The Recording Process

Slide 2-1

The The Recording Recording ProcessProcess

Financial Accounting,

Seventh Edition

Chapter 2

Slide 2-2

An account is a record of

increases and decreases in a specific asset,

liability, equity, revenue, or

expense item.

An account is a record of

increases and decreases in a specific asset,

liability, equity, revenue, or

expense item.

The general ledger is a

record containing all accounts used

by the company.

The general ledger is a

record containing all accounts used

by the company.

The AccountThe AccountThe AccountThe Account

Slide 2-3

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Owner’s Capital

Owner’s Capital DividendsDividends Revenue

sRevenue

sExpense

sExpense

s

+ +– –

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Slide 2-4

Knowledge Check # 1:Knowledge Check # 1:

An individual person starting a business made an investment of a building, which is valued at $300,000 with an $180,000 outstanding mortgage payable. The effect of this transaction on the accounting equation of the business would be to:

A. Increase assets by $120,000.B. Increase assets by $180,000.C. Increase stockholders’ equity by $120,000.D. Increase stockholders’ equity by $300,000.

Slide 2-5

The ledger is a collection of all accounts for aninformation system. A company’s size anddiversity of operations affect the number

of accounts needed.

The ledger is a collection of all accounts for aninformation system. A company’s size anddiversity of operations affect the number

of accounts needed.

The chart of accounts is a list of all accounts andincludes an identifying number for each account.The chart of accounts is a list of all accounts andincludes an identifying number for each account.

Account Number Account Name Accounting Number Accounting Name101 Cash 319 Dividends106 Accounts receivable 403 Revenues126 Supplies 406 Rental revenue128 Prepaid insurance 622 Salaries expense167 Equipment 637 Insurance expense

201 Accounting payable 640 Rent expense

236 Unearned revenue 652 Supplies expense307 Common stock 690 Utilities expense

The Chart of AccountsThe Chart of AccountsThe Chart of AccountsThe Chart of Accounts

Slide 2-6

Debits are Debits are simply simply

entries on entries on the left.the left.

Credits are

simply entries on the right.

Remember:

Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits

Slide 2-7

DR CR DR CR (+) (-) (-) (+)

Assets LiabilitiesExpenses Revenues

Dividends Owners’ Equity

Debit is an increase.Credit is a decrease.

Debit is a decrease.Credit is an increase.

Rule of Debits and CreditsRule of Debits and CreditsRule of Debits and CreditsRule of Debits and Credits

Slide 2-8


Debit Credit Debit Credit Debit Credit

ASSETS

+ - + -

LIABILITIES

- + - +

EQUITIES

- + - +

Basic Accounting EquationBasic Accounting EquationBasic Accounting EquationBasic Accounting Equation

Slide 2-9

RevenuesRevenues ExpensesExpensesCapital StockCapital Stock DividendsDividends__ ++ __

Debit Credit

Capital Stock

- + - + Debit Credit

Dividends

+ - + - Debit Credit

Expenses

+ - + -Debit Credit

Revenues

- + - +

EquityEquity

Double-Entry bookkeepingDouble-Entry bookkeepingDouble-Entry bookkeepingDouble-Entry bookkeeping

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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.

TOTAL DEBITS must always equalmust always equal TOTAL CREDITS.

Rule of Debits and CreditsRule of Debits and CreditsRule of Debits and CreditsRule of Debits and Credits

Slide 2-11

Name of Account

Debit

CreditAccounts with

typical debit balances are?

Accounts with typical credit balances are?

Expense

s

Assets

Dividends

Owners’

Equity

Liabilities

Revenues

An account’s balance is usually

on the side that increases the account. It is referred to as

the “Normal Balance.”

Remember the mnemonic memory device, DEAD COLR

Determining Account BalancesDetermining Account BalancesDetermining Account BalancesDetermining Account Balances

Slide 2-12

Chapter 3-23

AssetsAssets

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

Chapter 3-27



ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25


Normal Balance

Owners’ Equity

Chapter 3-26



RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance Debit

Normal Balance Debit

Debits Debits and and

Credits Credits SummaSumma

ryry

Debits Debits and and

Credits Credits SummaSumma

ryry

Chapter 3-23

DividendsDividends



Slide 2-13

A T-account represents a ledger account and is A T-account represents a ledger account and is a tool used to understand the effects of one a tool used to understand the effects of one

or more transactions. or more transactions.

(Left side) (Right side)Debit Credit

T- Account

“Friends don’t let friends do Accounting without t-accounts”


Slide 2-14

Account Name


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

$8,000 Transaction #2$7,0005,000Transaction #3

Balance

Transaction #1


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Account Name


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

$4,000

Transaction #1$6,000

Balance

Transaction #2


3,000 Transaction #3

Slide 2-16


Which of the following accounts normally has a credit balance?

1. Accounts Receivable. 2. Dividends.3. Rent Expense4. Notes Payable.

Slide 2-17

Step 1: Analyze transactions and source

documents.


Step 2: Apply double-entry accounting

(Left side) (Right side)Debit Credit

T- Account

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledger Step 3: Record journal entry

Journalizing and Posting TransactionsJournalizing and Posting TransactionsJournalizing and Posting TransactionsJournalizing and Posting Transactions

Slide 2-18

Dollar amount of debits and

credits

Dollar amount of debits and

credits

Transaction Date

Transaction Date

Transaction explanation

Transaction explanation

Titles of Affected Accounts

Titles of Affected Accounts

Journalizing Transactions Journalizing Transactions (using Double entry Bookkeeping) (using Double entry Bookkeeping)

Journalizing Transactions Journalizing Transactions (using Double entry Bookkeeping) (using Double entry Bookkeeping)

Slide 2-19

Double entry:

Analyzing Transactions (1)Analyzing Transactions (1)Analyzing Transactions (1)Analyzing Transactions (1)

1. On December 1, 2011, Scott invests $10,000 cash to start a

management consulting business (Scott Company).

Posting:

Slide 2-20

Double entry:


2. Scott Company purchased office supplies paying $1,000 cash.

Posting:

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Double entry:


3. Scott Company purchased Office Supplies of $600 and Computer

Equipment of $3,000 on account.

Posting:

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Double entry:


4. Scott Company borrowed $4,000 from Bank of Maryland.

Posting:

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Double entry:


5. During the month of December 2011 , Scott Company provided consulting services for $3,500. The company

received cash of $1,000, and billed the balance $2,500 to the customers.

Posting:

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Double entry:


6. During the month of December 2011 , Scott Company paid cash of $800 for

Rent, and $1,200 for Salaries to its only employee.

Posting:

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Double entry:


7. During the month of December 2011 , Scott Company received a bill for $300

from the electric company, but decides to pay the bill at a later date.

Posting:

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Double entry:


8. Scott Company received a check for $1,500 from a customer who was

billed earlier.

Posting:

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Double entry:


9. Scott Company paid $2,500 for the computer equipment that it had

purchased in transaction (3).

Posting:

Slide 2-28

Double entry:


10. Scott Company paid a dividend of $500 to its owner/stockholder.

Slide 2-29

After processing its remaining transactions for December, Scott company prepares a Trial

Balance.


Balance.

Debits CreditsCash 3,950$

Accounts receivable - 1,500

Supplies 9,650

Prepaid Insurance 2,400 Equipment 23,500 Accounts payable 6,200$

Unearned consulting revenue 3,000 Common stock 30,000 Dividends 600

Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 2,000Utilities expense 300 Total 45,300$

Scott CompanyTrial Balance

December 31, 2011

The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total

credits.


credits.

$ 45,300

Slide 2-30


Paying a previously recorded invoice from a supplier (of supplies) involves

1. Debiting Supplies and crediting Cash.2. Debiting Accounts Payable and

crediting Cash. 3. Debiting Supplies and crediting

Accounts Payable. 4. Debiting Cash and crediting Supplies.

Slide 2-31

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 BalanceThe Trial BalanceThe Trial Balance

Limitations of a Trial Balance

Slide 2-32


AA trial balance can be described as1. A list of general ledger account titles

and balances at a certain date.2. A grouping of the accounts used by

an organization to prepare its basic financial statements.

3. A record on which are recorded the increases and decreases of a particular financial statement component, such as cash.

4. One of the basic financial statements of an organization.

Slide 2-33

The accounts

come from the

ledger of Snow-

Go Corporation

at December

31, 2011.

The Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

Slide 2-34

If the trial balance does not balance, the error(s) must be found and

corrected.

Make sure the trial balance columns are

correctly added.

Make sure the trial balance columns are

correctly added.

Make sure account balances are correctly

entered from the ledger.

Make sure account balances are correctly

entered from the ledger.

See if debit or credit accounts are mistakenly

placed on the trial balance.

See if debit or credit accounts are mistakenly

placed on the trial balance.

Recompute each account balance in the

ledger.

Recompute each account balance in the

ledger.

Verify that each journal entry is posted

correctly.

Verify that each journal entry is posted

correctly.

Verify that each original journal entry has equal debits and

credits.

Verify that each original journal entry has equal debits and

credits.

Searching for and Correcting ErrorsSearching for and Correcting ErrorsSearching for and Correcting ErrorsSearching for and Correcting Errors

Slide 2-35


Balance.


Balance.

Debits CreditsCash 3,950$

Accounts receivable - 1,500

Supplies 9,650

Prepaid Insurance 2,400 Equipment 23,500 Accounts payable 6,200$

Unearned consulting revenue 3,000 Common stock 30,000 Dividends 600

Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 2,000Utilities expense 300 Total 45,300$

Scott CompanyTrial Balance

December 31, 2011


credits.


credits.

$ 45,300

Slide 2-36

Stmt. Of Cash Flows

Income Statement

Stmt. of Ret. Earnings

Beginning Balance

Sheet

Ending Balance Sheet

Using a Trial Balance to prepare Using a Trial Balance to prepare Financial StatementsFinancial Statements


Slide 2-37

Use the Trial Balance for Scott Use the Trial Balance for Scott company to prepare its financial company to prepare its financial

statementsstatements

Use the Trial Balance for Scott Use the Trial Balance for Scott company to prepare its financial company to prepare its financial

statementsstatements

Slide 2-38

Income StatementIncome StatementIncome StatementIncome Statement

Slide 2-39

Statement of Retained Statement of Retained EarningsEarnings

Statement of Retained Statement of Retained EarningsEarnings

Slide 2-40

Balance SheetBalance SheetBalance SheetBalance Sheet

Slide 2-41

Knowledge Check # 5:Knowledge Check # 5:An accountant for O’Leary Company enters a transaction in which she debits Accounts Receivable and credits Service Revenue. What type of transaction occurred that results in this entry?

1. O’Leary collected an Account Receivable.

2. O’Leary performed a service in exchange for cash.

3. O’Leary performed a service for a client and sent a bill for services rendered

4. O’Leary wrote off an Account Receivable that it expects not to collect.

Slide 2-42


If assets and equity have both been reduced by equal amounts in the same journal entry, what is the most likely explanation?

1. A fixed asset has been purchased on credit.

2. An invoice has been received from the cell phone company.

3. A supplier has been paid.

4. An owner has received a dividend.

Slide 2-43

June 1 Shareholders contributed $15,000 cash and a delivery truck worth $12,000.June 2 Paid $4,500 as rent for June, July, and

August.June 3 Purchased supplies on account, $1,800.June 9 Billed customers for deliveries made, $3,100.June 14 Received $1,000 cash from a customer as

advance payment for deliveries scheduled throughout July.June 17 Paid $1,500 on account to suppliers.June 20 Collected $2,300 on account from customers.June 29 Paid $700 cash dividends to shareholdersJune 30 Paid salaries for June, $2,000.

Record the following transactions in Record the following transactions in journal entries for United Delivery Inc.journal entries for United Delivery Inc.Record the following transactions in Record the following transactions in

journal entries for United Delivery Inc.journal entries for United Delivery Inc.

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End of Chapter 2End of Chapter 2End of Chapter 2End of Chapter 2

Documents

The Recording Process