Chapter 2

The Recording
Process

Chapter 3 of Williams et al. (2015)

Chapter
2-1
 Study Objectives

1. Identify the basic steps in the recording process.

2. Explain what an account is and how it helps in the
recording process.
3. Define debits and credits and explain their use in
recording business transactions.
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
2-2
 The Recording Process

Recording
Accounting The Trial
transaction in T -
records Balance
Account

Recording process Journal Limitations of a

Account Ledger trial balance
Debit and credit Locating errors
Double entries
accounting system

Chapter
2-3
 Recording transations in T accounts

Chapter
2-4
 Transactions

Exchanges of economic consideration

between two parties.

External Transactions Internal Transactions

occur between the occur within the
organization and an organization.
outside party.
Chapter
2-5
 Analyzing and Recording Process

Record relevant transactions

Analyze each transaction and
and events in a journal
event from source documents

Post journal
information
to ledger
Prepare and analyze accounts
Chapter the trial balance
2-6
 Source Documents
Bills from
Checks Suppliers Purchase
Orders
Employee
Earnings
Records Bank
Statements

Sales
Tickets

Chapter Provide evidence of the transaction.

2-7
 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
2-8
 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
2-9
 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
2-10
 Increases and Decreases
in the Accounts

Accounting Stockholders’
Equation: Assets = Liabilities + Equity

Rules of
Debit and
Credit: Debit Credit Debit Credit Debit Credit
+ – – + – +

Chapter
2-11
 Debits and Credits
for Revenue and Expense

Expenses EQUITIES Revenues

decrease Debit Credit increase
owner’s for for owner’s
equity. Decrease Increase equity.

EXPENSES REVENUES
Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase

Chapter
2-12
 Debits and Credits Summary
Liabilities

Normal Normal
Debit / Dr. Credit / Cr.

Balance Balance
Debit Credit Normal Balance

Assets Chapter

Stockholders’ 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
2-13
 Recall: Double Effect of the
Transactions on accounting equatation.
A = L + OE
Borrow money

Invest in company

Pay off a note

Purchase
equipment

Borrow funds to
settle
Chapter
2-14
a debt
 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
2-15
 Steps in double-entry accounting system

1. Make journal entries:

⚫ Identify each account affected and its type
⚫ Determine whether each account is increased or
decreased. Use the rules of debit and credit
⚫ Record transaction in journal, including a brief
explanation
⚫ Debit side of entry is entered first
⚫ Total debits should always equal total credits
2. Post to the accounts (ledge)

Chapter
2-16
 Let’s record
selected
transactions for
JJ’s Lawn Care
Service in the
accounts.

Chapter
2-17
 JJ’s Lawn Care Service

1. May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care
Service and received 800 shares of stock.
2. May 2: JJ’s purchased a riding lawn mower for $2,500 cash.
3. May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in
cash and issued a note payable for the remaining $13,000.
4. May 11: JJ’s purchased some repair parts for $300 on account.
5. May 18: JJ’s sold half of the repair parts to ABC Lawns for $150, a
price equal to JJ’s cost. ABC Lawns agrees to pay JJ’s within 30
days.
6. May 29: JJ’s provided lawn care services for a client and received
$750 in cash
7. May 31: JJ’s purchased gasoline for the lawn mower and the truck for
$50 cash.
8. May 31: JJ’s Lawn Care paid Jill Jones and her family a $200
dividend.
Chapter
2-18
 In practice: Accounting records

Chapter
2-19
 The Journal

In an actual accounting system, transactions

are initially recorded in the journal.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

2003
May 1 Cash 8,000
Capital Stock 8,000

Chapter
Owners invest cash in the business.
2-20
 The Ledger

Ledger contains the entire group of accounts

maintained by a company.
A general ledger contains all the asset,
liability, stockholder’s equity, revenue, and
expense accounts.
Chart of Accounts

Chapter
2-21
 Chart of Accounts
Accounts arranged in sequence in which they are
presented in the financial statements.

Hanshew Real Estate Agency

Chart of Accounts
Assets Stockholders' Equity
101 Cash 300 Common stock
112 Accounts receivable 306 Retained earnings
126 Supplies 350 Dividends
130 Prepaid insurance
150 Office furniture Revenues
158 Accumulated depreciation 400 Service revenue

Liabilities Expenses
200 Accounts payable 631 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
2-22
 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
2-23
 Posting Journal Entries to the Ledger
Accounts

Posting involves
copying
information from
the journal to the
ledger accounts.

Chapter
2-24
 Posting Journal Entries to the Ledger
Accounts

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

2003
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.
General Ledger
Cash
Date Debit Credit Balance
2003
May 1 8,000 8,000
Chapter
2-25
 Posting Journal Entries to the Ledger
Accounts

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

2003
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.
General Ledger
Capital Stock
Date Debit Credit Balance
2003
May 1 8,000 8,000
Chapter
2-26
 Posting Journal Entries to the Ledger
Accounts

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

2003
May 2 Tools & Equipment 2,500
Cash 2,500
Purchased lawn mower.

Let’s see what the cash account looks like after

posting the cash portion of this transaction for
JJ’s Lawn Care Service.
Chapter
2-27
 Ledger Accounts After Posting

General Ledger
Cash
Date Debit Credit Balance
2003
May 1 8,000 8,000
2 2,500 5,500

This ledger format is referred to as a

running balance (as opposed to simple
T accounts).
Chapter
2-28
 The trial balance

Chapter
2-29
 The Trial Balance

A list of accounts Hanshew Real Estate Agency

and their balances
Trial Balance
October 31, 2008
at a given time. Debit Credit
Cash $ 11,800
Purpose is to Accounts receivable 3,200

prove that debits Office furniture

Accounts payable
1,900
$ 1,200
equal credits. Common stock 15,000
Service revenue 3,200
Salaries expense 2,500
$ 19,400 $ 19,400

Chapter
2-30
 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
2-31
 Six Steps for Searching for and
Correcting Errors

If the trial balance does not balance, the

error(s) must be found and corrected.
Make sure the trial balance Recompute each account
columns are correctly added. balance in the ledger.

Make sure account

Verify that each journal
balances are correctly
entry is posted correctly.
entered from the ledger.

See if debit or credit Verify that each original

accounts are mistakenly journal entry has equal
placed on the trial balance.
Chapter
debits and credits.
2-32
 End of chapter 2

Chapter
2-33