Opener Sit in your NEW TEAMS, delegate a note taker NAME, Email, phone #, cell phone # Slide 2-1 Get your outlines for Chapter 1 out—turn in to me as a group One person, send me and your teammates an email BEFORE next class with the above info. Confirm receipt of email. Assign homework chapter 1 (give me their names) Give transparency to these people Dim Sum activity Finish Statements from Ch 1 Finish Ch 1 Begin Ch 2 Chapter 2 The Recording Process Accounting 201, Instructor: Judith Paquette Financial Accounting, Seventh Edition Slide 2-2 So now we go into the land of Slide 2-3 DEBITS & CREDITS Study Objectives Slide 2-4 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 Debit and credit procedure Stockholders’ equity relationships Summary of debit/credit rules Slide 2-5 Steps in the Recording Process Journal Ledger Posting 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 Account Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = “Left” Credit = “Right” An Account can be illustrated in a T-Account form. Slide 2-6 Account Name Debit / Dr. Credit / Cr. SO 1 Explain what an account is and how it helps in the recording process. Debits and Credits Double-entry accounting 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. Slide 2-7 SO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits If Debits are greater than Credits, the account will have a debit balance. Cash Debit / Dr. Credit / Cr. Transaction #1 $10,000 $3,000 Transaction #3 8,000 Balance Slide 2-8 Transaction #2 $15,000 SO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits If Credits are greater than Debits, the account will have a credit balance. Accounts Payable Transaction #1 Balance Slide 2-9 Debit / Dr. Credit / Cr. $10,000 $3,000 Transaction #2 8,000 Transaction #3 $1,000 SO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits Summary Liabilities Normal Balance Debit Normal Balance Credit Assets Credit / Cr. Normal Balance Chapter 3-24 Equity Credit / Cr. Debit / Dr. Debit / Dr. 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 Slide 2-10 Credit / Cr. Normal Balance Chapter 3-26 SO 2 Debits and Credits Summary Balance Sheet Asset = Liability + Equity Income Statement Revenue - Expense Debit Credit Slide 2-11 SO 2 Define debits and credits and explain their use in recording business transactions. 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. Slide 2-12 Solution notes page SO 2 Define debits and credits and explain their use in recording business transactions. Assets and Liabilities Assets Debit / Dr. Credit / Cr. Normal Balance Liabilities – Credits should exceed debits. Chapter 3-23 Liabilities Debit / Dr. Assets - Debits should exceed credits. Credit / Cr. The normal balance is on the increase side. Normal Balance Chapter 3-24 Slide 2-13 SO 2 Define debits and credits and explain their use in recording business transactions. Stockholders’ Equity Issuance of stock and revenues increase equity (credit). Equity Debit / Dr. Credit / Cr. Dividends and expenses decrease equity (debit). Normal Balance Chapter 3-25 Common Stock Debit / Dr. Retained Earnings Credit / Cr. Debit / Dr. Normal Balance Chapter 3-25 Slide 2-14 Chapter 3-25 Dividends Credit / Cr. Debit / Dr. Normal Balance Normal Balance Credit / Cr. Chapter 3-23 SO 2 Define debits and credits and explain their use in recording business transactions. Revenue and Expense Revenue Debit / Dr. Credit / Cr. Normal Balance Chapter 3-26 Expense Debit / Dr. Normal Balance 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. Credit / Cr. Expenses have the opposite effect: expenses decrease owner’s equity. Chapter 3-27 Slide 2-15 SO 2 Define debits and credits and explain their use in recording business transactions. ASSETS LIABILITIES Debit to Increase STOCKHOLDERS' EQUITY Revenue Expense Credit to Increase Credit to Increase Credit to Increase Debit to Increase Cash Notes Payable Service Revenue Salaries Expense Accounts Receivable Accounts Payable Additional Paid in Capital Sales Revenue Advertising Expense Prepaid Rent Current Portion of Long term debt Consulting Fees Earned Utilities Expense Common Stock Preferred Stock Unearned Prepaid Insurance Revenue Commissions Earned Rent Expense Retained Earnings Land Building Equipment Slide 2-16 Long Term Debt Ticket Sales Supplies Expense Interest Income Travel Expense Interest Expense Debits and Credits Summary Review Question Accounts that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and retained earnings. c. assets, liabilities, and dividends declared. d. assets, dividends declared, and expenses. Slide 2-17 Solution notes page SO 2 Define debits and credits and explain their use in recording business transactions. Debits & Credits This is called: DOUBLE ENTRY accounting system. For every transaction, there is at least one debit and one credit or the accounting equation won’t balance. DEBITS must equal CREDITS Slide 2-18 Summary of Debit/Credit Rules Relationship among the assets, liabilities and stockholders’ equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit. Slide 2-19 SO 2 Define debits and credits and explain their use in recording business transactions. Steps in the Recording Process Illustration 2-13 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. Slide 2-20 SO 3 Identify the basic steps in the recording process. The Journal – see your coursepack 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. Slide 2-21 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing - Entering transaction data in the journal. Illustration: On September 1, stockholders invested $15,000 cash in exchange for shares of stock, and Softbyte purchased computer equipment for $7,000 cash. Illustration 2-14 General Journal Date Sept. 1 Account Title Cash Ref. Debit 15,000 Common stock Computer equipment Cash Slide 2-22 Solution on notes page Credit 15,000 7,000 7,000 SO 4 Journalizing Simple and Compound Entries Illustration: 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. Illustration 2-15 General Journal Date Sept. 1 Slide 2-23 Solution on notes page Account Title Delivery equipment Ref. Debit Credit 14,000 Cash 8,000 Accounts payable 6,000 SO 4 The Ledger – see coursepack – T accts A General Ledger contains the entire group of accounts maintained by a company. The General Ledger includes all the asset, liability, stockholders’ equity, revenue and expense accounts. Illustration 2-16 Slide 2-24 SO 5 Explain what a ledger is and how it helps in the recording process. Standard Form of Account T-account form used in accounting textbooks. In practice, the account forms used in ledgers are much more structured. Illustration 2-17 Slide 2-25 SO 5 Explain what a ledger 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 Slide 2-26 SO 5 Explain what a ledger is and how it helps in the recording process. Posting Posting – the process of transferring amounts from the journal to the ledger accounts. Illustration 2-19 Slide 2-27 SO 6 Explain what posting is and how it helps in the recording process. Coursepack - The Recording Process Illustrated Follow these steps: #1: On October 1, CR Byrd invests $10,000 cash in an advertising company to be known as Pioneer Advertising Agency, Inc. 1. Determine what type of account is involved. 2. Determine what items increased or decreased and by how much. # DATE Account Titles AND Description Debit 1 10/1 Cash 10,000 3. Translate the increases and decreases into debits and credits. Common Stock Credit 10,000 To record owner’s investment. Illustration 2-20 Slide 2-28 SO 6 Explain what posting is and how it helps in the recording process. Use coursepack: The Recording Process Illustrated Illustration 2-21 #2: On October 1, Pioneer purchases office equipment costing $5,000 by signing a 3-month, 12% note payable. 2 10/1 Office Equipment Notes Payable 5,000 5,000 To record purchase of equipments, 3 month note, 12% Slide 2-29 SO 6 Explain what posting is and how it helps in the recording process. Use coursepack: The Recording Process Illustrated Illustration 2-21 #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. 3 10/2 Cash Unearned Revenue 1,200 1,200 To record cash advance Slide 2-30 SO 6 Explain what posting is and how it helps in the recording process. Use coursepack: The Recording Process Illustrated Illustration 2-21 #4: On October 3, Pioneer pays $900 office rent for October in cash. 4 10/3 Rent Expense Cash 900 900 To record paying rent. Slide 2-31 SO 6 Explain what posting is and how it helps in the recording process. Use coursepack: The Recording Process Illustrated Illustration 2-21 #5: On October 3, Pioneer pays $600 for a oneyear insurance policy that will expire next year on September 30. 5 10/4 Prepaid Insurance Cash 600 600 To record purchase of one year insurance policy Slide 2-32 SO 6 Explain what posting is and how it helps in the recording process. Use coursepack: The Recording Process Illustrated Illustration 2-21 #6: On October 5, Pioneer purchases an estimated 3-month supply of advertising materials on account from Aero Supply for $2,500. 6 10/5 Advertising Supplies Accounts Payable 2,500 2,500 Purchased supplies on account. Slide 2-33 SO 6 Explain what posting is and how it helps in the recording process. Use coursepack: The Recording Process Illustrated Illustration 2-21 #7: 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. 7 Slide 2-34 10/9 No entry SO 6 Explain what posting is and how it helps in the recording process. Use coursepack: The Recording Process Illustrated Illustration 2-21 #8: On October 20, Pioneer’s board of directors declares and pays a $500 cash dividend to stockholders. 8 10/20 Dividends Cash 500 500 To pay dividend. Slide 2-35 SO 6 Explain what posting is and how it helps in the recording process. Use coursepack: The Recording Process Illustrated Illustration 2-21 #9: On October 26, Pioneer owes employee salaries of $4,000 and pays them in cash. 9 10/26 Salaries Expense Cash 4,000 4,000 Paid salaries to employees. Slide 2-36 SO 6 Explain what posting is and how it helps in the recording process. Use coursepack: The Recording Process Illustrated Illustration 2-21 #10: On October 31, Pioneer receives $10,000 in cash from Copa Company for advertising services provided in October. 10 10/31 Cash Service Revenue 10,000 10,000 To record payment for advertising services. Slide 2-37 SO 6 Explain what posting is and how it helps in the recording process. Use Course pack -Next steps – T Accounts Post to your T Accounts Total your T Accounts – remember which side to put the total Slide 2-38 Assets, Expenses – Debit side Liabilities, Stockholders’ Equity, Revenues – Credit Side Dividends – Debit Side Use Coursepack - Next steps – Trial Balance Slide 2-39 List Accounts and their balances 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. Solution on notes page Slide 2-40 SO 6 Explain what posting is and how it helps in the recording process. The Trial Balance Illustration 2-32 A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. Slide 2-41 SO 7 Prepare a trial balance and explain its purposes. 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. Slide 2-42 SO 7 Prepare a trial balance and explain its purposes. 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. Slide 2-43 Solution on notes page SO 7 Prepare a trial balance and explain its purposes. Use coursepack: Statements Income Statement Retained Earnings Balance Sheet DO IT! Slide 2-44 End of Chapter 2 Slide 2-45 The Trial Balance The accounts come from the ledger of Christel Corporation at December 31, 2011. Slide 2-46 Solution on notes page SO 7 Your Personal Annual Report David Edmondson, the president and CEO of well-known electronics retailer Radio Shack, overstated his accomplishments by claiming that he had earned a bachelor’s of science degree, when in fact he had not. Apparently his employer had not done a background check to ensure the accuracy of his résumé. A chief financial officer of Veritas Software lied about having an M.B.A. from Stanford University. Slide 2-47 A former president of the U.S. Olympic Committee lied about having a Ph.D. from Arizona State University. When the truth was discovered, she resigned. The University of Notre Dame discovered that its football coach, George O’Leary, lied about his education and football history. He was forced to resign after only five days. Slide 2-48 A survey by Automatic Data Processing reported that 40% of applicants misrepresented their education or employment history. A survey by the Society for Human Resource Management of human resource professionals reported the following responses to the following question. Slide 2-49 Using Radio Shack as an example, what should the company have done when it learned of the falsehoods on Mr. Edmondson’s résumé? Should Radio Shack have fired him? NO: Mr. Edmondson had been a Radio Shack employee for 11 years. He had served the company in a wide variety of positions, and had earned the position of CEO through exceptional performance. While the fact that he lied 11 years earlier on his résumé was unfortunate, his service since then made this past transgression irrelevant. In addition, the company was in the midst of a massive restructuring, which included closing 700 of its 7,000 stores. It could not afford additional upheaval at this time. YES: Radio Shack is a publicly traded company. Investors, creditors, employees, and others doing business with the company will not trust it if its leader is known to have poor integrity. The Slide “tone at the top” is vital to creating an ethical organization. 2-50 Copyright Copyright © 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Slide 2-51 Summary of Debit/Credit Rules Kathy Browne, president of Hair It Is, Inc., has just rented space in a shopping mall in which she will open and operate a beauty salon. A friend has advised Kathy to set up a double-entry set of accounting records in which to record all of her business transactions. Following are the balance sheet accounts that Hair It Is, Inc., will likely need to record the transactions. Indicate whether the normal balance of each account is a debit or a credit. Slide 2-52 Cash Debit Equipment Debit Supplies Debit Accounts payable Credit Notes payable Credit Common stock Credit Solution on notes page SO 2 Define debits and credits and explain their use in recording business transactions. Slide 2-53 SO 5 Explain what a ledger is and how it helps in the recording process. The Recording Process Illustrated Kate Turner recorded the following transactions in a general journal during the month of March. Post these entries to the Cash account. Slide 2-54 Solution on notes page SO 6 Slide 2-55 SO 7 Prepare a trial balance and explain its purposes.