2. Chapter 2
The Recording
Process
Chapter
2-2 Accounting Principles, Ninth Edition
3. Study Objectives
Study Objectives
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.
Chapter
2-3
4. The Recording Process
The Recording Process
Steps in the
Steps in the The Recording
The Recording
The Account
The Account Recording
Recording Process
Process The Trial Balance
The Trial Balance
Process
Process Illustrated
Illustrated
Debits and Journal Summary Limitations of a
credits Ledger illustration of trial balance
Expansion of journalizing and Locating errors
basic equation posting
Use of dollar
signs
Chapter
2-4
5. The Account
The Account
Record of increases and decreases
Account in a specific asset, liability, equity,
revenue, or expense item.
Debit = “Left”
Credit = “Right”
An Account can Account Name
be illustrated in a Debit / Dr. Credit / Cr.
T-Account
form.
Chapter
2-5 SO 1 Explain what an account is and how it helps in the recording process.
6. Debits and Credits
Debits and Credits
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 equal CREDITS.
Chapter SO 2 Define debits and credits and explain their
2-6
use in recording business transactions.
7. Debits and Credits
Debits and Credits
If Debits are greater than Credits, the account
will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
Transaction #3 8,000
Balance $15,000
Chapter SO 2 Define debits and credits and explain their
2-7
use in recording business transactions.
8. Debits and Credits
Debits and Credits
If Credits are greater than Debits, the account
will have a credit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
8,000 Transaction #3
Balance $1,000
Chapter SO 2 Define debits and credits and explain their
2-8
use in recording business transactions.
9. Debits and Credits Summary
Debits and Credits Summary
Liabilities
Normal
Debit / Dr. Credit / Cr.
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance
Assets Chapter
Owner’s Equity
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
Chapter
2-9 SO 2
10. Debits and Credits Summary
Debits and Credits Summary
Balance Sheet Income Statement
Asset = Liability + Equity Revenue - Expense
Debit
Credit
Chapter SO 2 Define debits and credits and explain their
2-10
use in recording business transactions.
11. Debits and Credits Summary
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.
Chapter SO 2 Define debits and credits and explain their
2-11
use in recording business transactions.
12. Debits and Credits Summary
Debits and Credits Summary
Discussion Question
Q2-4: Maria Alvarez, a beginning accounting
student, believes debit balances are favorable
and credit balances are unfavorable. Is Maria
correct? Discuss.
See notes page for discussion
Chapter SO 2 Define debits and credits and explain their
2-12
use in recording business transactions.
13. Assets and Liabilities
Assets and Liabilities
Assets
Assets - Debits should
Debit / Dr. Credit / Cr.
exceed credits.
Normal Balance
Chapter
3-23
Liabilities – Credits
should exceed debits.
Liabilities
The normal balance is on
Debit / Dr. Credit / Cr.
the increase side.
Normal Balance
Chapter
3-24
Chapter SO 2 Define debits and credits and explain their
2-13
use in recording business transactions.
14. Owners’ Equity
Owners’ Equity
Owner’s Equity Owner’s investments and
revenues increase owner’s
Debit / Dr. Credit / Cr.
equity (credit).
Owner’s drawings and expenses
Normal Balance
Chapter
3-25
decrease owner’s equity (debit).
Owner’s Capital Owner’s Drawing
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
Normal Balance Normal Balance
Chapter Chapter
3-25 3-23
Chapter SO 2 Define debits and credits and explain their
2-14
use in recording business transactions.
15. Revenue and Expense
Revenue and Expense
Revenue The purpose of earning
Debit / Dr. Credit / Cr.
revenues is to benefit the
owner(s).
Normal Balance
The effect of debits and
credits on revenue accounts
Chapter
3-26
Expense
is the same as their effect
Debit / Dr. Credit / Cr.
on Owner’s Capital.
Expenses have the opposite
effect: expenses decrease
Normal Balance
Chapter
3-27
owner’s equity.
Chapter SO 2 Define debits and credits and explain their
2-15
use in recording business transactions.
16. Debits and Credits Summary
Debits and Credits Summary
Review Question
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and owner’s capital.
c. assets, liabilities, and owner’s drawings.
d. assets, owner’s drawings, and expenses.
Chapter SO 2 Define debits and credits and explain their
2-16
use in recording business transactions.
17. Expansion of the Basic Equation
Expansion of the Basic Equation
Relationship among the assets, liabilities and
owner’s equity of a business:
Illustration 2-11
Basic
Assets = Liabilities + Owner’s Equity
Equation
Expanded
Basic
Equation
The equation must be in balance after every
transaction. For every Debit there must be a Credit.
Chapter SO 2 Define debits and credits and explain their
2-17
use in recording business transactions.
18. Steps in the Recording Process
Steps in the Recording Process
Illustration 2-12
Transfer journal information
Analyze each transaction Enter transaction in a journal to ledger accounts
Business documents, such as a sales slip, a check, a
bill, or a cash register tape, provide evidence of the
transaction.
Chapter
2-18 SO 3 Identify the basic steps in the recording process.
19. The Journal
The 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.
Chapter
2-19 SO 4 Explain what a journal is and how it helps in the recording process.
20. Journalizing
Journalizing
Journalizing - 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 Journal
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
R. Neal, Capital 15,000
Computer equipment 7,000
Cash 7,000
Chapter
2-20 SO 4 Explain what a journal is and how it helps in the recording process.
21. Journalizing
Journalizing
Simple and Compound Entries
Illustration: Assume that 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 Journal
Date Account Title Ref. Debit Credit
Sept. 1 Delivery equipment 14,000
Cash 8,000
Accounts payable 6,000
Chapter
2-21 SO 4 Explain what a journal is and how it helps in the recording process.
22. The Ledger
The Ledger
A General Ledger contains the entire group of accounts
maintained by a company.
The General Ledger includes all the asset, liability,
owner’s equity, revenue and expense accounts.
Illustration 2-15
Chapter
2-22 SO 5 Explain what a ledger is and how it helps in the recording process.
23. Chapter
2-23 SO 5 Explain what a ledger is and how it helps in the recording process.
24. Standard Form of Account
Standard Form of Account
T-account form used in accounting textbooks.
In practice, the account forms used in ledgers are
much more structured.
Illustration 2-16
Chapter
2-24 SO 5 Explain what a ledger is and how it helps in the recording process.
25. Posting
Posting
Posting – the
process of
transferring
amounts from
the journal to
the ledger
accounts.
Illustration 2-17
Chapter
2-25 SO 6 Explain what posting is and how it helps in the recording process.
26. Posting
Posting
Review Question
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.
Chapter
2-26 SO 6 Explain what posting is and how it helps in the recording process.
27. Chart of Accounts
Chart of Accounts
Accounts and account numbers arranged in sequence in
which they are presented in the financial statements.
Illustration 2-18
Chapter
2-27 SO 6 Explain what posting is and how it helps in the recording process.
28. The Recording Process Illustrated
The Recording Process Illustrated
Follow these steps:
1. Determine what Illustration 2-19
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.
Chapter
2-28 LO 6 Explain what posting is and how it helps in the recording process.
29. The Recording Process Illustrated
The Recording Process Illustrated
Illustration 2-20
Chapter
2-29 LO 6 Explain what posting is and how it helps in the recording process.
30. The Recording Process Illustrated
The Recording Process Illustrated
Illustration 2-21
Chapter
2-30
31. The Recording Process Illustrated
The Recording Process Illustrated
Illustration 2-22
Chapter
2-31
32. The Recording Process Illustrated
The Recording Process Illustrated
Illustration 2-23
Chapter
2-32
33. The Recording Process Illustrated
The Recording Process Illustrated
Illustration 2-24
Chapter
2-33
34. The Recording Process Illustrated
The Recording Process Illustrated
Illustration 2-25
Chapter
2-34
35. The Recording Process Illustrated
The Recording Process Illustrated
Illustration 2-26
Chapter
2-35
36. The Recording Process Illustrated
The Recording Process Illustrated
Illustration 2-27
Chapter
2-36
37. The Recording Process Illustrated
The Recording Process Illustrated
Illustration 2-28
Chapter
2-37
38. The Trial Balance
The Trial Balance
Illustration 2-31
A list of accounts
and their
balances at a
given time.
Purpose is to
prove that debits
equal credits.
Chapter
2-38 LO 7 Prepare a trial balance and explain its purposes.
39. The Trial Balance
The Trial Balance
Limitations of a Trial Balance
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.
Chapter
2-39 LO 7 Prepare a trial balance and explain its purposes.
40. The Trial Balance
The Trial Balance
Review Question
A 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
Owner’s 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.
Chapter
2-40 LO 7 Prepare a trial balance and explain its purposes.
41. Recording Process
Recording Process
Discussion Question
Q2-19. Jim Benes is confused about how accounting
information flows through the accounting system. He believes
the flow of information is as follows.
a. Debits and credits posted to the ledger.
b. Business transaction occurs.
c. Information entered in the journal.
d. Financial statements are prepared.
e. Trial balance is prepared.
Is Jim correct? If not, indicate to Jim the proper flow of the
information.
See notes page for discussion
Chapter
2-41 LO 7 Prepare a trial balance and explain its purposes.
42. Chapter
2-42 LO 7 Prepare a trial balance and explain its purposes.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
Question 2-4 (textbook) Maria is incorrect. A debit balance only means that debits amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable.
Question 2-19 (textbook) No, Jim is not correct . The proper sequence is as follows : ( b ) Business transaction occurs. ( c ) Information entered in the journal. ( a ) Debits and credits are posted to the ledger. ( e ) Trial balance is prepared. ( d ) Financial statements are prepared.
