CH 2

Slide 2-1
Chapter
The Recording Process

Financial Accounting, Seventh Edition
Slide 2-2
Study Objectives
1. 2. 3. 4. 5. 6. 7.
Slide 2-3
Explain what an account is and how it helps in the recording process. Define debits and credits and explain their use in recording business transactions. Identify the basic steps in the recording process. Explain what a journal is and how it helps in the recording process. Explain what a ledger is and how it helps in the recording process. Explain what posting is and how it helps in the recording process. Prepare a trial balance and explain its purposes.
The Recording Process
The Account
Steps in the Recording Process Journal Ledger Posting
The Recording Process Illustrated Summary illustration of journalizing and posting
The Trial Balance
Debits and credits Debit and credit procedure Stockholders equity relationships Summary of debit/credit rules
Slide 2-4
Limitations of a trial balance Locating errors Use of dollar signs
The Account
Account
Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = Left Credit = Right
An Account can be illustrated in a T-Account form.
Account Name
Debit / Dr. Credit / Cr.
Slide 2-5
SO 1 Explain what an account is and how it helps in the recording process.
Debits and Credits
DoubleDouble-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.
Slide 2-6
SO 2 Define debits and credits and explain their use in recording business transactions.
Debits and Credits

If Debits are greater than Credits, the account will have a debit balance.
Account Name
Transaction #1 Transaction #3
$10,000 8,000
$3,000
Transaction #2
Balance
$15,000
Slide 2-7
Debits and Credits

If Credits are greater than Debits, the account will have a credit balance.
Account Name
Transaction #1
$10,000
$3,000 8,000
Transaction #2 Transaction #3
Balance
$1,000
Slide 2-8
Debits and Credits Summary

Liabilities
Normal Balance Debit

Assets
Normal Balance Credit

Equity
Debit / Dr.
Chapter 3-24
Debit / Dr.
Credit / Cr.
Normal Balance
Credit / Cr.
Normal Balance Normal Balance

Chapter 3-23
Expense
Chapter 3-25
Revenue
Normal Balance
Normal Balance
Chapter 3-27
Chapter 3-26
Slide 2-9
SO 2

Balance Sheet Asset = Liability + Equity Debit Income Statement Revenue - Expense
Credit
Slide 2-10
Review 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.
Slide 2-11
Solution notes page
Discussion Question
Q2-4. Maria Alvarez, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Maria correct? Discuss.
See notes page for discussion

Slide 2-12
Assets and Liabilities

Assets
Assets - Debits should exceed credits. Liabilities Credits should exceed debits.
Normal Balance
Chapter 3-23
Liabilities
The normal balance is on the increase side.
Normal Balance
Chapter 3-24
Slide 2-13
Stockholders Equity
Equity
Issuance of stock and revenues increase equity (credit). Dividends and expenses decrease equity (debit).
Normal Balance
Chapter 3-25
Common Stock
Retained Earnings
Dividends
Normal Balance
Normal Balance
Normal Balance
Chapter 3-25
Chapter 3-25
Chapter 3-23
Slide 2-14
Revenue and Expense

Revenue
The purpose of earning revenues is to benefit the owner(s). The effect of debits and credits on revenue accounts is the same as their effect on stockholders equity. Expenses have the opposite effect: expenses decrease stockholders equity.
Normal Balance
Chapter 3-26
Expense
Normal Balance
Chapter 3-27
Slide 2-15
Review Question
Accounts that normally have debit balances are:
a. assets, expenses, and revenues. b. assets, expenses, and retained earnings. c. assets, liabilities, and dividends declared. d. assets, dividends declared, and expenses.
Slide 2-16
Solution notes page
Summary of Debit/Credit Rules

Relationship among the assets, liabilities and stockholders equity of a business:
The equation must be in balance after every transaction. For every Debit there must be a Credit.
Slide 2-17
Summary of Debit/Credit Rules

Kathy 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 Kathy to set up a double-entry set of accounting records in which to record all of her business transactions. Following are the balance sheet accounts that Hair It Is, Inc., will likely need to record the transactions. Indicate whether the normal balance of each account is a debit or a credit. Cash Supplies Notes payable
Slide 2-18 Solution on notes page
Debit Debit Credit
Equipment Accounts payable Common stock
Debit Credit Credit
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 slip, a check, a bill, or a cash register tape, provide evidence of the transaction.
Slide 2-19
SO 3 Identify the basic 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.
Slide 2-20
SO 4 Explain what a journal is and how it helps in the recording process.
Journalizing
Journalizing - Entering transaction data in the journal.
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Oct. 1 Pete Hanshew begins business as a real estate agent with a cash investment of $15,000 in exchange for stock. 3 Purchases office furniture for $1,900, on account. 6 Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. 27 Pays $700 on balance related to transaction of Oct. 3. 30 Pays the administrative assistant $2,500 salary for Oct. E2-5 Instructions - Journalize the transactions for E2-4.
Slide 2-21
Journalizing
E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency.
Oct. 1
Pete Hanshew begins business as a real estate agent with a cash investment of $15,000.
General Journal
Date
Oct. 1
Account Title
Cash Common stock
(Investment for stock)
Ref.
Debit
15,000
Credit
15,000
Slide 2-22
Journalizing
Oct. 3
Purchases office furniture for $1,900, on account.

General Journal
Date
Oct. 3
Account Title
Office furniture Accounts payable
(Purchase on account)
Ref.
Debit
1,900
Credit
1,900
Slide 2-23
Journalizing
Oct. 6
Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.
General Journal
Date
Oct. 6
Account Title
Accounts receivable Service revenue
(Services provided)
Ref.
Debit
3,200
Credit
3,200
Slide 2-24
Journalizing
Oct. 27 Pays $700 on balance related to transaction of
Oct. 3.
General Journal
Date
Oct. 27
Account Title
Accounts payable Cash
(Payment on account)
Ref.
Debit
700
Credit
700
Slide 2-25
Journalizing
Oct. 30 Pays the administrative assistant $2,500
salary for Oct.

General Journal
Date
Oct. 30
Account Title
Salaries expense Cash
(Payment for salaries)
Ref.
Debit
2,500
Credit
2,500
Slide 2-26
Journalizing
Simple Entry Two accounts, one debit and one credit. Compound Entry Three or more accounts.
Example On June 15, H. Burns, purchased equipment for $15,000 by paying cash of $10,000 and the balance on account (to be paid within 30 days).
General Journal
Date
Jun. 15
Account Title
Equipment Cash Accounts payable
(Purchase equipment)
Ref.
Debit
15,000
Credit
10,000 5,000
Slide 2-27
The Ledger
A General Ledger contains the entire group of accounts maintained by a company. The General Ledger includes all the asset, liability, stockholders equity, revenue and expense accounts.
Illustration 2-16
Slide 2-28
SO 5 Explain what a ledger is and how it helps in the recording process.
Slide 2-29
Standard Form of Account

T-account form used in accounting textbooks. In practice, the account forms used in ledgers are much more structured.
Illustration 2-17
Slide 2-30
Chart of Accounts
Accounts and account numbers arranged in sequence in which they are presented in the financial statements.
Hanshew Real Estate Agency
Chart of Accounts Assets
101 112 126 140 150 158 Cash Accounts receivable Advertising supplies Office furniture Equipment Accumulated depreciation 300 310
Stockholders' Equity
Common stock Retained earnings
Revenues
400 Service revenue
Liabilities
200 201 209 212 230
Slide 2-31
Expenses
631 711 722 726 729 905 Advertising supplies expense Depreciation expense Insurance expense Salaries expense Rent expense Interest expense
Accounts payable Notes payable Unearned revenue Salaries payable Interest payable
Posting
Posting the process of transferring amounts from the journal to the ledger accounts.
Illustration 2-19
Slide 2-32
SO 6 Explain what posting is and how it helps in the recording process.
Posting
Posting the process of transferring amounts from the journal to the ledger accounts.
General Journal
Date Oct. Account Title Cash Common stock (Owner's investment in business) Ref. Debit 15,000 15,000
J1
Credit
101
General Ledger Cash

Date Explanation Ref. Debit
Acct. No. 101

Credit Balance
Oct. 1
J1
15,000
15,000
Slide 2-33
Posting E2-5
General Journal
Date Oct. Account Title Cash Common stock Ref. Debit 15,000 15,000 Credit
J1
101 300
(Owner's investment in business)
General Ledger Cash

Acct. No. 101

Credit Balance
Oct. 1
J1
15,000
15,000
General Ledger Common stock

Acct. No. 300

Credit Balance
Oct. 1
J1
15,000
15,000
Slide 2-34
Posting
140
J1
E2-5
General Ledger Office Furniture
200
Acct. No. 140

Credit Balance
Oct. 3
J1
1,900
1,900
General Ledger Accounts Payable

Acct. No. 200

Credit Balance
Oct. 3
J1
1,900
1,900
Slide 2-35
Posting
112
J1
E2-5
General Ledger Accounts Receivable
400
Acct. No. 112

Credit Balance
Oct. 6
J1
3,200
3,200
General Ledger Service Revenue

Acct. No. 400

Credit Balance
Oct. 6
J1
3,200
3,200
Slide 2-36
Posting E2-5
General Ledger Cash
J1
200 101
Acct. No. 101

Credit Balance
Oct. 1 Oct.27
J1 J1
15,000 700
15,000 14,300
General Ledger Accounts Payable

Acct. No. 200

Credit Balance
Oct. 3 Oct.27
Slide 2-37
J1 J1
1,900 700
1,900 1,200
Posting E2-5
General Ledger Cash
J1
726 101
Acct. No. 101

Credit Balance
Oct. 1 Oct.27 Oct.30
J1 J1 J1
15,000 700 2,500
15,000 14,300 11,800
General Ledger Salaries Expense

Acct. No. 726

Credit Balance
Oct.30
J1
2,500
2,500
Slide 2-38
Posting
Review Question
Posting:
a. normally occurs before journalizing. b. transfers ledger transaction data to the journal. c. is an optional step in the recording process. d. transfers journal entries to ledger accounts.
Solution on notes page Slide 2-39
The Recording Process Illustrated

Kate Turner recorded the following transactions in a general journal during the month of March.
Post these entries to the Cash account.
Slide 2-40
Solution on notes page
SO 6
The Trial Balance

E2-5
A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits.
Hanshew Real Estate Agency

Trial Balance October 31, 2011 Cash Accounts receivable Office furniture Accounts payable Common stock Service revenue Salaries expense Debit $ 11,800 3,200 1,900 $ Credit
1,200 15,000 3,200
2,500 $ 19,400
$ 19,400
Slide 2-41
SO 7 Prepare a trial balance and explain its purposes.
The Trial 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, or
5. offsetting errors are made in recording the amount
of a transaction.
Slide 2-42
The Trial Balance
Review 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
Owners 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.

Slide 2-43 Solution on notes page
Slide 2-44
The Trial Balance
The accounts come from the ledger of Christel Corporation at December 31, 2011.
Slide 2-45
Solution on notes page
SO 7
Your Personal Annual Report
David Edmondson, the president and CEO of well-known electronics retailer Radio Shack, overstated his accomplishments by claiming that he had earned a bachelors of science degree, when in fact he had not. Apparently his employer had not done a background check to ensure the accuracy of his rsum. A chief financial officer of Veritas Software lied about having an M.B.A. from Stanford University.
Slide 2-46
A former president of the U.S. Olympic Committee lied about having a Ph.D. from Arizona State University. When the truth was discovered, she resigned. The University of Notre Dame discovered that its football coach, George OLeary, lied about his education and football history. He was forced to resign after only five days.
Slide 2-47
A survey by Automatic Data Processing reported that 40% of applicants misrepresented their education or employment history. A survey by the Society for Human Resource Management of human resource professionals reported the following responses to the following question.
Slide 2-48
Using Radio Shack as an example, what should the company have done when it learned of the falsehoods on Mr. Edmondsons rsum? Should Radio Shack have fired him? NO: Mr. Edmondson had been a Radio Shack employee for 11 years. He had served the company in a wide variety of positions, and had earned the position of CEO through exceptional performance. While the fact that he lied 11 years earlier on his rsum was unfortunate, his service since then made this past transgression irrelevant. In addition, the company was in the midst of a massive restructuring, which included closing 700 of its 7,000 stores. It could not afford additional upheaval at this time. YES: Radio Shack is a publicly traded company. Investors, creditors, employees, and others doing business with the company will not trust it if its leader is known to have poor integrity. The Slide tone at the top is vital to creating an ethical organization.
2-49
Copyright
Copyright 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Slide 2-50

CH 2

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Slide 2-1

The Recording Process

The Recording Process

Steps in the Recording Process Journal Ledger Posting

The Recording Process Illustrated Summary illustration of journalizing and posting

The Trial Balance

Limitations of a trial balance Locating errors Use of dollar signs

An Account can be illustrated in a T-Account form.

SO 1 Explain what an account is and how it helps in the recording process.

Debits and Credits

DoubleDouble-entry accounting system

Debits and Credits

Debits and Credits

Debits and Credits Summary

Normal Balance Debit

Normal Balance Credit

Normal Balance Normal Balance

Debits and Credits Summary

Debits and Credits Summary

Solution notes page

Debits and Credits Summary

See notes page for discussion

Assets and Liabilities

The normal balance is on the increase side.

Revenue and Expense

Debits and Credits Summary

Solution notes page

Summary of Debit/Credit Rules

Summary of Debit/Credit Rules

Debit Debit Credit

Equipment Accounts payable Common stock

Debit Credit Credit

Steps in the Recording Process

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger accounts

SO 3 Identify the basic steps in the recording process.

and credit amounts can be easily compared.

SO 4 Explain what a journal is and how it helps in the recording process.

SO 4 Explain what a journal is and how it helps in the recording process.

SO 4 Explain what a journal is and how it helps in the recording process.

Purchases office furniture for $1,900, on account.

SO 4 Explain what a journal is and how it helps in the recording process.

SO 4 Explain what a journal is and how it helps in the recording process.

SO 4 Explain what a journal is and how it helps in the recording process.

salary for Oct.

SO 4 Explain what a journal is and how it helps in the recording process.

SO 4 Explain what a journal is and how it helps in the recording process.

SO 5 Explain what a ledger is and how it helps in the recording process.

SO 5 Explain what a ledger is and how it helps in the recording process.

Standard Form of Account

SO 5 Explain what a ledger is and how it helps in the recording process.

SO 5 Explain what a ledger is and how it helps in the recording process.

SO 6 Explain what posting is and how it helps in the recording process.

General Ledger Cash

Acct. No. 101

SO 6 Explain what posting is and how it helps in the recording process.

(Owner's investment in business)

General Ledger Cash

Acct. No. 101

General Ledger Common stock

Acct. No. 300