1. The Recording Process of Accounting Information
Chapter 2
The Recording Process of Accounting Information

2. Objectives of the Chapter
I. Definitions of accounts on the financial statements (F/S).
II. Learning the accounting process (AP) in preparing financial statements.
a. using the accounting equation,
b. using the double-entry system.
Processing Accounting Information

3. I. Definitions of Accounts on Financial Statements
Assets: economic resources that benefit the business in the future, including:
Cash: in all forms: (coins, currency, checking accounts,…)
Account receivable: an oral promise for future cash receipt as a result of sales.
Inventory (or merchandise): goods for sale.
Note receivable: a written promissory note that the customer will pay a fixed amount by a certain date.
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4. I. Definitions of Accounts on Financial Statements (contd.)
Prepaid expenses: expenses paid in advance.
Land: recorded at cost of land.
Buildings: record at cost, subject to depreciation.
Equipment, furniture and fixture: record at cost, subject to depreciation.
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5. I. Definitions of Accounts on Financial Statements (contd.)
Liabilities: legal obligations.
Note Payable: a written promissory note that the business promises to pay.
Account payable: an oral promise to pay, arising from credit purchases of inventory and other goods.
Accrued liabilities: liabilities that have occurred but have not been paid. For example: salary payable, interest payable, etc.
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6. I. Definitions of Accounts on Financial Statements (contd.)
Stockholders’ equity: the owners’ claims to the assets of a corporation including:
Common stock: represents the owners’ investment.
Retained earnings: the cumulative net income earned by the corporation over its lifetime , minus cumulative losses and dividends.
Dividends: distribution of earnings to stockholders.
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7. I. Definitions of Accounts on Financial Statements (contd.)
Revenues: increase or inflow of assets; will eventually increase stockholders’ equity (i.e., sales revenue)
Expenses: decrease or outflow of assets; will eventually decrease stockholders’ equity.
Gains: increase in assets from incidental transactions not related to the major operation.
Losses: decrease in assets from incidental transactions.
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8. II. Accounting Process and Preparation of Financial Statements
How do accountants prepare financial statements?
Identify, measure and record business transactions for business entities
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9. Accounting Process (Cont.)
a. Using the accounting equation.
Accounting Equation:
Assets = Liabilities + Stockholders’ Equity
b. Using the double-entry system (the process includes the recording of Journal entries, posting Journal entries to ledger accounts, work sheet (including adjustments…), prepare financial statements and closing entries)
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10. Processing Accounting Information
a. Using the Accounting Equation - Exhibit 2-1 (from Financial Accounting by Harrison and Horegren)
Analysis of Air & Sea Travel, Inc., Transactions
Panel A - Details of transactions
(1) Issued stock to the owners who invested $50,000 cash in the business.
(2) Paid $40,000 cash for land.
(3) Bought $500 of office supplies on account.
(4) Received $5,500 cash from customers for service revenue earned.
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11. Using the Accounting Equation - Exhibit 2-1 (contd.)
(5) Performed services for customers on account, $3,000.
(6) Paid cash expenses: rent, $1,100; employee salary, $1,200; utilities, $400.
(7) Paid $400 on the account payable created in Transaction 3.
(8) Owners paid personal funds to remodel home. This is not a transaction of the business.
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12. Using the Accounting Equation - Exhibit 2-1 (contd.)
(9) Received $1,000 on the account receivable created in Transaction 5.
(10) Sold land for cash at its cost of $22,000.
(11) Declared and paid a dividend of $2,100 to the stockholders.
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13. Using the Accounting Equation - Exhibit 2-1 (contd.)
PANEL B - Analysis of transactions
Income Statement Data
Statement of Cash Flows Data
Balance Sheet Data
For Financial statements, see Exhibit 2-2.
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14. b.Introduction of the Double-Entry System and Journal Entries
A. Double-entry system
B. The T- accounts
C. Increases and decreases in the accounts
D. Examples of journalizing and posting transactions
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15. Processing Accounting Information
A. Double-Entry System
Each transaction affects at least two accounts and the balance of the accounting equation must be maintained.
Example: Purchases inventory and charges to accounts payable
Assets = Liabilities Equity
Inventory  Accounts Payable 
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16. A. Double-Entry System (contd.)
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17. B. Introduction of the T- account
Inventory Accounts Payable
Debit Credit Debit Credit
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18. C. Increases and Decreases in the Accounts
Debit
Credit A L E
Revenue
Expense
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19. D. Examples of Journalizing and Posting Transactions
1. Transaction: Air & Sea Travel, Inc., received $50,000 cash from the business and in turn issued common stock to them.
Journal Entry:
Cash 50,000
Common Stock ,000
Issued common stock to owners.
Ledger Accounts:
Cash Common Stock
50, ,000
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20. D. Examples of Journalizing and Posting Transactions (contd.)
2. Transaction: The business paid $40,000 cash for land as a future office location.
Journal Entry:
Land 40,000
Cash ,000
Paid cash for land.
Ledger Accounts:
Cash Land
50, , ,000
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21. D. Examples of Journalizing and Posting Transactions (contd.)
3. Transaction: The business purchased $500 office supplies on account.
Journal Entry:
Office Supplies
Accounts Payable 500
Ledger Accounts:
Office Supplies Accounts Payable
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22. D. Examples of Journalizing and Posting Transactions (contd.)
4. Transaction: The business performed travel service for clients and received cash of $5,500.
Journal Entry:
Cash ,500
Service Revenue 5,500
Ledger Accounts:
Cash Service Revenue
50, , ,500
5,500
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23. D. Examples of Journalizing and Posting Transactions (contd.)
5. Transaction: The business performed service for clients who did not pay immediately. Air & Sea Travel billed the clients for $3,000 on account.
Journal Entry:
Accounts Receivable 3,000
Service Revenue 3,000
Ledger Accounts:
Accounts Receivable Service Revenue
3, ,500
3,000
8,500
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24. D. Examples of Journalizing and Posting Transactions (contd.)
6. Transaction: The business paid $2,700 for the following expenses: office rent, $1,100; employee salary; $1,200; and utilities, $400.
Journal Entry:
Rent Expense 1,100
Salary Expense 1,200
Utilities Expense
Cash 2,700
Ledger Accounts:
Cash Rent Expense
50, , ,100
5, ,700
Salary Expense Utilities Expense 1,
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25. D. Examples of Journalizing and Posting Transactions (contd.)
7. Transaction: The business paid $400 on the account payable created in Transaction 3.
Journal Entry:
Accounts Payable
Cash
Ledger Accounts:
Cash Accounts Payable
50, ,
5, ,700
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26. D. Examples of Journalizing and Posting Transactions (contd.)
8. Transaction: The Lyons remodeled their personal residence. This is not a transaction of the travel agency, so no journal entry is made.
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27. D. Examples of Journalizing and Posting Transactions (contd.)
9. Transaction: The business collected $1,000 cash on account from the clients in transaction 5.
Journal Entry:
Cash ,000
Accounts Receivable 1,000
Ledger Accounts:
Cash Accounts Receivable
50, ,000 3,000 1,000
5, ,700
1, ,000
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28. D. Examples of Journalizing and Posting Transactions (contd.)
10. Transaction; The business sold land for its cost of $22,000, receiving cash
Journal Entry:
Cash ,000
Land ,000
Ledger Accounts:
Cash Land
50, , , ,000
5, ,700
1, ,000
22,000
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29. D. Examples of Journalizing and Posting Transactions (contd.)
11. Transaction: Air & Sea Travel, Inc., paid the Lyons cash dividends of $2,100.
Journal Entry:
Dividends 2,100
Cash ,100
Ledger Accounts:
Cash Dividends
50, , ,100
5, ,700 1,
22, ,100
33,300
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30. D. Examples of Journalizing and Posting Transactions (contd.)
The followings are examples of T-accounts, trial balance and financial statements of the example in Exhibit 2.1.
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31. Exhibit 2-2 (from Financial Accounting by Harrison and Horgren)
ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
Cash
(1) 50,000 (2) 40,000
(4) 5,500 (6) 2,700
(9) 1,000 (7) 400
(10) 22,000 (11) 2,100
Bal. 33,300
A/P
(7) 400 (3) 500
Bal. 100
Comm Stock
(1) 50,000
Bal. 50,000
EXPENSES
Rent Exp.
(6) 1, Bal. 1,100
Dividends
(11) 2, Bal. 2,100
Salary Exp.
(6) 1, Bal. 1,200
A/R
(5) 3,000 (9) 1,000
Bal. 2,000
Office Supplies
(3) 500
Bal. 500
Utilities Exp.
(6) Bal. 400
REVENUE
Service Rev.
(4) 5,500
(5) 3,000
Bal. 8,500
Land
(2) 40,000 (10) 22,000
Bal. 18,000
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32. Exhibit 2-3 (from Financial Accounting by Harrison and Horngren)
AIR & SEA TRAVEL, INC.
Trail Balance
4/30/19x1
Balance
Account Title Debit Credit
Cash $33,300
Accounts receivable 2,000
Office supplies 500
Land 18,000
Accounts payable $
Common Stock 50,000
Dividends 2,100
Service revenue 8,500
Rent expense 1,100
Salary expense 1,200
Utilities expense 400
Total $58,600 $58,600
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33. Exhibit 2-4 (from Financial Accounting by Harrison and Horngren)
AIR & SEA TRAVEL, INC.
Income Statement
Month Ended April 30, 19x1
Revenue:
Service revenue ($5,500+$3,000) ... $ 8,500
Expenses:
Salary expense ……………………… $1,200
Rent expense ……………………….. 1,100
Utilities expense ……………………
Total expenses ……………………… 2,700
Net income …………………………….. $5,800 
AIR & SEA TRAVEL, INC.
Statement of Retained Earnings
Month Ended April 30, 19x1
Retained earnings, April 1, 19x1 ……... $
Add: Net income for the month ..……… 5,800
5,800
Less: Dividends …………………………. 2,100
Retained earnings, April 30, 19x1……… $3,700
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34. Exhibit 2-3 (contd.)  Statement of Retained Earnings
Month Ended April 30, 19x1
Retained earnings, April 1, 19x1 ……... $
Add: Net income for the month ..……… 5,800
5,800
Less: Dividends …………………………. 2,100
Retained earnings, April 30, 19x1……… $3,700
AIR & SEA TRAVEL, INC.
Balance Sheet
April 30, 19x1 
Assets Liabilities
Cash …………... $33,300 Accounts payable …... $
A/R …………….. 2,000
Office supplies Stockholders’ Equity
Land …………... 18,000 Common stock ………. 50,000
Retained earnings … ,700
Total stockholders’
equity …………….. 53,700
Total liabilities and
Total assets ……. $53,800 stockholders’ equity... $53,800
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35. Exhibit 2-3 (contd.)  Balance Sheet, April 30, 19x1
Assets Liabilities
Cash ……………………. $33,300 Accounts payable ……………... $
A/R ……………………... 2,000
Office supplies ……… Stockholders’ Equity
Land ……………………. 18,000 Common stock ……………… ,000
Retained earnings …………… ,700
Total stockholders’ equity ….. 53,700
Total liabilities and
Total assets ………….… $53,800 stockholders’ equity………….. $53,800 
Statement of Cash Flows, Month Ended April 30, 19x1
Cash flows from operating activities:
Receipts:
Collections fm customers ($5,500+1,000) …….. $ 6,500
Payments:
To suppliers and employees ($ ) ……. (3,100)
Net cash inflow fm operating activities ……... 3,400
Cash flows from investing activities:
Acquisition of land ………………………………….. $(40,000)
Sale of land ………………………………………….. 22,000
Net cash outflow from investing activities…... (18,000)
Cash flows from financing activities:
Issuance (sale) of stock to owners ……………….. $50,000
Dividends ……………………………………………. (2,100)
Net cash inflow from financing activities……. 47,900
Net increase in cash ………………………………….. $33,300
Cash balance, April 1, 19x1 …………………………. 0
Cash balance, April 30, 19x1 ………………………... $33,300
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36. An Example of the Journal and A Ledger Account (cash):
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37. An Example of the Journal and A Ledger Account (cash): (contd.)
The Ledger: all individual accounts (assets, liability, and stockholder’s equity accounts) combined make up the ledger.
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38. The Flows of Accounting Data
Transaction
Analysis
Takes
Place
Source
Documents
Prepared
Transaction
Entered in
Journal
Amounts
Posted to
Ledger
Transaction
Occurs
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39. The Normal Balance of an Account
Assets Debit
Liabilities Credit
Stockholder’s Equity Credit
(overall)
Common Stock Credit
Retained Earnings Credit
Dividends Debit
Revenues Credit
Expenses Debit
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40. Processing Accounting Information
The Chart of Accounts
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