Chapter 2

Accounting
Cycle: The
Recording
Phase
By: Tewodros Endale 1
 Objectives
Objectives
After
After
1) Explain why studying
studying
accounts are used to
record andthis
this chapter,
chapter,the
summarize
effects ofyou should
should be
transactions
you beon
able
able to:
financial statements. to:
2) Describe the characteristics of an
account.
3) List the rules of debit and credit
and the normal balances of
accounts.
4) Analyze andBy:summarize
Tewodros Endale
the financial
2
 Objectives
Objectives
5) Prepare a trial balance and
explain how it can be used to
discover errors.
6) Discover errors in recording
transactions and correct them.

By: Tewodros Endale 3

 Each
Each financial
financial
statement
statement item, item,
called
called an an account,
account,
is
is included
included in
in the
the
ledger.
ledger.

By: Tewodros Endale

4
 A
A group
group of of
accounts
accounts for for aa
business
business entity
entity is
is
called
called aa ledger.
ledger.

By: Tewodros Endale 5

AA list
list of
of accounts
accounts
in
in aa ledger
ledger is
is called
called
aa chart
chart ofof
accounts.
accounts.

By: Tewodros Endale 6

 Major Account Classifications

Assets
Assets are
are Liabilities
Liabilities are
are debts
debts
resources
resources owned
owned owed
owed toto outsiders
outsiders
by
by the
the business.
business. (creditors).
(creditors).
 Cash Accounts payable
 Supplies Notes payable
 Building Wages payable
 Accounts receivable

By: Tewodros Endale 7

 Major Account Classifications
Liabilities
Liabilities are
are often
often identified
identified
Assets are on
on the
the balance
balance sheet
sheet
Liabilities by
by
are titles
titles
debts
Assets are Liabilities are debts
resources owned
resources owned that
that include
include
owed payable
payable
to ..
outsiders
owed to outsiders
by
by the
the business.
business. (creditors).
(creditors).
Cash Accounts
Supplies payable
Building Notes payable
Accounts Wages payable
receivable
By: Tewodros Endale 8
 Major Account Classifications
Owner’s
Owner’s Revenues
Revenues are are Expenses
Expenses areare the
the
equity
equity isis the
the increases
increases inin using
using up
up of
of assets
assets
owner’s
owner’s right
right toto owner’s
owner’s equity
equity asas or
or consuming
consuming of of
the
the assets
assets ofof the
the aa result
result of
of selling
selling services
services to
to
business.
business. services
services or
or generate
generate revenue.
revenue.
Megabi , products.
products. Rent Expense
Capital Fees Earned Salary Expense
Megabi , Fares Earned Utilities
Drawing Commission Expense
Revenue
By: Tewodros Endale 9
Transactions and Balance
Sheet Accounts

By: Tewodros Endale 19

 Rules of Debit / Credit
Balance Sheet Accounts
Debits Credits
Asset accounts………. Increase (+) Decrease (-)
Liability accounts…… Decrease (-) Increase (+)
Owner’s equity
(capital) accounts…. Decrease (-) Increase (+)

By: Tewodros Endale 20

 Balance Sheet Accounts
ASSETS LIABILITIES
Asset Accounts Liability Accounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (-) (-) (+)

OWNER’S EQUITY
Owner’s Equity Accounts
Debit for Credit for
decreases increases
(-) (+)

By: Tewodros Endale 21

 Normal Balances of
Accounts
Increase
(Normal Balances) Decreases

Balance sheet accounts:

AssetDebit Credit
Liability Credit Debit
Owner’s Equity:
Capital Credit Debit
Drawing Debit Credit
Income statement accounts:
Revenue Credit Debit
Expense Debit Credit

By: Tewodros Endale 23

 (A) On
(A) On November
November 1, 1, Megabi
Megabi deposits
deposits
$25,000 in
$25,000 in aa bank
bank account
account in
in the
the
name of
name of NetSolutions.
NetSolutions.

JOURNAL Page
Post.
1
Date Description Debit Credit
2005 Ref.
1 Nov. 1 Cash 25 000 00
2 Megabi , Capital 25 000 00
3 Invested cash in NetSolutions.
4

By: Tewodros Endale 24

 (B) On
(B) On November
November 5,5,
NetSolutions bought
NetSolutions bought land
land
for $20,000,
for $20,000, paying
paying cash.
cash.

4
5 5 Land 20 000 00
6 Cash 20 000 00
7 Purchased land for building
8 site.
9
10

By: Tewodros Endale 26

 (C) On
(C) On November
November 10,
10, NetSolutions
NetSolutions
purchased supplies
purchased supplies on
on account
account
for $1,350.
for $1,350.

10
11 10 Supplies 1 350 00
12 Accounts Payable 1 350 00
13 Purchased supplies on account.
14
15
16

By: Tewodros Endale 28

 (F) On
(F) On November
November 30,30, NetSolutions
NetSolutions
paid creditors
paid creditors on
on account,
account, $950.
$950.

30
31 30 Accounts Payable 950 00
32 Cash 950 00
33 Paid creditors on account.
34
35
36

By: Tewodros Endale 30

 Rules of Debit / Credit
Income Statement
Accounts
Expense Accounts Revenue Accounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (-) (-) (+)

By: Tewodros Endale 32

 Income Statement
Accounts
Debits Credits
Revenue accounts…… Decrease (-) Increase (+)
Expense accounts…… Increase (+) Decrease (-)

By: Tewodros Endale 33

 (D) On
(D) On November
November 18, 18, NetSolutions
NetSolutions
received fees
received fees of
of $7,500
$7,500 from
from
customers for
customers for services
services provided
provided ..

14
15 18 Cash 7 500 00
16 Fees Earned 7 500 00
17 Received fees from customers.
18
19
20

By: Tewodros Endale 34

 (E) Throughout
(E) Throughout thethe month,
month, NetSolutions
NetSolutions
incurred the
incurred the following
following expenses:
expenses:
wages, $2,125;
wages, $2,125; rent,
rent, $800;
$800; utilities,
utilities,
$450; and
$450; and miscellaneous,
miscellaneous, $275
$275 ..
18
19 30 Wages Expense 2 125 00
20 Rent Expense 800 00
21 Utilities Expense 450 00
22 Miscellaneous Expense 275 00
23 Cash 3 650 00
24 Paid expenses.

By: Tewodros Endale 36

 In
In every
every entry
entry the
the
sum
sum ofof the
the debits
debits
always
always equal
equal the
the
sum
sum ofof the
the
credits.
credits.

By: Tewodros Endale 38

 (G) On
(G) On November
November 30, 30, aa count
count revealed
revealed
that $800
that $800 of
of the
the supplies
supplies inventory
inventory
had been
had been used.
used.

25
26 30 Supplies Expense 800 00
27 Supplies 800 00
28 Supplies used during
29 November.
30
31

By: Tewodros Endale 39

 Double-Entry
Double-Entry Accounting
Accounting
“ Double-entry accounting is based on a
simple concept: each party in a business
transaction will receive something and give
something in return.
In bookkeeping terms, what is received is a
debit and what is given is a credit.
The T account is a representation of a scale or
balance.”
Scale or Balance T account

Left Side Right Side

Receive Give
Luca Pacioli DEBIT CREDIT
Developer of
Double-Entry Receive Give
Accounting DEBIT CREDIT
By: Tewodros Endale 41
Withdrawals
Withdrawals
by
by the
the
Owner
Owner

By: Tewodros Endale 42

 (H) On
(H) On November
November 30,30, Megabi
Megabi withdrew
withdrew
$2,000 in
$2,000 in cash
cash from
from NetSolutions
NetSolutions for
for
personal use.
personal use.

JOURNAL Page
Post.
2
Date Description Debit Credit
2005 Ref.
1 Nov. 30 Megabi , Drawing 2 000 00
2 Cash 2 000 00
3 Megabi withdrew cash for
4 personal use.

By: Tewodros Endale 43

 Flow
Flow of
of Business
Business Transactions
Transactions
Transaction Transaction Document
1 authorized 2 takes place 3 prepared

Entry recorded Entry posted to

4 in journal 5 ledger

By: Tewodros Endale 47

 System
System to
to Analyze
Analyze
Transactions
Transactions
1. Determine whether an asset, a
liability, owner’s equity,
revenue, or expense account is
affected by the transaction.
2. For each account affected by the
transaction, determine whether
the account increases or
decreases.
3. Determine whether each increase
or decrease should be recorded as 48
Journalizing and
Posting
By: Tewodros Endale 49
By: Tewodros Endale 50
By: Tewodros Endale 51
 Dec. 11 NetSolutions
Dec. NetSolutions paid
paid aa premium
premium ofof
$2,400 for
$2,400 for aa comprehensive
comprehensive insurance
insurance
policy covering
policy covering two
two years.
years.

JOURNAL Page
Post.
2
Date Description Debit Credit
2005 Ref.
1 Dec. 31 Prepaid Insurance 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.

By: Tewodros Endale 52

 JOURNAL Page
Post.
2
Date Description Debit Credit
2005 Ref.
1 Dec. 1 Prepaid Insurance 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.

ACCOUNT Prepaid Insurance ACCOUNT NO. 15

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Dec. 1 2 400 00 2 400 00

By: Tewodros Endale 53

 JOURNAL Page
Post.
2
Date Description Debit Credit
2005 Ref.
1 Dec. 1 Prepaid Insurance 15 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.

ACCOUNT Prepaid Insurance ACCOUNT NO. 15

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Dec. 1 2 2 400 00 2 400 00

By: Tewodros Endale 54

 JOURNAL Page
Post.
2
Date Description Debit Credit
2005 Ref.
1 Dec. 1 Prepaid Insurance 15 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.

ACCOUNT Cash ACCOUNT NO. 11

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Nov. 30 2 2 000 00 5 900 00
Dec. 1 2 400 00 3 500 00
By: Tewodros Endale 55
 JOURNAL Page
Post.
2
Date Description Debit Credit
2005 Ref.
1 Dec. 1 Prepaid Insurance 15 2 400 00
2 Cash 11 2 400 00
3 Paid premium on two-year
4 policy.

ACCOUNT Cash ACCOUNT NO. 11

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Nov. 30 2 2 000 00 5 900 00
Dec. 1 2 2 400 00 3 500 00
By: Tewodros Endale 56
 Dec. 11 NetSolutions
Dec. NetSolutions paid
paid rent
rent for
for December,
December,
$800.
$800.

14 1 Rent Expense 52 800 00

15 Cash 11 800 00
16 Paid rent for December.
17

By: Tewodros Endale 57

 Dec. 11 NetSolutions
Dec. NetSolutions receives
receives $360
$360 for
for three
three
month’s rent
month’s rent beginning
beginning December
December 1. 1.

14 1 Cash 14 360 00
15 Unearned Rent 23 360 00
16 Received advanced payment
17 For three months’ rent of land.

By: Tewodros Endale 58

 Dec. 44 NetSolutions
Dec. NetSolutions purchased
purchased office
office
equipment on
equipment on account
account from
from Executive
Executive
Supply Co.
Supply Co. for
for $1,800.
$1,800.

18 4 Office Equipment 18 1 800 00

19 Accounts Payable 21 1 800 00
20 Purchased office equipment on
21 account.

By: Tewodros Endale 59

 Dec. 66 NetSolutions
Dec. NetSolutions paid
paid $180
$180 for
for aa
newspaper advertisement.
newspaper advertisement.

21 6 Miscellaneous Expense 59 180 00

22 Cash 11 180 00
23 Paid for newspaper ad.
24

By: Tewodros Endale 60

 Dec. 11
Dec. 11 NetSolutions
NetSolutions paid
paid creditors
creditors $400.
$400.

24 11 Accounts Payable 21 400 00

25 Cash 11 400 00
26 Paid creditors on account.
27

By: Tewodros Endale 61

 Dec. 13
Dec. 13 NetSolutions
NetSolutions paid
paid aa receptionist
receptionist and
and
part-time assistant
part-time assistant $950
$950 for
for two
two
weeks’ wages.
weeks’ wages.

JOURNAL Page
Post.
3
Date Description Debit Credit
2005 Ref.
1 Dec. 13 Wages Expense 51 950 00
2 Cash 11 950 00
3 Paid two week’s wages.
4

By: Tewodros Endale 62

 Dec. 16
Dec. 16 NetSolutions
NetSolutions received
received $3,100
$3,100 from
from
fees earned
fees earned for
for the
the first
first half
half of
of
December.
December.

5 16 Cash 11 3 100 00
6 Fees Earned 41 3 100 00
7 Received fees from customers.
8

By: Tewodros Endale 63

 Dec. 16
Dec. 16 Fees
Fees earned
earned on on account
account totaled
totaled
$1,750 for
$1,750 for the
the first
first half
half of
of
December.
December.

9 16 Accounts Receivable 12 1 750 00

10 Fees Earned 41 1 750 00
11 Received fees from customers.
12

By: Tewodros Endale 64

 Dec. 20
Dec. 20 NetSolutions
NetSolutions paid
paid $900
$900 to
to Executive
Executive
Supply Co.
Supply Co. on
on the
the $1,800
$1,800 debt
debt owed
owed
from the
from the December
December 44 transaction.
transaction.

13 20 Accounts Payable 21 900 00

14 Cash 11 900 00
15 Paid part of amount owed to
16 Executive Supply Co.

By: Tewodros Endale 65

 Dec. 21
Dec. 21 NetSolutions
NetSolutions received
received $650
$650 from
from
customers in
customers in payment
payment ofof their
their
accounts.
accounts.

18 21 Cash 11 650 00
19 Accounts Receivable 12 650 00
20 Received cash from customer
21 on account.

By: Tewodros Endale 66

 Dec. 23
Dec. 23 NetSolutions
NetSolutions paid
paid $1,450
$1,450 for
for
supplies.
supplies.

22 23 Supplies 14 1 450 00
23 Cash 11 1 450 00
24 Purchased supplies.
25

By: Tewodros Endale 67

 Dec. 27
Dec. 27 NetSolutions
NetSolutions paid
paid the
the receptionist
receptionist
and part-time
and part-time assistant
assistant $1,200
$1,200 for
for
two weeks’
two weeks’ wages.
wages.

27 27 Wages Expense 51 1 200 00

28 Cash 11 1 200 00
29 Paid two weeks’ wages.
30

By: Tewodros Endale 68

 Dec. 31
Dec. 31 NetSolutions
NetSolutions paidpaid its
its $310
$310 telephone
telephone
bill for
bill for the
the month.
month.

31 31 Utilities Expense 54 310 00

32 Cash 11 310 00
33 Paid telephone bill.
34

By: Tewodros Endale 69

 Dec. 31
Dec. 31 NetSolutions
NetSolutions paidpaid its
its $225
$225 electric
electric
bill for
bill for the
the month.
month.

JOURNAL Page
Post.
4
Date Description Debit Credit
2005 Ref.
1 Dec. 31 Utilities Expense 54 225 00
2 Cash 11 225 00
3 Paid utility bill.
4

By: Tewodros Endale 70

 Dec. 31
Dec. 31 NetSolutions
NetSolutions received
received $2,870
$2,870 from
from
fees earned
fees earned for
for the
the second
second half
half of
of
December.
December.

5 31 Cash 11 2 870 00
6 Fees Earned 41 2 870 00
7 Received fees from customers.
8

By: Tewodros Endale 71

 Dec. 31
Dec. 31 NetSolutions
NetSolutions earned
earned $1,120
$1,120 on
on
account for
account for the
the second
second half
half of
of
December.
December.

9 31 Accounts Receivable 12 1 120 00

10 Fees Earned 41 1 120 00
11 Recorded fees earned on
12 account.

By: Tewodros Endale 72

 Dec. 31
Dec. 31 Megabi
Megabi withdrew
withdrew $2,000
$2,000 for
for
personal use.
personal use.

14 31 Megabi , Drawing 32 2 000 00

15 Cash 11 2 000 00
16 Megabi withdrew cash
17 for personal use.

By: Tewodros Endale 73

Trial Balance

By: Tewodros Endale 74

By: Tewodros Endale 75
 NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Megabi , Capital 25 000 00
Megabi , Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
By: Tewodros Endale 76
 NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance Balance 2 400 00
Land Sheet 20 000 00
Office Equipment 1 800 00
Accounts Payable Items 900 00
Unearned Rent 360 00
Megabi , Capital 25 000 00
Megabi , Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
By: Tewodros Endale 77
 NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Megabi , Capital 25 000 00
Megabi , Drawing 4 000 00
Fees Earned Statement 16 340 00
Wages Expense 4 275 00
Rent Expense
of Owner’s 1 600 00
Utilities Expense Equity 985 00
Supplies Expense Item 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
By: Tewodros Endale 78
 NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Megabi , Capital 25 000 00
Megabi , Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense Income 4 275 00
Rent Expense 1 600 00
Utilities Expense
Statement 985 00
Supplies Expense Items 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
By: Tewodros Endale 79
By: Tewodros Endale 80
 Errors that will not cause the
trial balance to be unequal:
1. Failure to record a transaction or
to post a transaction.
2. Recording the same erroneous
amount for both the debit and
the credit parts of a transaction.
3. Recording the same transaction
more than once.
4. Posting a part of a transaction
correctly as a debit or credit but to
the wrong account.
By: Tewodros Endale 81
 Correctio
n of
Errors
Error Correction Procedure
1. Journal entry is incorrect Draw a line through the
error
but not posted. and insert correct title or
amount.

By: Tewodros Endale 82

 Correction
of Errors

Error Correction Procedure

1. Journal
2. Journal entry
entryisisincorrect
correct Draw a line through the
errorposted incorrectly.
but posted error and post
but not posted. and insert correct title or
correctly.
amount.

By: Tewodros Endale 83

 Correction
of Errors

Error Correction Procedure

3. Journal entry is incorrect Journalize and post a
and posted correcting entry.

By: Tewodros Endale 84

Correcting
Correcting Errors
Errors –– An
An Example
Example

On May 5, a Purchase of Office Equipment on

account was incorrectly journalized and
posted as shown.

Journal – As recorded and posted

Date Description Debit Credit

May 5 Supplies 12,500

Accounts Payable 12,500

What
What would
would be
be the
the necessary
necessary
correcting
correcting entry?
entry?
By: Tewodros Endale 85
Correcting
Correcting Errors
Errors –– An
An Example
Example

On May 5, a Purchase of Office Equipment on

account was incorrectly journalized and
posted as shown.

Journal – As recorded and posted

Date Description Debit Credit

May 5 Supplies 12,500

Accounts Payable 12,500

Date Description Debit Credit

May 5 Office Equipment 12,500

By: Tewodros Endale 86

Correcting
Correcting Errors
Errors –– An
An Example
Example

On May 5, a Purchase of Office Equipment on

account was incorrectly journalized and
posted as shown.

Journal – As recorded and posted

Date Description Debit Credit

May 5 Supplies 12,500

Accounts Payable 12,500

Date Description Debit Credit

May 5 Office Equipment 12,500
Supplies 12,500
By: Tewodros Endale 87
The
End!