1. Principle of Accounting
Chapter 4
The double-entry Recording Process
BA in International Business
Foreign Trade University

2. Outline
• An introduction to double-entry accounting
• State the rules of double-entry for the
different types of accounts.
• Footing and balancing ledger accounts
• The role of trial balance
• Detecting errors through a trial balance
• Chart of account
• Three-column ledger accounts
• Accounting for drawings

3. The Account
Accounting’s main summary device
is the account, the record of changes.
Accounts are grouped in three broad categories,
according to the accounting equation:
Cash

4. The Account
Assets are the economic resources that
benefit the business now and in the future
Cash Land
Accounts receivable Buildings
Inventory Equipment,
Notes receivable furniture,
Prepaid expenses and fixtures

5. The Account
Liabilities are the debts of the company.
Notes payable
Accounts payable
Accrued liabilities
(for expenses incurred but not paid)
Long-term liabilities (bonds)

6. The Account
Stockholders’ (owners’) equity is the
owners’ claims to the assets of a corporation.

7. The Account

8. Accounting Transactions
Transactions are economic events that require
recording in the financial statements.
• May be external or internal.
• Not all activities represent transactions.
• Each transaction has a dual effect on the
accounting equation.

9. Accounting Transactions
Question: Are the following events recorded in the
accounting records? Discuss
Purchased a product
Event computer. design with Pay rent.
potential
customer.
Criterion Is the financial position (assets, liabilities, or
stockholders’ equity) of the company changed?
Record/
Don’t Record

10. Double-Entry Accounting
Double-entry bookkeeping means to record
the dual effects of each business transaction.

11. The T-Account
Account Title
Debit Credit
LEFT SIDE RIGHT SIDE
Three parts :
1) the Title of the account
2) a left or Debit side
3) a right or Credit side

12. Ledger Accounts
• T-accounts and the balance sheet
equation:
Assets = Liabilities + Owners’ Equity
Assets Liabilities
Increases Decreases Decreases Increases
Owners’
Equity
Decreases Increases

13. Debits and Credits
• Debit (dr.) - an entry or balance on
the left side of an account
• Credit (cr.) - an entry or balance on
the right side of an account
• Remember:
– Debit is always the left side!
– Credit is always the right side!

14. Recording entries in ledger
accounts
Identify the transaction and state two ledger accounts
affected by the transaction
Classify the ledger accounts according to
their report classification
Determine whether each account is
increased or decreased by the transaction
State whether the accounts will have
a debit or a credit entry

15. Recording entries in ledger
accounts
Air & Sea received $50,000 from issuing stock.
Stockholders’
Assets = Liabilities + Equity
Cash Common Stock
Debit Credit
for for
Increase, Increase,
50,000 50,000

16. Recording entries in ledger
accounts
Air & Sea purchased land for $40,000 cash.
Stockholders’
Assets = Liabilities + Equity
Cash Common Stock
Bal. 50,000 Credit Bal. 50,000
for
Decrease,
40,000
Land
Debit
for
Increase,
40,000

17. Recording Transactions
in the Journal
Journal Page 1
Date Accounts and Explanation Debit Credit
April 2 Cash 50,000
Common Stock 50,000
Issued common stock

18. Analysis chart
• An analysis chart provides an analysis of a
financial transaction to determine the double-
entry to be recorded in ledger accounts.
• An analysis chart helps to ensure that the
double-entry for each transaction is correctly
determined.
• Example
Transaction A/c names Classifica- Increase/ Debit/
tion Decrease Credit
Bought vehicle for Vehicle Asset Increase Dr
$18,000 by cash at Cash at Asset Decrease Cr
bank bank

19. Double-entry accounting
Vehicles
Cash at bank Mar 1 Cash at bank 18,000
Mar 1 Vehicles 18,000
Mar 4 Wages 400
Wages
Mar 4 Cash at bank 400

20. Revenue and Expense
Transactions
• Retained Income is merely accumulated
revenues less expenses, but we cannot
just increase or decrease the Retained
Income account directly.
– This would make preparing the
income statement very difficult
• By accumulating revenues and
expenses separately, a more
meaningful income statement can be
easily prepared.

21. Revenue and Expense
Transactions
• Revenue and expense accounts are a
part of Retained Income.
Retained Income
Decrease Increase
Expense Revenue
Debit Credit
Increase Increase

22. Revenue and Expense
Transactions
• Summary of revenue and expense transactions:
– A credit to a revenue increases the revenue
and increases Retained Income.
– A debit to a revenue decreases the revenue
and decreases Retained Income.
– A credit to an expense decreases the expense
and increases Retained Income.
– A debit to an expense increases the expense
and decreases Retained Income.

23. Debits and Credits Summary Liabilities
Normal
Debit / Dr. Credit / Cr.
Normal
Balance Balance
Debit Credit Normal Balance
Assets Chapter
Stockholders’ Equity
Stockholders’
3-24
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
Expense
3-23
Revenue
Chapter
3-25
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
SO 3 Define debits and credits and explain their use in recording business transactions.

24. Debits and Credits Summary
Review Question
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.
SO 3 Define debits and credits and explain their use in recording business transactions.

25. Examples – Exercise 4.3
Transaction Account Classifi- Increase/ Debit/
names cation Decrease Credit
Banked $60,000 cash Cash at bank A Increase Dr
to start business Capital OE Increase Cr
Paid the 1st month Expense
rent $4,000 cash
Bought shop fittings Shop fitting
for cash $12,000 Cash
Purchased CDs for Stock control
$4,300 on credit Credit
Sold CDs
Cost $2,000

26. Example – Exercise 4.3
(Cont’d)
Transaction Account Classifi- Increase/ Debit/
names cation Decrease Credit
Sold CDs for cash $4,300
Paid 1 month’s advertising
$600
Borrowed cash from bank
$5,000
Sold CDs on credit at cost
$600
(Record Cost of sale)
Sold CDs on credit for $1,200
(Record revenue)
Purchased stock for cash
$3,600

27. Example – Exercise 4.3
(Cont’d)
Transaction Account Classifi Increase/ Debit/
names -cation Decrease Credit
Repaid the National Bank
$2,000
Paid wages $800
Cash sales of stock at cost
$1,200 (record cost of sale)
Cash sales of stock for
$2,200
(record revenue)
Purchased inventory on
credit
for $3,400

28. Footing – Example E 4.3
Cash at bank
Feb 1 Capital $60,000 Feb 2 Rent $ 4,000
5 Sales $ 3,400 3 Shop fittings $ 12,000
8 Loan $ 5,000 6 Advertising $ 600
10 Sales $ 2,200 9 Stock control $ 3,600
14 Loan $ 5,000
47,600 15 Wages $ 800
$70,600 $23,000

29. Balancing – Example E 4.3
Cash at bank
Feb 1 Capital $60,000 Feb 2 Rent $ 4,000
5 Sales $ 3,400 3 Shop fittings $ 12,000
8 Loan $ 5,000 6 Advertising $ 600
10 Sales $ 2,200 9 Stock control $ 3,600
14 Loan $ 2,000
15 Wages $ 800
Balance $ 47,600
$70,600 $70,600
Balance $47,600

30. Closing the Accounts
• Once the financial statements are
prepared, the ledger accounts must
be prepared to record the next
period’s transactions. This process is
called closing the books.
– The balances in all “temporary”
stockholders’ equity accounts are
transferred to a “permanent”
stockholders’ equity account.
– The revenue and expense accounts are
“reset” to zero and the current net

31. Closing the Accounts
• The Closing Process:
– The revenue accounts are
closed to Income Summary
in the first
entry.
– The expense accounts are
closed to Income
Summary in
the second entry.
– The amount of Net Income (revenues -
expenses) is then transferred from

32. Preparing the Trial Balance
• Once all transactions have been posted
to the ledger, a trial balance is
prepared.
• Trial balance - a list of all of the
accounts with their balances – assets
first, followed by liabilities, and then
stockholders’ equity. It is prepared as a
test or check before continuing the
recording process.

33. Preparing the Trial Balance
• The purposes of the trial balance:
– To help check on accuracy of posting by
proving whether the total debits equal
the total credits
– To detect errors in double-entry
recording
– To establish a convenient summary of
balances in all accounts for the
preparation of formal financial
statements

34. Trial balance – An example
Dr Cr
Capital – Mammone 60,000
Rent 4,000
Shop fittings 12,000
Stock control 7,500
Advertising 600
Loan 3,000
Wages 800
Sales 6,800
Costs of sales 3,800
Debtors 1,200
Creditors 7,700
Cash at bank 47,600
77,500 77,500

35. Trial balance (Cont’d)
Some errors may not be detected by a
trial balance:
• Entering an incorrect amount for both the
debit and credit.
• Entering a debit or credit in the wrong
account.
• The debit and credit entries are reversed.
• Omitting a transaction completely.
• Compensating errors.

36. Chart of accounts
• An organized index to the ledger
accounts
• Groups the account together according
to their accounting report classifications
• Facilitate report preparation

37. Three-column ledger accounts
• A simpler form of ledger with three columns:
debit entry, credit entry and the balance of
account.
• Advantage: the balances of all accounts are
readily available.
• Ideal for computerized system.
Eg: Three-column ledger – Cash at bank account
Date Account Dr Cr Balance
1 Capital 25,000 25,000 Dr
2 Loan 10,000 35,000 Dr
4 Loan 500 34,500 Dr
5 Stock control 600 33,900 Dr

38. Accounting for Drawings
• Drawings: withdrawals of assets by the
owner for personal use.
• The balance of drawings is accounted for
as a deduction against the owners’ equity.
Example:
– The proprietor withdraws $500 cash for personal use.
– Balances of accounts under owners’ equity section are
as follows:
Capital account: $50,000
Profit earned for the year: $20,000
Drawings for the year: $10,000
Requirement: Record the transaction and prepare an
extract of the statement of financial position, owners’
equity section.

39. Accounting for Drawings
(Cont’d)
Dr Drawings a/c $500
Cr Cash at bank a/c $500
Extract statement of financial position
Owners’ equity
Capital $50,000
Plus Net profit $20,000 $70,000
Less Drawings $10,000 $60,000

40. Flow of Accounting Data
Transaction Amounts
Transaction Transaction Entered in Posted to
Occurs Analyzed the Journal the Ledger

41. Ledger Accounts
• Ledger - a group of related accounts kept
current in a systematic manner
– Think of a ledger as a book with one page for
each account.
– The ledger is a company’s “books.”
• General ledger - the collection of
accounts that accumulates the Ledger
amounts reported in the major
financial statements

42. The General Ledger

43. Homework
Exercise 4.5
Exercise 4.9
Exercise 4.11

44. Quiz
Give appropriate terms for the below definitions.
2. A numerical list of all the accounts used by a company.
3. An entry on the left side of an account.
4. A list of each account and its balance at a specific point
in time used to prove the equality of debits and credits.
5. A system of accounting in which every transaction is
recorded with equal debits and credits.
6. An entry on the right side of an account.
7. An analysis of a financial transaction leading to
determine the double-entry to be recorded in ledger
accounts.

45. Quiz
Give appropriate terms for the below definitions.
2. A numerical list of all the accounts used by a company.
(chart of account)
3. An entry on the left side of an account.(debit)
4. A list of each account and its balance at a specific point
in time used to prove the equality of debits and credits.
(balancing ledger accounts)
5. A system of accounting in which every transaction is
recorded with equal debits and credits. (trail balance)
6. An entry on the right side of an account (credit)
7. An analysis of a financial transaction leading to
determine the double-entry to be recorded in ledger
accounts. (an analysis chart)