CH-2: The Recording Process

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Study
Study Objectives
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.

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 The
The Recording
Recording Process
Process

Steps in the The Recording

The Trial
The Account Recording Process
Balance
Process 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

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 The Account
 An account is an accounting record of increase and
decrease in a specific asset, liability, or owner’s equity
item.
Debit = “Left”
Credit = “Right”

An Account can be Account Name

illustrated in a T- Debit (Dr.) Credit (Cr.)
Account form.

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 The Account
Debit and Credit Procedures
Double-entry 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.

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 Debits
Debits and
and Credits
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

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 Debits
Debits and
and Credits
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

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 The Account
Assets  Increase in Assets are recorded
Debit / Dr. Credit / Cr.
as Debit
 Increase in Liabilities are
Normal Balance
recorded as Credit.
Chapter
3-23

 Normal balance is on the

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

Normal Balance

Chapter
3-24

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 The Account
Owner’s Equity
 Increase in Owner’s Equity are
Debit / Dr. Credit / Cr.
recorded as Credit
 Remember:
o Investment (Capital) and
Normal Balance Revenue increases owner’s
equity
Chapter

Drawings and Expenses

3-25
o

decrease owner’s equity

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The Account
Owner’s Capital/Investment Owner’
Owner’s Drawing
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance

Chapter Chapter
3-25 3-23

Revenue Expense
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance

Chapter
Chapter
3-27
3-26

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Debits
Debits and
and Credits
Credits Summary
Summary
Liabilities
Debit / Dr. Credit / Cr.
Normal
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

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 The Account
Summary of Debit/Credit Rule
Relationship among the assets, liabilities and owner’s equity of
a business:
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.

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 Debits
Debits and
and Credits
Credits Summary
Summary
Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit

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Debits
Debits and
and Credits
Credits Summary
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.

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Debits
Debits and
and Credits
Credits Summary
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.

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 Steps in the recording process

Transfer journal information to

Analyze each transaction Enter transaction in a journal ledger accounts

Source documents, such as a sales slip, a check, a bill, or a

cash register tape, provide evidence of the transaction.

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 Steps in the recording process
The Journal
 Book of original entry.
 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.

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 Steps in the recording process
Journalizing - Entering transaction data in the journal.
Example: On September 1, Ray Neal invested $15,000 cash in the
business, and Softbyte purchased computer equipment for $7,000
cash.

General Journal
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
Owner’s, Capital 15,000

Equipment 7,000
Cash 7,000

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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)

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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 A c c ount T itle Ref . Deb it Cred it
O c t. 3 Off ic e Furniture 1,9 00
Ac coun ts Pa ya b le 1,90 0
(Purcha se f urniture)

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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 A c c ount T itle Ref . Deb it Cred it
Oc t. 6 Ac c ounts Rec eiva b le 3,2 00
S ervic e Revenue 3 ,200
(Rea lty servic es provid ed )

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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 A c c ount T itle Ref . Deb it Cred it
Oc t. 27 Ac c ounts Pa ya b le 700
C a sh 70 0
(Pa yment on a cc ount)

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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 A c c ount T itle Ref . Deb it Cred it
Oc t. 30 S a la ry Ex pense 2 ,50 0
C a sh 2,500
(Pa yment f or sa la ries)

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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 A c count Title Ref . Deb it Cred it
J une 15 Eq uipment 15,000
C ash 10,00 0
Ac c ounts Pa yab le 5,0 00
(Purc ha sed equipment)

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 Steps in the recording process
The Ledger
 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.

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 Steps in the recording process
Example: Standard Form of Account

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Chart
Chart of
of Accounts
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

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Standard
Standard Form
Form of
of Account
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

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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

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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.

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 Steps in the recording process

Posting –
process of
transferring
amounts
from the
journal to
the ledger
accounts.

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 The
The Recording
Recording Process
Process Illustrated
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.

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 The Trial Balance
Example:
A list of accounts and
their balances at a
given time.

Purpose is to prove
that debits equal
credits.

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The
The Trial
Trial Balance
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.

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The
The Trial
Trial Balance
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.

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