accounting

1. Chapter
2-1

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

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

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

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

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

7. Debits and Credits
Debits and Credits
If Debits are greater than Credits, the account
will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
Transaction #3 8,000
Balance $15,000
Chapter LO 2 Define debits and credits and explain their
2-7
use in recording business transactions.

8. Debits and Credits
Debits and Credits
If Credits are greater than Debits, the account
will have a credit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
8,000 Transaction #3
Balance $1,000
Chapter LO 2 Define debits and credits and explain their
2-8
use in recording business transactions.

9. Debits and Credits Summary
Debits and Credits Summary
Liabilities
Normal
Debit / Dr. Credit / Cr.
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance
Assets Chapter
Owner’s Equity
3-24
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
Expense
3-23
Revenue
Chapter
3-25
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
Chapter
2-9 LO 2

10. Debits and Credits Summary
Debits and Credits Summary
Balance Sheet Income Statement
Asset = Liability + Equity Revenue - Expense
Debit
Credit
Chapter LO 2 Define debits and credits and explain their
2-10
use in recording business transactions.

11. Debits and Credits Summary
Debits and Credits Summary
Review Question
Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.
Chapter LO 2 Define debits and credits and explain their
2-11
use in recording business transactions.

12. Debits and Credits Summary
Debits and Credits Summary
Discussion Question
Q4. Maria Alvarez, a beginning accounting
student, believes debit balances are favorable
and credit balances are unfavorable. Is Maria
correct? Discuss.
See notes page for discussion
Chapter LO 2 Define debits and credits and explain their
2-12
use in recording business transactions.

13. Assets and Liabilities
Assets and Liabilities
Assets
Assets - Debits should
Debit / Dr. Credit / Cr.
exceed credits.
Normal Balance
Chapter
3-23
Liabilities – Credits
should exceed debits.
Liabilities
The normal balance is on
Debit / Dr. Credit / Cr.
the increase side.
Normal Balance
Chapter
3-24
Chapter LO 2 Define debits and credits and explain their
2-13
use in recording business transactions.

14. Owners’ Equity
Owners’ Equity
Owner’s Equity Owner’s investments and
revenues increase owner’s
Debit / Dr. Credit / Cr.
equity (credit).
Owner’s drawings and expenses
Normal Balance
Chapter
3-25
decrease owner’s equity (debit).
Owner’s Capital Owner’s Drawing
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
Normal Balance Normal Balance
Chapter Chapter
3-25 3-23
Chapter LO 2 Define debits and credits and explain their
2-14
use in recording business transactions.

15. Revenue and Expense
Revenue and Expense
Revenue The purpose of earning
Debit / Dr. Credit / Cr.
revenues is to benefit the
owner(s).
Normal Balance
The effect of debits and
credits on revenue accounts
Chapter
3-26
Expense
is the same as their effect
Debit / Dr. Credit / Cr.
on Owner’s Capital.
Expenses have the opposite
effect: expenses decrease
Normal Balance
Chapter
3-27
owner’s equity.
Chapter LO 2 Define debits and credits and explain their
2-15
use in recording business transactions.

16. Debits and Credits Summary
Debits and Credits Summary
Review Question
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.
Chapter LO 2 Define debits and credits and explain their
2-16
use in recording business transactions.

17. Expansion of the Basic Equation
Expansion of the Basic Equation
Relationship among the assets, liabilities and
owner’s equity of a business:
Illustration 2-11
Basic
Assets = Liabilities + Owner’s Equity
Equation
Expanded
Basic
Equation
The equation must be in balance after every
transaction. For every Debit there must be a Credit.
Chapter LO 2 Define debits and credits and explain their
2-17
use in recording business transactions.

18. Steps in the Recording Process
Steps in the Recording Process
Illustration 2-12
Transfer journal information
Analyze each transaction Enter transaction in a journal to ledger accounts
Business documents, such as a sales slip, a check, a
bill, or a cash register tape, provide evidence of the
transaction.
Chapter
2-18 LO 3 Identify the basic steps in the recording process.

19. The Journal
The Journal
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.
Chapter
2-19 LO 3 Identify the basic steps in the recording process.

20. Journalizing
Journalizing
Journalizing - Entering transaction data in the journal.
E2-4 (Facts) Presented below is information related to
Hanshew Real Estate Agency.
Oct. 1 Pete Hanshew begins business as a real estate agent with
a cash investment of $15,000.
3 Purchases office furniture for $1,900, on account.
6 Sells a house and lot for B. Kidman; bills B. Kidman $3,200
for realty services provided.
27 Pays $700 on balance related to transaction of Oct. 3.
30 Pays the administrative assistant $2,500 salary for Oct.
E2-5 Instructions - Journalize the transactions for E2-4.
Chapter
2-20 LO 4 Explain what a journal is and how it helps in the recording process.

21. Journalizing
Journalizing
E2-4 (Facts) Presented below is information related
to Hanshew Real Estate Agency.
Oct. 1 Pete Hanshew begins business as a real estate
agent with a cash investment of $15,000.
General Journal
Date Account Title Ref. Debit Credit
Oct. 1 Cash 15,000
Hanshew, Capital 15,000
(Owners investment)
Chapter
2-21 LO 4 Explain what a journal is and how it helps in the recording process.

22. Journalizing
Journalizing
E2-4 (Facts) Presented below is information related
to Hanshew Real Estate Agency.
Oct. 3 Purchases office furniture for $1,900, on
account.
General Journal
Date Account Title Ref. Debit Credit
Oct. 3 Office Furniture 1,900
Accounts Payable 1,900
(Purchase furniture)
Chapter
2-22 LO 4 Explain what a journal is and how it helps in the recording process.

23. Journalizing
Journalizing
E2-4 (Facts) Presented below is information related
to Hanshew Real Estate Agency.
Oct. 6 Sells a house and lot for B. Kidman; bills B.
Kidman $3,200 for realty services provided.
General Journal
Date Account Title Ref. Debit Credit
Oct. 6 Accounts Receivable 3,200
Service Revenue 3,200
(Realty services provided)
Chapter
2-23 LO 4 Explain what a journal is and how it helps in the recording process.

24. Journalizing
Journalizing
E2-4 (Facts) Presented below is information related
to Hanshew Real Estate Agency.
Oct. 27 Pays $700 on balance related to transaction of
Oct. 3.
General Journal
Date Account Title Ref. Debit Credit
Oct. 27 Accounts Payable 700
Cash 700
(Payment on account)
Chapter
2-24 LO 4 Explain what a journal is and how it helps in the recording process.

25. Journalizing
Journalizing
E2-4 (Facts) Presented below is information related
to Hanshew Real Estate Agency.
Oct. 30 Pays the administrative assistant $2,500
salary for Oct.
General Journal
Date Account Title Ref. Debit Credit
Oct. 30 Salary Expense 2,500
Cash 2,500
(Payment for salaries)
Chapter
2-25 LO 4 Explain what a journal is and how it helps in the recording process.

26. Journalizing
Journalizing
Simple Entry – Two accounts, one debit and one credit.
Compound Entry – Three or more accounts.
Example – On June 15, H. Burns, purchased equipment
for $15,000 by paying cash of $10,000 and the balance
on account (to be paid within 30 days).
General Journal
Date Account Title Ref. Debit Credit
June 15 Equipment 15,000
Cash 10,000
Accounts Payable 5,000
(Purchased equipment)
Chapter
2-26 LO 4 Explain what a journal is and how it helps in the recording process.

27. The Ledger
The Ledger
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.
Chapter
2-27 LO 5 Explain what a ledger is and how it helps in the recording process.

28. Chart of Accounts
Chart of Accounts
Accounts and account numbers arranged in sequence in
which they are presented in the financial statements.
Hanshew Real Estate Agency
Chart of Accounts
Assets Owner's Equity
101 Cash 300 Hanshew, Capital
112 Accounts receivable 306 Hanshew, Drawing
126 Advertising supplies 350 Income summary
130 Prepaid insurance
150 Office equipment Revenues
158 Accumulated depreciation 400 Service revenue
Liabilities Expenses
200 Accounts payable 631 Advertising supplies expense
201 Notes payable 711 Depreciation expense
209 Unearned revenue 722 Insurance expense
212 Salaries payable 726 Salaries expense
230 Interest payable 729 Rent expense
905 Interest expense
Chapter
2-28 LO 6 Explain what posting is and how it helps in the recording process.

29. Standard Form of Account
Standard Form of Account
T-account form used in accounting textbooks.
In practice, the account forms used in ledgers are
much more structured.
Cash No. 101
Date Explanation Ref. Debit Credit Balance
Oct. 1 15,000 15,000
27 700 14,300
30 2,500 11,800
Chapter
2-29 LO 5 Explain what a ledger is and how it helps in the recording process.

30. Posting
Posting
Posting – the process of transferring amounts from the
journal to the ledger accounts.
General Journal J1
Date Account Title Ref. Debit Credit
Oct. 1 Cash 101 15,000
Hanshew, Capital 15,000
(Owner's investment in business)
General Ledger
Cash Acct. No. 101
Date Explanation Ref. Debit Credit Balance
Oct. 1 J1 15,000 15,000
Chapter
2-30 LO 6 Explain what posting is and how it helps in the recording process.

31. Posting
Posting
Review Question
Posting:
a. normally occurs before journalizing.
b. transfers ledger transaction data to the
journal.
c. is an optional step in the recording process.
d. transfers journal entries to ledger accounts.
Chapter
2-31 LO 6 Explain what posting is and how it helps in the recording process.

32. The Recording Process Illustrated
The Recording Process Illustrated
Illustration 2-19
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.
Chapter
2-32 LO 6 Explain what posting is and how it helps in the recording process.

33. The Trial Balance
The Trial Balance
A list of accounts Hanshew Real Estate Agency
Trial Balance
and their balances October 31, 2008
at a given time. Debit Credit
Cash $ 11,800
Purpose is to Accounts receivable 3,200
Office furniture 1,900
prove that debits Accounts payable $ 1,200
equal credits. Hanshew, Capital
Service revenue
15,000
3,200
Salaries expense 2,500
$ 19,400 $ 19,400
Chapter
2-33 LO 7 Prepare a trial balance and explain its purposes.

34. The Trial Balance
The Trial Balance
Limitations of a Trial Balance
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.
Chapter
2-34 LO 7 Prepare a trial balance and explain its purposes.

35. The Trial Balance
The Trial Balance
Review Question
A trial balance will not balance if:
a. a correct journal entry is posted twice.
b. the purchase of supplies on account is debited to
Supplies and credited to Cash.
c. a $100 cash drawing by the owner is debited to
Owner’s Drawing for $1,000 and credited to
Cash for $100.
d. a $450 payment on account is debited to
Accounts Payable for $45 and credited to Cash
for $45.
Chapter
2-35 LO 7 Prepare a trial balance and explain its purposes.

36. Recording Process
Recording Process
Discussion Question
Q2-19. Jim Benes is confused about how accounting
information flows through the accounting system. He
believes the flow of information is as follows.
a. Debits and credits posted to the ledger.
b. Business transaction occurs.
c. Information entered in the journal.
d. Financial statements are prepared.
e. Trial balance is prepared.
Is Jim correct? If not, indicate to Jim the proper flow
of the information.
See notes page for discussion
Chapter
2-36 LO 7 Prepare a trial balance and explain its purposes.

37. Copyright
Copyright
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caused by the use of these programs or from the use of the
information contained herein.
Chapter
2-37