2 The Recording Process

Learning Objectives
Describe how accounts, debits, and credits are used to
1
record business transactions.

2 Indicate how a journal is used in the recording process.

Explain how a ledger and posting help in the recording

3
process.

4 Prepare a trial balance.

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LEARNING Describe how accounts, debits, and credits
1
OBJECTIVE are used to record business transactions.

 Record of increases and decreases

The in a specific asset, liability, owners’
equity, revenue, or expense item.
Account
 Debit = “Left”
 Credit = “Right”

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 The Account

DEBIT AND CREDIT PROCEDURES

Double-entry 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 at least one other account.
 DEBITS must equal CREDITS.

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 Debits and Credits

If the sum of Debit entries are greater than the sum of

Credit entries, 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

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 Debits and Credits

If the sum of Credit entries are greater than the sum of

Debit entries, 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

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 Debits and Credits

Assets  Assets - Debits should exceed

Debit / Dr. Credit / Cr.
credits.
 Liabilities – Credits should
Normal Balance
exceed debits.
Chapter

 Normal balance is on the

3-23

increase side.
Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-24

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 Debits and Credits

Owner’s Equity  Owner’s investments and

Debit / Dr. Credit / Cr.
revenues increase owner’s equity
(credit).
Normal Balance
 Owner’s drawings and expenses
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

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 Debits and Credits

Revenue  The purpose of earning revenues

Debit / Dr. Credit / Cr.
is to benefit the owner(s).
 The effect of debits and credits on
Normal Balance
revenue accounts is the same as
Chapter
3-26 their effect on Owner’s Capital.
 Expenses have the opposite
Expense
Debit / Dr. Credit / Cr. effect: expenses decrease owner’s
equity.

Normal Balance

Chapter
3-27

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 Debits/Credits Rules

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.

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 Debits/Credits Rules

Question
Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and owner’s drawing.

d. assets, owner’s drawing, and expenses.

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 Summary of Debit/Credit Rules

Relationship among the assets, liabilities and owner’s equity

of a business:
Illustration 2-11
Basic
Equation Assets = Liabilities + Owner’s Equity

Expanded
Equation
Debit/Credit
Effects

The equation must be in balance after every transaction.

Total Debits must equal total Credits.

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 LEARNING Indicate how a journal is used in the
2
OBJECTIVE recording process.

Steps in the Recording Process

Illustration 2-12

Analyze each transaction Enter transaction in a journal Transfer journal information to

ledger accounts

Business documents, such as a sales slip, a check, or a bill,

provide evidence of the transaction.
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 Steps in the Recording Process

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.

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 Steps in the Recording Process

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
Owner’s Capital 15,000

Equipment 7,000
Cash 7,000
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 Steps in the Recording Process

SIMPLE AND COMPOUND ENTRIES

Illustration: 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
Compound journal entry

GENERAL JOURNAL
Date Account Title Ref. Debit Credit
July 1 Equipment 14,000
Cash 8,000
Accounts payable 6,000

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 DO IT! 2 Recording Business Activities

Kate Browne engaged in the following activities in establishing

her salon, Hair It Is:

1.Opened a bank account in the name of Hair It Is and

deposited $20,000 of her own money in this account as her
initial investment.

2.Purchased equipment on account (to be paid in 30 days) for a

total cost of $4,800.

3.Interviewed three persons for the position of hair stylist.

Prepare the entries to record the transactions.

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 LEARNING Explain how a ledger and posting help in the
3
OBJECTIVE recording process.

The Ledger
 General Ledger contains all the asset, liability, and owner’s
equity accounts.
Illustration 2-15

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 The Ledger

STANDARD FORM OF ACCOUNT Illustration 2-16

Three-column form
of account

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 Ledger

POSTING
Transferring
journal entries
to the ledger
accounts.

Illustration 2-17
Posting a journal
entry

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 Chart of Accounts
Illustration 2-18

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 The Recording Process Illustrated

Follow these steps:

1. Determine what
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.

Illustration 2-19

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 Illustration 2-20
2-22 Purchase of office equipment LO 3
 Illustration 2-21
Receipt of cash
for future service

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 Illustration 2-22
2-24 Payment of monthly rent LO 3
 Illustration 2-23
Payment for
insurance

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 Illustration 2-24
2-26 Purchase of supplies on credit LO 3
 The Recording Process Illustrated

Illustration 2-25
Hiring of employees

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 Illustration 2-26
2-28 Withdrawal of cash by owner LO 3
 Illustration 2-27
2-29 Payment of salaries LO 3
 Illustration 2-28
2-30 Receipt of cash for services performed LO 3
Summary Journalizing and Posting
Illustration 2-29

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2-32 Illustration 2-29 LO 3
 Illustration 2-30
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LO 3
 DO IT! 3 Posting

Kate Brown recorded the following transactions in a general journal

during the month of March. Post these entries to the Cash account.

Mar. 4 Cash 2,280

Service Revenue 2,280
Mar. 15 Salaries and Wages Expense 400
Cash 400
Mar. 19 Utilities Expense 92
Cash 92

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 LEARNING
OBJECTIVE
4 Prepare a trial balance.

2-35 Illustration 2-31 LO 4

 Trial Balance

Limitations of a Trial Balance

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.

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 Dollar Signs and Underlining

Dollar Signs
Do not appear in journals or ledgers.
Typicallyused only in the trial balance and the financial
statements.
Shown only for the first item in the column and for the total of
that column.

Underlining
A single line is placed under the column of figures to be added
or subtracted.
Totals are double-underlined.
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 Trial Balance

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.

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 DO IT! 4 Trial Balance

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 DO IT! 4 Trial Balance

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LO 4
 Problem-1
Desiree Clark is a licensed CPA. During the first month of operations
of her business, the following events and transactions occurred.
May 1 Clark invested $20,000 cash in her business.
2 Hired a secretary-receptionist at a salary of $2,000 per month.
3 Purchased $2,500 of supplies on account from Read Supply
Company.
7 Paid office rent of $900 cash for the month.
11 Completed a tax assignment and billed client $3,200 for
services provided.
12 Received $3,500 advance on a management consulting
engagement.

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 Problem-1 (Continue)
17 Received cash of $1,200 for services completed for C. Desmond
Co.
31 Paid secretary-receptionist $2,000 salary for the month.
31 Paid 60% of balance due Read Supply Company
Desiree uses the following chart of accounts: No. 101 Cash, No. 112
Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No.
209 Unearned Service Revenue, No. 301 Owner’s Capital, No. 400
Service Revenue, No. 726 Salaries and Wages Expense, and No. 729 Rent
Expense.
Instructions
(a)Journalize the transactions.
(b)Post to the ledger accounts.
(c)Prepare a trial balance on May 31, 2012.

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 Problem-2
San Jose Services was formed on May 1, 2012. The following transactions
took place during the first month.
Transactions on May 1:
1 Jarron Gilbert invested $40,000 cash in the company, as its sole owner.
2.Hired two employees to work in the warehouse. They will each be paid
a salary of $3,050 per month.
3. Signed a 2-year rental agreement on a warehouse; paid $24,000 cash in
advance for the first year.
4.Purchased furniture and equipment costing $30,000. A cash payment of
$10,000 was made immediately; the remainder will be paid in 6 months.
5.Paid $1,800 cash for a one-year insurance policy on the furniture and
equipment.

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 Problem-2 (Continue)
6.Purchased basic office supplies for $500 cash.
7.Purchased more office supplies for $1,500 on account.
8.Total revenues earned were $20,000—$8,000 cash and $12,000 on
account.
9.Paid $400 to suppliers for accounts payable due.
10. Received $3,000 from customers in payment of accounts receivable.
11.Received utility bills in the amount of $350, to be paid next month.
12.Paid the monthly salaries of the two employees, totalling $6,100.
Instructions:
(a) Prepare journal entries (b) Post the journal entries
(c) Prepare a trial balance as of May 31, 2012.

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