Download presentation
2
Financial Accounting, IFRS Edition
Chapter 2 The Recording Process Financial Accounting, IFRS Edition Weygandt Kimmel Kieso
3
Study Objectives 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.
4
Steps in the Recording Process The Recording Process Illustrated
The Account Steps in the Recording Process The Recording Process Illustrated The Trial Balance Debits and credits Debit and credit procedure Equity relationships Summary of debit/credit rules Journal Ledger Posting Summary illustration of journalizing and posting Limitations of a trial balance Locating errors Use of currency signs
5
An Account can be illustrated in a T-Account form.
The Account 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.
6
The Account Debits and Credits 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 must equal CREDITS. SO 2 Define debits and credits and explain their use in recording business transactions.
7
Debits and Credits If Debits are greater than Credits, the account will have a debit balance. Transaction #1 $10,000 $3,000 Transaction #2 Transaction #3 8,000 Balance $15,000 SO 2 Define debits and credits and explain their use in recording business transactions.
8
Debits and Credits If Credits are greater than Debits, the account will have a credit balance. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance $1,000 SO 2 Define debits and credits and explain their use in recording business transactions.
9
Debits and Credits Summary
Normal Balance Debit Normal Balance Credit SO 2
10
Debits and Credits Summary
Balance Sheet Income Statement Asset = Liability + Equity Revenue - Expense Debit Credit SO 2 Define debits and credits and explain their use in recording business transactions.
11
Debits and Credits Summary
Review Question Debits: increase both assets and liabilities. decrease both assets and liabilities. increase assets and decrease liabilities. decrease assets and increase liabilities. Debits: increase both assets and liabilities. decrease both assets and liabilities. increase assets and decrease liabilities. decrease assets and increase liabilities. Solution notes page SO 2 Define debits and credits and explain their use in recording business transactions.
12
Assets and Liabilities
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.
13
Equity Relationships Issuance of share capital and revenues increase equity (credit). Dividends and expenses decrease equity (debit). SO 2 Define debits and credits and explain their use in recording business transactions.
14
Revenue and Expense The purpose of earning revenues is to benefit the shareholders. The effect of debits and credits on revenue accounts is the same as their effect on equity. Expenses have the opposite effect: expenses decrease equity. SO 2 Define debits and credits and explain their use in recording business transactions.
15
Summary of Debit/Credit Rules
Relationship among the assets, liabilities and equity of a business: Illustration 2-12 The equation must be in balance after every transaction. For every Debit there must be a Credit. SO 2 Define debits and credits and explain their use in recording business transactions.
16
Summary of Debit/Credit Rules
Review Question Accounts that normally have debit balances are: assets, expenses, and revenues. assets, expenses, and retained earnings. assets, liabilities, and dividends. assets, dividends, and expenses. Accounts that normally have debit balances are: assets, expenses, and revenues. assets, expenses, and retained earnings. assets, liabilities, and dividends. assets, dividends, and expenses. Solution notes page SO 2 Define debits and credits and explain their use in recording business transactions.
17
Summary of Debit/Credit Rules
Kathy Renee Browne, president of Hair It Is Company 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 accounts that Hair It Is Company, will likely need to record the transactions. Indicate whether the normal balance of each account is a debit or a credit. Cash Debit Equipment Debit Supplies Debit Accounts payable Credit Notes payable Credit Share capital Credit Solution on notes page SO 2 Define debits and credits and explain their use in recording business transactions.
18
Steps in the Recording Process
Illustration 2-13 Transfer journal information to ledger accounts Analyze each transaction Enter transaction in a journal Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. SO 3 Identify the basic steps in the recording process.
19
Steps in the Recording Process
Journalizing Book of original entry. Transactions recorded in chronological order. Contributions to the recording process: Discloses the complete effects of a transaction. Provides a chronological record of transactions. Helps to prevent or locate errors because the debit and credit amounts can be easily compared. SO 4 Explain what a journal is and how it helps in the recording process.
20
Steps in the Recording Process
Journalizing - Entering transaction data in the journal. Illustration: On September 1, stockholders invested $15,000 cash in exchange for ordinary shares, and Softbyte purchased computer equipment for $7,000 cash. Illustration 2-14 General Journal Sept. 1 Cash 15,000 Share capital 15,000 Computer equipment 7,000 Cash 7,000 Solution on notes page SO 4
21
Steps in the Recording Process
Simple and Compound Entries Illustration: On July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000 cash now and agrees to pay the remaining $6,000 on account. Illustration 2-15 General Journal Sept. 1 Delivery equipment 14,000 Cash 8,000 Accounts payable 6,000 Solution on notes page SO 4
22
Steps in the Recording Process
The Ledger General Ledger All accounts maintained by a company. All asset, liability, equity, revenue and expense accounts. Illustration 2-16 SO 5 Explain what a ledger is and how it helps in the recording process.
23
p. 59 What Would Sam Do? Q: Why did Sam Walton keep separate pigeonholes and blue binders? A: Using separate pigeonholes and blue binders for each store enabled Walton to accumulate and track the performance of each individual store easily. Q: Why bother to keep separate records for each store? A: Keeping separate records for each store provided Walton with more information about performance of individual stores and managers, and greater control. Walton would want and need the same advantages if he were starting his business today. The difference is that he might now use a computerized system for small businesses. Answer on notes page SO 5 Explain what a ledger is and how it helps in the recording process.
24
The Ledger Standard Form of Account
T-account form used in accounting textbooks. Ledger form used in practice. Illustration 2-17 SO 5 Explain what a ledger is and how it helps in the recording process.
25
The Ledger Chart of Accounts
Illustration 2-18 SO 5 Explain what a ledger is and how it helps in the recording process.
26
Posting Posting – the process of transferring amounts from the journal to the ledger accounts. Illustration 2-19 SO 6 Explain what posting is and how it helps in the recording process.
27
The Recording Process Illustrated
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 2-20 SO 6 Explain what posting is and how it helps in the recording process.
28
The Recording Process Illustrated
Illustration 2-21 SO 6 Explain what posting is and how it helps in the recording process.
29
The Recording Process Illustrated
Illustration 2-22 SO 6
30
The Recording Process Illustrated
Illustration 2-23 SO 6
31
The Recording Process Illustrated
Illustration 2-24 SO 6
32
The Recording Process Illustrated
Illustration 2-25 SO 6
33
The Recording Process Illustrated
Illustration 2-26 SO 6 Explain what posting is and how it helps in the recording process.
34
The Recording Process Illustrated
Illustration 2-27 SO 6
35
The Recording Process Illustrated
Illustration 2-28 SO 6
36
The Recording Process Illustrated
Illustration 2-29 SO 6
37
Review Question Posting Posting: normally occurs before journalizing.
transfers ledger transaction data to the journal. is an optional step in the recording process. transfers journal entries to ledger accounts. Posting: normally occurs before journalizing. transfers ledger transaction data to the journal. is an optional step in the recording process. transfers journal entries to ledger accounts. Solution on notes page SO 6 Explain what posting is and how it helps in the recording process.
38
The Recording Process Illustrated
Katherine Turner recorded the following transactions during the month of March. Post these entries to the Cash account. Solution on notes page SO 6
39
The Trial Balance Illustration 2-32 A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. SO 7 Prepare a trial balance and explain its purposes.
40
The Trial Balance Limitations of a Trial Balance
The trial balance may balance even when a transaction is not journalized, a correct journal entry is not posted, a journal entry is posted twice, incorrect accounts are used in journalizing or posting, or offsetting errors are made in recording the amount of a transaction. SO 7 Prepare a trial balance and explain its purposes.
41
SO 7 Prepare a trial balance and explain its purposes.
p. 71 Accuracy Isn’t Everything Q: In order for these companies to prepare and issue financial statements, their accounting equations (debits and credits) must have been in balance at year-end. How could these errors or misstatements have occurred? A: A company’s accounting equation (as expressed in its books) can be in balance yet its financial statements have errors or misstatements because of the following: Entire transactions were not recorded; transactions were recorded at wrong amounts; transactions were recorded in the wrong accounts; transactions were recorded in the wrong accounting period. Audits of financial statements uncover some, but not all, errors or misstatements. Answer on notes page SO 7 Prepare a trial balance and explain its purposes.
42
Trial Balance (in thousands)
The Trial Balance The accounts come from the ledger of Christel Corporation at December 31, 2011. Christel Corporation Trial Balance (in thousands) December 31, 2011 Solution on notes page SO 7
43
Understanding U.S. GAAP Key Differences The Recording Process
Rules for accounting for specific events sometimes differ across countries. For example, IFRS companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the double-entry accounting system is the basis of accounting systems worldwide. Both the IASB and FASB go beyond the basic definitions provided in this textbook for the key elements of financial statements, that is, assets, liabilities, equity, revenues, and expenses. The more substantive definitions, using the FASB definitional structure, are provided in the Chapter 1 “Understanding U.S. GAAP” section.
44
Understanding U.S. GAAP Key Differences The Recording Process
A trial balance under GAAP follows the same format as shown in the textbook. In the United States, equity is often referred to as either shareholders’ equity or stockholders’ equity, and Share Capital—Ordinary is referred to as Common Stock. The statement of financial position is often called the balance sheet in the United States.
45
Understanding U.S. GAAP Looking to the Future The Recording Process
The basic recording process shown in this textbook is followed by companies across the globe. It is unlikely to change in the future. The definitional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing accounting standards.
46
Copyright Copyright © 2011 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.
Similar presentations
© 2024 SlidePlayer.com. Inc.
All rights reserved.