Chapter 2: The
Recording Process
ACT 201 Lecture
By: Ms. Adina Malik
The Account
• Record of increases and decreases in a specific asset, liability
& owner’s equity item.
• The format resembles the letter ‘T’, hence referred to as the T
Account
• An Account consists of three parts:
• A title
• Left side, known as debit side
• Right side, known as credit side
Accounting
custom/rule
Title of Account
Debit
Credit
Debits & Credits
Double-entry accounting system
•
Commonly abbreviate Debit as ‘Dr.’ and Credit as ‘Cr.’
•
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.
Debits & Credits
Debit > Credit
= Debit Balance
1
3
Title of Account
Debit/Dr.
Credit/Cr.
$10,000
$ 3,000
$ 8,000
$ 15,000
Balance
Credit > Debit
= Credit Balance
2
Title of Account
Debit/Dr.
Credit/Cr.
$ 10,000
$ 3,000
$ 8,000
$ 1,000
Balance
Accounting Equation: Reminder
Basis Equation:
Assets = Liabilities + Owner’s Equity
Expanded Equation:
Assets = Liabilities + (Owner’s Capital Owner’s Drawings +
Revenue Expenses)
• The equation must be in balance after every transaction.
• For every Debit there must be a Credit.
Debit & Credit Procedure
ASSETS
LIABILITIES
Assets
Debit / Dr.
Liabilities
Credit / Cr.
Debit / Dr.
Normal Balance
Chapter
3-23
Normal Balance is on the increase side
Credit / Cr.
Normal Balance
Chapter
3-24
Debit & Credit Procedure: Owner’s
Equity
Owners’ Capital
Debit / Dr.
Credit / Cr.
Owners’ Equity
Debit / Dr.
Normal Balance
Credit / Cr.
Chapter
3-25
Owners’ Drawing
Normal Balance
Debit / Dr.
Chapter
3-25
Normal Balance
Chapter
3-23
Credit / Cr.
Debit & Credit Procedure: Owner’s
Equity
Revenue
Debit / Dr.
Credit / Cr.
Owners’ Equity
Debit / Dr.
Credit / Cr.
Normal Balance
Chapter
3-26
Expense
Normal Balance
Debit / Dr.
Chapter
3-25
Normal Balance
Chapter
3-27
Credit / Cr.
Normal Balance
‘Normal Balance is on the increasing side’ means that:
 Normal Balance for Assets, Owner’s Drawings and Expenses is
on the Debit side.
Normal Balance for Liabilities, Owner’s Capital and Revenue is
on the Credit side.
Debit & Credit Rules
Summary
Question 1
Question 2
Steps in the Recording Process
Source documents, such as a sales slip, a check, a bill, or a cash
register tape, provide evidence of the transaction.
Three basic steps generally in every business:
• Analyze each transaction for its effects on the accounts.
• Enter the transaction information in a journal.
• Transfer the journal information to the appropriate accounts in the
ledger.
Journal
• It discloses in one place the complete effects of a transaction
(debit & credit effects)
• It provides a chronological record of transactions.
• As debit & credit amounts for each entry can be easily
compared, it helps to prevent or locate errors.
• Also known as ‘General Journal’ or ‘The Book of Original
Entry’.
GENERAL JOURNAL
Date
Account Titles and Explanation
Ref.
Debit
Credit
Simple & Compound Entries
• Entering transaction data in the journal is known as journalizing.
• It is important to use ‘correct’ & ‘specific account titles’ in
journalizing.
• Simple Entry: entry which involves only two accounts, one debit and
one credit.
• Compound Entry: entry that requires more than two accounts in
journalizing. E.g. Butler company purchases a delivery truck costing
$14,000. ($8,000 paid in cash now and to pay the remaining $6,000
on account)
GENERAL JOURNAL
Account Titles and Explanation
Date
1 Delivery Truck
Cash
Accounts Payable
(Purchased truck for cash with balance on account)
Ref.
Debit
Credit
$14,000
$8,000
$6,000
Journal
Problem: Prepare a General Journal
Transaction 1: Kate Browne invested $ 20,000 cash for
establishing her salon named ‘Super Salon’.
Transaction 2: Purchased equipment on account (to be paid in
30 days) for a total cost of $ 5,000
GENERAL JOURNAL
Account Titles and Explanation
Date
1 Cash
Ref.
Debit
$20,000
K. Browne, Capital
(Owner's investment of cash in business)
2 Equipment
Accounts Payable
(Purchase of equipment on account)
Credit
$20,000
$5,000
$5,000
The Ledger
• It is the entire group of accounts maintained by a company.
• It keeps in one place all the information about changes in
specific account balances.
• A General Ledger contains all the asset, liability & owner’s
equity accounts.
Individual Assets
Accounts
• Cash
• Land
• Equipment
• Supplies
• Etc.
Individual Liability
Accounts
Individual Owner’s
Equity Accounts
• Accounts Payable
• Salaries Payable
• Notes Payable
• Interest Payable
• Etc.
• Salaries Expense
• Service Revenue
• K. Browne, Capital
• K. Browne,
Drawings
• Etc.
Posting ‘Journal Entry’ into ‘The Ledger’
Transaction 1:
Cash
Debit
K. Browne, Capital
$ Credit
$
20,000
K. Browne, Capital
Debit
$
Credit
Cash
$
20,000
Posting ‘Journal Entry’ into ‘The Ledger’
Transaction 2:
Debit
Accounts Payable
Debit
Equipment
$ Credit
5,000
Accounts Payable
$ Credit
Equipment
$
$
5,000
Problem (Continued)
During the year, there were other transactions, as given below:
Transaction 3: Super Salon pays $ 500 as rent of premise.
Transaction 4: Received $ 4,000 for providing customer service.
GENERAL JOURNAL
Account Titles and Explanation
Date
3 Rent Expense
Ref.
Debit
Credit
$500
Cash
(Pays rent of premise in cash)
$500
4 Cash
Service Revenue
(Received Revenue in Cash for service provided)
$4,000
$4,000
Problem (Continued)
Debit
K. Browne, Capital
Service Revenue
Cash
$ Credit
20,000 Rent Expense
4,000
Balance
23,500
Debit
Cash
Rent Expense
$ Credit
500
Debit
Service Revenue
$ Credit
Cash
$
500
$
$
4,000
Trial Balance
• It is a list of accounts and their balances at a given time.
• Prepared at the end of an accounting period.
• The primary purpose of a trial balance is to prove (check) that
the debits equal the credits after posting.
Super Salon
Trial Balance
December 31, 2012
Details
Debit ($)
Cash
23,500
K. Browne, Capital
Equipment
5,000
Accounts Payable
Rent Expense
500
Service Revenue
29,000
Credit ($)
20,000
5,000
4000
29,000
Limitations of a Trial Balance
The trial balance may balance even when:
•
A transaction is not journalized
•
A correct journal entry is not posted
•
A journal entry is posted twice
•
Incorrect accounts are used in journalizing or posting, or
•
Offsetting errors are made in recording the amount of a
transaction
Question
Question
Bob Sample opened the Campus Laundromat on September 1, 2010.
During the first month of operations, the following transactions occurred.
Sept.1
Bob invested $20,000 cash in the business
Sept.2
The company paid $1,000 cash for store rent for Sept.
Sept.3
Purchased washers & dryers for $25,000, paying
$10,000 in cash and $15,000 on account
Sept.4
Received a bill from the Daily News for advertising the
opening of the Laundromat $200
Sept.10
The company owes employee salaries of $2,000 and
pays them in cash
Sept.20
Bob withdraw $700 cash for personal use
Sept.30
The company determined that cash receipts for
laundry services for the month were $6,200
(a) Journalize the September transactions
(b) Open ledger accounts and post the September transactions
(c) Prepare a trial balance at September 30, 2010