
Service Revenue Acct. No. 400
Oct. 6 J1 3,200 3,200
SO 6 Explain what posting is and how it helps in the recording process.
Oct. 6 J1 3,200 3,200
112400
J1
PostingPosting
SO 6 Explain what posting is and how it helps in the recording process.
200101
J1
Date Explanation Ref. Debit Credit Balance
General LedgerAccounts Payable Acct. No. 200
Oct. 3 J1 1,9001,900Oct.27 J1 1,200700
Date Explanation Ref. Debit Credit Balance
General Ledger
Oct. 1 J1 15,000 15,000
Cash Acct. No. 101
Oct.27 J1 700 14,300
PostingPosting
SO 6 Explain what posting is and how it helps in the recording process.
726101
J1
Date Explanation Ref. Debit Credit Balance
General LedgerSalaries Expense Acct. No. 726
Oct.30 J1 2,5002,500
Date Explanation Ref. Debit Credit Balance
General Ledger
Oct. 1 J1 15,000 15,000
Cash Acct. No. 101
Oct.27 J1 700 14,300Oct.30 J1 2,500 11,800
PostingPosting
A list of accounts and their balances at a given time.
Purpose is to prove that debits equal credits.
The Trial BalanceThe Trial Balance
LO 7 Prepare a trial balance and explain its purposes.
Debit CreditCash 11,800$ Accounts receivable 3,200 Office furniture 1,900 Accounts payable 1,200$ Hanshew, Capital 15,000 Service revenue 3,200 Salaries expense 2,500
19,400$ 19,400$
Hanshew Real Estate AgencyTrial Balance
October 31, 2010
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.
The Trial BalanceThe Trial Balance
LO 7 Prepare a trial balance and explain its purposes.
Limitations of a Trial Balance