Financial Accounting

Course Code: 5101

Weygandt, Kimmel, and Kieso

Chapter Two
The Recording Process
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Account
 Debits and Credits
• The term debit indicates the left side of an
account, and credit indicates the right side.
• They are commonly abbreviated as Dr. for debit
and Cr. for credit.
• The terms debit and credit repeatedly used in
the recording process to describe where entries
are made in accounts.
• For example, the act of entering an amount on
the left side of an account is called debiting the
account. Making an entry on the right side is
crediting the account.
 Cont.
• When comparing the totals of the two sides, an
account shows a debit balance if the total of the
debit amounts exceeds the credits.
• An account shows a credit balance if the credit
amounts exceed the debits.
 DEBIT AND CREDIT PROCEDURE
• Under the double-entry system, the dual (two-
sided) effect of each transaction is recorded in
appropriate accounts.
• This system provides a logical method for
recording transactions and also helps ensure the
accuracy of the recorded amounts as well as the
detection of errors.
• If every transaction is recorded with equal debits
and credits, the sum of all the debits to the
accounts must equal the sum of all the credits.
DR./CR. PROCEDURES FOR ASSETS
AND LIABILITIES
DR./CR. PROCEDURES FOR OWNER’S
EQUITY
Cont.
DR./CR. PROCEDURES FOR REVENUES
AND EXPENSES
Summary of Debit/Credit Rules
 The Journal
• The journal is referred to as the book of original
entry. For each transaction, the journal shows the
debit and credit effects on specific accounts.
• The journal makes several significant contributions
to the recording process:
• 1. It discloses in one place the complete effects 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
easily compared.
How a journal is used in the recording
process
 Steps in the Recording Process
• Practically every business uses three basic steps in
the recording process:
• 1. Analyze each transaction for its effects on the
accounts.
• 2. Enter the transaction information in a journal.
• 3. Transfer the journal information to the
appropriate accounts in the ledger.
 JOURNALIZING
• Entering transaction data in the journal is known
as journalizing. Companies make separate journal
entries for each transaction. 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.
Cont.
 The Ledger
• The entire group of accounts maintained by a
company is the ledger. The ledger provides the
balance in each of the accounts as well as keeps
track of changes in these balances.
• Companies may use various kinds of ledgers, but
every company has a general ledger.
• A general ledger contains all the asset, liability,
and owner’s equity accounts.
Cont.
STANDARD FORM OF ACCOUNT
 CHART OF ACCOUNTS
• The number and type of accounts differ for each
company.
• The number of accounts depends on the amount
of detail management desires.
• For example, the management of one company
may want a single account for all types of utility
expense. Another may keep separate expense
accounts for each type of utility, such as gas,
electricity, and water.
 Cont.
• Most companies have a chart of accounts.
• This chart lists the accounts and the account
numbers that identify their location in the ledger.
• The numbering system that identifies the
accounts usually starts with the balance sheet
accounts and follows with the income statement
accounts.
Cont.
 Trial balance
• A trial balance is a list of accounts and their
balances at a given time.
• Customarily, companies prepare a trial balance at
the end of an accounting period.
• They list accounts in the order in which they
appear in the ledger.
• Debit balances appear in the left column and
credit balances in the right column.
 Cont.
• The trial balance proves the mathematical
equality of debits and credits after posting.
• Under the double-entry system, this equality
occurs when the sum of the debit account
balances equals the sum of the credit account
balances.
• A trial balance may also uncover errors in
journalizing and posting.
 Limitations of a Trial Balance
• A trial balance does not guarantee freedom from
recording errors, however.
• Numerous errors may exist even though the
totals of the trial balance columns agree. For
example, 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.
 Cont.
• 4. Incorrect accounts are used in journalizing or
posting.
• 5. Offsetting errors are made in recording the
amount of a transaction.
• The trial balance does not prove that the
company has recorded all transactions or that
the ledger is correct.
 Dollar Signs and Underlining
• Dollar signs do not appear in journals or ledgers.
• Dollar signs are typically used only in the trial
balance and the financial statements.
• Generally, a dollar sign is shown only for the first
item in the column and for the total of that
column.
• A single line (a totaling rule) is placed under the
column of figures to be added or subtracted.
• Total amounts are double-underlined to indicate
they are final sums.
Problems
 Analyze the effects of business
transactions on the accounting equation
Cont.