Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
2-1
2
The Recording Process
Learning Objectives
After studying this chapter, you should be able to:
1. State the accounting equation, and define its components.
2-2
2.
Analyze the effects of business transactions on the accounting equation.
3.
Understand the four financial statements and how they are prepared.
4.
Explain what an account is and how it helps in the recording process.
5.
Define debits and credits and explain their use in recording business transactions.
6.
Identify the basic steps in the recording process.
7.
Explain what a journal is and how it helps in the recording process.
8.
Explain what a ledger is and how it helps in the recording process.
9.
Explain what posting is and how it helps in the recording process.
10. Prepare a trial balance and explain its purposes.
Preview of Unit 2
2-3
The Basic Accounting Equation
Assets
=
Liabilities
+
Owner’s
Equity
Provides the underlying framework for recording and
summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership claims.
2-4
LO 6 State the accounting equation, and define its components.
The Basic Accounting Equation
Assets

Resources a business owns.

Provide future services or benefits.

Cash, Supplies, Equipment, etc.
Assets
2-5
=
Liabilities
+
Owner’s
Equity
LO 6 State the accounting equation, and define its components.
The Basic Accounting Equation
Liabilities

Claims against assets (debts and obligations).

Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.
Assets
2-6
=
Liabilities
+
Owner’s
Equity
LO 6 State the accounting equation, and define its components.
The Basic Accounting Equation
Owner’s Equity

Ownership claim on total assets.

Referred to as residual equity.

Investment by owners and revenues (+)

Drawings and expenses (-).
Assets
2-7
=
Liabilities
+
Owner’s
Equity
LO 6 State the accounting equation, and define its components.
Owner’s Equity
Illustration 1-6
Increases in Owner’s Equity
 Investments by owner are the assets the owner puts into the
business.
 Revenues result from business activities entered into for the
purpose of earning income.

Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
2-8
LO 6 State the accounting equation, and define its components.
Owner’s Equity
Illustration 1-6
Decreases in Owner’s Equity
 Drawings An owner may withdraw cash or other assets for
personal use.
 Expenses are the cost of assets consumed or services used in
the process of earning revenue.

Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
2-9
LO 6 State the accounting equation, and define its components.
Using the Accounting Equation
Transactions are a business’s economic events recorded
by accountants.
2-10

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the accounting
equation.
LO 7 Analyze the effects of business transactions on the accounting equation.
Using the Accounting Equation
Illustration: Are the following events recorded in the accounting
records?
Discuss
Purchase
guided trip
Event
Pay rent
computer
options with
customer
Criterion
Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
Record/
Don’t Record
2-11
LO 7 Analyze the effects of business transactions on the accounting equation.
Transaction Analysis
Transaction (1): Ray Neal decides to open a computer programming
service which he names Softbyte. On September 1, 2014, Ray Neal
invests $15,000 cash in the business.
2-12
LO 7
Transaction Analysis
Transaction (2): Purchase of Equipment for Cash. Softbyte purchases
computer equipment for $7,000 cash.
2-13
LO 7
Transaction Analysis
Transaction (3): Softbyte purchases for $1,600 from Acme Supply
Company computer paper and other supplies expected to last several
months. The purchase is made on account.
2-14
LO 7
Transaction Analysis
Transaction (4): Softbyte receives $1,200 cash from customers for
programming services it has provided.
2-15
LO 7
Transaction Analysis
Transaction (5): Softbyte receives a bill for $250 from the Daily News
for advertising but postpones payment until a later date.
2-16
LO 7
Transaction Analysis
Transaction (6): Softbyte provides $3,500 of programming services
for customers. The company receives cash of $1,500 from customers,
and it bills the balance of $2,000 on account.
2-17
LO 7
Transaction Analysis
Transaction (7): Softbyte pays the following expenses in cash for
September: store rent $600, salaries of employees $900, and utilities
$200.
2-18
LO 7
Transaction Analysis
Transaction (8): Softbyte pays its $250 Daily News bill in cash.
2-19
LO 7
Transaction Analysis
Transaction (9): Softbyte receives $600 in cash from customers who
had been billed for services [in Transaction (6)].
2-20
LO 7
Transaction Analysis
Transaction (10): Ray Neal withdraws $1,300 in cash from the
business for his personal use.
Illustration 1-8
Tabular summary of
Softbyte transactions
2-21
LO 7
Financial Statements
Companies prepare four financial statements :
Income
Statement
2-22
Owner’s
Equity
Statement
Balance
Sheet
Statement
of Cash
Flows
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Net income is needed to determine the
ending balance in owner’s equity.
Illustration 1-9
Financial statements and
their interrelationships
2-23
LO 8
Financial Statements
The ending balance in owner’s equity is
needed in preparing the balance sheet
Illustration 1-9
2-24
LO 8
Financial Statements
The balance sheet and income statement are
needed to prepare statement of cash flows.
Illustration 1-9
2-25
LO 8
Financial Statements
Income Statement
2-26

Reports the revenues and expenses for a specific period
of time.

Lists revenues first, followed by expenses.

Shows net income (or net loss).
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Owner’s Equity Statement
2-27

Reports the changes in owner’s equity for a specific
period of time.

The time period is the same as that covered by the
income statement.
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Balance Sheet
2-28

Reports the assets, liabilities, and owner’s equity at a
specific date.

Lists assets at the top, followed by liabilities and owner’s
equity.

Total assets must equal total liabilities and owner’s equity.

Is a snapshot of the company’s financial condition at a
specific moment in time (usually the month-end or yearend).
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Statement of Cash Flows

Information for a specific period of time.

Answers the following:
1. Where did cash come from?
2. What was cash used for?
3. What was the change in the
cash balance?
2-29
LO 8 Understand the four financial statements and how they are prepared.
The Account

Record of increases and decreases
in a specific asset, liability, equity,
revenue, or expense item.

Debit = “Left”

Credit = “Right”
Account
An account can be
illustrated in a Taccount form.
2-30
Account Name
Debit / Dr.
Credit / Cr.
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.
►
2-31
DEBITS must equal CREDITS.
LO 2 Define debits and credits and explain their use
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 #3
8,000
Balance
2-32
Transaction #2
$15,000
LO 2 Define debits and credits and explain their use
in recording business transactions.
Debits and Credits
If Debit amounts are less than Credit amounts, the
account will have a credit balance.
Account Name
Transaction #1
Balance
2-33
Debit / Dr.
Credit / Cr.
$10,000
$3,000
Transaction #2
8,000
Transaction #3
$1,000
LO 2 Define debits and credits and explain their use
in recording business transactions.
Debits and Credits
Assets
Debit / Dr.

Assets - Debits should exceed
credits.

Liabilities – Credits should
exceed debits.

Normal balance is on the
increase side.
Credit / Cr.
Normal Balance
Chapter
3-23
Liabilities
Debit / Dr.
Credit / Cr.
Normal Balance
Chapter
3-24
2-34
LO 2 Define debits and credits and explain their use
in recording business transactions.
Debits and Credits
Owner’s Equity

Owner’s investments and
revenues increase owner’s equity
(credit).

Owner’s drawings and expenses
decrease owner’s equity (debit).
Credit / Cr.
Debit / Dr.
Normal Balance
Chapter
3-25
Owner’s Capital
Debit / Dr.
Chapter
3-25
2-35
Owner’s Drawing
Credit / Cr.
Debit / Dr.
Normal Balance
Normal Balance
Credit / Cr.
Helpful Hint Because
revenues increase owner’s
equity, a revenue account
has the same debit/credit
rules as the Owner’s
Capital account. Expenses
have the opposite effect.
Chapter
3-23
LO 2
Debits and Credits
Revenue
Debit / Dr.

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 Owner’s Capital.

Expenses have the opposite
effect: expenses decrease owner’s
equity.
Credit / Cr.
Normal Balance
Chapter
3-26
Expense
Debit / Dr.
Credit / Cr.
Normal Balance
Chapter
3-27
2-36
LO 2 Define debits and credits and explain their use
in recording business transactions.
Debits/Credits Rules
Liabilities
Normal
Balance
Debit
Assets
Credit / Cr.
Normal Balance
Chapter
3-24
Owner’s Equity
Credit / Cr.
Debit / Dr.
Debit / Dr.
Normal
Balance
Credit
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-23
Expense
Debit / Dr.
Chapter
3-25
Revenue
Credit / Cr.
Debit / Dr.
Normal Balance
Chapter
3-27
2-37
Credit / Cr.
Normal Balance
Chapter
3-26
LO 2
Debits/Credits Rules
Balance Sheet
Asset = Liability + Equity
Income Statement
Revenue - Expense
Debit
Credit
2-38
LO 2 Define debits and credits and explain their use
in recording business transactions.
Summary of Debits/Credits Rules
Relationship among the assets, liabilities and owner’s equity
of a business:
Illustration 2-11
Basic
Equation
Assets = Liabilities +
Owner’s Equity
Expanded
Basic
Equation
The equation must be in balance after every transaction.
For every Debit there must be a Credit.
2-39
LO 2 Define debits and credits and explain their use
in recording business transactions.
Steps in the Recording Process
Illustration 2-12
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.
2-40
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.
2-41
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, Ray Neal invested $15,000 cash in
the business, and Softbyte purchased computer equipment for
$7,000 cash.
Illustration 2-13
General Journal
Date
Account Title
Sept. 1
Cash
Ref.
Debit
15,000
Owner’s Capital
Equipment
Cash
2-42
Credit
15,000
7,000
7,000
LO 4 Explain what a journal is and how it helps in the recording process.
Steps in the Recording Process
Simple and Compound Entries
Illustration: On July 1, Butler Company purchases a delivery truck
costing $14,000. It pays $8,000 cash now and agrees to pay the
remaining $6,000 on account.
Illustration 2-14
General Journal
Date
July 1
2-43
Account Title
Equipment
Ref.
Debit
Credit
14,000
Cash
8,000
Accounts payable
6,000
LO 4 Explain what a journal is and how it helps in the recording process.
Steps in the Recording Process
The Ledger

General Ledger contains the entire group of accounts
maintained by a company.
Illustration 2-15
2-44
LO 5 Explain what a ledger is and how it helps in the recording process.
Steps in the Recording Process
Standard Form of Account
Illustration 2-16
2-45
LO 5 Explain what a ledger is and how it helps in the recording process.
Steps
Posting –
process of
transferring
amounts from
the journal to
the ledger
accounts.
Illustration 2-17
2-46
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 2-18
2-47
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 2-19
2-48
LO 6
The Recording Process Illustrated
Illustration 2-20
2-49
LO 6
The Recording Process Illustrated
Illustration 2-21
2-50
LO 6
The Recording Process Illustrated
Illustration 2-22
2-51
LO 6
The Recording Process Illustrated
Illustration 2-23
2-52
LO 6
The Recording Process Illustrated
Illustration 2-24
2-53
LO 6
The Recording Process Illustrated
Illustration 2-25
2-54
LO 6
The Recording Process Illustrated
Illustration 2-26
2-55
LO 6
The Recording Process Illustrated
Illustration 2-27
2-56
LO 6
The Recording Process Illustrated
Illustration 2-28
2-57
LO 6
Summary of
Journalizing
and Posting
Illustration 2-29
2-58
LO 6
2-59
Illustration 2-30
LO 6
Trial Balance
Illustration 2-31
2-60
LO 7 Prepare a trial balance and explain its purposes.
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.
2-61
LO 7 Prepare a trial balance and explain its purposes.