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Chapter 2
Chapter 2
STUDY OBJECTIVES
2. DEFINE DEBITS AND CREDITS AND EXPLAIN HOW THEY ARE USED TO
RECORD BUSINESS TRANSACTIONS.
Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning.
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Accounting 11A Financial Accounting and Reporting
Accounting Process for Service Operations
The Account
2. In its simplest form, an account consists of (a) the title of the account, (b) a left or debit side,
and (c) a right or credit side. The alignment of these parts resembles the letter T, and
therefore the account form is called a T-account.
3. (S.O. 2) The terms debit and credit mean left and right, respectively.
a. The act of entering an amount on the left side of an account is called debiting the
account and making an entry on the right side is crediting the account.
b. When the debit amounts exceed the credits, an account has a debit balance; when
the reverse is true, the account has a credit balance.
4. In a double-entry system, equal debits and credits are made in the accounts for each trans-
action. Thus, the total debits will always equal the total credits.
5. The effects of debits and credits on assets and liabilities and the normal balances are:
6. Accounts are kept for each of the four subdivisions of owner's equity: capital, drawings,
revenues, and expenses.
7. The effects of debits and credits on the owner's equity accounts and the normal balances
are:
Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning.
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Accounting 11A Financial Accounting and Reporting
Accounting Process for Service Operations
The Recording Process
The Journal
11. The journal makes several significant contributions to the recording process:
a. It discloses in one place the complete effect of a transaction.
b. It provides a chronological record of transactions.
c. It helps to prevent or locate errors because the debit and credit amounts for each entry
can be readily compared.
12. Entering transaction data in the journal is known as journalizing. When three or more
accounts are required in one journal entry, the entry is known as a compound entry.
The Ledger
13. (S.O. 5) The ledger is the entire group of accounts maintained by a company. It keeps in
one place all the information about changes in account balances and it is a source of useful
data for management.
14. The standard form of a ledger account has three money columns and the balance in the
account is determined after each transaction.
15. (S.O. 6) Posting is the procedure of transferring journal entries to the ledger accounts. The
following steps are used in posting:
a. In the ledger, enter in the appropriate columns of the account(s) debited the date, jour-
nal page, and debit amount.
b. In the reference column of the journal, write the account number to which the debit
amount was posted.
c. Perform the same steps in a. and b. for the credit amount.
Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning.
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Accounting 11A Financial Accounting and Reporting
Accounting Process for Service Operations
The Basic Steps
17. The basic steps in the recording process are illustrated as follows:
Transaction On September 4, Fesmire Inc. pays $3,000 cash to a creditor in full pay-
ment of the balance due.
Basic analysis The liability Accounts Payable is decreased $3,000, and the asset Cash is
decreased $3,000.
The following transactions were completed during July, the second month of the busi-
ness operations:
1 Lee Chang made an additional investment in Music Depot by depositing P2,500 in
Music Depot’s checking account.
1 Instead of continuing to share office space with a local real estate agency, Lee decided
to rent office a local music store. Paid rent for July, P2,000.
1 Paid a premium of P2,700 for a comprehensive insurance policy covering liability, theft,
and fire. The policy covers a one year period.
2 Received P1,350 on account.
3 On behalf of Music Depot, Lee signed a contract with a local radio station WHBD, to
provide a guest disc jockey for 80 hours per month for a monthly fee of P3,600. Any
additional hours beyond 80 will be billed to WHBD at P40 per hour. In accordance with
the contract, lee received P7,200 from WHBD as an advance payment for the first two
months.
3 Paid P250 on account.
4 Paid an attorney P500 for reviewing the July 3rd contract with WHBD. (Recorded as
Miscellaneous Expense.)
5 Purchase office equipment on account from One-Stop Office Mart, P5,000.
8 Paid for a newspaper advertisement, P200.
11 Received P800 for serving as a disc jockey for a party.
13 Paid P600 to a total audio electronics store for rental of digital recording equipment.
14 Paid wages of P1,000 to receptionist and part-time assistant.
Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning.
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Accounting 11A Financial Accounting and Reporting
Accounting Process for Service Operations
Music Depot’s chart of accounts and the balance of accounts as of June 1, 2010 (normal
balances), are as follows:
INSTRUCTIONS
1. Enter the July 1, 2010 accounts balances in the appropriate balance column of a four-column
account. Write Balance in the Item column, and place a check mark (/) in the Posting
Reference column. (Hint: Verify the equality of the debit and credit balances in the ledger
before proceeding with the next instruction.) You may use T-accounts in lieu of formal
accounts.
2. Analyze and journalize each transaction in a two-column journal, omitting journal entry
explanations.
3. Post the journal to the ledger, extending the account balance to the appropriate balance
column after each posting.
4. Prepare an unadjusted trial balance trial balances as of July 31, 2010.
Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning.
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Accounting 11A Financial Accounting and Reporting
Accounting Process for Service Operations
The Trial Balance
18. (S.O. 7) A trial balance is a list of accounts and their balances at a given time. The primary
purpose of the trial balance is to prove the mathematical equality of the debits and credits
after posting.
19. A trial balance does not prove that all transactions have been recorded or that the ledger is
correct because the trial balance may still balance when
a. a transaction is not journalized.
b. a correct journal entry is not posted.
c. an entry is posted twice.
d. incorrect accounts are used in journalizing or posting.
e. offsetting errors are made in recording the amount of a transaction.
MUSIC DEPOT
Unadjusted Trial Balance
July 31, 2010
Debit Credit
Balances Balances
Cash .............................................................................................. 12,780
Accounts Receivable ..................................................................... 3,150
Supplies ......................................................................................... 850
Prepaid Insurance ......................................................................... 2,700
Office Equipment ........................................................................... 5,000
Accounts Payable .......................................................................... 5,680
Unearned Revenue ....................................................................... 7,200
Lee Chang, Capital ........................................................................ 10,500
Lee Chang, Drawing ...................................................................... 1,700
Fees Earned .................................................................................. 15,300
Wages Expense ............................................................................ 2,400
Office Rent Expense...................................................................... 2,750
Equipment Rent Expense .............................................................. 1,100
Utilities Expense ............................................................................ 860
Music Expense .............................................................................. 2,810
Advertising Expense ...................................................................... 1,600
Supplies Expense .......................................................................... 180
Miscellaneous Expense ................................................................. 800
38,680 38,680
Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning.
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Accounting 11A Financial Accounting and Reporting
Accounting Process for Service Operations
20 MINUTE QUIZ
Circle the correct answer.
True/False
True False
3. An account will have a credit balance if the total debit amounts exceed the total credit
amounts.
True False
4. The ledger is the entire group of accounts and is referred to as the book of original entry.
True False
5. The basic steps in the recording process are (1) to analyze each transaction, (2) to enter
the transaction in a journal, and (3) to transfer the journal entry to the appropriate ledger
accounts.
True False
6. The procedure of transferring journal entries to the ledger accounts is called posting and
should be performed in chronological order.
True False
8. In posting, one should enter “J2” in the Post. Ref. Column on page two of the journal.
True False
9. When the columns of the trial balance equal each other, it proves no errors occurred in
recording and posting.
True False
10. The double-entry system is possible because all business transactions may be expressed
in equal debit and credit entries.
True False
Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning.
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Accounting 11A Financial Accounting and Reporting
Accounting Process for Service Operations
Multiple Choice
Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning.
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