Financial Accounting

The Recording Process

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 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.

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 Preview of Chapter 2

Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
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 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 be Account Name

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

2-4 LO 1 Explain what an account is and how it helps in the recording process.
 The Account

Debits and Credits

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.

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 Debits and Credits

If Debit amounts are greater than Credit amounts, 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

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 Debits and Credits

If Debit amounts are less than Credit amounts, 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

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 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

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 Debits and Credits

Owner’s Equity  Owner’s investments and

Debit / Dr. Credit / Cr.
revenues increase owner’s equity
(credit).
Normal Balance  Owner’s drawings and expenses
Chapter
3-25 decrease owner’s equity (debit).

Owner’s Capital Owner’s Drawing Helpful Hint Because

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. revenues increase owner’s
equity, a revenue account
has the same debit/credit
rules as the Owner’s
Normal Balance Normal Balance Capital account. Expenses
have the opposite effect.
Chapter Chapter
3-25 3-23

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 Debits and Credits

Revenue  The purpose of earning revenues

Debit / Dr. Credit / Cr.
is to benefit the owner(s).
 The effect of debits and credits on
Normal Balance
revenue accounts is the same as
Chapter
3-26 their effect on Owner’s Capital.
 Expenses have the opposite
Expense
Debit / Dr. Credit / Cr.
effect: expenses decrease owner’s
equity.

Normal Balance

Chapter
3-27

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 Debits/Credits Rules
Liabilities
Debit / Dr. Credit / Cr.
Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance

Assets Chapter
3-24

Owner’s Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expense Chapter
3-25
Revenue
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

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LO 2
 Debits/Credits Rules

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 Debits/Credits 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.

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 Debits/Credits Rules

Question
Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and owner’s drawing.

d. assets, owner’s drawing, and expenses.

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 (See page 95.)

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 Summary of Debits/Credits Rules

Relationship among the assets, liabilities and owner’s equity

of a business:
Illustration 2-11

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.

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 > DO IT!

Kate Browne has just rented space in a shopping mall. In this space,
she will open a hair salon to be called “Hair It Is.” A friend has advised
Kate to set up a double-entry set of accounting records in which to
record all of her business transactions. Identify the balance sheet
accounts that Kate will likely need to record the transactions needed
to open her business. Indicate whether the normal balance of each
account is a debit or a credit.

Assets Liabilities Equity

Cash (debit) Notes payable (credit) Owner’s Capital (credit)

Supplies (debit) Accounts payable
Equipment (debit) (credit)

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 Steps in the Recording Process

Illustration 2-12

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

ledger accounts

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

a cash register tape, provide evidence of the transaction.

2-18 LO 3 Identify the basic steps in the recording process.

 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.

2-19 LO 4 Explain what a journal is and how it helps in the recording process.
 Steps in the Recording Process

Journalizing - Entering transaction data in the journal.

Illustration: On September 1, Ray Neal invested $15,000 cash in
the business, and Softbyte purchased computer equipment for
$7,000 cash.
Illustration 2-13

General Journal

Date Account Title Ref. Debit Credit

Sept. 1 Cash 15,000
Owner’s Capital 15,000

Equipment 7,000
Cash 7,000
2-20 LO 4 Explain what a journal is and how it helps in the recording process.
 Steps in the Recording Process

Simple and Compound Entries

Illustration: On July 1, Butler Company purchases a delivery truck
costing $14,000. It pays $8,000 cash now and agrees to pay the
remaining $6,000 on account.
Illustration 2-14

General Journal

Date Account Title Ref. Debit Credit

July 1 Equipment 14,000
Cash 8,000
Accounts payable 6,000

2-21 LO 4 Explain what a journal is and how it helps in the recording process.
2-22
 Steps in the Recording Process

The Ledger
 General Ledger contains the entire group of accounts
maintained by a company.
Illustration 2-15

2-23 LO 5 Explain what a ledger is and how it helps in the recording process.
2-24
 Steps in the Recording Process

Standard Form of Account

Illustration 2-16

2-25 LO 5 Explain what a ledger is and how it helps in the recording process.
 Steps

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

Illustration 2-17

2-26 LO 6 Explain what posting is and how it helps in the recording process.
 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.

2-27 LO 6 Explain what posting is and how it helps in the recording process.
 Chart of Accounts
Accounts and account numbers arranged in sequence in which
they are presented in the financial statements.
Illustration 2-18

2-28 LO 6 Explain what posting is and how it helps in the recording process.
 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 2-19

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LO 6
 The Recording Process Illustrated

Illustration 2-20

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LO 6
 The Recording Process Illustrated

Illustration 2-21

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LO 6
 The Recording Process Illustrated

Illustration 2-22

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LO 6
 The Recording Process Illustrated

Illustration 2-23

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LO 6
 The Recording Process Illustrated

Illustration 2-24

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LO 6
 The Recording Process Illustrated
Illustration 2-25

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LO 6
 The Recording Process Illustrated

Illustration 2-26

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LO 6
 The Recording Process Illustrated

Illustration 2-27

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LO 6
 The Recording Process Illustrated

Illustration 2-28

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LO 6
 > DO IT!
Kate Brown 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
Mar. 15 Salaries and Wages Expense 400
Cash 400
Mar. 19 Utilities Expense 92
Cash 92

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LO 6
Summary of
Journalizing
and Posting

Illustration 2-29

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LO 6
 Illustration 2-30
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LO 6
 Trial Balance

Illustration 2-31

2-42 LO 7 Prepare a trial balance and explain its purposes.

 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.

2-43 LO 7 Prepare a trial balance and explain its purposes.

 Trial Balance

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.

2-44 LO 7 Prepare a trial balance and explain its purposes.

 (See page 95.)

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 IFRS and Indian GAAP

 The accounting profession has developed standards that are generally accepted
and universally practiced. This common set of standards is called generally
accepted accounting principles (GAAP). These standards indicate how to report
economic events.
 In India accounting standards are issued by the Institute of Chartered Accountants of
India (ICAI).
 International Financial Reporting Standards (IFRS) are issued by International
Accounting standards board.
 Many countries have adopted IFRS and many are converging their standards to
IFRS
 The Government of India in consultation with the ICAI decided to converge and not
to adopt IFRSs issued by the IASB by formulating IFRS-converged Indian
Accounting Standards (Ind AS). Efforts have been made to keep these Standards,
as far as possible, in line with the corresponding IFRS and departures have been
made where considered absolutely essential.

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 A Look at IFRS and Indian GAAP

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 A Look at IFRS and Indian GAAP

Why use GAAP?

 Recent events in the global capital markets have underscored the
importance of financial disclosure and transparency not only in
the United States but in markets around the world.
 As a result, many are examining which accounting and financial
disclosure rules should be followed. As indicated in the graphic
above, much of the world has voted for the standards issued by
the IASB. Over 115 countries require or permit use of IFRS.
 A number of ethics violations, such as Enron, WorldCom, and AIG
in US, at Satyam Computer Services in India, Parmalat in Italy
and Royal Ahold in the Netherlands.

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 A Look at IFRS and Indian GAAP

Key Bases
 IFRS tends to be simpler in its accounting and disclosure
requirements; some people say more “principles-based.” GAAP is
more detailed; some people say it is more “rules-based.”
 The Indian GAAP are prepared in compliance with the various
requirement of the Indian Companies Act, 2013.
 The conceptual framework that underlies IFRS is mostly used to
develop IndAS.

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 A Look at IFRS and Indian GAAP

Key Points
 Transaction analysis is the same under IFRS, Indian GAAP and
IndAS, but different standards sometimes impact how
transactions are recorded.
 Rules for accounting for specific events sometimes differ across
countries. For example, European companies rely less on
historical cost and more on fair value than U.S. companies.
Despite the differences, the double-entry accounting system is the
basis of accounting systems worldwide.
 Both the IASB and ICAI go beyond the basic definitions provided
in this textbook for the key elements of financial statements, that
is, assets, liabilities, equity, revenues, and expenses.

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 A Look at IFRS and Indian GAAP

Key Points
 A trial balance under IFRS/Indian GAAP/IndAS follows the same
format as shown in the textbook.
 As shown in the textbook, dollars signs are typically used only in
the trial balance and the financial statements. The same practice
is followed under IFRS, using the currency of the country that the
reporting company is headquartered.

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 A Look at IFRS and Indian GAAP

Looking to the Future

The basic recording process shown in this textbook is followed by
companies across the globe. It is unlikely to change in the future. The
definitional structure of assets, liabilities, equity, revenues, and
expenses may change over time as the IASB and ICAI evaluate their
overall conceptual framework for establishing accounting standards.

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 A Look at IFRS and Indian GAAP

IFRS Self-Test Questions

Which statement is correct regarding IFRS?
a) IFRS reverses the rules of debits and credits, that is, debits
are on the right and credits are on the left.
b) IFRS uses the same process for recording transactions as
Indian GAAP.
c) The chart of accounts under IFRS is different because
revenues follow assets.
d) None of the above statements are correct.

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 A Look at IFRS and Indian GAAP

IFRS Self-Test Questions

A trial balance:
a) is the same under IFRS and Indian GAAP.
b) proves that transactions are recorded correctly.
c) proves that all transactions have been recorded.
d) will not balance if a correct journal entry is posted twice.

2-54 LO 8 Compare the procedures for the accounting process under GAAP and IFRS.
 A Look at IFRS and Indian GAAP

IFRS Self-Test Questions

One difference between IFRS and GAAP is that:
a) GAAP uses accrual-accounting concepts and IFRS uses
primarily the cash basis of accounting.
b) IFRS uses a different posting process than GAAP.
c) IFRS uses more fair value measurements than GAAP.
d) the limitations of a trial balance are different between IFRS
and GAAP.

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