2-1

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.

2-2
LEARNING Describe how accounts, debits, and credits
1
OBJECTIVE are used to record business transactions.

Debits  Record of increases and decreases in

a specific asset, liability, stockholders’
and equity, revenue, or expense item.
Credits  Debit = “Left”
 Credit = “Right”

An account can Account Name

be illustrated in a Debit / Dr. Credit / Cr.
T-account form.

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 Debits and Credits

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.
 Normal balance is on the
Chapter
3-23

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

Normal Balance

Chapter
3-24

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 Debits and Credits

Stockholders’
Stockholders’ Equity  Owner’s investments and
Debit / Dr. Credit / Cr.
revenues increase stockholders’
equity (credit).
Normal Balance  Dividends and expenses decrease
Chapter
3-25 stockholders’ equity (debit).

Common Stock Retained Earnings Dividends

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

3-25 3-25 3-23

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 Debits and Credits

Revenues  The purpose of earning revenues

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

Normal Balance

Chapter
3-27

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 Debits and Credits
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter
3-24

Stockholders’ Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expenses Chapter
3-25
Revenues
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

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LO 1
 Summary of Debit/Credit Rules

Balance Sheet Income Statement

Assets = Liabilities + Equity Revenues - Expenses

Debit

Credit

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 Summary of Debit/Credit 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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 Summary of Debit/Credit Rules

Question
Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

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2-14 LO 1
 Stockholders’ Equity Relationships
Illustration 2-11

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 Summary of Debit/Credit Rules

Relationship among the assets, liabilities and

stockholders’ equity of a business:
Illustration 2-12
Basic
Equation Assets = Liabilities + Stockholders’ 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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 DO IT! 1 Normal Account Balances

Kate Browne, president of Hair It Is, Inc. has just rented space in a
shopping mall in which she will open and operate a beauty salon. A
friend has advised Kate to set up a double-entry set of accounting
records in which to record all of her business transactions.
Identify the balance sheet accounts that Hair It Is, Inc. will likely
use to record the transactions needed to establish and open the
business. Also, indicate whether the normal balance of each account
is a debit or a credit.
Assets Liabilities Equity

Cash (debit) Notes Payable (credit) Common Stock (credit)

Supplies (debit) Accounts Payable
Equipment (debit) (credit)

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

Steps in the Recording Process

Illustration 2-13

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

ledger accounts

Business documents, such as a sales receipt, 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, stockholders invested $15,000 cash
in the corporation in exchange for shares of stock, and Softbyte
purchased computer equipment for $7,000 cash.
Illustration 2-14

GENERAL JOURNAL
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
Common Stock 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 2-15
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

As president and sole stockholder, Kate Browne engaged in the

following activities in establishing her salon, Hair It Is, Inc.

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

deposited $20,000 of her own money in this account in
exchange for shares of common stock.

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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 DO IT! 2 Recording Business Activities

Prepare the entries to record the transactions.

1. Opened a bank account and deposited $20,000.

Cash 20,000
Common Stock 20,000

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

a total cost of $4,800.
Equipment 4,800
Accounts Payable 4,800

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

No entry
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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
stockholders’ equity accounts.
Illustration 2-16

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