Chapter 2-1

Chapter 2-2 Chapter 2 The Recording Process Accounting Principles, Ninth Edition

Chapter 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. Study Objectives

Chapter 2-4 The Account Debits and credits Expansion of basic equation Limitations of a trial balance Locating errors Use of dollar signs Summary illustration of journalizing and posting JournalLedger Steps in the Recording Process The Recording Process Illustrated The Trial Balance The Recording Process

Chapter 2-5 Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = “Left” Credit = “Right” Account 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. The Account

Chapter 2-6 Double-entry 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. must equal DEBITS must equal CREDITS. SO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits

Chapter 2-7 greater than If Debits are greater than Credits, the account will have a debit balance. $10,000Transaction #2$3,000 $15,000 8,000Transaction #3 Balance Transaction #1 Debits and Credits SO 2 Define debits and credits and explain their use in recording business transactions.

Chapter 2-8 greater than If Credits are greater than Debits, the account will have a credit balance. $10,000Transaction #2$3,000 Balance Transaction #1 Debits and Credits SO 2 Define debits and credits and explain their use in recording business transactions. $1,000 8,000Transaction #3

Chapter 2-9 Normal Balance Credit Normal Balance Debit Debits and Credits Summary SO 2

Chapter 2-10 Balance Sheet Income Statement Balance Sheet Income Statement = + - AssetLiabilityEquityRevenueExpense Debit Credit Debits and Credits Summary SO 2 Define debits and credits and explain their use in recording business transactions.

Chapter 2-11 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. Review Question Debits and Credits Summary SO 2 Define debits and credits and explain their use in recording business transactions.

Chapter 2-12 Assets - Debits should exceed credits. Liabilities – Credits should exceed debits. The normal balance is on the increase side. SO 2 Define debits and credits and explain their use in recording business transactions. Assets and Liabilities

Chapter 2-13 Owner’s investments and revenues increase owner’s equity (credit). Owner’s drawings and expenses decrease owner’s equity (debit). SO 2 Define debits and credits and explain their use in recording business transactions. Owners’ Equity

Chapter 2-14 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 Owner’s Capital. Expenses have the opposite effect: expenses decrease owner’s equity. SO 2 Define debits and credits and explain their use in recording business transactions. Revenue and Expense

Chapter 2-15 Accounts that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and owner’s capital. c. assets, liabilities, and owner’s drawings. d. assets, owner’s drawings, and expenses. Review Question Debits and Credits Summary SO 2 Define debits and credits and explain their use in recording business transactions.

Chapter 2-16 Expansion of the Basic Equation Relationship among the assets, liabilities and owner’s equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit. AssetsLiabilities = Owner’s Equity Basic Equation Expanded Basic Equation SO 2 Define debits and credits and explain their use in recording business transactions. + Illustration 2-11

Chapter 2-17 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. The Journal SO 4 Explain what a journal is and how it helps in the recording process.

Chapter 2-18 TECHNIQUE OF JOURNALIZING The date of the transaction is entered into the date column. 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)

Chapter 2-19 TECHNIQUE OF JOURNALIZING The debit account title is entered at the extreme left margin of the Account Titles and Explanation column. The credit account title is indented on the next line. 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)

Chapter 2-20 TECHNIQUE OF JOURNALIZING The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column.

Chapter 2-21 TECHNIQUE OF JOURNALIZING A brief explanation of the transaction is given.

Chapter 2-22 TECHNIQUE OF JOURNALIZING A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005 Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for Cash)

Chapter 2-23 TECHNIQUE OF JOURNALIZING The column entitled Ref. is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts.

Chapter 2-24 If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. SIMPLE AND COMPOUND JOURNAL ENTRIES

Chapter 2-25 When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. COMPOUND JOURNAL ENTRY 2 1 3

Chapter 2-26 COMPOUND JOURNAL ENTRY This is the wrong format; all debits must be listed before the credits are listed.

Chapter 2-27 A General Ledger contains the entire group of accounts maintained by a company. The General Ledger includes all the asset, liability, owner’s equity, revenue and expense accounts. The Ledger SO 5 Explain what a ledger is and how it helps in the recording process. Illustration 2-15

Chapter 2-28 T-account form used in accounting textbooks. In practice, the account forms used in ledgers are much more structured. Standard Form of Account SO 5 Explain what a ledger is and how it helps in the recording process. Illustration 2-16

Chapter 2-29 Posting Posting – the process of transferring amounts from the journal to the ledger accounts. PostingPosting Illustration 2-17 SO 6 Explain what posting is and how it helps in the recording process.

Chapter 2-30 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. Review Question PostingPosting SO 6 Explain what posting is and how it helps in the recording process.

Chapter 2-31 Accounts and account numbers arranged in sequence in which they are presented in the financial statements. Chart of Accounts SO 6 Explain what posting is and how it helps in the recording process. Illustration 2-18

Chapter 2-32 The Recording Process Illustrated LO 6 Explain what posting is and how it helps in the recording process. 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

Chapter 2-33 The Recording Process Illustrated LO 6 Explain what posting is and how it helps in the recording process. Illustration 2-20

Chapter 2-34 The Recording Process Illustrated Illustration 2-21

Chapter 2-35 The Recording Process Illustrated Illustration 2-22

Chapter 2-36 The Recording Process Illustrated Illustration 2-23

Chapter 2-37 The Recording Process Illustrated Illustration 2-24

Chapter 2-38 The Recording Process Illustrated Illustration 2-25

Chapter 2-39 The Recording Process Illustrated Illustration 2-26

Chapter 2-40 The Recording Process Illustrated Illustration 2-27

Chapter 2-41 The Recording Process Illustrated Illustration 2-28

Chapter 2-42 A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. If debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. The Trial Balance LO 7 Prepare a trial balance and explain its purposes. Illustration 2-31

Chapter 2-43 A trial balance does not prove all transactions have been recorded or the ledger is correct. 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. The Trial Balance LO 7 Prepare a trial balance and explain its purposes. Limitations of a Trial Balance

Chapter 2-44 Which one of the following represents the expanded basic accounting equation? Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue - Expenses. Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue - Expenses. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenue. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenue. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenue – Expenses. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenue – Expenses. Assets = Revenue + Expenses – Liabilities. Assets = Revenue + Expenses – Liabilities.

Chapter 2-45 Which one of the following represents the expanded basic accounting equation? Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue - Expenses. Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue - Expenses. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenue. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenue. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenue – Expenses. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenue – Expenses. Assets = Revenue + Expenses – Liabilities. Assets = Revenue + Expenses – Liabilities.

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