Chapter 2
THE RECORDING PROCESS
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Chapter Topics
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The Accounts
• Is an individual accounting record of increases and
decreases in a specific asset, liabilities, or owner’s equity
item.
• Assets are the economic resources that benefit the
business now and in the future
• The Cash account
• Shows the cash effects of a business’s
transactions
• Includes money and any medium of exchange that
a bank accepts at face value
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THE ACCOUNT
– The Accounts Receivable account
• Represents a promise for future receipt
– The Inventory (Merchandise, Merchandise
Inventory) account
• Is merchandise held for sale to customers
– The Notes Receivable account
• Is a written pledge that the customer will pay a
fixed amount of money by a certain date
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THE ACCOUNT
– Prepaid expense accounts
• Are expenses paid in advance
– The Land account
• Is a record of the cost of land a business owns and
uses in its operation
– The Buildings account
• Is the cost of a business’s buildings, e.g., office
and manufacturing plant
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THE ACCOUNT
– Equipment, Furniture, and Fixtures
accounts
• Record separate asset accounts for each type of
equipment
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THE ACCOUNT
• Liabilities are the debts of the company
– The Notes Payable account
• Includes the amounts that the business must
pay on promissory notes
– The Accounts Payable account
• Represents the promise to pay off debts arising
from credit purchases
– Accrued Liability accounts
• Are expenses that have not yet been paid, e.g.,
Interest Payable, Salary Payable, and Income
Taxes Payable
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THE ACCOUNT
• Owners ’ equity is the owners’ claims to the
assets
– A proprietorship uses a single account
– A partnership uses separate accounts for
each owner’s capital balance and withdrawals
– A corporation uses separate capital
accounts for each source of capital
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THE ACCOUNT
– Revenues
• Are reported in a separate account for each
increase in stockholders’ equity created by
delivering goods or services to customers, e.g.,
Sales Revenues, Service Revenues, Rent
Revenues, Interest Revenues
– Expenses
• Are reported in a separate account for each type of
expense, e.g., Cost of Sales, Salary Expense,
Rent Expense, Advertising Expense, Utilities
Expense
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T-Account
An account consists of three parts
1. The title of the account
2. A left or Debit side
3. A right or Credit side
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Debit and Credit
•
•
•
•
•
The terms debit and credit mean left and right.
Abbreviated as Dr. for debit
Abbreviated as Cr. For Credit
When total of debit larger than credit called Debit balance.
When total of credit larger than debit called credit balance.
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DOUBLE-ENTRY
ACCOUNTING
The Double-Entry System:
Each transaction affects at least two accounts
Dr.
Title Account
Cr.
Dr.
400
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Title Account
Cr.
400
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Example 1
Bob Sample opened the Campus Laundromat on September 1, 2012. During
the first month of operations, the following transactions occurred.
Sept. 1 Bob invested $20,000 cash in the business.
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Example 2
Sept.2 The company paid $1,000 cash for store rent for September.
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Example 3
Sept. 3 Purchased washers and dryers for $25,000, paying $10,000
in cash and signing a $15,000, 6-month, 12% note payable.
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Example 4
Sept. 4 Paid $1,200 for a one-year accident insurance policy
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Example 5
Sept. 10 Received a bill from the Daily News for advertising the
opening of the laundromat $200.
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Example 6
Sept. 20 Bob withdrew $700 cash for personal use.
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Example 7
Sept. 30 The company determined that cash receipts for laundry
services for the month were $6,200.
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Simple and Compound Entries
• Some entries involve only two accounts, one
debit and one credit. An entry like these is a
simple entry.
• Some transactions, however, require more than
two accounts in journalizing. An entry that
requires three or more accounts is a
compound entry.
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Example:
assume that 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 (to be paid later). The
compound entry is as follows.
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The Ledger
The entire group of accounts maintained by a
company is the ledger. The ledger keeps in one
place all the information about changes in specific
account balances. Companies may use various
kinds of ledgers, but every company has a general
ledger. A general ledger contains all the asset,
liability, and owner’s equity
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The Ledger
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The Ledger Form
The simple T-account form used in accounting
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The Ledger Form
in practice, the account forms used in ledgers are much more
structured.
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POSTING
Transferring journal entries to the ledger accounts is called posting. This
phase of the recording process accumulates the effects of journalized
transactions into the individual accounts. Posting involves the following
steps.
1. In the ledger, in the columns of the account(s) debited, enter the
date, journal page, and debit amount shown in the journal.
2. In the reference column of the journal, write the account number to
which the debit amount was posted.
3. In the ledger, in the columns of the account(s) credited, enter the
date, journal page, and credit amount shown in the journal.
4. In the reference column of the journal, write the account number to
which the credit amount was posted.
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The Recording Process
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CHART OF ACCOUNTS
The number and type of accounts differ for each
company. The number of accounts depends on the amount
of detail management desires. For example, the
management of one company may want a single account
for all types of utility expense. Most companies have a
chart of accounts. This chart lists the accounts and the
account numbers that identify their location in the ledger.
The numbering system that identifies the accounts usually
starts with the balance sheet accounts and follows with
the income statement accounts.
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In this and the next two chapters, we will be explaining the
accounting forPioneer Advertising Agency (a service
company). Accounts 101–199 indicate asset accounts;
200–299 indicate liabilities; 301–350 indicate owner’s
equity accounts; 400–499, revenues; 601–799, expenses;
800–899, other revenues; and 900–999, other expenses .
We are shows Pioneer’s chart of accounts. (C. R. Byrd is
Pioneer’s owner.). The company open on October.
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Example
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The Recording Process
Transaction 1: On October 1, C. R. Byrd invests $10,000 cash in an advertising
company called Pioneer Advertising Agency.
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Transaction 2: On October 1, Pioneer purchases office equipment costing $5,000 by signing
a 3-month, 12%, $5,000 note payable.
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Transaction 3 :On October 2, Pioneer receives a $1,200 cash advance from R.
Knox, a client, for advertising services that are expected to be completed by
December 31.
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Transaction 4 : On October 3, Pioneer pays office rent for October in cash, $900.
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Transaction 5 : On October 4, Pioneer pays $600 for a one-year insurance policy that will
expire next year on September 30.
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Transaction 6 : 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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Event : On October 9, Pioneer hires four employees to begin
work on October 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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Transaction 8 : On October 20, C. R. Byrd withdraws $500 cash for personal use.
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Transaction 9 : On October 26, Pioneer owes employee salaries of $4,000 and pays them
in cash. (See October 9 transaction.)
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Transaction 10: On October 31, Pioneer receives $10,000 in cash from Copa Company for
advertising services provided in October.
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The Trial Balance
A trial balance is a list of accounts and their balances at a given
time. The companies prepare a trial balance at the end of an
accounting period. They list accounts in the order in which they
appear in the ledger. Debit balances appear in the left column and
credit balances in the right column.
The steps for preparing a trial balance are:
1. List the account titles and their balances in the appropriate debit
or credit column.
2. Total the debit and credit columns.
3. Prove the equality of the two columns
Prepare a trial balance
and explain its purposes.
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Pioneer Advertising Agency
Income Statement
October 31, 2012
Revenues
Service revenue
Expenses
Salaries and wages expense
Rent expense
Total expenses
Net income
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$ 10,000
$4,000
900
4,900
$ 5,100
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Pioneer Advertising Agency
Owner’s Equity Statement
October 31, 2012
Owner’s capital, October 1
Add: Investments
Net income
Less: Drawings
Owner’s capital, October 31
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$ –0–
$10,000
5,100
15,100
15,100
500
$14,600
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Pioneer Advertising Agency
Balance Sheet
October 31, 2012
Assets
Cash
Supplies
Prepaid Insurance
Equipment
Total assets
$ 15,200
2,500
600
5,000
$ 23,300
Liabilities and Owner’s Equity
Liabilities
Note Payable
Accounts payable
Unearned Service Revenue
Owner’s equity
Owner’s capital
Total liabilities and owner’s equity
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$ 5,000
2,500
1,200
14,600
$ 23,300
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Pioneer Advertising Agency
Statement of Cash Flows
October 31, 2012
Cash flows from operating activities
Cash receipts from revenues (1,200+10,000)
Cash payments for expenses (900+600+4,000)
Net cash provided by operating activities
Cash flows from investing activities
Purchase of equipment
Sell of equipment
Cash flows from financing activities
Investments by owner
Drawings by owner
Net increase in cash
Cash at the beginning of the period
Cash at the end of the period
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$ 11,200
(5,500)
5,700
0
0
0
$10,000
(500)
9,500
9,500
0
$ 15,200
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Exercise
Ms. Anderson, she open the book shop in January, in her first
month of business ,are as follows.
Jan. 2 Invested $10,000 cash in business.
3 Purchased used car for $4,000 cash for use in business.
9 Purchased supplies on account for $500.
11 Billed customers $2,100 for services performed.
16 Paid $350 cash for advertising.
20 Received $700 cash from customers billed on January 11.
23 Paid creditor $300 cash on balance owed.
28 Withdrew $1,000 cash for personal use by owner.
Instructions
(a) Prepare the complete general journal.
(b) Prepare a trial balance at January 31, 2012.
(c) Prepare financial statement at January 31, 2012.
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Lecturer: Chan Sambo
Assignment
• E2-9 , E2-10 , E2-11 , E2-14 ,
• P2-1A ,P2-2A, P2-1B , P2-2B , P2-3B
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