Chapter 2

The Recording
Process

Chapter
2-1
 The
The Account
Account
Record of increases and decreases
Account in a specific asset, liability, owner’s
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
2-2
 Debits
Debits and
and Credits
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
2-3
 Debits
Debits and
and Credits
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
2-4
 Debits
Debits and
and Credits
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
2-5
 Debits
Debits and
and Credits
Credits Summary
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
2-6
 Assets
Assets and
and Liabilities
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
2-7
 Owners’
Owners’ Equity
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
2-8
 Revenue
Revenue and
and Expense
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
2-9
 Expansion
Expansion of
of the
the Basic
Basic Equation
Equation

Relationship among the assets, liabilities and

owner’s equity of a business:
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
2-10
 Steps
Steps in
in the
the Recording
Recording Process
Process

Three basic steps:

1.Analyze each transaction (Evidence of the

transaction can be taken from business documents like
sales slip, bills, etc)

2.Enter transaction in a journal

3.Transfer journal information to ledger accounts

Chapter
2-11
 The
The Journal
Journal

Book of original entry/general journal.

Transactions recorded in chronological order

(i.e. the order in which they occur).

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
2-12
 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.

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
2-13
 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.

General Journal
Date Account Title Ref. Debit Credit
Sept. 1 Delivery equipment 14,000
Cash 8,000
Accounts payable 6,000

Chapter
2-14
 The
The Ledger
Ledger

General Ledger contains the entire group of accounts

maintained by a company. It includes all the asset,
liability, owner’s equity, revenue and expense accounts.

T-account form used in textbooks. In practice, the

account forms used in ledgers are much more structured
like the three-column form of account shown below.

Chapter
2-15
 Posting Posting – the process of transferring amounts
Posting from the journal to the ledger accounts.

Chapter
2-16
 The
The Trial
Trial Balance
Balance
A list of accounts and their balances at a given time.
Purpose is to prove that debits equal credits after posting.

Chapter
2-17
 The
The Trial
Trial Balance
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,
5. offsetting errors are made in recording the amount
of a transaction.

Chapter
2-18