Chapter 2
The Recording
Process
Chapter
2-1
The
The Account
Account
Record of increases and decreases
Account in a specific asset, liability, owner’s
equity, revenue or expense item.
Debit = “Left”
Credit = “Right”
An Account can Account Name
be illustrated in a Debit / Dr. Credit / Cr.
T-Account
form.
Chapter
2-2
Debits
Debits and
and Credits
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.
Chapter
2-3
Debits
Debits and
and Credits
Credits
If Debits are greater than Credits, the account
will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
Transaction #3 8,000
Balance $15,000
Chapter
2-4
Debits
Debits and
and Credits
Credits
If Credits are greater than Debits, the account
will have a credit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
8,000 Transaction #3
Balance $1,000
Chapter
2-5
Debits
Debits and
and Credits
Credits Summary
Summary
Liabilities
Normal
Debit / Dr. Credit / Cr.
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance
Assets Chapter
Owner’s Equity
3-24
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
Expense
3-23
Revenue
Chapter
3-25
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
Chapter
2-6
Assets
Assets and
and Liabilities
Liabilities
Assets
Assets - Debits should
Debit / Dr. Credit / Cr.
exceed credits.
Normal Balance
Chapter
3-23
Liabilities – Credits
should exceed debits.
Liabilities
The normal balance is on
Debit / Dr. Credit / Cr.
the increase side.
Normal Balance
Chapter
3-24
Chapter
2-7
Owners’
Owners’ Equity
Equity
Owner’s Equity Owner’s investments and
revenues increase owner’s
Debit / Dr. Credit / Cr.
equity (credit).
Owner’s drawings and expenses
Normal Balance
Chapter
3-25
decrease owner’s equity (debit).
Owner’s Capital Owner’s Drawing
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
Normal Balance Normal Balance
Chapter Chapter
3-25 3-23
Chapter
2-8
Revenue
Revenue and
and Expense
Expense
Revenue The purpose of earning
Debit / Dr. Credit / Cr.
revenues is to benefit the
owner(s).
Normal Balance
The effect of debits and
credits on revenue accounts
Chapter
3-26
Expense
is the same as their effect
Debit / Dr. Credit / Cr.
on Owner’s Capital.
Expenses have the opposite
effect: expenses decrease
Normal Balance
Chapter
3-27
owner’s equity.
Chapter
2-9
Expansion
Expansion of
of the
the Basic
Basic Equation
Equation
Relationship among the assets, liabilities and
owner’s equity of a business:
Basic
Assets = Liabilities + Owner’s Equity
Equation
Expanded
Basic
Equation
The equation must be in balance after every
transaction. For every Debit there must be a Credit.
Chapter
2-10
Steps
Steps in
in the
the Recording
Recording Process
Process
Three basic steps:
1.Analyze each transaction (Evidence of the
transaction can be taken from business documents like
sales slip, bills, etc)
2.Enter transaction in a journal
3.Transfer journal information to ledger accounts
Chapter
2-11
The
The Journal
Journal
Book of original entry/general journal.
Transactions recorded in chronological order
(i.e. the order in which they occur).
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.
Chapter
2-12
Journalizing
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.
General Journal
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
R. Neal, Capital 15,000
Computer equipment 7,000
Cash 7,000
Chapter
2-13
Journalizing
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.
General Journal
Date Account Title Ref. Debit Credit
Sept. 1 Delivery equipment 14,000
Cash 8,000
Accounts payable 6,000
Chapter
2-14
The
The Ledger
Ledger
General Ledger contains the entire group of accounts
maintained by a company. It includes all the asset,
liability, owner’s equity, revenue and expense accounts.
T-account form used in textbooks. In practice, the
account forms used in ledgers are much more structured
like the three-column form of account shown below.
Chapter
2-15
Posting Posting – the process of transferring amounts
Posting from the journal to the ledger accounts.
Chapter
2-16
The
The Trial
Trial Balance
Balance
A list of accounts and their balances at a given time.
Purpose is to prove that debits equal credits after posting.
Chapter
2-17
The
The Trial
Trial Balance
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,
5. offsetting errors are made in recording the amount
of a transaction.
Chapter
2-18
