Accounting 211 – Chapter 2 The Recording Process

What you will learn in Chapter 2: Basics of the account Steps in the recording process Journalizing and posting The trial balance

The Account Individual record of increases or decreases in a specific asset, liability or equity item. The T-account is a way of illustrating those changes. We will use it in the course to illustrate the effects of events on these specific accounts…

Remember: debits on the left, credits on the right! Debits and Credits A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Remember: debits on the left, credits on the right!

Double-Entry Accounting An account balance is the difference between the increases and decreases in an account.

Double-Entry Accounting Liabilities Equity Assets = + Debit Credit ASSETS + - LIABILITIES - + EQUITIES In an accounting system, the sum of the debits always equals the sum of the credits.

Normal Account Balances Asset = Increase is a debit = Decrease is a credit = Normal balance is a debit Liability = Increase is a credit = Decrease is a debit = Normal balance is a credit Equity = Increase is a credit

Double-Entry Accounting Exh. 3.8 Double-Entry Accounting Equity Revenues Expenses Owner’s Capital Owner’s Withdrawals _ + Debit Credit Capital - + Withdrawals + - Expenses Revenues

The Recording Process Steps are: Analyze each transaction and how it affects the accounts. Enter the transaction information in a journal. Transfer (post) the journal information in the ledger (book of accounts).

Analyzing and Recording Process Analyze each transaction and event form source documents Record relevant transactions and events in a journal Post journal information to ledger accounts Prepare and analyze the trial balance

Journalizing A journal is an original book of entry where the transactions are recorded. It shows the complete record of one transaction. It provides a chronological record of all transactions. It helps to find errors by comparing debits and credits.

Employee Earnings Record Source Documents Bills from Suppliers Checks Purchase Orders Employee Earnings Record Bank Statement Sales Tickets

Journalizing and Posting Transactions Step 1: Analyze transactions and source documents. Liabilities Equity Assets = + Step 2: Apply double-entry accounting Step 3: Record journal entry Step 4: Post entry to ledger

General Journal (Debits on left, credits on right) Titles of Affected Accounts Transaction Date Dollar amount of debits and credits Transaction explanation

Simple vs. Compound Entry A simple entry involves one debit and one credit. A compound entry involves more than one debit or more than one credit 1/1/2006 Delivery Equipment 100,000 Cash 40,000 Accounts Payable 60,000 To record purchase of truck on credit with down payment of $40,000.

General Ledger A ledger account contains all the information in one place about changes in a specific account and the account’s balance. The general ledger contains all the asset, liability and equity accounts maintained by the business. Let’s look at Ill. 2-15 on p. 54.

Posting Journal Entries 1 Identify the account.

Posting Journal Entries Enter the date. 2

Posting Journal Entries Enter the amount and description. 3

Posting Journal Entries 4 Enter the journal reference.

Posting Journal Entries Compute the balance. 5

Posting Journal Entries 6 Enter the ledger reference.

Chart of Accounts A list of accounts identified by a unique account number. III. 2-18 in text Typical numbering system: Assets 100-199 Liabilities 200-299 Equity 300-399 Revenues 400-499 Expenses 500-599 More specific revenue/expenses 600-999

Analyzing Transactions – An Illustration Analysis: Double entry: 101 301 Posting:

Analyzing Transactions Analysis: Double entry: 126 101 Posting:

Analyzing Transactions Analysis: Double entry: 167 101 Posting:

Analyzing Transactions Analysis: Double entry: 126 201 Posting:

Analyzing Transactions Analysis: Double entry: 403 101 Posting:

The Trial Balance A trial balance is a list of all accounts and their balances at a specific point in time. The trial balance is used to prove the equality of debits and credits. If there are errors, the trial balance can be used to find them.

Steps to Prepare A Trial Balance List the account titles and their balances Total the debit and credit columns Prove the equality of the two columns Note: the trial balance proves that debits equal credits, but it does not prove that all transactions are correctly record or that the ledger balances are correct.

Example of a Trial Balance After processing its remaining transactions for December, FastForward’s Trial Balance is prepared. Debits Credits Cash 3,950 $ Accounts receivable - Supplies 9,720 Prepaid Insurance 2,400 Equipment 26,000 Accounts payable 6,200 Unearned consulting revenue 3,000 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 600 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total 45,300 FastForward Trial Balance December 31, 2004 The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits.

Finding Errors In A Trial Balance If the error is $1 or a multiple of $10, 100 or $1,000 re-add the trial balance or re-add the individual account balances. If the error can be divided by $2, check if an amount equal to half the error was entered in the wrong column. If the error can be divided by 9, there may be a transposition error. If the error is some other amount, check to see if that amount was not entered on the trial balance. If all else fails, go back to the original journal entries and check if they are correct!

Formatting with Dollar Signs Don’t use dollar signs in the journals and ledgers. Use them only in the trial balance and on financial statements.

Questions ?