Slide
2-1
Chapter
2
The Recording
Process
Financial Accounting,
Seventh Edition
Slide
2-2
Study Objectives
Slide
2-3
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.
The Recording Process
The Account
Debits and
credits
Debit and credit
procedure
Stockholders’
equity
relationships
Summary of
debit/credit
rules
Slide
2-4
Steps in the
Recording
Process
Journal
Ledger
Posting
The Recording
Process
Illustrated
Summary
illustration of
journalizing and
posting
The Trial Balance
Limitations of a
trial balance
Locating errors
Use of dollar
signs
The Account
Account
Record of increases and decreases
in a specific asset, liability, equity,
revenue, or expense item.
Debit = “Left”
Credit = “Right”
An Account can
be illustrated in a
T-Account form.
Slide
2-5
Account Name
Debit / Dr.
Credit / Cr.
SO 1 Explain what an account is and how it helps in the recording process.
Debits and 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.
Slide
2-6
SO 2 Define debits and credits and explain their
use in recording business transactions.
Debits and Credits
If Debits are greater than Credits, the account
will have a debit balance.
Account Name
Debit / Dr.
Transaction #1
$10,000
Transaction #3
8,000
Balance
Slide
2-7
Credit / Cr.
$3,000
Transaction #2
$15,000
SO 2 Define debits and credits and explain their
use in recording business transactions.
Debits and Credits
If Credits are greater than Debits, the account
will have a credit balance.
Account Name
Debit / Dr.
Transaction #1
Balance
Slide
2-8
$10,000
Credit / Cr.
$3,000
Transaction #2
8,000
Transaction #3
$1,000
SO 2 Define debits and credits and explain their
use in recording business transactions.
Debits and Credits Summary
Liabilities
Normal
Balance
Debit
Normal
Balance
Credit
Assets
Credit / Cr.
Normal Balance
Chapter
3-24
Equity
Credit / Cr.
Debit / Dr.
Debit / Dr.
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-23
Expense
Debit / Dr.
Revenue
Chapter
3-25
Credit / Cr.
Debit / Dr.
Normal Balance
Chapter
3-27
Slide
2-9
Credit / Cr.
Normal Balance
Chapter
3-26
SO 2
Debits and Credits Summary
Balance Sheet
Asset = Liability + Equity
Income Statement
Revenue - Expense
Debit
Credit
Slide
2-10
SO 2 Define debits and credits and explain their
use in recording business transactions.
Debits and Credits 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.
Slide
2-11
Solution
notes page
SO 2 Define debits and credits and explain their
use in recording business transactions.
Debits and Credits Summary
Discussion Question
Q2-4. Maria Alvarez, a beginning accounting
student, believes debit balances are favorable
and credit balances are unfavorable. Is Maria
correct? Discuss.
See notes page for discussion
Slide
2-12
SO 2 Define debits and credits and explain their
use in recording business transactions.
Assets and Liabilities
Assets
Debit / Dr.
Credit / Cr.
Normal Balance
Liabilities – Credits
should exceed debits.
Chapter
3-23
Liabilities
Debit / Dr.
Assets - Debits should
exceed credits.
Credit / Cr.
The normal balance is on
the increase side.
Normal Balance
Chapter
3-24
Slide
2-13
SO 2 Define debits and credits and explain their
use in recording business transactions.
Stockholders’ Equity
Issuance of stock and
revenues increase equity
(credit).
Equity
Debit / Dr.
Credit / Cr.
Dividends and expenses
decrease equity (debit).
Normal Balance
Chapter
3-25
Common Stock
Debit / Dr.
Retained Earnings
Credit / Cr.
Debit / Dr.
Normal Balance
Chapter
3-25
Slide
2-14
Chapter
3-25
Dividends
Credit / Cr.
Debit / Dr.
Normal Balance
Normal Balance
Credit / Cr.
Chapter
3-23
SO 2 Define debits and credits and explain their
use in recording business transactions.
Revenue and Expense
Revenue
Debit / Dr.
Credit / Cr.
Normal Balance
Chapter
3-26
Expense
Debit / Dr.
Normal Balance
The purpose of earning
revenues is to benefit the
owner(s).
The effect of debits and
credits on revenue accounts is
the same as their effect on
stockholders’ equity.
Credit / Cr.
Expenses have the opposite
effect: expenses decrease
stockholders’ equity.
Chapter
3-27
Slide
2-15
SO 2 Define debits and credits and explain their
use in recording business transactions.
Debits and Credits Summary
Review Question
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and retained earnings.
c. assets, liabilities, and dividends declared.
d. assets, dividends declared, and expenses.
Slide
2-16
Solution
notes page
SO 2 Define debits and credits and explain their
use in recording business transactions.
Summary of Debit/Credit Rules
Relationship among the assets, liabilities and
stockholders’ equity of a business:
The equation must be in balance after every transaction.
For every Debit there must be a Credit.
Slide
2-17
SO 2 Define debits and credits and explain their
use in recording business transactions.
Summary of Debit/Credit Rules
Kathy Browne, president of Hair It Is, Inc., has
just rented space in a shopping mall in which she
will open and operate a beauty salon. A friend has advised Kathy to
set up a double-entry set of accounting records in which to record
all of her business transactions. Following are the balance sheet
accounts that Hair It Is, Inc., will likely need to record the
transactions. Indicate whether the normal balance of each account
is a debit or a credit.
Slide
2-18
Cash
Debit
Equipment
Debit
Supplies
Debit
Accounts payable
Credit
Notes payable
Credit
Common stock
Credit
Solution on
notes page
SO 2 Define debits and credits and explain their
use in recording business transactions.
Steps in the Recording Process
Illustration 2-13
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.
Slide
2-19
SO 3 Identify the basic 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.
Slide
2-20
SO 4 Explain what a journal is and how it helps in the recording process.
Journalizing
Journalizing - Entering transaction data in the journal.
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 in exchange for stock.
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.
Slide
2-21
SO 4 Explain what a journal is and how it helps in the recording process.
Journalizing
E2-5 (Facts) Journalize the transactions 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
Oct. 1
Account Title
Cash
Common stock
Ref.
Debit
Credit
15,000
15,000
(Investment for stock)
Slide
2-22
SO 4 Explain what a journal is and how it helps in the recording process.
Journalizing
E2-5 (Facts) Journalize the transactions related to
Hanshew Real Estate Agency.
Oct. 3
Purchases office furniture for $1,900, on
account.
General Journal
Date
Oct. 3
Account Title
Office furniture
Accounts payable
Ref.
Debit
Credit
1,900
1,900
(Purchase on account)
Slide
2-23
SO 4 Explain what a journal is and how it helps in the recording process.
Journalizing
E2-5 (Facts) Journalize the transactions 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
Account Title
Oct. 6
Accounts receivable
Service revenue
Ref.
Debit
Credit
3,200
3,200
(Services provided)
Slide
2-24
SO 4 Explain what a journal is and how it helps in the recording process.
Journalizing
E2-5 (Facts) Journalize the transactions related to
Hanshew Real Estate Agency.
Oct. 27 Pays $700 on balance related to transaction of
Oct. 3.
General Journal
Date
Oct. 27
Account Title
Accounts payable
Cash
Ref.
Debit
Credit
700
700
(Payment on account)
Slide
2-25
SO 4 Explain what a journal is and how it helps in the recording process.
Journalizing
E2-5 (Facts) Journalize the transactions related to
Hanshew Real Estate Agency.
Oct. 30 Pays the administrative assistant $2,500
salary for Oct.
General Journal
Date
Oct. 30
Account Title
Salaries expense
Cash
Ref.
Debit
Credit
2,500
2,500
(Payment for salaries)
Slide
2-26
SO 4 Explain what a journal is and how it helps in the recording process.
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
Jun. 15
Account Title
Equipment
Cash
Accounts payable
Ref.
Debit
Credit
15,000
10,000
5,000
(Purchase equipment)
Slide
2-27
SO 4 Explain what a journal is and how it helps in the recording process.
The Ledger
A General Ledger contains the entire group of accounts
maintained by a company.
The General Ledger includes all the asset, liability,
stockholders’ equity, revenue and expense accounts.
Illustration 2-16
Slide
2-28
SO 5 Explain what a ledger is and how it helps in the recording process.
Slide
2-29
SO 5 Explain what a ledger is and how it helps in the recording process.
Standard Form of Account
T-account form used in accounting textbooks.
In practice, the account forms used in ledgers are
much more structured.
Illustration 2-17
Slide
2-30
SO 5 Explain what a ledger 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.
Hanshew Real Estate Agency
Chart of Accounts
Assets
101
112
126
140
Cash
Accounts receivable
Advertising supplies
Office furniture
150
158
Equipment
Accumulated depreciation
Stockholders' Equity
300
310
Revenues
400
Liabilities
200
201
209
212
230
Slide
2-31
Accounts payable
Notes payable
Unearned revenue
Salaries payable
Interest payable
Common stock
Retained earnings
Service revenue
Expenses
631
711
722
726
729
905
Advertising supplies expense
Depreciation expense
Insurance expense
Salaries expense
Rent expense
Interest expense
SO 5 Explain what a ledger is and how it helps in the recording process.
Posting
Posting – the
process of
transferring
amounts from
the journal to
the ledger
accounts.
Illustration 2-19
Slide
2-32
SO 6 Explain what posting is and how it helps in the recording process.
Posting
Posting – the process of transferring amounts from the
journal to the ledger accounts.
General Journal
Date
Oct.
Account Title
Cash
J1
Ref.
Debit
101
15,000
Common stock
Credit
15,000
(Owner's investment in business)
General Ledger
Cash
Date
Oct. 1
Slide
2-33
Explanation
Ref.
J1
Debit
15,000
Acct. No. 101
Credit
Balance
15,000
SO 6 Explain what posting is and how it helps in the recording process.
Posting
Date
Oct.
E2-5
Account Title
Cash
Common stock
Ref.
Debit
101
15,000
Credit
15,000
300
(Owner's investment in business)
General Ledger
Cash
Date
Explanation
Oct. 1
Acct. No. 101
Ref.
Debit
J1
15,000
General Ledger
Common stock
Date
Oct. 1
Slide
2-34
J1
General Journal
Explanation
Credit
Balance
15,000
Acct. No. 300
Ref.
Debit
J1
15,000
Credit
Balance
15,000
SO 6 Explain what posting is and how it helps in the recording process.
J1
Posting
140
E2-5
200
General Ledger
Office Furniture
Date
Explanation
Oct. 3
Ref.
Acct. No. 140
Debit
J1
1,900
General Ledger
Accounts Payable
Date
Oct. 3
Slide
2-35
Explanation
Ref.
J1
Credit
Debit
Balance
1,900
Acct. No. 200
Credit
1,900
Balance
1,900
SO 6 Explain what posting is and how it helps in the recording process.
J1
Posting
112
E2-5
400
General Ledger
Accounts Receivable
Date
Explanation
Oct. 6
Ref.
Debit
J1
3,200
General Ledger
Service Revenue
Date
Oct. 6
Slide
2-36
Explanation
Ref.
J1
Debit
Acct. No. 112
Credit
Balance
3,200
Acct. No. 400
Credit
3,200
Balance
3,200
SO 6 Explain what posting is and how it helps in the recording process.
J1
Posting
200
E2-5
101
General Ledger
Cash
Date
Explanation
Oct. 1
Oct.27
Acct. No. 101
Ref.
Debit
J1
J1
15,000
General Ledger
Accounts Payable
Date
Oct. 3
Oct.27
Slide
2-37
Explanation
Ref.
J1
J1
Credit
700
Balance
15,000
14,300
Acct. No. 200
Debit
700
Credit
1,900
Balance
1,900
1,200
SO 6 Explain what posting is and how it helps in the recording process.
J1
Posting
726
E2-5
101
General Ledger
Cash
Date
Explanation
Oct. 1
Oct.27
Oct.30
Acct. No. 101
Ref.
Debit
J1
J1
J1
15,000
General Ledger
Salaries Expense
Date
Oct.30
Slide
2-38
Explanation
Credit
700
2,500
Balance
15,000
14,300
11,800
Acct. No. 726
Ref.
Debit
J1
2,500
Credit
Balance
2,500
SO 6 Explain what posting is and how it helps in the recording process.
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.
Solution on
notes page
Slide
2-39
SO 6 Explain what posting is and how it helps in the recording process.
The Recording Process Illustrated
Kate Turner recorded the following transactions
in a general journal during the month of March.
Post these entries to the Cash account.
Slide
2-40
Solution on
notes page
SO 6
The Trial Balance
A list of accounts
and their
balances at a
given time.
Purpose is to
prove that debits
equal credits.
Slide
2-41
E2-5
Hanshew Real Estate Agency
Trial Balance
October 31, 2011
Cash
Accounts receivable
Office furniture
Accounts payable
Common stock
Service revenue
Salaries expense
Debit
$ 11,800
3,200
1,900
Credit
$
2,500
$ 19,400
1,200
15,000
3,200
$ 19,400
SO 7 Prepare a trial balance and explain its purposes.
The 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.
Slide
2-42
SO 7 Prepare a trial balance and explain its purposes.
The Trial 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.
Slide
2-43
Solution on
notes page
SO 7 Prepare a trial balance and explain its purposes.
Slide
2-44
SO 7 Prepare a trial balance and explain its purposes.
The Trial Balance
The accounts
come from the
ledger of
Christel
Corporation at
December 31,
2011.
Slide
2-45
Solution on
notes page
SO 7
Your Personal Annual Report
 David Edmondson, the president and CEO of well-known
electronics retailer Radio Shack, overstated his
accomplishments by claiming that he had earned a bachelor’s
of science degree, when in fact he had not. Apparently his
employer had not done a background check to ensure the
accuracy of his résumé.
 A chief financial officer of Veritas Software lied about having
an M.B.A. from Stanford University.
Slide
2-46
 A former president of the U.S. Olympic Committee lied
about having a Ph.D. from Arizona State University. When
the truth was discovered, she resigned.
 The University of Notre Dame discovered that its football
coach, George O’Leary, lied about his education and football
history. He was forced to resign after only five days.
Slide
2-47
 A survey by Automatic Data Processing reported that 40% of
applicants misrepresented their education or employment
history.
 A survey by the
Society for Human
Resource Management
of human resource
professionals
reported the following
responses to the
following question.
Slide
2-48
Using Radio Shack as an example, what should the company have
done when it learned of the falsehoods on Mr. Edmondson’s
résumé? Should Radio Shack have fired him?
NO: Mr. Edmondson had been a Radio Shack employee for 11 years.
He had served the company in a wide variety of positions, and had
earned the position of CEO through exceptional performance. While
the fact that he lied 11 years earlier on his résumé was unfortunate,
his service since then made this past transgression irrelevant. In
addition, the company was in the midst of a massive restructuring,
which included closing 700 of its 7,000 stores. It could not afford
additional upheaval at this time.
YES: Radio Shack is a publicly traded company. Investors,
creditors, employees, and others doing business with the company
will not trust it if its leader is known to have poor integrity. The
Slide “tone at the top” is vital to creating an ethical organization.
2-49
Copyright
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Slide
2-50