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Basic Accounting and Terms..It will help u to learn Accounting...

Text of ch02 Accounting

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CHAPTER2The Recording Process

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PreviewofCHAPTER2

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The Account

Account

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.Debit = Left Credit = RightAccount NameDebit / Dr. Credit / Cr.

An Account can be illustrated in a T-Account form.

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SO 1 Explain what an account is and how it helps in the recording process.

The AccountDebit and Credit ProceduresDouble-entry 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 andcrediting another.

DEBITS must equal CREDITS.

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SO 2 Define debits and credits and explain their use in recording business transactions.

Debits and CreditsIf Debits are greater than Credits, the account will have a debit balance.Account NameDebit / Dr. Credit / Cr.

Transaction #1Transaction #3

$10,0008,000

$3,000

Transaction #2

Balance

$15,000

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SO 2 Define debits and credits and explain their use in recording business transactions.

Debits and CreditsIf Debits are less than Credits, the account will have a credit balance.Account NameDebit / Dr. Credit / Cr.

Transaction #1

$10,000

$3,0008,000

Transaction #2Transaction #3

Balance

$1,000

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SO 2 Define debits and credits and explain their use in recording business transactions.

Debits and CreditsAssetsDebit / Dr. Credit / Cr.

Assets - Debits should exceed credits. Liabilities Credits should exceed debits. Normal balance is on the increase side.

Normal Balance

Chapter 3-23

LiabilitiesDebit / Dr. Credit / Cr.

Normal Balance

Chapter 3-24

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SO 2 Define debits and credits and explain their use in recording business transactions.

Debits and CreditsOwners EquityDebit / Dr. Credit / Cr.

Owners investments and revenues increase owners equity (credit). Owners drawings and expenses decrease owners equity (debit).

Normal Balance

Chapter 3-25

Owners CapitalDebit / Dr. Credit / Cr.

Owners DrawingDebit / Dr. Credit / Cr.

Normal Balance

Normal Balance

Chapter 3-25

Chapter 3-23

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SO 2 Define debits and credits and explain their use in recording business transactions.

Debits and CreditsRevenueDebit / Dr. Credit / Cr.

Purpose of earning revenues is to benefit the owner(s). 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.

Normal Balance

Chapter 3-26

ExpenseDebit / Dr. Credit / Cr.

Normal Balance

Chapter 3-27

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SO 2 Define debits and credits and explain their use in recording business transactions.

Debits/Credits RulesLiabilities

Normal Balance DebitAssetsDebit / Dr. Credit / Cr.

Normal Balance CreditOwners EquityDebit / Dr.Chapter 3-24

Debit / Dr.

Credit / Cr.

Normal Balance

Credit / Cr.

Normal Balance

Normal BalanceChapter 3-23

ExpenseDebit / Dr. Credit / Cr.

Chapter 3-25

RevenueDebit / Dr. Credit / Cr.

Normal Balance

Normal Balance

Chapter 3-27

Chapter 3-26

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SO 2

Debits/Credits RulesBalance SheetAsset = Liability + Equity

Income StatementRevenue - Expense =

Debit

Credit

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SO 2 Define debits and credits and explain their use in recording business transactions.

Debits/Credits Rules QuestionDebits:a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities.

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SO 2 Define debits and credits and explain their use in recording business transactions.

Debits/Credits Rules QuestionAccounts 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.

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SO 2 Define debits and credits and explain their use in recording business transactions.

Summary of Debits/Credits RulesRelationship among the assets, liabilities and owners equity of a business:Basic Equation Expanded Basic EquationIllustration 2-11

Assets = Liabilities +

Owners Equity

The equation must be in balance after every transaction. For every Debit there must be a Credit.SO 2 Define debits and credits and explain their use in recording business transactions.

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Steps in the Recording ProcessIllustration 2-12

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger accounts

Source documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.

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SO 3 Identify the basic steps in the recording process.

Steps in the Recording ProcessThe 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.

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

Steps in the Recording ProcessJournalizing - 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 JournalDateSept. 1

Account TitleCash Owners, Capital Equipment Cash

Ref.

Debit15,000

Credit15,000

7,000 7,000

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

Steps in the Recording ProcessSimple and Compound EntriesIllustration: 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 JournalDateJuly 1

Account TitleEquipment Cash

Ref.

Debit14,000

Credit8,000 6,000

Accounts payable

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

Steps in the Recording ProcessThe Ledger

General Ledger contains the entire group of accounts maintained by a company.Illustration 2-15

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

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Steps in the Recording ProcessStandard Form of AccountIllustration 2-16

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

StepsPosting process of transferring amounts from the journal to the ledger accounts.

Illustration 2-17

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

Posting QuestionPosting: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.

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

Chart of AccountsAccounts and account numbers arranged in sequence in which they are presented in the financial statements.Illustration 2-18

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

The Recording Process IllustratedFollow 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 2-19

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SO 6

The Recording Process IllustratedIllustration 2-20

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SO 6

The Recording Process IllustratedIllustration 2-21

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SO 6

The Recording Process IllustratedIllustration 2-22

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SO 6

The Recording Process IllustratedIllustration 2-23

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SO 6

The Recording Process IllustratedIllustration 2-24

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SO 6

The Recording Process IllustratedIllustration 2-25

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SO 6

The Recording Process IllustratedIllustration 2-26

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SO 6

The Recording Process IllustratedIllustration 2-27

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SO 6

The Recording Process IllustratedIllustration 2-28

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SO 6

Trial BalanceIllustration 2-31

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SO 7 Prepare a trial balance and explain its purposes.

Trial BalanceLimitations of a Trial BalanceThe 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, or5. offsetting errors are made in recording the amount of a transaction.

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SO 7 Prepare a trial balance and explain its purposes.

Trial Balance QuestionA 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 $45.2-38

SO 7 Prepare a trial balance and explain its purposes.

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Key Points

Transaction analysis is the same under IFRS and GAAP but different standards sometimes impact how transactions are recorded.Rules for accounting for specific events sometimes differ across countries. For example, European companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the double-entry accounting system is the basis of accounting systems worldwide. Both the IASB and FASB go beyond the basic definitions provided in this textbook for the key elements of financial statements, that is, assets, liabilities, equity, revenues, and expenses.

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Key Points

A trial balance under IFRS follows the same format as shown in the textbook.As shown in the textbook, dollars signs are typically used only in the trial balance and the financial statements. The same practice is followed under IFRS, using the currency of the country that the reporting company is headquartered. In February 2010, the SEC expressed a desire to continue working toward a single set of high-quality standards.

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Looking to the FutureThe basic recording process shown in this textbook is followed by companies across the globe. It is unlikely to change in the future. The definitional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing accounting standards.

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IFRS Self-Test QuestionsWhich statement is correct regarding IFRS?a) IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on the left.

b) IFRS uses the same process for recording transactions as GAAP. c) The chart of accounts under IFRS is different because revenues follow assets.

d) None of the above statements are correct.

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IFRS Self-Test QuestionsA trial balance:a) is the same under IFRS and GAAP.

b) proves that transactions are recorded correctly. c) proves that all transactions have been recorded.

d) will not balance if a correct journal entry is posted twice.

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IFRS Self-Test QuestionsOne difference between IFRS and GAAP is that:a) GAAP uses accrual-accounting concepts and IFRS uses primarily the cash basis of accounting.

b) IFRS uses a different posting process than GAAP. c) IFRS uses more fair value measurements than GAAP.

d) the limitations of a trial balance are different between IFRS and GAAP.

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