Recording Process

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Class 3, 4

The Recording Process


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After studying this chapter, you should be able to:

THE RECORDING PROCESS

1 Explain what an account is and how it helps in therecording process

2 Define debits and credits and explain how they are used torecord business transactions

3 Identify the basic steps in the recording process

4 Explain what a journal is and how it helps in the recordingprocess


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THE ACCOUNTSTUDY OBJECTIVE 1

An account i s an ind iv idua l acco un t ing record of increases and decreases in a specif ic asset ,l iabil i ty, or owners equi ty i t em .

There are separate accounts for theitems we used in transactions such as:

cash , salaries expense , accounts payable , etc.


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BASIC FORM OF ACCOUNTSTUDY OBJECTIVE 2

The simplest form an account consists of:1 th e t i t le o f the acco unt 2 a left o r DEBIT sid e 3 a r igh t o r CREDIT sid e

The alignment of these parts resembles theletter T = T account

DEBIT side

Ti t le o f Acc oun t

CREDIT side

Debit balance Credit balance


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DEBITS AND CREDITS

Debit indicates left and Credit indicates right

Recording Ron/Euro/$ on the left side of an account is debit ing the

account

Recording Ron/Euro/$ on the right side is cred i t ing the account

If the total of debit amounts is bigger than credits, the account has adebi t balance

If the total of credit amounts is bigger than debits, the account has acredi t balance


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TABULAR SUMMARY COMPAREDTO ACCOUNT FORM


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Example: Monthly rent of $7,000 is paid.Cash is credited as Rent Expense is debited.

CREDITING AN ACCOUNT

Cash

Debits Credits7,000


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DEBITING / CREDITING ANACCOUNT

Cash

Debits Credits

15,000 7,000

8,000

Example: Cash is debited for $15,000 and credited for $7,000 , leavinga debit balance of $8,000 .


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DOUBLE-ENTRY SYSTEM

equal debits and credits madeaccounts for each transaction

total debits always equal the totalcredits accounting equation always stays

in balanceAssets Liabilities Equity


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DEBIT AND CREDIT EFFECTS

Debits (+) Credits ( -)

In cr ease ass ets Decrease ass ets

Debit balance

ASSETS

Debits ( -) Credits (+)

Decrease l iabi l i t ies Inc rease l iabi l i t ies

Credit balance

LIABILITIES


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NORMAL BALANCE

every account has adesignated normal balance. It is either a debit or credit.

accounts rarely have anabnormal balance.


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NORMAL BALANCES ASSETSAND LIABILITIES

AssetsIncrease DecreaseDebit Credit

Decrease IncreaseDebit Credit

Liabilities

NormalBalance

NormalBalance


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DEBIT AND CREDIT EFFECTS OWNERS CAPITAL

Debits Credits

Decrease owners capital Increase owners capital


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NORMAL BALANCE OWNERSSHARE CAPITAL

Owners Share Capital

Decrease Increase

Debit Credit

NormalBalance


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DEBIT AND CREDIT EFFECTS OWNERS DRAWING

Debits CreditsIncrease owners drawing Decrease owners

drawing

Remember, Drawing is a contra-account an account that is backwards from the account it accompanies (the Share Capital account).


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NORMAL BALANCE OWNERSDRAWING

Owners Drawing

NormalBalance

Increase Decrease

Debit Credit


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DEBIT AND CREDIT EFFECTS REVENUES AND EXPENSES

Decrease revenues Increase revenues

Debits (-) Credits (+)REVENUES

Increase expenses Decrease expenses

Debits (+) Credits (-)EXPENSES


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NORMAL BALANCES REVENUES AND EXPENSES

Increase DecreaseDebit Credit

Expenses

RevenuesDecrease IncreaseDebit Credit

Normal Balance

Normal

Balance


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EXPANDED BASIC EQUATION ANDDEBIT/CREDIT RULES AND EFFECTS

LiabilitiesAssets Owners Equity

= + -

+=

+ -

Assets

Dr. Cr.+ -

Liabilities

Dr. Cr.- +

Dr. Cr.

OwnersDrawing

+ -

Dr. Cr.

Revenues

- +Dr. Cr.

Expenses

+ -

Dr. Cr.

OwnersCapital

- +


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Chapter 2

Which of the following is not true of theterms debit and credit .

a. They can be abbreviated as Dr. and Cr.

b. They can be interpreted to mean increase anddecrease.

c. They can be used to describe the balance of anaccount.

d. They can be interpreted to mean left and right.


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Chapter 2

Which of the following is not true of theterms debit and credit .

a. They can be abbreviated as Db. and Cr.

b. They can be interpreted to mean increase anddecrease .

c. They can be used to describe the balance of anaccount.

d. They can be interpreted to mean left and right.


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THE RECORDING PROCESSSTUDY OBJECTIVE 3

1 analyze each transaction (+, -) 2 enter transaction in a journal (Db, Cr)3 transfer journal information toledger accounts


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A journal makes several contributions torecording process:

1 dis clo ses in on e place the com plete effect of a

t ransact ion

2 prov ides a chron ologic al record of t ransac t ions

3 helps to prevent or locate errors as debi t and cred i t am oun ts for each en t ry c an be com pared

THE JOURNAL


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TECHNIQUE OFJOURNALIZING

A brief explanation of the transaction is given.

GENERAL JOURNAL J1Date Account Titles and Explanation Ref. Debit Credit2009

Sept. 1 Cash 15,000R. Neal, Capital 15,000

(Invested cash in business)

1 Computer Equipment 7,000Cash 7,000

(Purchased equipment for cash)


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A space is left between journal entries. Theblank space separates individual journal entriesand makes the entire journal easier to read.

GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2009

Sept. 1 Cash 15,000 R. Neal, Capital 15,000

(Invested cash in business) 1 Computer Equipment 7,000

Cash 7,000 (Purchased equipment for cash)


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The column entitled Ref. is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts .


Sept. 1 Cash 15,000R. Neal, Capital 15,000

(Invested cash in business)

1 Computer Equipment 7,000Cash 7,000

(Purchased equipment for cash)


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GENERAL JOURNAL J1Date Account Titles and Explanation Ref. Debit Credit

2009July 1 Cash 20,000K. Browne, Capital 20,000

(Invested cash in thebusiness)

If an entry involves only two accounts, one debitand one credit, it is considered a simple entry .

SIMPLE AND COMPOUNDJOURNAL ENTRIES


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When three or more accounts are required inone journal entry, the entry is referred to as acompound entry .

COMPOUND JOURNALENTRY

2

1

3


July 1 Equipments 14,000Cash 8,000Accounts Payable 6,000

(Purchased truck for cashwith balance on account)


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GENERAL JOURNAL

J1

Date Account Titles and Explanation Ref. Debit Credit2005

July 1 Cash 8,000

Delivery Equipment 14,000Accounts Payable 6,000(Purchased truck for cashwith balance on account)

COMPOUND JOURNALENTRY

This is the WRONG FORMAT; all debits must belisted before the credits are listed.

THE LEDGER


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THE LEDGERSTUDY OBJECTIVE 5

A Group of accounts maintained by acompany is called the ledger .

A general ledger contains all theassets, liabilities, and equitys accounts


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POSTING A JOURNAL ENTRY

In the ledger, enter in the appropriate columns of the account(s)debited the date , journal page , and debit amount shown in the journal.


Sept. 1 Cash 10 15,000R. Neal, Capital 25 15,000

(invested cash in business)

R. NEAL, CAPITAL NO. 25 Date Explanation Ref. Debit Credit Balance2005

Sept. 1 J1 15,000 15,000

GENERAL LEDGERCASH NO. 10

Date Explanation Ref. Debit Credit Balance2005

Sept. 1 J1 15,000 15,000


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Sept. 1 J1 15,000 15,000






Sept. 1 J1 15,000 15,000

In the reference column of the journal, write the accountnumber to which the debit amount was posted.


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In the ledger, enter in the appropriate columns of the account(s) credited the date , journalpage , and credit amount shown in the journal.

R. NEAL, CAPITAL NO. 25 Date Explanation Ref. Debit Credit Balance

2005Sept. 1 J1 15,000 15,000

GENERAL JOURNAL J1

Date Account Titles and Explanation Ref. Debit Credit2005Sept. 1 Cash 10 15,000

R. Neal, Capital 25 15,000 (invested cash in business)

GENERAL LEDGER CASH NO. 10

Date Explanation Ref. Debit Credit Balance 2009

Sept. 1 J1 15,000 15,000


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In the reference column of the journal, write the account number to which thecredit amount was posted.


Sept. 1 J1 15,000 15,000






Sept. 1 J1 15,000 15,000


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A Chart of Accounts lists the accounts and theaccount numbers which identify their location in theledger.

CHART OF ACCOUNTS


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PURCHASE OF OFFICEEQUIPMENT

BasicAnalysis

Debit-CreditAnalysis

TransactionOctober 1, C. R. Byrd purchases $5,000 of equipment by issuing a 3-month, 12% notepayable.

The asset Office Equipment is increased $5,000. The liability, Notes Payable is increased $5,000.

Debits increase assets: debit Office Equipment$5,000 .Credits increase liabilities: credit Notes Payable$5,000 .


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PURCHASE OF OFFICEEQUIPMENT

Notes Payable 200Oct. 1 5,000

OfficeEquipment

157

Oct. 1 5,000

Date Account Titles and Explanation Ref. Debit Credit

Oct. 1 Office Equipment 157 5,000Notes Payable 200 5,000(Issued 3-month, 12% notefor office equipment)

JOURNAL ENTRY

POSTING

RECEIPT OF CASH FOR


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RECEIPT OF CASH FORFUTURE SERVICE

BasicAnalysis


TransactionOctober 2, a $1,200 cash advance is received from aclient, for advertising services expected to becompleted by December 31.

Asset Cash is increased $1,200

Liability Unearned Fees is increased $1,200 Service has not been rendered yet.

Liabilities often have the word payable in theirtitle, Unearned fees are a liability.

Debits increase assets: debit Cash $1,200 .Credits increase liabilities: credit Unearned Fees$1,200 .


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RECEIPT OF CASH FORFUTURE SERVICE

Unearned Fees 209Oct. 2 1,200

Cash 101Oct. 1 10,000

2 1,200


Oct. 2 Cash 101 1,200Unearned Fees 209 1,200(Received advance from R.Knox for future services)

JOURNAL ENTRY

POSTING


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PAYMENT OF MONTHLYRENT

BasicAnalysis


Transaction October 3, office rent for October is paid in cash,$900.

The expense Rent is increased $900Payment pertains only to the current monthAsset Cash is decreased $900.

Debits increase expenses: debit Rent Expense $900 .Credits decrease assets: credit Cash $900 .


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PAYMENT OF RENTEXPENSE

Cash 101Oct. 1 10,000 Oct. 3 900 Oct. 2 1,200

Rent Expense 729Oct. 3 900

Date Account Titles and Explanation Ref. Debit CreditOct. 3 Rent Expense 729 900

Cash 101 900 (Paid $900 for October rent)

JOURNAL ENTRY

POSTING


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PAYMENT FOR INSURANCE

-Asset Prepaid Insurance increases $600-Payment extends to more than the current month

-Asset Cash is decreased $600 .-Payments of expenses benefiting more than one

period are prepaid expenses or prepayments.

TransactionOctober 4, $600 Paid one-year insurance policy-expires next year on September 30.


Debits increase assets: debit Prepaid Insurance$600 . Credits decrease assets: credit Cash $600 .

BasicAnalysis


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PAYMENT FOR INSURANCE

Cash 101Oct. 1 10,000 Oct. 3 900

2 1,200 4 600


Oct. 4 Prepaid Insurance 130 600Cash 101 600(Paid one-year policy;effective date October 1)

JOURNAL ENTRY

POSTING

Prep aid Insurance 130Oct. 4 600


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PURCHASE OF SUPPLIESON CREDIT

BasicAnalysis


TransactionOctober 5, an estimated 3-month supply of advertising materials is purchased on account fromAero Supply for $2,500.

The asset Advertising Supplies is increased $2,500;the liability Accounts Payable is increased $2,500.

Debits increase assets: debit Advertising Supplies$2,500 . Credits increase liabilities: creditAccounts Payable $2,500 .


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PURCHASE OF SUPPLIESON CREDIT

Accounts Payable 201Oct. 5 2,500

Advertising Supplies 126Oct. 5 2,500


Oct. 5 Advertising Supplies 126 2,500Accounts Payable 201 2,500(Purchased supplies onaccount from Aero Supply)

JOURNAL ENTRY

POSTING


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HIRING OF EMPLOYEES

BasicAnalysis


Transaction

October 9, hire four employees to begin work onOctober 15. Each employee is to receive a weeklysalary of $500 for a 5-day work week, payable every2 weeks -- first payment made on October 26.

A business transaction has not occurred only anagreement between the employer and theemployees to enter into a business transactionbeginning on October 15.

A debit-credit analysis is not needed because there isno accounting entry.


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PAYMENT OF SALARIES

BasicAnalysis


TransactionOctober 26, employee salaries of $4,000 are owedand paid in cash. (See October 9 transaction.)

The expense account Salaries Expense is increased$4,000; the asset Cash is decreased $4,000.

Debits increase expenses: debit Salaries Expense$4,000 . Credits decrease assets: credit Cash $4,000 .


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RECEIPT OF CASH FOR FEESEARNED

BasicAnalysis


TransactionOctober 31, received $10,000 in cash from CopaCompany for advertising services rendered inOctober.

The asset Cash is increased $10,000; the revenueFees Earned is increased $10,000.

Debits increase assets: debit Cash $10,000 . Creditsincrease revenues: credit Fees Earned $10,000 .


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RECEIPT OF CASH FOR FEESEARNED

Cash 101Oct. 1 10,000 Oct. 3 900

2 1,200 4 60031 10,000 20 500

26 4,000

Date Account Titles and Explanation Ref. Debit CreditOct. 31 Cash 101 10,000

Fees Earned 400 10,000(Received cash for feesearned)

Fees Earned 400Oct. 31 10,000

JOURNAL ENTRY

POSTING

THE TRIAL BALANCE


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THE TRIAL BALANCESTUDY OBJECTIVE 7

The trial balance is a list of accounts andtheir balances at a given time.

The primary purpose of a trial balance isto prove debits = credits after posting.

If debits and credits do not agree, thetrial balance can be used to uncover errors in journalizing and posting.


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THE TRIAL BALANCE

The Steps in preparing the Trial Balance are:1. List the account titles and balances2. Total the debit and credit columns

3. Prove the equality of the two columns


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PIONEER ADVERTISING AGENCYTrial Balance

October 31, 2005

Debit CreditCash $ 15,200Advertising Supplies 2,500Prepaid Insurance 600Office Equipment 5,000Notes Payable $ 5,000Accounts Payable 2,500

Unearned Fees 1,200C. R. Byrd, Capital 10,000C. R. Byrd, Drawing 500Fees Earned 10,000Salaries Expense 4,000Rent Expense 900

$ 28,700 $ 28,700

The totaldebits must equal the total

credits.

A TRIAL BALANCE

A O S O A


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LIMITATIONS OF ATRIAL BALANCE

A trial balance does not prove all transactionshave been recorded or the ledger is correct.

Numerous errors may exist even though thetrial balance columns agree. For example, thetrial balance may balance even when: a transaction is not journalized a correct journal entry is not posted a journal entry is posted twice incorrect accounts used in journalizing or

posting offsetting errors are made in recording


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Chapter 2

Which one of the following represents the expandedbasic accounting equation?

a. Assets = Liabilities + Owners Capital + Owners

Drawings Revenue - Expenses.b. Assets + Owners Drawings + Expenses = Liabilities

+ Owners Capital + Revenue. c. Assets Liabilities Owners Drawings = Owners

Capital + Revenue Expenses.d. Assets = Revenue + Expenses Liabilities.


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Which one of the following represents the expandedbasic accounting equation?

a. Assets = Liabilities + Owners Capital + Owners

Drawings Revenue - Expenses.b. Assets + Owners Drawings + Expenses = Liabilities

+ Owners Capital + Revenue. c. Assets Liabilities Owners Drawings = Owners

Capital + Revenue Expenses.d. Assets = Revenue + Expenses Liabilities.

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Recording Process