Accounting Principles
Thirteenth Edition
Weygandt Kimmel Kieso
Chapter 2
The Recording Process
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Chapter 2
The Recording Process
Chapter Outline
Learning Objectives
LO 1 Describe how accounts, debits, and credits are
used to record business transactions.
LO 2 Indicate how a journal is used in the recording
process.
LO 3 Explain how a ledger and posting help in the
recording process.
LO 4 Prepare a trial balance.
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Accounts, Debits, and Credits
The Account
• Record of increases and decreases in a specific asset,
liability, owner’s equity, revenue, or expense item.
• Debit = “Left”
• Credit = “Right”
Account Name
Debit / Dr. Credit / Cr.
An account can be
illustrated in a
T-account form.
LO 1
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Debits and Credits
If the sum of Debit entries are greater than the sum of
Credit entries, the account will have a debit balance.
Transaction #1
Transaction #3
Balance
LO 1
Account Name
Debit / Dr.
Credit / Cr.
€10,000
€3,000
8,000
Transaction #2
€15,000
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Debits and Credits
If the sum of Credit entries are greater than the sum of
Debit entries, the account will have a credit balance.
Transaction #1
Balance
LO 1
Account Name
Debit / Dr.
Credit / Cr.
€10,000
€3,000
8,000
Transaction #2
Transaction #3
€1,000
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Debits and Credits
Debit and Credit Procedure
Double-entry system
• Each transaction must affect two or more accounts to
keep basic accounting equation in balance
• Recording done by debiting at least one account and
crediting at least one other account
• DEBITS must equal CREDITS
LO 1
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Accounts, Debits, and Credits
Assets
Debit / Dr.
Liabilities
Credit / Cr.
Debit / Dr.
Normal Balance
Credit / Cr.
Normal Balance
• Assets - Debits should exceed credits
• Liabilities – Credits should exceed debits
• Normal balance is on the increase side
LO 1
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Accounts, Debits, and Credits
Owner’s Capital
Debit / Dr.
Owner’s Drawings
Credit / Cr.
Debit / Dr.
Normal Balance
Normal Balance
Credit / Cr.
• Owner’s investments and revenues increase owner’s
equity (credit)
• Owner’s drawings and expenses decrease owner’s
equity (debit)
LO 1
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Accounts, Debits, and Credits
Expenses
Revenues
Debit / Dr.
Credit / Cr.
Debit / Dr.
Normal Balance
Normal Balance
Credit / Cr.
• Earning revenues is to benefit owner(s)
• Effect of debits and credits on revenue accounts is
the same as effect on Owner’s Capital
• Expenses have opposite effect
LO 1
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Summary of Debit / Credit Rules
Balance Sheet
Income Statement
Assets = Liabilities + Equity
Revenue - Expense
Debit
Credit
LO 1
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Summary of Debit / Credit Rules
Debit/credit rules and effects on each type of account.
Assets = Liabilities +
ILLUSTRATION 2.11
Owner’s Equity
Owner's Owner's
Assets = Liabilities + Capital - Drawing + Revenue - Expense
Dr. Cr.
+
-
Dr.
Cr.
-
+
Dr. Cr.
-
+
Dr. Cr.
+
-
Dr. Cr.
-
+
Dr. Cr.
+
-
Equation must be in balance after every transaction.
Total Debits must equal total Credits.
LO 1
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The Journal
Analyze
Adjusted
Trial
Balance
Journalize
the
transactions
Financial
Statements
Post
Closing
Entries
Trial
Balance
Adjusting
Entries
Post-Closing
Trial Balance
The Recording Process
• Analyze transaction
• Enter transaction in journal
• Transfer journal information to ledger accounts
LO 2
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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
LO 2
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Journalizing
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 Titles and Explanations
Sept. 1 Cash
Owner's Capital
Equipment
Cash
LO 2
J1
Ref. Debit Credit
15,000
15,000
7,000
7,000
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Journalizing
Simple and Compound Entries
Illustration: On July 1, Butler Shipping 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).
ILLUSTRATION 2.14
GENERAL JOURNAL
Date
July 1
LO 2
Account Titles and Explanations
Equipment
Cash
Accounts Payable
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Ref. Debit Credit
14,000
8,000
6,000
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The Ledger and Posting
Analyze
Adjusted
Trial
Balance
Journalize
Financial
Statements
Post to
ledger
accounts
Closing
Entries
Trial
Balance
Adjusting
Entries
Post-Closing
Trial Balance
The Ledger
• Entire group of accounts maintained by a company
• Provides the balance in each account
• Keeps track of changes in account balances
LO 3
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The Ledger
General ledger contains all asset, liability, and owner’s equity
accounts
ILLUSTRATION 2.15
LO 3
Asset Accounts
Liability
Accounts
Owner's Equity
Accounts
Cash
Notes Payable
Owner's Capital
Supplies
Accounts Payable
Owner's Drawings
Equipment
Salaries and Wages
Payable
Service Revenue
Land
Interest Payable
Salaries and Wages
Expense
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The Ledger
Standard Form of Account
ILLUSTRATION 2.16
CASH
Date
2020
June 1
2
3
9
17
20
30
LO 3
Explanation
NO. 101
Ref.
Debit
Credit Balance
25,000
8,000
4,200
7,500
11,700
250
7,300
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25,000
17,000
21,200
28,700
17,000
16,750
9,450
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The
Ledger
GENERAL JOURNAL
J1
Date Account Titles and Explanation Ref. Debit
2020
Sept. 1 Cash
101 15,000
301
Owner’s Capital
Credit
15,000
GENERAL LEDGER
Cash
Date
2020
Sept. 1
Explanation
NO. 101
Ref.
Debit
J1
15,000
Credit
15,000
Owner’s Capital
Date
ILLUSTRATION 2.17
Posting a journal
entry
LO 3
Explanation
Balance
NO. 301
Ref.
2020
Sept. 1
J1
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Debit
Credit
Balance
15,000
15,000
20
Chart of Accounts
Assets
101
112
126
130
157
158
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation—Equipment
200
201
209
212
230
Liabilities
Notes Payable
Accounts Payable
Unearned Service Revenue
Salaries and Wages Payable
Interest Payable
ILLUSTRATION 2.18
LO 3
Accounts in Red are used in this chapter.
Owner's Equity
301 Owner’s Capital
306 Owner’s Drawings
350 Income Summary
Revenues
400 Service Revenue
631
711
722
726
729
732
905
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Expenses
Supplies Expense
Depreciation Expense
Insurance Expense
Salaries and Wages Expense
Rent Expense
Utilities Expense
Interest Expense
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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.
LO 3
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Transaction
On October 1, C. R. Byrd invests ₺10,000 cash in an advertising
company called Yazici Advertising.
Basic
Analysis
The asset Cash increases ₺10,000; owner’s equity (specifically,
Owner's Capital) increases ₺10,000.
Equation
Analysis
Debit-Credit
Analysis
Journal
Entry
Posting
LO 3
ILLUSTRATION 2.19
Assets
Cash
+₺10,000
=
=
Liabilities
+
Owner's Equity
Owner's Capital
+₺10,000
Debits increase assets: debit Cash ₺10,000.
Credits increase owner's equity: credit Owner's Capital ₺10,000.
Date
Titles
Ref.
Debit
Oct. 1
Cash
Owner's Capital
101
301
10,000
Oct. 1
Cash
10,000
101
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Credit
10,000
Owner's Capital
301
Oct. 1 10,000
23
Transaction
Basic
Analysis
The asset Equipment increases ₺5,000;
the liability Notes Payable increases ₺5,000.
Equation
Analysis
Assets
=
Equipment =
+₺5,000
Debit-Credit
Analysis
Journal
Entry
Posting
LO 3
On October 1, Yazici purchases office equipment costing
₺5,000 by signing a 3-month, 12%, ₺5,000 note payable.
ILLUSTRATION 2.20
Liabilities
+
Notes Payable
+₺5,000
Owner's Equity
Debits increase assets: debit Equipment ₺5,000.
Credits increase liabilities: credit Notes Payable ₺5,000.
Date
Titles
Ref.
Oct. 1
Equipment
Notes Payable
157
200
Oct. 1
Equipment
5,000
157
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Debit
Credit
5,000
Notes Payable
Oct. 1
5,000
200
5,000
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Transaction
Basic
Analysis
Equation
Analysis
Debit-Credit
Analysis
Journal
Entry
Posting
LO 3
ILLUSTRATION 2.21
On October 2, Yazici receives a ₺1,200 cash for advertising services
that are expected to be completed by December 31.
The asset Cash increases ₺1,200;
the liability Unearned Revenue increases ₺1,200.
Assets
Cash
+₺1,200
=
=
Liabilities
Unearned Revenue
+₺1,200
+
Owner's Equity
Debits increase assets: debit Cash ₺1,200.
Credits increase liabilities: credit Unearned Revenue ₺1,200.
Date
Titles
Ref.
Oct. 2
Cash
Unearned Revenue
101
209
Oct. 1
2
Cash
10,000
1,200
101
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Debit
Credit
1,200
1,200
Unearned Revenue 209
Oct. 2 1,200
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Transaction
Basic
Analysis
Equation
Analysis
Debit-Credit
Analysis
Journal
Entry
Posting
LO 3
ILLUSTRATION 2.22
On October 3, Yazici pays office rent for October in cash of ₺900.
The expense account Rent Expense increases ₺900;
the asset Cash decreases ₺900.
Assets
Cash
-₺900
=
=
Liabilities
+
Owner's Equity
Rent Expense
-₺900
Debits increase expenses: debit Rent Expense ₺900.
Credits decrease assets: credit Cash ₺900.
Date
Titles
Ref.
Oct. 3
Rent Expense
Cash
729
101
Oct. 1
2
Cash
10,000 Oct. 3
1,200
101
900
Debit
900
Rent Expense
Oct. 3
900
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Credit
900
729
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Transaction
Basic
Analysis
Equation
Analysis
Debit-Credit
Analysis
Journal
Entry
Posting
LO 3
ILLUSTRATION 2.23
On October 4, Yazici pays ₺600 for a one-year insurance policy that
will expire next year on September 30.
The asset Prepaid Insurance increases ₺600;
the asset Cash decreases ₺600.
Cash
-₺600
Assets
= Liabilities +
+ Prepaid Insurance
+₺600
Owner's Equity
Debits increase assets: debit Prepaid Insurance ₺600.
Credits decrease assets: credit Cash ₺600.
Date
Titles
Ref.
Oct. 4
Prepaid Insurance
Cash
130
101
Oct. 1
2
Cash
10,000 Oct. 3
1,200
4
101
900
600
Debit
Credit
600
Prepaid Insurance
Oct. 4
600
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600
130
27
Transaction
Basic
Analysis
Equation
Analysis
Debit-Credit
Analysis
Journal
Entry
Posting
LO 3
ILLUSTRATION 2.24
On October 5, Yazici purchases a 3-month supply
of advertising materials on account from Aero Supply for ₺2,500.
The asset Supplies increases ₺2,500;
the liability Accounts Payable increases ₺2,500.
Assets
Supplies
+₺2,500
=
=
Liabilities
Accounts Payable
+₺2,500
+
Owner's Equity
Debits increase assets: debit Supplies ₺2,500.
Credits increase liabilities: credit Accounts Payable ₺2,500.
Date
Titles
Ref.
Oct. 5
Supplies
Accounts Payable
126
201
Oct. 5
Supplies
2,500
126
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Debit
Credit
2,500
2,500
Accounts Payable
201
Oct. 5 2,500
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Transaction
Basic
Analysis
Equation
Analysis
On October 9, Yazici hires four employees to begin work on
October 15. Each employee is to receive a weekly salary of ₺500.
A business transaction has not occurred, there is no need to record
an accounting entry.
Assets
=
=
Liabilities
+
Owner's Equity
Debit-Credit
Analysis
Date
Titles
Ref.
Debit
Credit
Journal
Entry
Posting
LO 3
ILLUSTRATION 2.25
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Transaction
Basic
Analysis
Equation
Analysis
Debit-Credit
Analysis
Journal
Entry
Posting
LO 3
ILLUSTRATION 2.26
On October 20, C. R. Byrd withdraws ₺500 cash for
personal use.
The owner’s equity account Owner’s Drawings increases ₺500;
the asset Cash decreases ₺500.
Assets
Cash
-₺500
=
=
Liabilities
+
Owner's Equity
Owner’s Drawings
-₺500
Debits increase drawings: debit Owner's Drawings ₺500.
Credits decrease assets: credit Cash ₺500.
Date
Titles
Ref.
Oct. 20
Owner’s Drawings
Cash
306
101
Oct. 1
2
Cash
10,000 Oct. 3
1,200
4
20
101
900
600
500
Debit
500
Owner’s Drawings
Oct. 20
500
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Credit
500
306
30
Transaction
Basic
Analysis
Equation
Analysis
Debit-Credit
Analysis
Journal
Entry
Posting
LO 3
ILLUSTRATION 2.27
On October 26, Yazici owes employee salaries of ₺4,000
and pays them in cash (see October 9 event).
Expense account Salaries and Wages Expense increases ₺4,000;
the asset Cash decreases ₺4,000.
Assets
Cash
-₺4,000
=
=
Liabilities
+
Owner's Equity
Sal. & Wages Expense
-₺4,000
Debits increase expenses: debit Salaries and Wages Expense
₺4,000. Credits decrease assets: credit Cash ₺4,000.
Date
Titles
Ref.
Oct. 26
Salaries and Wages Expense
Cash
726
101
Oct. 1
2
Cash
10,000 Oct. 3
1,200
4
20
26
101
900
600
500
4,000
Debit
Credit
4,000
4,000
Salaries & Wages Expense 726
Oct. 26 4,000
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Transaction
Basic
Analysis
Equation
Analysis
Debit-Credit
Analysis
Journal
Entry
Posting
LO 3
ILLUSTRATION 2.28
On October 31, Yazici receives ₺10,000 in cash from Copa
Company for advertising services performed in October.
The asset Cash increases ₺10,000; the revenue account
Service Revenue increases ₺10,000.
Assets
Cash
+₺10,000
=
=
Liabilities
+
Owner's Equity
Service Revenue
+₺10,000
Debits increase assets: debit Cash ₺10,000.
Credits increase revenues: credit Service Revenue ₺10,000.
Date
Titles
Ref.
Debit
Oct. 31
Cash
Service Revenue
101
400
10,000
Oct. 1
2
31
Cash
10,000 Oct. 3
1,200
4
10,000
20
26
101
900
600
500
4,000
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Credit
10,000
Service Revenue
400
Oct. 31 10,000
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Journalizing and Posting Summary
GENERAL JOURNAL
Page J1
Date
Explanation
2020
Oct. 1 Cash
Owners’ Capital
Ref.
Debit
101
301
10,000
1 Equipment
Notes Payable
157
200
5,000
2 Cash
Unearned Revenue
101
209
1,200
3 Rent Expense
Cash
729
101
900
LO 3
ILLUSTRATION 2.29
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Credit
10,000
5,000
1,200
900
33
GENERAL JOURNAL
Date
Explanation
2020
Oct. 4 Prepaid Insurance
Cash
Ref.
Debit
130
101
600
126
201
2,500
20 Owner’s Drawings
Cash
306
101
500
26 Salaries and Wages Expense
Cash
726
101
4,000
31 Cash
Service Revenue
101
400
10,000
5 Supplies
Accounts Payable
LO 3
Page J1
ILLUSTRATION 2.29
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Credit
600
2,500
500
4,000
10,000
34
LO 3
ILLUSTRATION 2.30
General Ledger
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Yazici Advertising
Trial Balance
October 31, 2020
Cash
Supplies
Prepaid Insurance
Equipment
Notes Payable
Accounts Payable
Unearned Service Revenue
Owner’s Capital
Owner’s Drawings
Service Revenue
Salaries and Wages Expense
Rent Expense
ILLUSTRATION 2.31
LO 4
Debit
₺15,200
2,500
600
5,000
Credit
₺ 5,000
2,500
1,200
10,000
500
10,000
4,000
900
₺28,700
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₺28,700
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Limitations of a Trial Balance
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.
5. Offsetting errors are made in recording the amount
of a transaction.
LO 4
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Trial Balance
Locating Errors
Errors in a trial balance generally result from
• mathematical mistakes,
• incorrect postings,
• or simply transcribing data incorrectly.
LO 4
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Trial Balance
Currency Signs
• Do not appear in journals or ledgers
• Typically used only in trial balance and financial
statements
• Shown only for first item in column and for the total of
that column
Underlining
• Single line is placed under column of figures to be
added or subtracted
• Totals are double-underlined
LO 4
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Bali Beach Supply
Trial Balance
December 31, 2020
Cash
Accounts Receivable
Prepaid Insurance
Equipment
Notes Payable
Accounts Payable
Salaries and Wages Payable
Owner’s Capital
Owner’s Drawings
Service Revenue
Utilities Expense
Salaries and Wages Expense
LO 4
Debit
R$ 7,000
4,000
6,000
88,000
Credit
R$ 19,000
22,000
2,000
20,000
8,000
95,000
3,000
42,000
R$158,000
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R$158,000
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A Look at U.S. GAAP
Key Points
Similarities
• Transaction analysis is the same under IFRS and GAAP.
• Both the IASB and the FASB go beyond the basic definitions provided
in this textbook for the key elements of financial statements, that is
assets, liabilities, equity, revenues, and expenses. The more
substantive definitions, using the FASB definitional structure, are
provided in the Chapter 1 A Look at U.S. GAAP section.
• As shown in the textbook, currency signs are typically used only in
the trial balance and the financial statements. The same practice is
followed under GAAP, using the U.S. dollar.
LO 5
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A Look at U.S. GAAP
Key Points
Similarities
• A trial balance under GAAP follows the same format as shown in the
textbook.
Differences
• IFRS relies less on historical cost and more on fair value than U.S.
companies.
• The statement of financial position is often called the balance sheet
in the United States.
LO 5
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Copyright
Copyright © 2019 John Wiley & Sons, Inc.
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or from the use of the information contained herein.
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