2 The Recording Process

Learning Objectives
Describe how accounts, debits, and credits are used to
1 record business transactions.

2 Indicate how a journal is used in the recording process.

Explain how a ledger and posting help in the recording

3 process.

4 Prepare a trial balance.

2-1
 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal
withdraws $1,300 in cash from the business for his personal use.
Illustration 1-8
Assets = Liabilities + Owner's Equity
Owner's
Trans- Accounts Accounts Owner's
Cash + + Supplies + Equipment = + - Drawing + Rev. - Exp.
action Receivable Payable Capital
s
1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 - $1,300 + $4,700 - $1,950

2-2 $18,050 $18,050 LO 4

LEARNING Describe how accounts, debits, and credits
1
OBJECTIVE are used to record business transactions.

The  Record of increases and decreases

in a specific asset, liability, owners’
Account 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.

2-3 LO 1
 The Account

DEBIT AND CREDIT PROCEDURES

Double-entry 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 at least one other account.
 DEBITS must equal CREDITS.

2-4 LO 1
 Debits and Credits

If the sum of Debit entries are greater than the sum of

Credit entries, 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

2-5 LO 1
 Debits and Credits

If the sum of Credit entries are greater than the sum of

Debit entries, 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

2-6 LO 1
 Debits and Credits

Assets  Assets - Debits should exceed

Debit / Dr. Credit / Cr.
credits.
 Liabilities – Credits should
Normal Balance
exceed debits.
 Normal balance is on the
Chapter
3-23

increase side.
Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-24

2-7 LO 1
 Debits and Credits

Owner’s Equity  Owner’s investments and

Debit / Dr. Credit / Cr.
revenues increase owner’s equity
(credit).
Normal Balance  Owner’s drawings and expenses
Chapter
3-25 decrease owner’s equity (debit).

Owner’s Capital Owner’s Drawing

Helpful Hint Because
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
revenues increase
owner’s
equity, a revenue account
has the same debit/credit
Normal Balance Normal Balance rules as the Owner’s
Capital account.
Chapter
3-25
Chapter
3-23
Expenses
have the opposite effect.

2-8 LO 1
 Debits and Credits

Revenue  The purpose of earning revenues

Debit / Dr. Credit / Cr.
is to benefit the owner(s).
 The effect of debits and credits on
Normal Balance
revenue accounts is the same as
Chapter
3-26 their effect on Owner’s Capital.
 Expenses have the opposite
Expense
Debit / Dr. Credit / Cr.
effect: expenses decrease owner’s
equity.

Normal Balance

Chapter
3-27

2-9 LO 1
 Debits/Credits Rules
Liabilities
Debit / Dr. Credit / Cr.
Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance

Assets Chapter
3-24

Owner’s Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expense Chapter
3-25
Revenue
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

2-10 LO 1
 Debits/Credits Rules

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit

2-11 LO 1
 Debits/Credits Rules

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.

2-12 LO 1
 Debits/Credits Rules

Question
Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and owner’s drawing.

d. assets, owner’s drawing, and expenses.

2-13 LO 1
 Summary of Debit/Credit Rules

Relationship among the assets, liabilities and owner’s equity

of a business:
Illustration 2-11
Basic
Equation Assets = Liabilities + Owner’s Equity

Expanded
Equation
Debit/Credit
Effects

The equation must be in balance after every transaction. Total

Debits must equal total Credits.

2-14 LO 1
 LEARNING Indicate how a journal is used in the
2
OBJECTIVE recording process.

Steps in the Recording Process

Illustration 2-12

Analyze each transaction Enter transaction in a journal Transfer journal information to

ledger accounts

Business documents, such as a sales slip, a check, or a bill,

provide evidence of the transaction.
2-15 LO 2
 Steps in the Recording Process

The 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.

2-16 LO 2
 Steps in the Recording Process

JOURNALIZING - Entering transaction data in the journal.

Illustration: On September 1, Ray Neal invested $15,000 cash in
the business.

Illustration 2-13

GENERAL JOURNAL
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
Owner’s Capital 15,000

2-17 LO 2
 Steps in the Recording Process

JOURNALIZING - Entering transaction data in the journal.

Illustration: On September 1, Softbyte purchased computer
equipment for $7,000 cash.

Illustration 2-13

GENERAL JOURNAL
Date Account Title Ref. Debit Credit
Sept. 1 Equipment 7,000
Cash 7,000

2-18 LO 2
 Journalizing (in class)

Sept. 1
Dr. Cash 15,000
15,000
Cr. Owner’s Capital

7,000
Dr. Equipment

Cr. CashGENERAL 7,000

JOURNAL

2-19 LO 2
 Steps in the Recording Process

SIMPLE AND COMPOUND ENTRIES

Illustration: 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 2-14
Compound journal entry

GENERAL JOURNAL
Date Account Title Ref. Debit Credit
July 1 Equipment 14,000
Cash 8,000
Accounts payable 6,000

2-20 LO 2
 Journalizing (in theory)

SIMPLE AND COMPOUND ENTRIES

Illustration: 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

July 1 Dr. Equipment 14,000

Cr. Cash 8,000
Cr. Accounts payable 6,000

2-21 LO 2
 DO IT! 2 Recording Business Activities

Kate Browne engaged in the following activities in establishing

her salon, Hair It Is:

1. Opened a bank account in the name of Hair It Is and

deposited $20,000 of her own money in this account as her
initial investment.

2. Purchased equipment on account (to be paid in 30 days) for

a total cost of $4,800.

3. Interviewed three persons for the position of hair stylist.

Prepare the entries to record the transactions.

2-22 LO 2
 DO IT! 2 Recording Business Activities

Prepare the entries to record the transactions.

1. Opened a bank account and deposited $20,000.

Dr. Cash 20,000
Cr. Owner’s Capital 20,000

2. Purchased equipment on account (to be paid in 30 days) for

a total cost of $4,800.
Dr. Equipment 4,800
Cr. Accounts Payable 4,800

3. Interviewed three persons for the position of hair stylist.

No entry
2-23 LO 2
 LEARNING Explain how a ledger and posting help in the
3
OBJECTIVE recording process.

The Ledger
 General Ledger contains all the asset, liability, and owner’s
equity accounts.
Illustration 2-15

2-24 LO 3
 The Ledger

STANDARD FORM OF ACCOUNT Illustration 2-16

Three-column form
of account

REMEMBER: IN THEORY, LEDGER IS T-ACCOUNT

2-25 LO 3
 Ledger

POSTING
Transferring
journal entries
to the ledger
accounts.

Illustration 2-17
Posting a journal
entry

2-26 LO 3
 Posting

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.

2-27 LO 3
 Chart of Accounts
Illustration 2-18

2-28 LO 3
 The Recording Process Illustrated

Follow these steps:

1. Determine what
type of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.

Illustration 2-19

2-29 LO 3
 Illustration 2-20
2-30 Purchase of office equipment LO 3
2-31 LO 3
 Illustration 2-22
2-32 Payment of monthly rent LO 3
 Illustration 2-23
Payment for
insurance

2-33 LO 3
 Illustration 2-24
2-34 Purchase of supplies on credit LO 3
 The Recording Process Illustrated

Illustration 2-25
Hiring of employees

2-35 LO 3
 Illustration 2-26
2-36 Withdrawal of cash by owner LO 3
 Illustration 2-27
2-37 Payment of salaries LO 3
 Illustration 2-28
2-38 Receipt of cash for services performed LO 3
Summary Journalizing and Posting
Illustration 2-29

2-39 LO 3
2-40 Illustration 2-29 LO 3
 Illustration 2-30
2-41
LO 3
 DO IT! 3 Posting

Kate Brown recorded the following transactions in a general journal

during the month of March. Post these entries to the Cash account.

Mar. 4 Cash 2,280

Service Revenue 2,280
Mar. 15 Salaries and Wages Expense 400
Cash 400
Mar. 19 Utilities Expense 92
Cash 92

2-42 LO 3
 LEARNING
OBJECTIVE
4 Prepare a trial balance.

2-43 Illustration 2-31 LO 4

 Trial Balance

Limitations of a Trial Balance

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.

2-44 LO 4
 Dollar Signs and Underlining

Dollar Signs
 Do not appear in journals or ledgers.
 Typically used only in the trial balance and the financial
statements.
 Shown only for the first item in the column and for the total
of that column.

Underlining
 A single line is placed under the column of figures to be
added or subtracted.
 Totals are double-underlined.
2-45 LO 4
 Trial Balance

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.

2-46 LO 4
 DO IT! 4 Trial Balance

2-47 LO 4
 DO IT! 4 Trial Balance

2-48
LO 4