PREVIEW OF CHAPTER 2

Financial Accounting
IFRS 3rd Edition
Weygandt Kimmel Kieso
2-1
 CHAPTER

2 The Recording Process

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

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.
2-2
 Expand accounting equation

2-3
 Expand accounting equation

1) Assets = Liabilities + Equity

2) Assets = Liabilities + (Capital + Retained earnings)

3) Assets = Liabilities + (Capital+(RevenuesExpensesDividends))

4) Assets Expenses Dividends = Liabilities + Capital+ Revenues

Debit side Credit side

Assets Expenses Dividends Liabilities + Capital+ Revenues

2-4
 Main Accounts
Debit Credit

Assets Liabilities

Expenses Revenues

Purchases (inventory) Sales (inventory)

Sales returns Purchases returns

Sales discount Purchase discount

Dividends or Drawings Capital

2-5
 The Account
Learning
Objective 1 Record of increases and decreases in
Explain what an a specific asset, liability, stockholders
account is and equity, revenue, or expense item.
how it helps in the
recording Debit = Left
process.
Credit = Right

Account Name
An account can be Debit / Dr. Credit / Cr.
illustrated in a T-
account form.

2-6 LO 1
 Debits and Credits
Learning
DEBIT AND CREDIT PROCEDURES Objective 2
Define debits and
credits and explain
Double-entry system their use in
recording business
Each transaction must affect two or more transactions.

accounts to keep the basic accounting

equation in balance.

Recording done by debiting at least one account and

crediting at least one other account.

DEBITS must equal CREDITS.

2-7 LO 2
 Debits and Credits

Assets Assets - Debits should exceed

Debit / Dr. Credit / Cr.
credits.

Liabilities Credits should

Normal Balance
exceed debits.

Normal balance is on the

Chapter

3-23

increase side.
Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-24

2-8 LO 2
 Debits and Credits

Equity Issuance of share capital and

Debit / Dr. Credit / Cr.
revenues increase equity (credit).

Dividends and expenses decrease

Normal Balance
equity (debit).
Chapter
3-25

Share Capital-Ordinary Retained Earnings Dividends

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

3-25 3-25 3-23

2-9 LO 2
 Debits and Credits

Revenues The purpose of earning revenues

Debit / Dr. Credit / Cr.
is to benefit the shareholders.

The effect of debits and credits on

Normal Balance
revenue accounts is the same as
Chapter
3-26
their effect on equity.

Expenses have the opposite effect:

Expenses
Debit / Dr. Credit / Cr.
expenses decrease equity.

Normal Balance

Chapter
3-27

2-10 LO 2
 Debits and Credits
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter
3-24

Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expenses Chapter
3-25
Revenues
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

2-11
LO 2
 Summary of Debit/Credit Rules

Statement of
Financial Position Income Statement
Asset = Liability + Equity Revenue - Expense

Debit

Credit

2-12 LO 2
 Summary of Debit/Credit Rules

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.

2-13 LO 2
 Summary of Debit/Credit Rules

Question
Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

2-14 LO 2
 Summary of Debit/Credit Rules

Relationship among the assets, liabilities, and equity of a

business:
Illustration 2-12
Summary of debit/credit rules

The equation must be in balance after every transaction.

Total Debits must equal total Credits.

2-15 LO 2
 Steps in the Recording Process
Learning
The Journal Objective 4
Explain what a
journal is and how
Book of original entry. it helps in the
recording
Transactions recorded in chronological process.

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.

2-16 LO 4
 The Journal

JOURNALIZING - Entering transaction data in the journal.

Illustration: On September 1, shareholders invested 15,000 cash in
the corporation in exchange for ordinary shares, and Softbyte
purchased computer equipment for 7,000 cash.
Illustration 2-14

GENERAL JOURNAL

Date Account Title Ref. Debit Credit

Sept. 1 Cash 15,000
Share CapitalOrdinary 15,000

Equipment 7,000
Cash 7,000
2-17 LO 4
 The Journal

SIMPLE AND COMPOUND ENTRIES

Illustration: On July 1, Tsai Company purchases a delivery truck
costing NT$420,000. It pays NT$240,000 cash now and agrees to
pay the remaining NT$180,000 on account. Illustration 2-15
Compound journal entry

GENERAL JOURNAL

Date Account Title Ref. Debit Credit

July 1 Equipment 420,000
Cash 240,000
Accounts Payable 180,000

2-18 LO 4
 Exercise
1) Ahmad intends to start his business by investing 20,000 cash.
2) The business purchases supplies for 1000 cash.
3) The business purchases supplies for 1000 on account.
4) The business purchase supplies for 2500, the business paid 1000 cash and the rest
to be paid later.
5) the sold an old vehicle for 3000 cash.
6) The business sold an old vehicle for 3000 on account.
7) The business sold an old vehicle for 3500, the business receives 2000 cash and the
rest to be received later.
8) The business provides services for 800 cash.
9) The business provides services for 800 on account.
10) The business provides services for 800, the business receives 500cash, and the rest
to be paid later.
11) The business paid the following expenses; salaries exp 1000, rent exp 300, utilities
exp 150.
12) The business paid cash dividends for 2000.

2-19
 Exercise
1) Jan 1st the business purchased 300 units for 10 each (on account)
With credit term 5/10, net/45
2) Jan . 3rd the business returned 10 damaged units.

3) Jan . 9th the business paid the due balance cash.

4) Jan 15th A business sold 30 units with a price of 5 each, with a credit term:
10/15, net/30

5) On Jan 20th the customer returned 5 units.

6) On Jan 24th The customer paid the due balance cash

2-20
 Steps in the Recording Process
Learning
The Ledger Objective 5
Explain what a
ledger is and how
General Ledger contains all the asset,
it helps in the
liability, and equity accounts. recording
process.

Illustration 2-16
The general ledger
2-21 LO 5
 The Ledger

STANDARD FORM OF ACCOUNT Illustration 2-17

Three-column form
of account

2-22 LO 5
 Posting

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.

2-23 LO 6
Illustration 2-19
Chart of accounts for Yazici Advertising A.S .

2-24 LO 6
 > DO IT!
Como Company SpA recorded the following transactions in a general
journal during the month of March. Post these entries to the Cash
account.

Mar. 4 Cash 2,280

Service Revenue 2,280
15 Salaries and Wages Expense 400
Cash 400
19 Utilities Expense 92
Cash 92

2-25 LO 6
2-26 Illustration 2-30 LO 6
General journal entries
 Illustration 2-30
General journal entries

2-27 LO 6
 Illustration 2-31
General ledger
2-28 LO 6
 The Trial Balance
Learning
A trial balance Objective 7
Prepare a trial
is a list of accounts and their balances balance and
explain its
at a given time. purposes.

proves the mathematical equality of debits and credits

after posting.

The steps for preparing a trial balance are:

1. List the account titles and their balances.

2. Total the debit and credit columns.

3. Prove the equality of the two columns.

2-29 LO 7
 Trial Balance
Illustration 2-32
A trial balance

2-30 LO 7
 > DO IT!

2-31 LO 7
2-32 LO 7
 Types of Adjusting Entries Learning
Objective 4
Identify the major
types of adjusting
entries.
Deferrals Accruals

1. Prepaid Expenses. 1. Accrued Revenues.

Expenses paid in cash Revenues for services
before they are used or performed but not yet
consumed. received in cash or recorded.

2. Unearned Revenues. 2. Accrued Expenses.

Cash received before Expenses incurred but not
services are performed. yet paid in cash or recorded.

Illustration 3-2
Categories of adjusting entries

2-33 LO 4