ACCOUNTING
PRINCIPLES
SIXTH CANADIAN EDITION
Chapter 2
The Recording Process
Prepared by:
Debbie Musil
Kwantlen Polytechnic University
Chapter 2:
The Recording Process
STUDY OBJECTIVES:
1. Define debits and credits and illustrate how they are
used to record transactions.
2. Explain the recording process and analyze, journalize,
and post transactions.
3. Explain the purpose of a trial balance, and prepare
one.
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The Recording Process
• The account
– Debits and credits
– Double-entry accounting
• Analyzing and Recording Transactions
– The accounting cycle and steps in the
recording process
– The journal
– The ledger
• The Trial Balance
– Limitations
– Locating errors
– Some process explanations
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The Account
• An individual accounting record of
increases and decreases in a specific
asset, liability, or owner’s equity item
– Examples: cash, accounts payable,
service revenue, salaries expense
• Three parts: title, debit side, credit
side
– In its simplest form, these parts are
positioned like the letter T
– Therefore called a T account
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Debits & Credits
• Debit (Dr.) indicates left; Credit (Cr.)
indicates right
– Entering an amount on the left side is called
debiting the account
– Entering an amount on the right side is crediting
the account
• Debit balance
– Debit amounts exceed the credits
• Credit balance
– Credit amounts exceed the debits
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Tabular Versus Account Form
Tabular Summary
Account Form
CASH
CASH
$15,000
-7,000
Debit
Credit
1,200
15,000
7,000
1,500
1,200
600
-600
1,500
900
-900
600
200
-200
250
-250
1,300
600
Balance
8,050
-1,300
$8,050
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Debit & Credit Procedure
• Debit does not mean increase or decrease
– Can be either depending on the type account
• Credit also does not mean increase or
decrease
– also depends on account type
• Assets are on the debit side of the equation
– Increases are also on debit side; decreases on
credit side
• Liabilities are on the credit side
– Increases are on the credit side; decreases on
the debit side
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Assets, Liabilities & Owner’s Capital
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Drawings, Revenues, Expenses
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Accounting Equation Expanded
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Double-Entry Accounting
System
• Each transaction is recorded with
equal debits and credits
– Total debits always equals total credits
• Accounting equation will always stay
in balance
– Assets = Liabilities + Owner’s Equity
• Every account has a normal balance
– Either debit or credit
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Chapter 2:
The Recording Process
STUDY OBJECTIVES:
1. Define debits and credits and illustrate how they are
used to record transactions.
2. Explain the recording process and analyze, journalize,
and post transactions.
3. Explain the purpose of a trial balance, and prepare
one.
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12
The Accounting Cycle
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The Recording Process
The first three steps in the accounting
cycle:
1. Analyze business transactions
– Determine effect on accounts
2. Enter transactions in a journal
– The book of original entry
3. Transfer journal information to
ledger accounts
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The Journal
• Where transactions are first recorded
• Every company has a general journal
• Contributes to recording process:
– Discloses complete effect of a
transaction in one place
– Provides a chronological record
– Helps prevent and locate errors
– Provides explanation and identifies the
source document
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Journalizing
• Entering transaction data in the
journal
• Separate journal entry for each
transaction
• A complete entry consists of
– Transaction date
– Accounts & amounts to be debited and
credited
– Brief explanation of transaction
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Journalizing Technique
– Transaction date is entered in date column
– Debit account title is entered at the left margin of the
“Account Titles and Explanation” column
– Credit account title is indented on the next line.
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Journalizing Technique 2
• Debit amounts are recorded in the Debit (left) column
• Credit amounts are recorded in the Credit (right) column
• A brief explanation of the transaction is provided
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Journalizing Technique 3
• Separate entries with a blank line
• Ref. column is used later when transferred to ledger
• List all debits in each entry before listing credits
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Journalizing Technique 4
• Simple entry: involves two accounts
• Compound entry: involves three or more
accounts
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The Ledger
• Ledger: entire group of accounts
maintained by a company
• General ledger: contains all the
assets, liabilities, and owner’s equity
accounts
– Arranged in financial statement order
– Assets, liabilities, owner’s capital,
drawings, revenues and expenses
• Posting: procedure of transferring
journal entries to the ledger accounts
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Standard Form of Account
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Posting
1.
2.
3.
4.
Post to debit account: date, journal page number, amount
Enter debit account number in journal reference column
Post to credit account: journal page number, amount
Enter credit account number in journal reference column
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Chart of Accounts
• List of accounts and their account
numbers
– Indicates where accounts are found in
the ledger
– Usually starts with balance sheet
accounts, followed by income statement
accounts
• Varies by company
– Number of accounts
– Types of accounts
– Numbering system
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Chapter 2:
The Recording Process
STUDY OBJECTIVES:
1. Define debits and credits and illustrate how they are
used to record transactions.
2. Explain the recording process and analyze, journalize,
and post transactions.
3. Explain the purpose of a trial balance, and prepare
one.
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25
The Trial Balance
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The Trial Balance
•
•
•
•
List of accounts and their balances at a
specific time
Proves that debits equal credits after
posting
Uncovers errors in journalizing and
posting
To prepare a trial balance:
1. List accounts and their balances
2. Total the debit and credit columns
3. Ensure the two columns are equal
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Example Trial Balance
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Limitations of a Trial Balance
• Does not prove:
– That all transactions have been
recorded, or
– That the ledger is correct
• Numerous errors may exist even
though the trial balance columns
agree
– Total debits and total credits may be
equal, but may still be posted to the
wrong account or in the wrong amount
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Locating Errors
• If trial balance does not balance, then:
– If error is an amount such as $1, $100 or
$1,000, re-add and re-calculate account
balances
– If divisible by two, look for entry (= ½ of
the error ) in the wrong column
– If divisible by nine, look for transposition
errors
– Otherwise, scan to see if an account
balance has been omitted
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COPYRIGHT
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from the use of the information contained herein.
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