ch02.ppt

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Chapter 2

The Recording The Recording ProcessProcess

Financial Accounting, IFRS EditionWeygandt Kimmel Kieso

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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.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

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The AccountThe AccountThe AccountThe Account

Debits and Debits and creditscredits

Debit and credit Debit and credit procedureprocedure

Equity Equity relationshipsrelationships

Summary of Summary of debit/credit debit/credit rulesrules

Limitations of a Limitations of a trial balancetrial balance

Locating errorsLocating errors

Use of currency Use of currency signssigns

Summary Summary illustration of illustration of journalizing and journalizing and postingposting

JournalJournal

LedgerLedger

PostingPosting

Steps in the Steps in the Recording Recording ProcessProcess

Steps in the Steps in the Recording Recording ProcessProcess

The Recording The Recording Process Process

IllustratedIllustrated

The Recording The Recording Process Process

IllustratedIllustratedThe Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

The Recording ProcessThe Recording ProcessThe Recording ProcessThe Recording Process

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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”

AccountAccount

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

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


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Double-entry 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 equalmust equal CREDITS.

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


Debits and Credits

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Account Name


If Debits are greater thangreater than Credits, the account will have a debit balance.

$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1

Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits


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Account Name


If Credits are greater thangreater than Debits, the account will have a credit balance.

$10,000 Transaction #2$3,000

Balance

Transaction #1

Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits

$1,000$1,000

8,000 Transaction #3


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Chapter 3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter 3-27



ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25



EquityEquity

Chapter 3-26



RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance

Debit

Normal Balance

Debit

Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary

SO 2 SO 2

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Balance Sheet Balance Sheet Income StatementIncome Statement

= + -Asset Liability Equity Revenue Expense

Debit

Credit



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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.

Review QuestionReview Question


Solution notes page

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.


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Assets - Debits should exceed credits.

Liabilities – Credits should exceed debits.

The normal balance is on the increase side.

Assets and LiabilitiesAssets and LiabilitiesAssets and LiabilitiesAssets and Liabilities

Chapter 3-23

AssetsAssets



Chapter 3-24

LiabilitiesLiabilities




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Issuance of share capital and revenues increase equity (credit).

Dividends and expenses decrease equity (debit).

Equity RelationshipsEquity RelationshipsEquity RelationshipsEquity Relationships

Chapter 3-25



Share CapitalShare Capital

Chapter 3-23

DividendsDividends



Chapter 3-25



EquityEquity

Chapter 3-25



Retained EarningsRetained Earnings


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The purpose of earning revenues is to benefit the shareholders.

The effect of debits and credits on revenue accounts is the same as their effect on equity.

Expenses have the opposite effect: expenses decrease equity.

Revenue and ExpenseRevenue and ExpenseRevenue and ExpenseRevenue and Expense

Chapter 3-27



ExpenseExpense

Chapter 3-26



RevenueRevenue


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Summary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit Rules

Relationship among the assets, liabilities and equity of a business:

The equation must be in balance after every transaction. For every Debit there must be a Credit.


Illustration 2-12

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Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and retained earnings.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.


Solution notes page



Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and retained earnings.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

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Debit

Debit

Credit

Debit

Credit

Credit

Solution on notes page

mall in which she will open and operate a beauty salon. A friend

has advised Kathy to set up a double-entry set of accounting

records in which to record all of her business transactions.

Following are the accounts that Hair It Is Company, will likely

need to record the transactions. Indicate whether the normal

balance of each account is a debit or a credit.


Cash

Supplies

Notes payable

Equipment

Accounts payable

Share capital


Kathy Renee Browne, president of Hair It Is

Company has just rented space in a shopping

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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 ProcessSteps in the Recording ProcessSteps in the Recording Process

SO 3 Identify the basic steps in the recording process.SO 3 Identify the basic steps in the recording process.

Analyze each transaction Enter transaction in a journalTransfer journal information to

ledger accounts

Illustration 2-13

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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.

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


Journalizing

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Account Title Ref. Debit CreditDate

Share capital

Journalizing - Entering transaction data in the journal.

SO 4SO 4

Illustration: On September 1, stockholders invested $15,000 cash in exchange for ordinary shares, and Softbyte purchased computer equipment for $7,000 cash.

CashSept. 1 15,000

15,000

General Journal

Computer equipment

Cash

7,000

7,000

Illustration 2-14



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Account Title Ref. Debit CreditDate

8,000

Delivery equipment

Cash

14,000

6,000Accounts payable

Sept. 1

Illustration: 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.

General Journal

Illustration 2-15

SO 4SO 4Solution on notes page

Simple and Compound Entries


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General Ledger

All accounts maintained by a company.

All asset, liability, equity, revenue and expense accounts.

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

The Ledger


Illustration 2-16

Slide 2-23 SO 5 Explain what a ledger is and how it helps in the recording process.SO 5 Explain what a ledger is and how it helps in the recording process.

Answer on notes page

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T-account form used in accounting textbooks.

Ledger form used in practice.


Illustration 2-17

The LedgerThe LedgerThe LedgerThe Ledger

Standard Form of Account

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The LedgerThe LedgerThe LedgerThe Ledger

Illustration 2-18


Chart of Accounts

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Posting Posting – the process of transferring amounts from the journal to the ledger accounts.

Illustration 2-19

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

PostingPostingPostingPosting

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The Recording Process IllustratedThe Recording Process IllustratedThe Recording Process IllustratedThe 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


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Illustration 2-21


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Illustration 2-22

SO 6SO 6

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Illustration 2-23

SO 6SO 6

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SO 6SO 6

Illustration 2-24

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SO 6SO 6

Illustration 2-25

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Illustration 2-26


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SO 6SO 6

Illustration 2-27

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SO 6SO 6

Illustration 2-28

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SO 6SO 6

Illustration 2-29

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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.


PostingPostingPostingPosting



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.

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Katherine Turner recorded the following

transactions during the month of March.



Post these entries to the Cash account.

SO 6SO 6

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SO 6SO 6

P2-1A. Prairie Park was started on April 1 by C.J. Amaro and associates. The following selected events and transactions occurred during April.

Apr. 1 Shareholders invested $50,000 cash in the business in exchange for ordinary shares.

4 Purchased land costing $30,000 for cash.

8 Incurred advertising expense of $1,800 on account.

11 Paid salaries to employees $1,500.

12 Hired park manager at a salary of $4,000 per month, effective May 1.

13 Paid $1,500 cash for a one-year insurance policy.

17 Declared and paid a $1,400 cash dividend.

20 Received $5,700 in cash for admission fees.

25 Sold 100 coupon books for $30 each. Each book contains 10 coupons that entitle the holder to one admission to the park.

30 Received $8,900 in cash admission fees.

30 Paid $900 on balance owed for advertising incurred on April 8.

Prairie Park uses the following accounts: Cash, Prepaid Insurance, Land, Accounts Payable, Unearned Service Revenue, Share Capital-Ordinary, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense.

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A list of accounts

and their

balances at a

given time.

Purpose is to

prove that debits

equal credits.

The Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

SO 7 Prepare a trial balance and explain its purposes.

Illustration 2-32

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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.


Limitations of a Trial Balance

SO 7 Prepare a trial balance and explain its purposes.

Slide 2-42 SO 7 Prepare a trial balance and explain its

purposes.

Answer on notes page

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The accounts

come from the

ledger of

Christel

Corporation at

December 31,

2011.



SO 7

Christel CorporationTrial Balance (in thousands)

December 31, 2011

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Comprehensive QuestionComprehensive QuestionComprehensive QuestionComprehensive Question

A group of student investors in Hong Kong opened Campus Laundromat Inc. on September 1, 2014. During the first month of operations, the following transactions occurred.

Sep. 1 Shareholders invested HK$200,000 cash in the business in exchange for ordinary shares.

2 Paid HK$10,000 cash for store rent for the month of September.

3 Purchased washers and dryers for HK$250,000, paying HK$100,000 in cash and signing a HK$150,000, 6-month, 12% note payable.

4 Paid HK$12,000 for a one-year accident insurance policy.

10 Received a bill from the Daily News for advertising the opening of the laundromat HK$2,000.

20 Declared and paid a cash dividend to shareholders HK$7,000.

30 Determined that cash receipts for laundry fees for the month were HK$62,000.

The chart of accounts for the company is the same as for Pioneer Advertising Agency Inc. except for the following: No. 610 Advertising Expense.

Instructions

(a)Journalize the September transactions. (Use J1 for the journal page number.)

(b)Open ledger accounts and post the September transactions.

(c)Prepare a trial balance at September 30, 2014.

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Rules for accounting for specific events sometimes differ

across countries. For example, IFRS 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. The more substantive definitions, using the FASB

definitional structure, are provided in the Chapter 1

“Understanding U.S. GAAP” section.

The Recording Process

Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP

Key DifferencesKey Differences

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A trial balance under GAAP follows the same format as shown

in the textbook.

In the United States, equity is often referred to as either

shareholders’ equity or stockholders’ equity, and Share Capital

—Ordinary is referred to as Common Stock. The statement of

financial position is often called the balance sheet in the United

States.


Key DifferencesKey Differences The Recording Process

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Looking to the FutureLooking to the Future


The 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.

The Recording Process

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