Chapter 2. The recording process.

1-The account.
An account is an individual accounting record of increases and decreases in a specific asset,
liability, stockholder’s equity, revenue or expense item.
An account consists of 3 parts: the title, the debit side and the right side. Due to the format of
an account, which is illustrated in a T form, is also referred as T-account.

Debit and credit procedures.

Each transaction must affect two or more accounts to keep the basic accounting equation in
balance. It’s a double entry system.

The double entry system also helps to ensure the accuracy of the recorded amounts as well as
the detection of errors.

Recording done by debiting at least one account and crediting at least one other account.
Debits must equal Credits.

If the sum of the debits is greater than the sum of the credits’ entries, the account will have a
debit balance. While in the contrary, it will have a credit balance. The normal balance is
considered as the side which increases the account.

Assets Liabilities

Assets Liabilities
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance Normal Balance

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Share capital. Credits increase the Share capital-ordinary, and debits decrease it.

Equity
Debit / Dr. Credit / Cr.

Normal Balance

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Retained earnings. It’s the net income that is kept in the business. It represents the portion
that the company has accumulated through the profitable operation of the business. Credits
increase the Retained Earnings account, and debits decrease it.

Dividends. Dividends reduce the shareholders’ claims on retained earnings. Debits increase
the Dividends account and credits decrease it.

Dividends
Debit / Dr. Credit / Cr.

Normal Balance

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Revenues and expenses. The effect of debits and credits on revenue accounts is the same as
their effect on equity. Expenses have the opposite effect.

Revenues Expenses
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance Normal Balance

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2-Steps in the accounting process.

Every business uses three basic steps in the recording process: (1) analyze each transaction for
its effects on the accounts, (2) enter the transaction information in a journal, and (3) transfer
the journal information to the appropriate accounts in the ledger.

The recording process begins with the transactions. Business documents, such as a sales
receipt, a check, or a bill, provide evidence of the transaction.

The journal. The (general) journal is deferred as the book of original entry. For each
transaction the journal shows the debit and credit effects on specific accounts. The journal
itself provides several significant contributions to the recording process: (1) it discloses the
complete effects of a transaction, (2) it provides a chronological record of transactions, and (3)
it helps to prevent and locate errors.

Journalizing is the action of entering transaction data in the journal. A complete entry consists
of: (1) the date of the transaction, (2) the accounts and amounts to be debited and credited,
and (3) a brief explanation of the transaction.

Simple and compound entries. An entry with only 2 accounts (one debit and one credit) is
considered to be a simple entry. However, some transactions require more than 2 accounts in
journalizing, those ones are known as compound entries. In a compound entry all debits are
listed before the credits.

The ledger. The entire group of accounts maintained by a company is the ledger. It keeps in
one place all the information about changes in specific account balances. The general ledger
contains all the asset, liability, and equity accounts.

Posting. It consists in transferring journal entries to the ledger accounts.

Chart of accounts. It lists the accounts and the account numbers that identify their location in
the ledger.

3-The trial balance.

A trial balance is a list of accounts and their balances at a given time. Customarily, companies
prepare a trial balance at the end of an accounting period. It proves the mathematical equality
of debits and credits after posting. The trial balance is very useful in the preparation of
financial statements. The steps for preparing a trial balance are: (1) list the account titles and
their balances, (2) total the debit and credit columns, and (3) prove the equality of the two
columns. Limitations of the trial balance: (1) a transaction is not journalized, (2) a correct entry
is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing
or posting, and (5) offsetting errors are made in recording the amount of a transaction.