Chapter 2: The Recording Process

The Recording Process The Account Debits and credits Double-entry accounting Analyzing and Recording Transactions The accounting cycle and steps in the recording process The journal The Ledger Posting The recording process illustrated Summary illustration of journalizing and posting The Trial Balance Limitations of a trial balance Locating errors Some process explanations

Chapter 2: The Recording Process LEARNING OBJECTIVES Describe how accounts, debits, and credits are used to record business transactions. State how a journal is used in the recording process and journalize transactions. Explain how a ledger helps in the recording process and post transactions. Prepare a trial balance.

The Account An individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item Examples: cash, accounts payable, service revenue, salaries expense Three parts: title, debit side, credit side In its simplest form, these parts are positioned like the letter T Therefore called a T account

Debits & Credits Debit (Dr.) indicates left; Credit (Cr.) indicates right Entering an amount on the left side is called debiting the account Entering an amount on the right side is crediting the account Debit balance Debit amounts exceed the credits Credit balance Credit amounts exceed the debits

Tabular Versus Account Form

Debit & Credit Procedure Debit does not mean increase or decrease Can be either depending on the type account Credit also does not mean increase or decrease also depends on account type Assets are on the debit side of the equation Increases are also on debit side; decreases on credit side Liabilities are on the credit side of the equation Increases are on the credit side; decreases on the debit side

Assets, Liabilities & Owner’s Capital

Drawings, Revenues, Expenses

Accounting Equation Expanded

Double-Entry Accounting System Each transaction is recorded with equal debits and credits Total debits always equals total credits Accounting equation will always stay in balance Assets = Liabilities + Owner’s Equity Every account has a normal balance Either debit or credit

Chapter 2: LEARNING OBJECTIVES Describe how accounts, debits, and credits are used to record business transactions. State how a journal is used in the recording process and journalize transactions. Explain how a ledger helps in the recording process and post transactions. Prepare a trial balance.

The Accounting Cycle — Steps 1 to 3

The first three steps in the accounting cycle: The Recording Process The first three steps in the accounting cycle: Analyze Business Transactions Determine effect on accounts Journalize the Transactions The book of original entry Post to Ledger Accounts

Where transactions are first recorded The Journal Where transactions are first recorded Every company has a general journal Contributes to recording process: Discloses complete effect of a transaction in one place Provides a chronological record Helps prevent and locate errors

Entering transaction data in the journal Journalizing Entering transaction data in the journal Separate journal entry for each transaction A complete entry consists of Transaction date Accounts & amounts to be debited and credited Brief explanation of transaction

Journalizing Technique Transaction date is entered in date column Debit account title is entered at the left margin of the “Account Titles and Explanation” column Credit account title is indented on the next line

Journalizing Technique (cont’d) Debit amounts are recorded in the Debit (left) column Credit amounts are recorded in the Credit (right) column A brief explanation of the transaction is provided

Journalizing Technique (cont’d) Separate entries with a blank line Ref column is used later when transferred to ledger List all debits in each entry before listing credits

Journalizing Technique (cont’d) Simple entry: involves two accounts Compound entry: involves three or more accounts

Chapter 2: LEARNING OBJECTIVES Describe how accounts, debits, and credits are used to record business transactions. State how a journal is used in the recording process and journalize transactions. Explain how a ledger helps in the recording process and post transactions. Prepare a trial balance.

The Ledger Ledger: entire group of accounts maintained by a company General ledger: contains all the assets, liabilities, and owner’s equity accounts Arranged in financial statement order Assets, liabilities, owner’s capital, drawings, revenues and expenses Posting: procedure of transferring journal entries to the ledger accounts

Standard Form of Account

Posting Post to debit account: date, journal page number, amount Enter debit account number in journal reference column Post to credit account: journal page number, amount Enter credit account number in journal reference column

List of accounts and their account numbers Chart of Accounts List of accounts and their account numbers Indicates where accounts are found in the ledger Usually starts with balance sheet accounts, followed by income statement accounts Varies by company Number of accounts Types of accounts Numbering system

Chapter 2: LEARNING OBJECTIVES Describe how accounts, debits, and credits are used to record business transactions. State how a journal is used in the recording process and journalize transactions. Explain how a ledger helps in the recording process and post transactions. Prepare a trial balance.

The Accounting Cycle – Steps 1 to 4

The Trial Balance List of accounts and their balances at a specific time Proves that debits equal credits after posting Uncovers errors in journalizing and posting To prepare a trial balance: List accounts and their balances Total the debit and credit columns Ensure the two column totals are equal

Example Trial Balance

Limitations of a Trial Balance Does not prove: That all transactions have been recorded, or That the ledger is correct Numerous errors may exist even though the trial balance columns agree Total debits and total credits may be equal, but may still be posted to the wrong account or in the wrong amount

If trial balance does not balance, then: Locating Errors If trial balance does not balance, then: If error is an amount such as $1, $100 or $1,000, re-add and re-calculate account balances If divisible by two, look for entry (= ½ of the error ) in the wrong column If divisible by nine, look for transposition errors Otherwise, scan to see if an account balance has been omitted

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