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 Chapter 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

Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
2-5
 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.

2-6 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
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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

Equity  Issuance of share capital and

Debit / Dr. Credit / Cr.
revenues increase equity (credit).
 Dividends and expenses
Normal Balance
decrease equity (debit).
Chapter
3-25

Share Capital Retained Earnings Dividends

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

3-25 3-25 3-23

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 Debits and Credits

Revenue  The purpose of earning

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

Chapter
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LO 2 Define debits and credits and explain their use

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

Assets Chapter
3-24

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
 Debit/Credit Rules
Statement of
Financial Position 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.
 Equity Relationships
Illustration 2-11

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 Summary of Debit/Credit Rules

Relationship among the assets, liabilities and equity of a

business:
Illustration 2-12

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.
 Examples of Debit/Credit Rules

LO 2 Define debits and credits and explain their use

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in recording business transactions.
 Steps in the Recording Process

Illustration 2-13

Transfer journal information to

Analyze each transaction Enter transaction in a journal 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, shareholders’ invested €15,000 cash in

the corporation in exchange for share of stock, and Softbyte purchased
computer equipment for €7,000 cash.

General Journal Illustration 2-14

Date Account Title Ref. Debit Credit

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 Steps in the Recording Process
Simple and Compound Entries

Illustration: On July 1, Tsai Company purchases a delivery truck

costing NT$420,000. It pays NT$240,000 cash now and agrees to pay
the remaining NT$180,000 on account.

General Journal Illustration 2-15

Date Account Title Ref. Debit Credit

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 Steps in the Recording Process

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 Steps in the Recording Process

The Ledger
 General Ledger contains the entire group of accounts
maintained by a company.
Illustration 2-16

2-23 LO 5 Explain what a ledger is and how it helps in the recording process.
 Standard Form of Account

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 Steps

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

Illustration 2-18

2-25 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 2-19

2-26 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 2-20

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LO 6
 The Recording Process Illustrated

The following events incur during October by Pioneer Advertising Inc.

On October 1, C. R. Yazici invests $10,000 cash in an advertising company
to be known as Pioneer Advertising Agency Inc.
On October 1, Pioneer purchases office equipment costing $5,000 by
signing a 3-month, 12%, $5,000 note payable.
On October 2, Pioneer receives a $1,200 cash advance fromR. Knox, a
client, for advertising services that are expected to be completed by
December 31.
On October 3, Pioneer pays office rent for October in cash, $900.
On October 4, Pioneer pays $600 for a one-year insurance policy that will
expire next year on September 30.
On October 5, Pioneer purchases an estimated 3-month supply of
advertising materials on account from Aero Supply for $2,500.
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LO 6
 The Recording Process Illustrated

On October 9, Pioneer hires four employees to begin work onOctober

15. Each employee is to receive a weekly salary of $500 for a 5-day
work week, payable every 2 weeks—first payment made on October
26.
On October 20, Pioneer’s board of directors declares and pays a $500
cash dividend to shareholders.
On October 26, Pioneer owes employee salaries of $4,000 and pays
them in cash. (See October 9 transaction.)
On October 31, Pioneer receives $10,000 in cash from Copa Company
for advertising services provided in October.

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LO 6
 The Recording Process Illustrated

On October 1, C. R. Yazici invests $10,000 cash in an advertising company

to be known as Pioneer Advertising Agency Inc

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LO 6
 The Recording Process Illustrated

On October 1, Pioneer purchases office equipment costing $5,000 by

signing a 3-month, 12%, $5,000 note payable

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LO 6
 The Recording Process Illustrated

On October 2, Pioneer receives a $1,200 cash advance fromR. Knox, a

client, for advertising services that are expected to be completed by
December 31.

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LO 6
 The Recording Process Illustrated

On October 3, Pioneer pays office rent for October in cash, $900.

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LO 6
 The Recording Process Illustrated

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

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LO 6
 The Recording Process Illustrated

On October 5, Pioneer purchases an estimated 3-month supply of

advertising materials on account from Aero Supply for $2,500.

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LO 6
 The Recording Process Illustrated

On October 9, Pioneer hires four employees to begin work onOctober

15. Each employee is to receive a weekly salary of $500 for a 5-day
work week, payable every 2 weeks—first payment made on October
26.

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LO 6
 The Recording Process Illustrated

On October 20, Pioneer’s board of directors declares and pays a $500

cash dividend to shareholders.

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LO 6
 The Recording Process Illustrated

On October 26, Pioneer owes employee salaries of $4,000 and pays

them in cash. (See October 9 transaction.)

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LO 6
 The Recording Process Illustrated

On October 31, Pioneer receives $10,000 in cash from Copa Company

for advertising services provided in October.

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LO 6
 Trial Balance
• A trial balance is a list of accounts and their balances at a given
time
• Debit balances are in the left column and credit balances are in
the right column
• Purposes
• Prove the mathematical equality of debits and credits after
posting
• Uncover errors in journalizing and posting
• Used to prepare financial statements
• Steps
• List the account titles and their balances
• Total debit and credit columns
• Prove the equality of the two columns
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LO 6
 Trial Balance

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LO 6
 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.

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

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