1. 1 A ccounting Principles, Weygandt, Kieso, & Kimmel

2. 2 After studying this chapter, you should be able to: CHAPTER 2 THE RECORDING PROCESS 1 what an account is and how it helps in the recording process. 2 Identify the basic steps in the recording process. 3 What a journal is and how it helps in the recording process. 4 Explain what a ledger is and how it helps in the recording process.

3. 3 5 Prepare a trial balance and explain its purpose. CHAPTER 2

4. 4 PREVIEW OF CHAPTER 2 The Recording Process Steps in the Recording Process Journal Ledger The Account Debits and credits Expansion of basic equation

5. 5 PREVIEW OF CHAPTER 2 The Recording Process The Trial Balance Limitations of a trial balance Locating errors The Recording Process Illustrated Summary illustration of journalizing and posting

6. 6 STUDY OBJECTIVE 1 Explain what an account is and how it helps in the recording process.

7. 7 THE ACCOUNT An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on. A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on.

8. 8 STUDY OBJECTIVE 2 Define debits and credits and explain how they are used to record business transactions.

9. 9 BASIC FORM OF ACCOUNT Left or debit side Title of Account Right or credit side Debit balanceCredit balance In its simplest form, an account consists of In its simplest form, an account consists of 1 the title of the account, 2 a left or debit side, and 3 a right or credit side. The alignment of these parts resembles the letter T, and therefore the account form is called a T account. The alignment of these parts resembles the letter T, and therefore the account form is called a T account.

10. 10 STEPS IN THE RECORDING PROCESS The basic steps in the recording process are: 1 Analyze each transaction for its effect on the accounts. 2 Enter the transaction information in a journal (book of original entry). 3 Transfer the journal information to the appropriate accounts in the ledger (book of accounts).

11. 11 DOUBLE-ENTRY SYSTEM In a double-entry system, equal debits and credits are made in the accounts for each transaction. In a double-entry system, equal debits and credits are made in the accounts for each transaction. Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance. Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance.

12. 12 THE JOURNAL Transactions are initially recorded in chronological order in a journal before being transferred to the accounts. Transactions are initially recorded in chronological order in a journal before being transferred to the accounts. Every company has a general journal which contains: Every company has a general journal which contains: 1 spaces for dates, 2 account titles and explanations, 3 references, and 4 two amount columns.

13. 13 **THE JOURNAL The journal makes several significant contributions to the recording process: 1 It discloses in one place the complete effect of a transaction. 2 It provides a chronological record of transactions. 3 It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

14. 14 THE LEDGER The entire group of accounts maintained by a company is called the ledger. The entire group of accounts maintained by a company is called the ledger. A general ledger contains all the assets, liabilities, and owner’s equity accounts. A general ledger contains all the assets, liabilities, and owner’s equity accounts.

15. 15 THE TRIAL BALANCE A trial balance is a list of accounts and their balances at a given time. A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. The procedures for preparing a trial balance consist of: The procedures for preparing a trial balance consist of: 1 List the account titles and their balances. 2 Total the debit and credit columns. 3 Prove the equality of the two columns.

16. 16 LIMITATIONS OF A TRIAL BALANCE A trial balance does not prove that all transactions have been recorded or that the ledger is correct. 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. Numerous errors may exist even though the trial balance columns agree. The trial balance may balance even when: 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 5 offsetting errors are made in recording the amount of the transaction.

17. 17 DEBITS AND CREDITS The term debit means left and credit means right respectively. The term debit means left and credit means right respectively. The act of entering an amount on the left side of an account is called debiting the account and making an entry on the right side is crediting the account. The act of entering an amount on the left side of an account is called debiting the account and making an entry on the right side is crediting the account. When the debit amounts exceed the credits, an account has a debit balance; when the reverse is true, the account has a credit balance. When the debit amounts exceed the credits, an account has a debit balance; when the reverse is true, the account has a credit balance. DRCR

18. 18 ILLUSTRATION 2-2 TABULAR SUMMARY COMPARED TO ACCOUNT FORM Tabular Summary Cash $15,000 - 7,000 1,200 1,500 - 1,700 - 250 600 - 1,300 Cash DebitCredit 15,000 1,200 1,500 600 7,000 1,700 1,300 250 Balance Account Form $ 8,050 (Debit)

19. 19 Cash DebitsCredits 15,000 Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited as the owner’s Capital is credited. DEBITING AN ACCOUNT

20. 20 Example: Monthly rent of $7,000 is paid. Cash is credited as Rent Expense is debited. CREDITING AN ACCOUNT Cash DebitsCredits 7,000

21. 21 DOUBLE-ENTRY SYSTEM In a double-entry system, equal debits and credits are made in the accounts for each transaction. In a double-entry system, equal debits and credits are made in the accounts for each transaction. Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance. Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance.

22. 22 ILLUSTRATION 2-3 DEBIT AND CREDIT EFFECTS — ASSETS AND LIABILITIES DebitsCredits Increase assets Decrease assets Decrease liabilities Increase liabilities

23. 23 NORMAL BALANCE Every account classification has a normal balance, whether it is a debit or credit. Every account classification has a normal balance, whether it is a debit or credit. For that particular account, the opposite side entries should never exceed the normal balance. For that particular account, the opposite side entries should never exceed the normal balance.

24. 24 ILLUSTRATION 2-4 NORMAL BALANCES — ASSETS AND LIABILITIES Assets Increase Decrease Debit Credit Decrease Increase Debit Credit Liabilities Normal Balance

25. 25 ILLUSTRATION 2-5 DEBIT AND CREDIT EFFECTS — OWNER’S CAPITAL DebitsCredits Decrease owner’s capital Increase owner’s capital

26. 26 ILLUSTRATION 2-6 NORMAL BALANCE — OWNER’S CAPITAL Owner’s Capital Decrease Increase Debit Credit Normal Balance

27. 27 ILLUSTRATION 2-7 DEBIT AND CREDIT EFFECTS — OWNER’S DRAWING DebitsCredits Increase owner’s drawing Decrease owner’s drawing

28. 28 ILLUSTRATION 2-8 NORMAL BALANCE — OWNER’S DRAWING Owner’s Drawing Normal Balance Increase Decrease Debit Credit

29. 29 ILLUSTRATION 2-9 DEBIT AND CREDIT EFFECTS — REVENUES AND EXPENSES Decrease revenues Increase revenues Increase expenses Decrease expenses DebitsCredits

30. 30 ILLUSTRATION 2-10 NORMAL BALANCES — REVENUES AND EXPENSES Increase Decrease Debit Credit Expenses Revenues Decrease Increase Debit Credit Normal Balance

31. 31 ILLUSTRATION 2-11 EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS Liabilities Assets Owner’s Equity =+- += +- Assets Dr.Cr. + - Liabilities Dr.Cr. - + Dr.Cr. Owner’s Drawing + - Dr.Cr. Revenues - + Dr.Cr. Expenses + - Dr.Cr. Owner’s Capital - +

32. 32 STUDY OBJECTIVE 3 Identify the basic steps in the recording process.

33. 33 ILLUSTRATION 2-12 THE RECORDING PROCESS 1 Analyze each transaction 2 Enter transaction in a journal 2 Enter transaction in a journal 3 Transfer journal information to ledger accounts 3 Transfer journal information to ledger accounts JOURNAL LEDGER

34. 34 STUDY OBJECTIVE 4 Explain what a journal is and how it helps in the recording process.

35. 35 THE JOURNAL Transactions are initially recorded in chronological order in a journal before being transferred to the accounts. Transactions are initially recorded in chronological order in a journal before being transferred to the accounts. Every company has a general journal which contains: Every company has a general journal which contains: 1 spaces for dates, 2 account titles and explanations, 3 references, and 4 two amount columns.

36. 36 The journal makes several significant contributions to the recording process: 1 It discloses in one place the complete effect of a transaction. 2 It provides a chronological record of transactions. 3 It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared. THE JOURNAL

37. 37 JOURNALIZINGJOURNALIZING Entering transaction data in the journal is known as journalizing. Entering transaction data in the journal is known as journalizing. Separate journal entries are made for each transaction. Separate journal entries are made for each transaction. A complete entry consists of: A complete entry consists of: 1 the date of the transaction, 2 the accounts and amounts to be debited and credited, and 3 a brief explanation of the transaction.

38. 38 ILLUSTRATION 2-13 TECHNIQUE OF JOURNALIZING The date of the transaction is entered in the date column.

39. 39 ILLUSTRATION 2-13 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.

40. 40 ILLUSTRATION 2-13 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.

41. 41 ILLUSTRATION 2-13 TECHNIQUE OF JOURNALIZING A brief explanation of the transaction is given.

42. 42 ILLUSTRATION 2-13 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.

43. 43 ILLUSTRATION 2-13 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.

44. 44 If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. SIMPLE AND COMPOUND JOURNAL ENTRIES

45. 45 When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. ILLUSTRATION 2-14 COMPOUND JOURNAL ENTRY 2 1 3

46. 46 COMPOUND JOURNAL ENTRY This is the wrong format; all debits must be listed before the credits are listed.

47. 47 STUDY OBJECTIVE 5 Explain what a ledger is and how it helps in the recording process.

48. 48 THE LEDGER The entire group of accounts maintained by a company is called the ledger. The entire group of accounts maintained by a company is called the ledger. A general ledger contains all the assets, liabilities, and owner’s equity accounts. A general ledger contains all the assets, liabilities, and owner’s equity accounts. GENERAL LEDGER

49. 49 Individual Liabilities Individual Assets Individual Owner’s Equity ILLUSTRATION 2-15 THE GENERAL LEDGER Equipment Land Supplies Cash Interest Payable Salaries Payable Accounts Payable Notes Payable Salaries Expense Fees Earned J. Lind, Drawing J. Lind, Capital

50. 50 LIMITATIONS OF A TRIAL BALANCE A trial balance is a list of accounts and their balances at a given time. A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. The procedures for preparing a trial balance consist of: 1 List the account titles and their balances. The procedures for preparing a trial balance consist of: 1 List the account titles and their balances. 2 Total the debit and credit columns. 3 Prove the equality of the two columns. 4 incorrect accounts are used in journalizing or posting 5 offsetting errors are made in recording the amount of the transaction.

51. 51 STUDY OBJECTIVE 6 Explain what posting is and how it helps in the recording process.

52. 52 ILLUSTRATION 2-17 POSTING A JOURNAL ENTRY In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.

53. 53 ILLUSTRATION 2-17 POSTING A JOURNAL ENTRY In the reference column of the journal, write the account number to which the debit amount was posted.

54. 54 ILLUSTRATION 2-17 POSTING A JOURNAL ENTRY In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in the journal.

55. 55 ILLUSTRATION 2-17 POSTING A JOURNAL ENTRY In the reference column of the journal, write the account number to which the credit amount was posted.

56. 56 Most companies have a chart of accounts that lists the accounts and the account numbers which identify their location in the ledger. ILLUSTRATION 2-18 CHART OF ACCOUNTS

57. 57 ILLUSTRATION 2-19 INVESTMENT OF CASH BY OWNER Basic Analysis Debit-Credit Analysis Transaction October 1, C.R. Byrd invests $10,000 cash in an advertising venture to be known as the Pioneer Advertising Agency. The asset Cash is increased $10,000, and owner’s equity C. R. Byrd, Capital is increased $10,000. Debits increase assets: debit Cash $10,000. Credits increase owner’s equity: credit C.R. Byrd, Capital $10,000.

58. 58 ILLUSTRATION 2-19 INVESTMENT OF CASH BY OWNER JOURNAL ENTRY POSTING

59. 59 ILLUSTRATION 2-20 PURCHASE OF OFFICE EQUIPMENT Basic Analysis Debit-Credit Analysis Transaction October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable. The asset Office Equipment is increased $5,000, and the liability Notes Payable is increased $5,000. Debits increase assets: debit Office Equipment $5,000. Credits increase liabilities: credit Notes Payable $5,000.

60. 60 ILLUSTRATION 2-20 PURCHASE OF OFFICE EQUIPMENT JOURNAL ENTRY POSTING

61. 61 ILLUSTRATION 2-21 RECEIPT OF CASH FOR FUTURE SERVICE Basic Analysis Debit-Credit Analysis Transaction October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed by December 31. The asset Cash is increased $1,200; the liability Unearned Fees is increased $1,200 because the service has not been rendered yet. Note that although many liabilities have the word “payable” in their title, unearned fees are considered a liability even though the word payable is not used. Debits increase assets: debit Cash $1,200. Credits increase liabilities: credit Unearned Fees $1,200.

62. 62 ILLUSTRATION 2-21 RECEIPT OF CASH FOR FUTURE SERVICE JOURNAL ENTRY POSTING

63. 63 ILLUSTRATION 2-22 PAYMENT OF MONTHLY RENT Basic Analysis Debit-Credit Analysis Transaction October 3, office rent for October is paid in cash, $900. The expense Rent is increased $900 because the payment pertains only to the current month; the asset Cash is decreased $900. Debits increase expenses: debit Rent Expense $900. Credits decrease assets: credit Cash $900.

64. 64 ILLUSTRATION 2-22 PAYMENT OF MONTHLY RENT JOURNAL ENTRY POSTING

65. 65 ILLUSTRATION 2-23 PAYMENT FOR INSURANCE The asset Prepaid Insurance is increased $600 because the payment extends to more than the current month; the asset Cash is decreased $600. Note that payments of expenses that will benefit more than one accounting period are identified as prepaid expenses or prepayments. When a payment is made, an asset account is debited in order to show the service or benefit that will be received in the future. Transaction October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30. Debit-Credit Analysis Debits increase assets: debit Prepaid Insurance $600. Credits decrease assets: credit Cash $600. Basic Analysis

66. 66 ILLUSTRATION 2-23 PAYMENT FOR INSURANCE JOURNAL ENTRY POSTING

67. 67 ILLUSTRATION 2-24 PURCHASE OF SUPPLIES ON CREDIT Basic Analysis Debit-Credit Analysis Transaction October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500. The asset Advertising Supplies is increased $2,500; the liability Accounts Payable is increased $2,500. Debits increase assets: debit Advertising Supplies $2,500. Credits increase liabilities: credit Accounts Payable $2,500.

68. 68 ILLUSTRATION 2-24 PURCHASE OF SUPPLIES ON CREDIT JOURNAL ENTRY POSTING

69. 69 ILLUSTRATION 2-25 HIRING OF EMPLOYEES Basic Analysis Debit-Credit Analysis Transaction October 9, hire four employees to begin work on October 15. Each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks -- first payment made on October 26. A business transaction has not occurred. There is only an agreement between the employer and the employees to enter into a business transaction beginning on October 15. A debit-credit analysis is not needed because there is no accounting entry.

70. 70 ILLUSTRATION 2-26 WITHDRAWAL OF CASH BY OWNER Basic Analysis Debit-Credit Analysis Transaction October 20, C. R. Byrd withdraws $500 cash for personal use. The owner’s equity account C. R. Byrd, Drawing is increased $500; the asset Cash is decreased $500. Debits increase drawings: debit C. R. Byrd, Drawing $500. Credits decrease assets: credit Cash $500.

71. 71 ILLUSTRATION 2-26 WITHDRAWAL OF CASH BY OWNER JOURNAL ENTRY POSTING

72. 72 ILLUSTRATION 2-27 PAYMENT OF SALARIES Basic Analysis Debit-Credit Analysis Transaction October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction.) The expense account Salaries Expense is increased $4,000; the asset Cash is decreased $4,000. Debits increase expenses: debit Salaries Expense $4,000. Credits decrease assets: credit Cash $4,000.

73. 73 ILLUSTRATION 2-27 PAYMENT OF SALARIES JOURNAL ENTRY POSTING

74. 74 ILLUSTRATION 2-28 RECEIPT OF CASH FOR FEES EARNED Basic Analysis Debit-Credit Analysis Transaction October 31, received $10,000 in cash from Copa Company for advertising services rendered in October. The asset Cash is increased $10,000; the revenue Fees Earned is increased $10,000. Debits increase assets: debit Cash $10,000. Credits increase revenues: credit Fees Earned $10,000.

75. 75 ILLUSTRATION 2-28 RECEIPT OF CASH FOR FEES EARNED JOURNAL ENTRY POSTING

76. 76 STUDY OBJECTIVE 7 Prepare a trial balance and explain its purposes.

77. 77 THE TRIAL BALANCE A trial balance is a list of accounts and their balances at a given time. A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. The procedures for preparing a trial balance consist of: The procedures for preparing a trial balance consist of: 1 List the account titles and their balances. 2 Total the debit and credit columns. 3 Prove the equality of the two columns.

78. 78 The total debits must equal the total credits. ILLUSTRATION 2-31 A TRIAL BALANCE

79. 79 LIMITATIONS OF A TRIAL BALANCE A trial balance does not prove that all transactions have been recorded or that the ledger is correct. 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. Numerous errors may exist even though the trial balance columns agree. The trial balance may balance even when: 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 5 offsetting errors are made in recording the amount of the transaction.