Chapter

2-1
 CHAPTER 2

THE RECORDING
PROCESS

Accounting Principles, Eighth Edition

Chapter
2-2
 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.
Chapter
2-3
 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

Chapter
2-4
 The
The Account
Account
Record of increases and
Accoun decreases in a specific asset,
t liability, equity, revenue, or
expense item.
Debit = “Left”
Credit = “Right”
An Account can Account Name
be illustrated Debit / Dr. Credit / Cr.
in a T-Account
form.

Chapter
2-5 LO 1 Explain what an account is and how it helps in the recording
 Debits
Debits and
and Credits
Credits

Double-entry accounting 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.

Chapter LO 2 Define debits and credits and explain

2-6
their use in recording business
 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 $3,00 Transaction #2

0
Transaction #3 8,000

Balance $15,000

Chapter LO 2 Define debits and credits and explain

2-7
their use in recording business
 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 $3,00 Transaction #2

0
8,000 Transaction #3

Balance $1,000

Chapter LO 2 Define debits and credits and explain

2-8
their use in recording business
 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
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

Chapter
2-9 LO 2
 Debits
Debits and
and Credits
Credits Summary
Summary
Balance Sheet Income Statement

Asset = Liabilit + Equity Reven - Expen

y ue se

Debit

Credit

Chapter LO 2 Define debits and credits and explain

2-10
their use in recording business
 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.

Chapter LO 2 Define debits and credits and explain

2-11
their use in recording business
 Assets
Assets and
and Liabilities
Liabilities

Assets

Assets - Debits should

Debit / Dr. Credit / Cr.

exceed credits.
Normal Balance

Chapter
3-23
Liabilities – Credits
should exceed debits.
Liabilities

The normal balance

Debit / Dr. Credit / Cr.

is on the increase side.

Normal Balance

Chapter
3-24

Chapter LO 2 Define debits and credits and explain

2-12
their use in recording business
 Owners’
Owners’ Equity
Equity

Owner’s Equity Owner’s investments and

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

Owner’s drawings and

Normal Balance

Chapter
3-25
expenses decrease owner’s
equity (debit).
Owner’s Capital Owner’s Drawing
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance

Chapter Chapter
3-25 3-23

Chapter LO 2 Define debits and credits and explain

2-13
their use in recording business
 Revenue
Revenue and
and Expense
Expense

Revenue The purpose of earning

Debit / Dr. Credit / Cr.
revenues is to benefit the
owner(s).
Normal Balance

Chapter
The effect of debits and
credits on revenue
3-26

Expense
accounts is the same as
Debit / Dr. Credit / Cr.
their effect on Owner’s
Capital.

Expenses have the

Normal Balance

Chapter
3-27
opposite effect: expenses
Chapter decrease owner’s equity.
LO 2 Define debits and credits and explain
2-14
their use in recording business
 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.

Chapter LO 2 Define debits and credits and explain

2-15
their use in recording business
 Expansion
Expansion of
of the
the Basic
Basic Equation
Equation

Relationship among the assets, liabilities and

owner’s equity of a business:
Illustration 2-
Basic
Assets = Liabilities + Owner’s Equity 11
Equation

Expanded
Basic
Equation

The equation must be in balance after every

transaction. For every Debit there must be a
Credit.
Chapter LO 2 Define debits and credits and explain
2-16
their use in recording business
 Steps
Steps in
in the
the Recording
Recording Process
Process
Illustration 2-
12

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

Business documents, such as a sales slip, a

check, a bill, or a cash register tape, provide
evidence of the transaction.

Chapter
2-17 LO 3 Identify the basic steps in the recording process.
 The
The Journal
Journal

Book of original entry (General Ledger).

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

Chapter
debit and credit amounts can be easily
2-18 LO 3 Identify the basic steps in the recording process.
compared.
 Journalizing
Journalizing
Journalizing - Entering transaction data in the
journal.
E2-4 (Facts) Presented below is information related to
Hanshew Real Estate Agency.

Oct. Pete Hanshew begins business as a real estate agent

1 with a cash investment of $15,000.
3 Purchases office furniture for $1,900, on account.
6 Sells a house and lot for B. Kidman; bills B. Kidman
$3,200 for realty services provided.
27 Pays $700 on balance related to transaction of Oct. 3.
30 Pays the administrative assistant $2,500 salary for
Oct.
E2-5 Instructions - Journalize the transactions for E2-4.
Chapter
2-19 LO 4 Explain what a journal is and how it helps in the recording
 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)

Chapter
2-20 LO 4 Explain what a journal is and how it helps in the recording
 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 ccount T itle Ref . Debit Credit
O ct. 3 O ffi ce F ur nitur e 1,900
A ccounts Payable 1,900
(Pur chase f ur nitur e)

Chapter
2-21 LO 4 Explain what a journal is and how it helps in the recording
 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 ccount T itle Ref . Debit Credit
O ct. 6 A ccounts Receivable 3,200
S er vice Revenue 3,200
(Realty ser vices pr ovided)

Chapter
2-22 LO 4 Explain what a journal is and how it helps in the recording
 Journalizing
Journalizing
E2-4 (Facts) Presented below is information
related to Hanshew Real Estate Agency.
Oct. Pays $700 on balance related to transaction
27 of Oct. 3.

General Journal
Date A ccount T itle Ref . Debit Credit
O ct. 27 A ccounts Payable 700
Cash 700
(Payment on account)

Chapter
2-23 LO 4 Explain what a journal is and how it helps in the recording
 Journalizing
Journalizing
E2-4 (Facts) Presented below is information
related to Hanshew Real Estate Agency.
Oct. Pays the administrative assistant $2,500
30 salary for Oct.

General Journal
Date A ccount T itle Ref . Debit Credit
O ct. 30 S alar y Ex pense 2,500
Cash 2,500
(Payment f or salar ies)

Chapter
2-24 LO 4 Explain what a journal is and how it helps in the recording
 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 ccount T itle Ref . Debit Credit
J une 15 Equipment 15,000
Cash 10,000
A ccounts Payable 5,000
(Pur chased equipment)

Chapter
2-25 LO 4 Explain what a journal is and how it helps in the recording
 The
The Ledger
Ledger

A 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.

Chapter
2-26 LO 5 Explain what a ledger is and how it helps in the recording
 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

Chapter
2-27 LO 6 Explain what posting is and how it helps in the recording
 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

Chapter
2-28 LO 5 Explain what a ledger is and how it helps in the recording
 Posting
Posting
Posting – the process of transferring amounts from
the journal to the ledger accounts.

General J1
Date Account TitleJournal
Ref. Debit Credit
Oct. 1 Cash 101 15,000
Hanshew, Capital 15,000
(Owner' s investment in business)

General
Cash
Ledger Acct. No. 101
Date Explanation Ref. Debit Credit Balance

Oct. 1 J1 15,000 15,000

Chapter
2-29 LO 6 Explain what posting is and how it helps in the recording
 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.

Chapter
2-30 LO 6 Explain what posting is and how it helps in the recording
 The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-
Follow these 19

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
Chapter
2-31credits. LO 6 Explain what posting is and how it helps in the recording
 The
The Trial
Trial Balance
Balance

A list of accounts Hans he w R e al E s tate A g e nc y

Trial B alanc e
and their O c tober 31, 2008
balances at a Debit Credit
Cas h $ 11,800
given time. A c c ounts rec eivable 3,200
O ffic e furniture 1,900
Purpose is to A c c ounts pay able $ 1,200
Hans hew, Capital 15,000
prove that S ervic e revenue 3,200
debits equal S alaries ex pens e 2,500
$ 19,400 $ 19,400
credits.

Chapter
2-32 LO 7 Prepare a trial balance and explain its purposes.
 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.

Chapter
2-33 LO 7 Prepare a trial balance and explain its purposes.
 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.
Chapter
2-34 LO 7 Prepare a trial balance and explain its purposes.
 Recording
Recording Process
Process

Discussion Question
Q2-19. Jim Benes is confused about how accounting
information flows through the accounting system. He
believes the flow of information is as follows.
a. Debits and credits posted to the ledger.
b. Business transaction occurs.
c. Information entered in the journal.
d. Financial statements are prepared.
e. Trial balance is prepared.
Is Jim correct? If not, indicate to Jim the proper flow
of the information.
See notes page for
Chapter
2-35discussion LO 7 Prepare a trial balance and explain its purposes.