Chapter 2 Notes
Created Sep 7, 2019 433 PM
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Updated Sep 7, 2019 510 PM
The Recording Process
Accounts, Debits and Credits
The Account
Account- individual accounting record of increases and decreases in a
specific asset, liability, or equity item
Consists of title, left or debit side, and right or credit side
T-account- format resembles of T-account
Debits and Credits
Debit- left side of an account
Credit- right side of the account
DO NOT MEAN INCREASE OR DECREASE!! Repeatedly in the recording
process to describe where entries are made in accounts
Debiting and crediting are the acts of making entries/ entering accounts in
the respective side of the account
Debit balance and credit balance is shown when debit exceeds credit or
credit exceeds debit
Debit and Credit Procedure
Debits must equal credits
Equality of debits and credits provides basis for double-entry system
of recording transactions (aka the dual effect of each transaction is
recorded in appropriate accounts)
Debit and Credit Procedure for Assets and Liabilities
Increases and decreases in liabilities are entered on the opposite side
of the increases and decreases in assets
Chapter 2 Notes 1
Assets usually show debit balances, while liability accounts show credit
balances
Debit and Credit Procedure for Equity
Share-Capital, Retained Earnings and Revenue increase in the Credit
side, while Dividends and Expenses increase on the Debit side
The Journal
The Recording Process
Analyze each transaction in terms of its effect on the accounts
Enter the transaction information in a journal
Transfer the journal information to the appropriate accounts in the ledger
The Journal
Journal- book of original entry
Shows the debit and credit effects on specific accounts
Discloses in one place the complete effects of a transaction
Provides a chronological record of transactions
Helps to prevent or locate errors because the debit and credit amounts
for each entry can be easily compared
Journalizing- entering transaction data in the journal
Complete entries consist of the date of the transaction, accounts and
amounts to be debited and credited, and a brief explanation of the
transaction
Important to use correct and specific account titles in journalizing
Simple and Compound Entries
Simple Entry- entries that only involve a debit and a credit
Compound Entry- transactions that require more than two accounts in
journalizing
Ledger and Posting
The Ledger
Ledger- Entire group of accounts maintained by a company
Chapter 2 Notes 2
General Ledger- contains all asset, liability, and equity accounts
Provides the balance in each of the accounts
Standard Form of Account
Three-column form of account- contains 3 money columns (debit,
credit, balance)
Balance in the account is determined after each transaction
Posting
Procedure of transferring journal entries to the ledger accounts
Steps:
In the ledger, date, journal page, and debit amount is entered in the
appropriate columns of the account debited
Write account number to which the debit amount is posted in the
reference column of the journal
Repeat for credit amounts
Posting should be in chronological order
Company should post all the debits and credits of one journal entry
before proceeding to the next journal entry
Reference column of a ledger account indicates the journal page from
which the transaction was posted
Chart of Accounts
Lists the accounts and the account numbers that identify their location in
the ledger
Numbering system usually starts with the statement of financial position
accounts and follows with income statement accounts
The purpose of transaction analysis is first to identify the type of account
involved, and then to determine whether to make a debit or a credit to the
account
Trial Balance
Trial Balance- list of accounts and their balances at a given time
Proves the mathematical equality of debits and credits after posting
Chapter 2 Notes 3
May also uncover errors in journalizing and posting
Useful in preparation of financial statements
Steps:
List the account titles and their balances in the appropriate debit or
credit column
Total the debit and credit columns
Verify the equality of the two columns
Limitations of a Trial Balance
Does not guarantee freedom from recording errors
Does not prove that the company has recorded all transactions or that the
ledger is correct
Chapter 2 Notes 4
