CH-2: The Recording Process
The Account
Steps in the recording
process
The Trial Balance
Study Objectives
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
Expansion of
basic equation
Steps in the
Recording
Process
Journal
Ledger
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

An account is an accounting record of increase and
decrease in a specific asset, liability, or owner’s equity
item.
Debit = “Left”
Credit = “Right”
An Account can be
illustrated in a TAccount form.
Account Name
Debit (Dr.)
Credit (Cr.)
The Account
Debit and Credit Procedures
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.
Debits and Credits
If Debits are greater than Credits, the account will have a debit
balance.
Account Name
Debit / Dr.
Credit / Cr.
Transaction #1
$10,000
$3,000
Transaction #3
8,000
Balance
$15,000
Transaction #2
Debits and Credits
If Credits are greater than Debits, the account will have a credit
balance.
Account Name
Transaction #1
Balance
Debit / Dr.
Credit / Cr.
$10,000
$3,000
Transaction #2
8,000
Transaction #3
$1,000
The Account
Assets
Debit / Dr.

Increase in Assets are recorded
as Debit

Increase in Liabilities are
recorded as Credit.

Normal balance is on the
increase side.
Credit / Cr.
Normal Balance
Chapter
3-23
Liabilities
Debit / Dr.
Credit / Cr.
Normal Balance
Chapter
3-24
The Account
Owner’s Equity
Debit / Dr.

Increase in Owner’s Equity are
recorded as Credit

Remember:
Credit / Cr.
o
Investment (Capital) and
Revenue increases onwer’s
equity
o
Drawings and Expenses
decrease owner’s equity
Normal Balance
Chapter
3-25
The Account
Owner’s Capital/Investment
Debit / Dr.
Owner’s Drawing
Credit / Cr.
Debit / Dr.
Normal Balance
Normal Balance
Chapter
3-23
Chapter
3-25
Expense
Revenue
Debit / Dr.
Chapter
3-26
Credit / Cr.
Credit / Cr.
Debit / Dr.
Normal Balance
Normal Balance
Chapter
3-27
Credit / Cr.
Debits and Credits Summary
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.
Revenue
Chapter
3-25
Credit / Cr.
Debit / Dr.
Normal Balance
Chapter
3-27
Credit / Cr.
Normal Balance
Chapter
3-26
The Account
Summary of Debit/Credit Rule
Relationship among the assets, liabilities and owner’s equity of a
business:
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.
Debits and Credits Summary
Balance Sheet
Asset
Debit
Credit
= Liability
Income Statement
+ Equity
Revenue
- Expense
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.
Debits and Credits Summary
Review Question
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.
Steps in the recording process
Analyze each transaction
Enter transaction in a journal
Transfer journal information to
ledger accounts
Source documents, such as a sales slip, a check, a bill, or a
cash register tape, provide evidence of the transaction.
)
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.
Steps in the recording process
Journalizing - Entering transaction data in the journal.
Example: On September 1, Ray Neal invested $15,000 cash in the
business, and Softbyte purchased computer equipment for $7,000
cash.
General Journal
Date
Sept. 1
Account Title
Cash
Ref.
Debit
15,000
Owner’s, Capital
Equipment
Cash
Credit
15,000
7,000
7,000
Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real
Estate Agency.
Pete Hanshew begins business as a real estate agent with a cash
investment of $15,000.
Oct. 1
General Journal
Date
Oct.
Account Title
1
Cash
Hanshew, Capital
(Owners investment)
Ref.
Debit
Credit
15,000
15,000
Journalizing
E2-4 (Facts) Presented below is information 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
(Purchase furniture)
Ref.
Debit
Credit
1,900
1,900
Journalizing
E2-4 (Facts) Presented below is information 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
Ref.
Service Revenue
(Realty services provided)
Debit
Credit
3,200
3,200
Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real
Estate Agency.
Oct. 27
Pays $700 on balance related to transaction of Oct. 3.
General Journal
Date
Account Title
Oct. 27
Accounts Payable
Cash
(Payment on account)
Ref.
Debit
Credit
700
700
Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real
Estate Agency.
Oct. 30
Pays the administrative assistant $2,500 salary for Oct.
General Journal
Date
Oct. 30
Account Title
Ref.
Salary Expense
Cash
(Payment for salaries)
Debit
Credit
2,500
2,500
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
June 15
Account Title
Equipment
Cash
Accounts Payable
(Purchased equipment)
Ref.
Debit
Credit
15,000
10,000
5,000
Steps in the recording process
The Ledger

General Ledger contains the entire group of accounts maintained by a
company.

The General Ledger includes all the asset, liability, owner’s equity, revenue
and expense accounts.
Steps in the recording process
Example: Standard Form of Account
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
130
150
158
Cash
Accounts receivable
Advertising supplies
Prepaid insurance
Office equipment
Accumulated depreciation
Owner's Equity
300
306
350
Revenues
400
Liabilities
200
201
209
212
230
Accounts payable
Notes payable
Unearned revenue
Salaries payable
Interest payable
Hanshew, Capital
Hanshew, Drawing
Income summary
Service revenue
Expenses
631
711
722
726
729
905
Advertising supplies expense
Depreciation expense
Insurance expense
Salaries expense
Rent expense
Interest expense
Standard Form of Account
T-account form used in accounting textbooks.
In practice, the account forms used in ledgers are
much more structured.
Cash
Date
Oct.
Explanation
1
27
30
Ref.
No. 101
Debit
Credit
15,000
700
2,500
Balance
15,000
14,300
11,800
Posting
Posting – the process of transferring amounts from the
journal to the ledger accounts.
General Journal
Date
Oct. 1
Account Title
Cash
J1
Ref.
Debit
101
15,000
Hanshew, Capital
Credit
15,000
(Owner's investment in business)
General Ledger
Cash
Date
Oct. 1
Explanation
Ref.
Debit
J1
15,000
Acct. No. 101
Credit
Balance
15,000
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.
Steps in the recording process
Posting –
process of
transferring
amounts
from the
journal to
the ledger
accounts.
The Recording Process Illustrated
Illustration 2-19
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.
The Trial Balance
Example:
A list of accounts and
their balances at a
given time.
Purpose is to prove
that debits equal
credits.
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.
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.