Chapter 2

 The Recording Process of Accounting

Information

1
 Definitions of Accounts on
Financial Statements
 Assets: economic resources that benefit the
business in the future, including:
 Cash: in all forms: (coins, currency, checking
accounts,…)
 Account receivable: an oral promise for
future cash receipt as a result of sales.
 Inventory (or merchandise): goods for sale.
 Note receivable: a written promissory note that
the customer will pay a fixed amount by a
certain date.
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 Definitions of Accounts on
Financial Statements
 Prepaid expenses: expenses paid in
advance.
 Land: recorded at cost of land.
 Buildings: record at cost, subject to
depreciation.
 Equipment, furniture and fixture: record at
cost, subject to depreciation.

3
 Definitions of Accounts on
Financial Statements (contd.)
 Liabilities: legal obligations.
 Note Payable: a written promissory note that
the business promises to pay.
 Account payable: an oral promise to pay,
arising from credit purchases of inventory and
other goods.
 Accrued liabilities: liabilities that have occurred
but have not been paid. For example: salary
payable, interest payable, etc.

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 Definitions of Accounts on
Financial Statements (contd.)
 Stockholders’ equity: the owners’ claims to
the assets of a corporation including:
 Common stock: represents the owners’
investment.
 Retained earnings: the cumulative net income
earned by the corporation over its lifetime ,
minus cumulative losses and dividends.
 Dividends: distribution of earnings to
stockholders.

5
 Definitions of Accounts on
Financial Statements (contd.)
 Revenues: increase or inflow of assets; will
eventually increase stockholders’ equity (i.e.,
sales revenue)
 Expenses: decrease or outflow of assets; will
eventually decrease stockholders’ equity.
 Gains: increase in assets from incidental
transactions not related to the major operation.
 Losses: decrease in assets from incidental
transactions.

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 Accounting Process
a. Using the accounting equation.
Accounting Equation:
Assets = Liabilities + Stockholders’ Equity
b. Using the double-entry system (the process
includes the recording of Journal entries,
posting Journal entries to ledger accounts,
work sheet (including adjustments…), prepare
financial statements and closing entries)
Processing Accounting Information 7
 Using the Accounting Equation -
Analysis of JM Fabrics Ltd. Transactions
Panel A - Details of transactions
(1) Issued stock to the owners who invested
$50,000 cash in the business.
(2) Paid $40,000 cash for land.
(3) Bought $500 of office supplies on account.
(4) Received $5,500 cash from customers for
service revenue earned.
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 Using the Accounting Equation -
(5) Performed services for customers on account,
$3,000.
(6) Paid cash expenses: rent, $1,100; employee
salary, $1,200; utilities, $400.
(7) Paid $400 on the account payable created in
Transaction 3.
(8) Owners paid personal funds to remodel home.
This is not a transaction of the business.

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 Using the Accounting Equation -
(9) Received $1,000 on the account
receivable created in Transaction 5.
(10) Sold land for cash at its cost of
$22,000.
(11) Declared and paid a dividend of $2,100
to the stockholders.

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 Using the Accounting Equation -
Analysis of transactions
Type of
Assets = Liabilities + Stockholders' Equity Stockholders'
Office Comm Retained Equity
Cash + A/R + Sup. + Land A/P + Stock + Earnin Transaction
1 50,000 50,000 Issued stock
to owners
2 -40,000 40,000
3 500 500
4 5,500 5,500 Service rev.
5 3,000 3,000 Service rev.
6 -1,100 = -1,100 Rent exp.
-1,200 -1,200 Salary exp.
-400 -400 Utilities exp.
7 -400 -400
8 Not a transaction of the business
9 1,000 -1,000
10 22,000 -22,000
11 -2100 -2,100 Dividends
Bal. 33,300 2000 500 18,000 100 50,000 3,700
53,800 53,800
Balance Sheet Data

Processing Accounting Information 11

11
b.Introduction of the Double-Entry
System and Journal Entries
A. Double-entry system
B. The T- accounts
C. Increases and decreases in the accounts
D. Examples of journalizing and posting
transactions

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A. Double-Entry System
 Each transaction affects at least two
accounts and the balance of the
accounting equation must be maintained.
 Example: Purchases inventory and
charges to accounts payable
Assets = Liabilities + Equity
Inventory  Accounts Payable 
+ +

Processing Accounting Information 13

A. Double-Entry System (contd.)
Asset = Liabilities + Equity Revenue Expense
1 + -
2 + +
3 + +
4 - -
5 - -
6 + +
7 - -
8
9
10

Processing Accounting Information 14

 ACCOUNT
An account is an individual
accounting record of increases and
decreases in a specific asset,
liability, or owner’s equity item.
There are separate accounts for
the items we used in transactions
such as cash, salaries expense,
accounts payable, etc.
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 BASIC FORM OF ACCOUNT

The simplest form an account

consists of
1. the title of the account
2. left or debit side
3. right or credit side
The alignment of these parts
resembles the letter T = T account
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 DEBITS AND CREDITS
Debit indicates left and Credit indicates right
Recording $ on the left side of an account is
debiting the account
Recording $ on the right side is crediting the
account
If the total of debit amounts is bigger than
credits, the account has a debit balance
If the total of credit amounts is bigger than
debits, the account has a credit balance

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B. Introduction of the T- account

Inventory Accounts Payable

Debit Credit Debit Credit

Processing Accounting Information 18

C. Increases and Decreases in the
Accounts
Debit
A
Credit

Credit Credit
L Revenue
Debit Debit
Credit Debit
E Expense
Debit Credit

Processing Accounting Information 19

 EXPANDED BASIC EQUATION AND
DEBIT/CREDIT RULES AND EFFECTS

Assets = Liabilities + Owner’s Equity

Owner’s Owner’s
Assets = Liabilities + -
Capital Drawing
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + + -

+ Revenues - Expenses

Dr. Cr. Dr. Cr.

- + + - 20
 NORMAL BALANCE

every account has a designated

normal balance.
It is either a debit or credit.

accounts rarely have an abnormal

balance.

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 THE RECORDING PROCESS

1analyze each transaction (+, -)

2 enter transaction in a journal
3 transfer journal information to
ledger accounts

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 THE JOURNAL

Transactions
Are initially recorded in chronological order before
they are transferred to the ledger accounts.
A general journal has
1 spaces for dates
2 account titles and explanations
3 references
4 two amount columns

Processing Accounting Information 23

 THE JOURNAL

A journal makes several contributions to

recording process:
1 discloses in one place the complete effect of a
transaction
2 provides a chronological record of transactions
3 helps to prevent or locate errors as debit and
credit amounts for each entry can be compared

Processing Accounting Information 24

 JOURNALIZING
Entering transaction data in the journal is known
as journalizing.
Separate journal entries are made for each
transaction.
A complete entry consists of:
1 the date of the transaction,
2 the accounts and amounts to be debited and
credited,
3 a brief explanation of transaction.

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TECHNIQUE OF JOURNALIZING:

1.The date of the transaction is entered into the date column.

2. The debit account title is entered at the extreme left
margin of the Account Titles and Explanation column. The
credit account title is indented on the next line.
3. The amounts for the debits are recorded in the Debit
column and the amounts for the credits are recorded in the
Credit column.
4. A brief explanation of the transaction is given.
5. A space is left between journal entries. The blank space
separates individual journal entries and makes the entire
journal easier to read.
6. The column entitled Ref. is left blank at the time journal
entry is made and is used later when the journal entries are
transferred to the ledger accounts.
Processing Accounting Information 26
TECHNIQUE OF JOURNALIZING

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
Sept. 1 Cash 15,000
ABC Ltd. Capital 15,000
(Invested cash in business)

1 Computer Equipment 7,000

Cash 7,000
(Purchased equipment for
cash)
Processing Accounting Information 27
Simple and Compound journal entry

If an entry involves only two accounts, one debit

and one credit, it is considered a simple entry.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
July 1 Cash 20,000
XYZ, Capital 20,000
(Invested cash in the
business)

Processing Accounting Information 28

Simple and Compound journal entry

When three or more accounts are required in

one journal entry, the entry is referred to as a
compound entry.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
July 1 Delivery Equipment 14,000
1 Cash 8,000
Accounts Payable 6,000
2 (Purchased truck for cash
with balance on account)
3 Processing Accounting Information 29
POSTING A JOURNAL ENTRY

GENERAL JOURNAL J
Date Account Titles and Explanation Ref. Debit Credit
2005
Sept. 1 Cash 10 15,000
XYZ, Capital 25 15,000
(invested cash in business)

XYZ, CAPITAL NO. 2

Date Explanation Ref. Debit Credit Balanc
2005
Sept. 1 J1 15,000 15,00
In the ledger, enter in the appropriate columns of the
Processing account(s)
Accounting debited the date, journal
Information 30
 Examples of Journalizing and
Posting Transactions
1. Transaction: JM Fabrics Ltd. received
$50,000 cash from the business and in turn
issued common stock to them.
Journal Entry:
Cash 50,000
Common Stock 50,000
Issued common stock to owners.
Ledger Accounts:
Cash Common Stock
50,000 50,000
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 Examples of Journalizing and
Posting Transactions (contd.)
2. Transaction: The business paid $40,000 cash
for land as a future office location.
Journal Entry:
Land 40,000
Cash 40,000
Paid cash for land.
Ledger Accounts:
Cash Land
50,000 40,000 40,000
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 Examples of Journalizing and
Posting Transactions (contd.)
3. Transaction: The business purchased $500
office supplies on account.
Journal Entry:
Office Supplies 500
Accounts Payable 500
Ledger Accounts:
Office Supplies Accounts Payable
500 500
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 Examples of Journalizing and
Posting Transactions (contd.)
4. Transaction: The business performed travel
service for clients and received cash of $5,500.
Journal Entry:
Cash 5,500
Service Revenue 5,500

Ledger Accounts:
Cash Service Revenue
50,000 40,000 5,500
5,500
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 Examples of Journalizing and
Posting Transactions (contd.)
5. Transaction: The business performed service for
clients who did not pay immediately. Air & Sea
Travel billed the clients for $3,000 on account.
Journal Entry:
Accounts Receivable 3,000
Service Revenue 3,000
Ledger Accounts:
Accounts Receivable Service Revenue
3,000 5,500
3,000
8,500
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 Examples of Journalizing and Posting
Transactions (contd.)
6. Transaction: The business paid $2,700 for the
following expenses: office rent, $1,100; employee
salary; $1,200; and utilities, $400.
Journal Entry:
Rent Expense 1,100
Salary Expense 1,200
Utilities Expense 400
Cash 2,700
Ledger Accounts:
Cash Rent Expense
50,000 40,000 1,100
5,500 2,700
Salary Expense Utilities Expense
1,200 400
Processing Accounting Information 36
 Examples of Journalizing and
Posting Transactions (contd.)
7. Transaction: The business paid $400 on the
account payable created in Transaction 3.
Journal Entry:
Accounts Payable 400
Cash 400
Ledger Accounts:
Cash Accounts Payable
50,000 40,000 400 500
5,500 2,700
400 100
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 Examples of Journalizing and
Posting Transactions (contd.)
8. Transaction: The Lyons remodeled their
personal residence. This is not a transaction
of the travel agency, so no journal entry is
made.

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 Examples of Journalizing and
Posting Transactions (contd.)
9. Transaction: The business collected $1,000 cash
on account from the clients in transaction 5.
Journal Entry:
Cash 1,000
Accounts Receivable 1,000
Ledger Accounts:
Cash Accounts Receivable
50,000 40,000 3,000 1,000
5,500 2,700
1,000 400 2,000
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 Examples of Journalizing and
Posting Transactions (contd.)
10. Transaction; The business sold land for its
cost of $22,000, receiving cash
Journal Entry:
Cash 22,000
Land 22,000
Ledger Accounts:
Cash Land
50,000 40,000 40,000 22,000
5,500 2,700
1,000 400 18,000
22,000
40
 Examples of Journalizing and
Posting Transactions (contd.)
11. Transaction: Air & Sea Travel, Inc., paid the
Lyons cash dividends of $2,100.
Journal Entry:
Dividends 2,100
Cash 2,100
Ledger Accounts:
Cash Dividends
50,000 40,000 2,100
5,500 2,700
1,000 400
22,000 2,100
33,300
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 Examples of Journalizing and
Posting Transactions (contd.)
 The followings are examples of T-
accounts, trial balance and financial
statements of the example in Exhibit
2.1.

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 ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
Cash A/P Comm Stock EXPENSES
(1) 50,000 (2)40,000 (7) 400 (3) 500 (1) 50,000 Rent Exp.
(4) 5,500 (6) 2,700 Bal. 100 Bal. 50,000 (6) 1,100
(9) 1,000 (7) 400 Bal.1,100
(10)22,000 (11) 2,100
Bal. 33,300 Dividends
(11) 2,100 Salary Exp.
A/R Bal.2,100 (6) 1,200
(5) 3,000 (9) 1,000
Bal.1,200
Bal. 2,000

Office Supplies
(3) 500 Utilities Exp.
Bal. 500 REVENUE (6) 400
Bal. 400
Service Rev.
Land (4) 5,500
(2) 40,000 (10)22,000 (5) 3,000
Bal. 18,000 Bal. 8,500
Processing Accounting Information 43
 THE TRIAL BALANCE

The trial balance is a list of accounts and their

balances at a given time.

The primary purpose of a trial balance is to

prove debits = credits after posting.

If debits and credits do not agree, the trial

balance can be used to uncover errors in
journalizing and posting.
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 THE TRIAL BALANCE

The Steps in preparing the Trial Balance

are:
1. List the account titles and balances
2. Total the debit and credit columns
3. Prove the equality of the two
columns

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 JM Fabrics Ltd.
Trail Balance
4/30/19x1
Balance
Account Title Debit Credit
Cash $33,300
Accounts receivable 2,000
Office supplies 500
Land 18,000
Accounts payable $ 100
Common Stock 50,000
Dividends 2,100
Service revenue 8,500
Rent expense 1,100
Salary expense 1,200
Utilities expense 400
Total $58,600 $58,600
Processing Accounting Information 46
The Normal Balance of an Account
Assets Debit
Liabilities Credit
Stockholder’s Equity Credit
(overall)
Common Stock Credit
Retained Earnings Credit
Dividends Debit
Revenues Credit
Expenses Debit
Processing Accounting Information 47
The Chart of Accounts
Assets Liabilities Stockholder’s Revenues Expense
Equity
101 Cash 201 Accounts 301 Common 401 Sales 501 salary
Payable Stock Revenue Expense

102 Accounts 202 Interest 302 Preferred 402 Interest 502 Rent
Receivable Payable Stock Revenue Expense
. . . . . .
. . . . .
. . .
191 Land

Processing Accounting Information 48

 Exercise
A. On May, 2016 Padma poly cotton ltd has completed the following transaction during the month
1. Paid cash Tk.600 for room rent.
2. Purchased printer tk. 5000 on account.
3.Received cash tk.7000 by selling T-shirt.
4.Paid tk. 700 cash for employee salary.
5.Received bank loan of tk. 1000 for industry use.
Journalize the transaction in a general journal, posting the transaction in a T-account and prepare a
trial balance.

B. On April, 2016 NASSA ltd has completed the following transaction during the month-
1. Borrowed 35000tk cash from Acmy Ltd.
2. Selling Polo Shirt of 900tk on account.
3.Purchased laptop of tk25000 cash.
4.Paid 300tk as advertising expense.
5.Paid 25000tk to Acmy Ltd.
Journalize the transaction in a
general journal, posting the
transaction in a T-account and
prepare a trial balance.
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 Exercise
C. On June, 2016 SQ Knitting ltd has completed the following transaction during the month--
1.Received bank loan of 5000tk.
2. purchased office supplies of 200tk. from ABC Co. Ltd.
3. Paid 500tk cash for employee salary.
4.paid 2000tk cash for Bank loan payment.
5. Received 900tk cash by selling T-Shirt.

D. On May, 2016 RS Fabrics ltd. has completed the following transaction during the month
1. paid cash 1200tk for employee salary
2. Borrowed 2500 cash from XYZ Co. Ltd.
3. Selling T -shirt of 1900tk on account.
4. Purchase equipment of 200tk from ABC Co. Ltd..
5. Paid 1500tk cash to XYZ CO. Ltd.
Journalize the transaction in a general journal, posting the transaction in a T-account and prepare
a trial balance

50
 Exercise
1. Mr. X opens his own Service business on July 1, 2017. During the first month of
operations, the following transactions occurred.
1. Invesed $29000 cash in
business.
2. Purchased computer for $20000 from XYZ
company ltd.
3. Paid $4000 cash for June rent on
storage space.
4. Received $15000 cash from customers by
providing survice.
5. Paid $11000 cash for employee salaries.
6. Provided computer service $3000 for
cash.
7. Paid $20000 cash to XYZ
company ltd.
8. Paid advertising expense of $1200 for cash to
advertising company.
Journalize the transaction in a general journal, posting the transaction in a T-
account and prepare a trial balance
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 Exercise
2.Mr. Johir opens his own Service business on May, 2017. During the first month of
operations, the following transactions occurred.
1. Invested $10,000 in cash in the law practice.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3,000.
4. Provided legal services to clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for a client on account $2,000.
7. Paid monthly expenses: salaries $500, utilities $300, and telephone $100.

Journalize the transaction in a general journal, posting the transaction in a T-account and
prepare a trial balance

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 Exercise
3.On May, 2017 SQ Fabrics ltd. has completed the following transaction during the month

1. Invested $20000 cash.

2. Paid office rent for month $1100.

3. Purchased office supply from XYZ supply company ltd. for $4000.

4. Received $5100 cash by selling T-shirt.

5. Received $1000 cash advanced from buyer.

6. Received $2100 cash by selling T-shirt.

7. Paid $2800 cash for employee salary.
8. Paid $2400 cash to XYZ supply company ltd.
Journalize the transaction in a general journal, posting the transaction in a T-account
and prepare a trial balance

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Thanks

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