1. Chapter 2-1

2. Chapter 2-2 CHAPTER 2 THE RECORDING PROCESS Accounting Principles, Eighth Edition

3. Chapter 2-3 1. 1.Explain what an account is and how it helps in the recording process. 2. 2.Define debits and credits and explain their use in recording business transactions. 3. 3.Identify the basic steps in the recording process. 4. 4.Explain what a journal is and how it helps in the recording process. 5. 5.Explain what a ledger is and how it helps in the recording process. 6. 6.Explain what posting is and how it helps in the recording process. 7. 7.Prepare a trial balance and explain its purposes. Study Objectives

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

5. Chapter 2-5 Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = Credit = Account An Account can be illustrated in a T-Account form. LO 1 Explain what an account is and how it helps in the recording process. The Account

6. 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. DEBITS CREDITS. LO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits

7. 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 LO 2 Define debits and credits and explain their use in recording business transactions.

8. 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 LO 2 Define debits and credits and explain their use in recording business transactions. $1,000 8,000Transaction #3

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

10. Chapter 2-10 - = - AssetLiabilityEquityRevenueExpense Debit Credit Debits and Credits Summary LO 2 Define debits and credits and explain their use in recording business transactions. Note: Debit does not automatically mean increase (=)

11. Chapter 2-11 Chapter 1 Chapter 2

12. Chapter 2-12

13. Chapter 2-13 How can I remember what to Credit or Debit? LO 2 Define debits and credits and explain their use in recording business transactions. One way is to create a few simple scenarios in your head… i.e. pay $1000 in salaries with cash i.e. buy $500 in supplies on account i.e. earn $50 cash by cutting a lawn i.e. withdraw $200 from the bus for personal use Did our _ go up/down? Is our _ an A,L,OE? To make our _ go up/down do we Dr/Cr?

14. Chapter 2-14 How can I remember what to Credit or Debit? LO 2 Define debits and credits and explain their use in recording business transactions. Another way is to use mnemonic devices… CRedit DEbit A I D L I C

15. Chapter 2-15 Assets - Debits should exceed credits. Liabilities – Credits should exceed debits. The normal balance is on the increase side. LO 2 Define debits and credits and explain their use in recording business transactions. Assets and Liabilities

16. Chapter 2-16 Owner’s investments and revenues increase owner’s equity (credit). Owner’s drawings and expenses decrease owner’s equity (debit). LO 2 Define debits and credits and explain their use in recording business transactions. Owners’ Equity

17. Chapter 2-17 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. LO 2 Define debits and credits and explain their use in recording business transactions. Revenue and Expense

18. Chapter 2-18 How can I remember what to Credit or Debit? LO 2 Define debits and credits and explain their use in recording business transactions. Another way is to use mnemonic devices… CRedit increases Revenues Capital/Inv DEbit increases Drawing Expenses A I D L I C Debit Increase Asset Credit Increase Liability

19. Chapter 2-19 How can I remember what to Credit or Debit? LO 2 Define debits and credits and explain their use in recording business transactions. One way is to create a few simple scenarios in your head… i.e. pay $1000 in salaries with cash i.e. buy $500 in supplies on account i.e. earn $50 cash by cutting a lawn i.e. withdraw $200 from the bus for personal use Did our _ go up/down? Is our _ an A,L,OE? To make our _ go up/down do we Dr/Cr?

20. Chapter 2-20 Practice problem E2-2

21. Chapter 2-21 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 LO 2 Define debits and credits and explain their use in recording business transactions.

22. Chapter 2-22 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…Debit and Credits. Illustration 2-11 AssetsLiabilities = Owner’s Equity Basic Equation Expanded Basic Equation LO 2 Define debits and credits and explain their use in recording business transactions. +

23. Chapter 2-23 Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. Steps in the Recording Process LO 3 Identify the basic steps in the recording process. Illustration 2-12 Analyze each transactionEnter transaction in a journal Transfer journal information to ledger accounts

24. Chapter 2-24 Book of original entry (General Ledger). 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 LO 3 Identify the basic steps in the recording process.

25. Chapter 2-25 Practice problem P1 Did our _ go up/down? Is our _ an A,L,OE? To make our _ go up/down do we Dr/Cr?

26. Chapter 2-26 Journalizing - Entering transaction data in the journal. JournalizingJournalizing THE JOURNAL Transactions are initially recorded in chronological order (as they occur) before they are transferred to the ledger accounts. (This is like recording your own journal… you write everything down as it happens)

27. Chapter 2-27 Journalizing - Entering transaction data in the journal. JournalizingJournalizing A journal makes several contributions to recording process: discloses in one place the complete effect of a transaction provides a chronological record of transactions helps to prevent or locate errors as debit and credit amounts for each entry can be compared

28. Chapter 2-28 JournalizingJournalizing CASH Capital

29. Chapter 2-29 JournalizingJournalizing

30. Chapter 2-30 Journalizing - Entering transaction data in the journal. JournalizingJournalizing

31. Chapter 2-31 Journalizing - Entering transaction data in the journal. JournalizingJournalizing

32. Chapter 2-32 Creating a Compound Entry We buy __ for $__. We have only $__ to put down. And must finance the rest.

33. Chapter 2-33 Journalizing - Entering transaction data in the journal. JournalizingJournalizing

34. Chapter 2-34 Journalizing - Entering transaction data in the journal. JournalizingJournalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. LO 4 Explain what a journal is and how it helps in the recording process. Pete Hanshew begins business as a real estate agent with a cash investment of $15,000. Oct. 1 Purchases office furniture for $1,900, on account.3 Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. 6 Pays $700 on balance related to transaction of Oct. 3.27 Pays the administrative assistant $2,500 salary for Oct.30 E2-5 Instructions - Journalize the transactions for E2-4.

35. Chapter 2-35 JournalizingJournalizing General Journal LO 4 Explain what a journal is and how it helps in the recording process. E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Pete Hanshew begins business as a real estate agent with a cash investment of $15,000. Oct. 1

36. Chapter 2-36 JournalizingJournalizing General Journal LO 4 Explain what a journal is and how it helps in the recording process. E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Purchases office furniture for $1,900, on account. Oct. 3

37. Chapter 2-37 JournalizingJournalizing General Journal LO 4 Explain what a journal is and how it helps in the recording process. E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. Oct. 6

38. Chapter 2-38 JournalizingJournalizing General Journal LO 4 Explain what a journal is and how it helps in the recording process. E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Pays $700 on balance related to transaction of Oct. 3. Oct. 27

39. Chapter 2-39 JournalizingJournalizing General Journal LO 4 Explain what a journal is and how it helps in the recording process. E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Pays the administrative assistant $2,500 salary for Oct. Oct. 30

40. Chapter 2-40 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 LO 5 Explain what a ledger is and how it helps in the recording process.

41. Chapter 2-41 Accounts and account numbers arranged in sequence in which they are presented in the financial statements. Chart of Accounts LO 6 Explain what posting is and how it helps in the recording process.

42. Chapter 2-42 T-account form used in accounting textbooks. In practice, the account forms used in ledgers are much more structured. Standard Form of Account LO 5 Explain what a ledger is and how it helps in the recording process.

43. Chapter 2-43 Posting Posting – the process of transferring amounts from the journal to the ledger accounts. General Ledger General Journal Oct. 1J115,000 101 J1 PostingPosting LO 6 Explain what posting is and how it helps in the recording process.

44. Chapter 2-44 A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. The Trial Balance LO 7 Prepare a trial balance and explain its purposes.

45. Chapter 2-45 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