Accounting and Financial

Reporting
Master of Business Administration
(MBA)

1
Lecture Week 3
The Recording Process

2
 Learning Objectives

1. Describe how accounts, debits, and credits are used to record

business transactions.
2. Indicate how a journal is used in the recording process.
3. Explain how a ledger and posting help in the recording process.

3
Accounting Cycle

4
 Accounting Cycle
The term accounting cycle refers to the steps in preparing financial statements. It is called a cycle
because the steps are repeated each reporting period. There are ten steps in the cycle which include:
1. Analyze transactions -- Analyze transactions to prepare for journalizing.
2. Journalize -- Record accounts, including debits and credits, in a journal.
3. Post -- Transfer debits and credits from the journal to the ledger.
4. Prepare unadjusted trial balance -- Summarize unadjusted ledger accounts and amounts.
5. Adjust -- Record adjustments to bring account balances up to date; journalize and post
adjustments.
6. Prepare adjusted trial balance -- Summarize adjusted ledger accounts and amounts.
7. Prepare statements -- Use adjusted trial balance to prepare financial statements.
8. Close -- Journalize and post entries to close temporary accounts.
9. Prepare post-closing trial balance -- Test clerical accuracy of the closing procedures.
10. Reverse (optional step) -- Reverse certain adjustments in the next period. 5
 Summarizing and Recording Process

Analyze each transaction and Record relevant transactions

event from source documents and events in a journal

Prepare and analyze

the trial balance Post journal information
to ledger accounts
6
 Summarizing and Recording Process
• We begin the accounting process by analyzing source documents. For example, you usually receive a
receipt when you pay cash for something. Think about the last time you went to a fast food
restaurant. When you received your order, you were given a receipt, a source document. If you
wanted a company to reimburse you for the meal because you were traveling on company business,
you must present evidence of your expenditure. This evidence takes the form of a source document,
the receipt.
• Once we identify a business transaction, we record it in a journal. A journal is arranged in
chronological order. Transactions are recorded by date of occurrence.
• At the end of the accounting period, usually a month, transactions in the journal are posted to a
ledger account. Posting is the systematic process of transferring information from the journal to the
ledger. The ledger groups transactions by the accounts impacted. For example, we will have a ledger
account for cash. All transactions that result in increases or decreases in the cash account will be
posted to the cash ledger account.
• Once all transactions have been posted, we prepare a trial balance. The purpose of the trial balance
is to make sure that all information has been transferred properly. The trial balance is a listing of all
account balances. 7
 Source Documents
Bills from
Checks Suppliers Purchase
Orders
Employee
Earnings
Records Bank
Statements

Sales
Tickets

8
 Source Documents
• Source documents identify and describe transactions and events entering the
accounting process.
• They are the sources of accounting information and can be in either hard copy or
electronic form.
• Almost all businesses use sales orders, purchase orders, statements from
suppliers, canceled checks, bank statements, shipping notices, packing slips, and
the like to support the existence of a transaction.
• In today’s highly computerized environment, many source documents are stored
digitally. Knowing how to access these digital source documents is an important
part of accounting.

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 The Account and its Analysis

Assets = Liabilities + Equity

+ – + –
Owner’s Owner's
Revenues Expenses
Capital Withdrawals

10
 Asset Accounts
Here is a listing of common asset accounts we are likely to find in all businesses.

Cash
Accounts
Land
Receivable

Buildings
Asset Notes Think about your auto
Receivable
Accounts insurance. Many of us
pay our auto insurance
for long periods. The
payment is made in
Prepaid advance and is referred
Equipment to as a prepaid amount.
Accounts Prepaid amounts will
Supplies turn into expenses as
they are used up.

11
 Liability Accounts
This is a listing of common liability accounts we are likely to see in the general ledger.

Accounts Notes When insurance

Payable Payable companies receive
insurance payments in

Liability
advance, cash is
received but nothing
has been done to earn

Accounts the revenue. As the

insurance service is
provided to customers,
Accrued Unearned
the company
recognizes a portion of
Liabilities Revenue
the money received as
revenue. At the end of
the insurance period,
all the revenue will be
earned and the liability
no longer exists.

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Equity Accounts

Owner’s Owner’s
Capital Withdrawals

Equity
Accounts

Revenues Expenses

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 Debits and Credits
Debit and Credit Procedure
Double-entry system (or double-entry accounting)
• Each transaction must affect two or more accounts to keep basic
accounting equation in balance
• Recording done by debiting at least one account and crediting at
least one other account
• DEBITS must equal CREDITS

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 Debits and Credits
Instead of using the terms increase and decrease, we use the terms debit and credit. It is
important to remember whether we are talking about an asset, liability, or equity
account for the meaning of a debit or a credit.

Assets = Liabilities + Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +
Normal Normal Normal

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 Debits and Credits

Equity
Owner’s _ Owner's _ Expenses
Capital Withdrawals + Revenues

Owner’s Owner's Revenues Expenses

Capital Withdrawals

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
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 Quick Test; Debit/ Credit Rules
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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 The Journal

Journalize
Trial Adjusting
Analyze the Post
Balance Entries
transactions

Adjusted
Financial Closing Post-Closing
Trial
Balance Statements Entries Trial Balance

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 The Journal
• Book of original entry
• Transactions recorded in chronological order
• Contributions to the recording process:
1. Provides a chronological record of transactions
2. Discloses the complete effects of a transaction
3. Helps to prevent or locate errors because the debit and
credit amounts can be easily compared

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 Journalizing
• The owner of the business contributes $30,000
cash to start the business. Let’s see how we get
the various pieces.
Transaction Date Titles of Affected
• The transaction occurred on December 1st, Accounts
2011. The date is important when recording
general journal transactions and is recorded on
the left side of the journal.
• Next we identify the accounts affected by the
transactions. The cash account is an asset that
has increased. We show increases in asset
accounts with a debit to that account. The C.
Taylor, Capital account also increased and we
show increases in equity accounts with a credit.
Debits are always listed first in the journal
followed by credits that are slightly indented Dollar amount of debits and
below the debits. credits
• The dollar amount is placed in the appropriate
debit or credit column. In this case, the cash
account was debited for $30,000, so we place
that amount in the debit column. 20
 Journalizing
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
(This is a simple entry with one account debited and one account credited).
GENERAL JOURNAL J1
Date Account Titles and Explanations Ref. Debit Credit
Sept. 1 Cash 15,000
Owner's Capital 15,000

Equipment 7,000
Cash 7,000

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 Journalizing
Simple and Compound Entries
Illustration: On July 1, Butler Shipping purchases an equipment
costing £14,000. It pays £8,000 cash now and agrees to pay the
remaining £6,000 on account “to be paid later” (This is a compound
entry with more than one account in the debit and/or credit sides).

GENERAL JOURNAL J1
Date Account Titles and Explanations Ref. Debit Credit
July 1 Equipment 14,000
Cash 8,000
Accounts Payable 6,000

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 Recording Business Activities
Julie Loeng engaged in the following activities in establishing her salon,
Hair It Is:
1. Opened a bank account in the name of Hair It Is and deposited ¥20,000
of her own money in this account as her initial investment.
2. Purchased equipment on account (to be paid in 30 days) for a total cost
of ¥4,800.
3. Interviewed three people for the position of hair stylist.
Prepare the journal entries to record the transactions.

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 Recording Business Activities
Prepare the journal entries to record the transactions.
1. Opened a bank account and deposited ¥20,000.
Cash 20,000
Owner’s Capital 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 persons for the position of hair stylist.
No entry

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 The Ledger and Posting
Post to
Trial Adjusting
Analyze Journalize ledger
Balance Entries
accounts

Adjusted
Financial Closing Post-Closing
Trial
Balance Statements Entries Trial Balance

The Ledger
a. Entire group of accounts maintained by a company
b. Keeps track of changes in account balances
c. Provides the balance in each account

25
 The Ledger
• Accountants often use a T-account to represent a general ledger account. It is a
quick way to analyze transactions before we enter the information in the journal.
• The account title is entered on the top of the T-account. The left side of a T-account
is always called the debit side, and the right side is always called the credit side.
• Debit and Credit terminologies come from the time when the first double-entry
system was developed. We still use the terms as a convention. The words do not
have any significant meaning other than that they stand for the left and right side of
a ledger.
• When the sum of the debits exceed the sum of the credits in a particular account,
the account has a debit balance.

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 The Ledger
A T-account represents a ledger account and is a tool used to
understand the effects of one or more transactions.

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 The Ledger
The Account
• Record of increases and decreases in a specific asset, liability, owner’s
equity, revenue, or expense item.
• Debit = “Left”
Account Name
• Credit = “Right” Debit / Dr. Credit / Cr.

An account can be
illustrated in a
T-account form.

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 Normal Account Balances
If the sum of Debit entries are greater than the sum of Credit
entries, the account will have a debit balance (Debit Normal
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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 Normal Account Balances
If the sum of Credit entries are greater than the sum of Debit
entries, the account will have a credit balance (Credit Normal
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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 Quick Test; Normal Account Balances
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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Posting to Date
GENERAL JOURNAL
Account Titles and Explanation Ref. Debit
J1
Credit
The Ledger 2020
Sept. 1 Cash 101 15,000
Owner’s Capital 301 15,000

GENERAL LEDGER
Cash NO. 101
Date Explanation Ref. Debit Credit Balance
2020
Sept. 1 J1 15,000 15,000

Owner’s Capital NO. 301

Date Explanation Ref. Debit Credit Balance
2020
Sept. 1 J1 15,000 15,000

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 Balance Column Ledger Account
T-accounts are useful illustrations, but balance column ledger
accounts are used in practice.

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 Chart of Accounts
A list of all accounts with identifying number for each account.

Assets Owner's Equity

101 Cash 301 Owner’s Capital
112 Accounts Receivable 306 Owner’s Drawings
126 Supplies 350 Income Summary
130 Prepaid Insurance
157 Equipment Revenues
158 Accumulated Depreciation—Equipment 400 Service Revenue
Liabilities Expenses
200 Notes Payable 631 Supplies Expense
201 Accounts Payable 711 Depreciation Expense
209 Unearned Service Revenue 722 Insurance Expense
212 Salaries and Wages Payable 726 Salaries and Wages Expense
230 Interest Payable 729 Rent Expense
732 Utilities Expense
905 Interest Expense
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 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.

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 On October 1, C. R. Byrd invests ₺10,000 cash in an advertising
Transaction
company called Yazici Advertising.

Basic The asset Cash increases ₺10,000;

Analysis owner’s equity (specifically, Owner's Capital) increases ₺10,000.

Assets = Liabilities + Owner's Equity

Equation
Analysis Cash = Owner's Capital
+₺10,000 +₺10,000
Debit-Credit Debits increase assets: debit Cash ₺10,000.
Analysis Credits increase owner's equity: credit Owner's Capital ₺10,000.
Date Titles Ref. Debit Credit
Journal Oct. 1 Cash 101 10,000
Entry
Owner's Capital 301 10,000

Cash 101 Owner's Capital 301

Posting
Oct. 1 10,000 Oct. 1 10,000

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 On October 1, Yazici purchases office equipment costing
Transaction
₺5,000 by signing a 3-month, 12%, ₺5,000 note payable.

Basic The asset Equipment increases ₺5,000;

Analysis the liability Notes Payable increases ₺5,000.

Assets = Liabilities + Owner's Equity

Equation
Analysis Equipment = Notes Payable
+₺5,000 +₺5,000
Debit-Credit Debits increase assets: debit Equipment ₺5,000.
Analysis Credits increase liabilities: credit Notes Payable ₺5,000.
Date Titles Ref. Debit Credit
Journal Oct. 1 Equipment 157 5,000
Entry
Notes Payable 200 5,000

Equipment 157 Notes Payable 200

Posting
Oct. 1 5,000 Oct. 1 5,000

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 On October 2, Yazici receives a ₺1,200 cash for advertising services
Transaction
that are expected to be completed by December 31.

Basic The asset Cash increases ₺1,200;

Analysis the liability Unearned Revenue increases ₺1,200.

Assets = Liabilities + Owner's Equity

Equation
Analysis Cash = Unearned Revenue
+₺1,200 +₺1,200
Debit-Credit Debits increase assets: debit Cash ₺1,200.
Analysis Credits increase liabilities: credit Unearned Revenue ₺1,200.
Date Titles Ref. Debit Credit
Journal Oct. 2 Cash 101 1,200
Entry
Unearned Revenue 209 1,200

Cash 101 Unearned Revenue 209

Posting
Oct. 1 10,000 Oct. 2 1,200
2 1,200

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Transaction On October 3, Yazici pays office rent for October in cash of ₺900.

Basic The expense account Rent Expense increases ₺900;

Analysis the asset Cash decreases ₺900.

Assets = Liabilities + Owner's Equity

Equation
Analysis Cash = Rent Expense
-₺900 -₺900
Debit-Credit Debits increase expenses: debit Rent Expense ₺900.
Analysis Credits decrease assets: credit Cash ₺900.
Date Titles Ref. Debit Credit
Journal Oct. 3 Rent Expense 729 900
Entry
Cash 101 900

Cash 101 Rent Expense 729

Posting
Oct. 1 10,000 Oct. 3 900 Oct. 3 900
2 1,200

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 On October 4, Yazici pays ₺600 for a one-year insurance policy that
Transaction
will expire next year on September 30.

Basic The asset Prepaid Insurance increases ₺600;

Analysis the asset Cash decreases ₺600.

Assets = Liabilities + Owner's Equity

Equation
Analysis Cash + Prepaid Insurance
-₺600 +₺600
Debit-Credit Debits increase assets: debit Prepaid Insurance ₺600.
Analysis Credits decrease assets: credit Cash ₺600.
Date Titles Ref. Debit Credit
Journal Oct. 4 Prepaid Insurance 130 600
Entry
Cash 101 600

Cash 101 Prepaid Insurance 130

Posting
Oct. 1 10,000 Oct. 3 900 Oct. 4 600
2 1,200 4 600

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 On October 5, Yazici purchases a 3-month supply
Transaction
of advertising materials on account from Aero Supply for ₺2,500.

Basic The asset Supplies increases ₺2,500;

Analysis the liability Accounts Payable increases ₺2,500.

Assets = Liabilities + Owner's Equity

Equation
Analysis Supplies = Accounts Payable
+₺2,500 +₺2,500
Debit-Credit Debits increase assets: debit Supplies ₺2,500.
Analysis Credits increase liabilities: credit Accounts Payable ₺2,500.
Date Titles Ref. Debit Credit
Journal Oct. 5 Supplies 126 2,500
Entry
Accounts Payable 201 2,500

Supplies 126 Accounts Payable 201

Posting
Oct. 5 2,500 Oct. 5 2,500

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 On October 9, Yazici hires four employees to begin work on
Transaction
October 15. Each employee is to receive a weekly salary of ₺500.

Basic A business transaction has not occurred, there is no need to record

Analysis an accounting entry.

Assets = Liabilities + Owner's Equity

Equation
Analysis =

Debit-Credit
Analysis
Date Titles Ref. Debit Credit
Journal
Entry

Posting

42
 On October 20, C. R. Byrd withdraws ₺500 cash for
Transaction
personal use.

Basic The owner’s equity account Owner’s Drawings increases ₺500;

Analysis the asset Cash decreases ₺500.

Assets = Liabilities + Owner's Equity

Equation
Analysis Cash = Owner’s Drawings
-₺500 -₺500
Debit-Credit Debits increase drawings: debit Owner's Drawings ₺500.
Analysis Credits decrease assets: credit Cash ₺500.
Date Titles Ref. Debit Credit
Journal Oct. 20 Owner’s Drawings 306 500
Entry
Cash 101 500

Cash 101 Owner’s Drawings 306

Posting
Oct. 1 10,000 Oct. 3 900 Oct. 20 500
2 1,200 4 600
20 500

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 On October 26, Yazici owes employee salaries of ₺4,000
Transaction
and pays them in cash (see October 9 event).

Basic Expense account Salaries and Wages Expense increases ₺4,000;

Analysis the asset Cash decreases ₺4,000.

Assets = Liabilities + Owner's Equity

Equation
Analysis Cash = Sal. & Wages Expense
-₺4,000 -₺4,000
Debit-Credit Debits increase expenses: debit Salaries and Wages Expense ₺4,000.
Analysis Credits decrease assets: credit Cash ₺4,000.
Date Titles Ref. Debit Credit
Journal Oct. 26 Salaries and Wages Expense 726 4,000
Entry
Cash 101 4,000

Cash 101 Salaries & Wages Expense 726

Posting
Oct. 1 10,000 Oct. 3 900 Oct. 26 4,000
2 1,200 4 600
20 500
26 4,000

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 On October 31, Yazici receives ₺10,000 in cash from Copa
Transaction
Company for advertising services performed in October.

Basic The asset Cash increases ₺10,000;

Analysis Service Revenue increases ₺10,000.

Assets = Liabilities + Owner's Equity

Equation
Analysis Cash = Service Revenue
+₺10,000 +₺10,000
Debit-Credit Debits increase assets: debit Cash ₺10,000.
Analysis Credits increase revenues: credit Service Revenue ₺10,000.
Date Titles Ref. Debit Credit
Journal Oct. 31 Cash 101 10,000
Entry
Service Revenue 400 10,000

Cash 101 Service Revenue 400

Posting
Oct. 1 10,000 Oct. 3 900 Oct. 31 10,000
2 1,200 4 600
31 10,000 20 500
26 4,000

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 Journalizing and Posting Summary
GENERAL JOURNAL Page J1
Date Explanation Ref. Debit Credit
2020
Oct. 1 Cash 101 10,000
Owners’ Capital 301 10,000
1 Equipment 157 5,000
Notes Payable 200 5,000
2 Cash 101 1,200
Unearned Revenue 209 1,200
3 Rent Expense 729 900
Cash 101 900

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 GENERAL JOURNAL Page J1
Date Explanation Ref. Debit Credit
2020
Oct. 4 Prepaid Insurance 130 600
Cash 101 600
5 Supplies 126 2,500
Accounts Payable 201 2,500
20 Owner’s Drawings 306 500
Cash 101 500
26 Salaries and Wages Expense 726 4,000
Cash 101 4,000
31 Cash 101 10,000
Service Revenue 400 10,000

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48
 Quick Test; Posting
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
Cash
3/1 Bal. 600 3/15 400
3/4 2,280 3/19 92
3/31 Bal. 2,388

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References
• Wild, J., Shaw, K., Chiappetta, B. and Samaha, K., 2017. Fundamental
Accounting Principles. 2nd ed. McGraw-Hill Education.
• Weygandt, J., Kimmel, P. and Kieso, D., 2019. Accounting Principles
IFRS Version. Global Edition. Wiley.

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