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.
2-1
 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 Debit / Dr. Credit / Cr.
be illustrated in a
T-account form.

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

2-3 LO 2
 Debits and Credits

If the sum of Debit entries are greater than the sum of

Credit entries, 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

2-4 LO 2
 Debits and Credits

If the sum of Credit entries are greater than the sum of

Debit entries, 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

2-5 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

2-6 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

2-7 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
Expenses
Debit / Dr. Credit / Cr.
effect: expenses decrease equity.

Normal Balance

Chapter
3-27

2-8 LO 2
 Debits and Credits
Liabilities
Debit / Dr. Credit / Cr.
Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
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

2-9
LO 2
 Equity
Relationships

Illustration 2-11
Equity relationships

2-10 LO 2
 The Account
Learning
Business documents, such as a sales Objective 3
Identify the basic
receipt, a check, or a bill, provide evidence steps in the
of the transaction. recording
process.

Analyze each transaction Enter transaction in a journal Transfer journal information to

ledger accounts
Illustration 2-13
The recording process

2-11 LO 3
 Steps in the Recording Process
Learning
The Journal Objective 4
Explain what a
journal is and
 Book of original entry. how 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.
2-12 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 Capital—Ordinary 15,000

Equipment 7,000
Cash 7,000
2-13 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

2-14 LO 4
 > DO IT!

As president and sole shareholder, Kate Browne engaged in

the following activities in establishing her salon, Hair It Is
Company SA.

1. Opened a bank account in the name of Hair It Is Company

SA and deposited €20,000 of her own money in this
account in exchange for ordinary shares.

2. Purchased equipment on account (to be paid in 30 days) for

a total cost of €4,800.

3. Interviewed three applicants for the position of beautician.

Prepare the entries to record the transactions.

2-15 LO 4
 > DO IT!

Prepare the entries to record the transactions.

1. Opened a bank account and deposited €20,000.

Cash 20,000
Share Capital—Ordinary 20,000

2. Purchased equipment on account (to be paid in 30 days) for

a total cost of €4,800.
Equipment 4,800
Accounts Payable 4,800

3. Interviewed three applicants for the position of beautician.

No entry
2-16 LO 4
 Steps in the Recording Process
Learning
The Ledger Objective 5
Explain what a
ledger is and
 General Ledger contains all the asset, how it helps in
liability, and equity accounts. the recording
process.

Illustration 2-16
The general ledger
2-17 LO 5
 The Ledger (General ledger)
STANDARD FORM OF ACCOUNT Illustration 2-17
Three-column form
of account

However, this syllabus only cover T-

Ledger !
2-18 LO 5
 Posting
Learning
Objective 6
Explain what
posting is and
how it helps in
the recording
process.

Transferring
journal entries
to the ledger
accounts.

Illustration 2-18
Posting a journal
entry

2-19 LO 6
 The Recording Process Illustrated

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.
Illustration 2-20
Investment of cash
by shareholders

2-20 LO 6
 Illustration 2-21
2-21 Purchase of office equipment LO 6
 Illustration 2-22
Receipt of cash
for future service

2-22 LO 6
2-23 Illustration 2-23
Payment of monthly rent LO 6
 Illustration 2-24
Payment for
insurance

2-24 LO 6
2-25 Illustration 2-25
Purchase of supplies on credit LO 6
 The Recording Process Illustrated

Illustration 2-26
Hiring of employees

2-26 LO 6
 Illustration 2-27
2-27 Declaration and payment of dividend LO 6
 Illustration 2-28
2-28
Payment of salaries LO 6
2-29 Illustration 2-29
Receipt of cash for services performed 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

2-30 LO 6
2-31 Illustration 2-30 LO 6
General journal entries
 Illustration 2-30
General journal entries

2-32 LO 6
 Illustration 2-31
General ledger
2-33 LO 6
 The Trial Balance
Learning
A trial balance Objective 7
Prepare a trial
balance and
 is a list of accounts and their balances 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.

2-34 LO 7
 Trial Balance
Illustration 2-32
A trial balance

2-35 LO 7
 Limitations of a Trial Balance

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.
5. Offsetting errors are made in recording the amount of a
transaction.

2-36 LO 7
 > DO IT!

2-37 LO 7
2-38 LO 7
 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.

2-39 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.

2-40 LO 2
 THE END

2-41