WILEY
IFRS EDITION
Prepared by
Coby Harmon
University
2-1
of California, Santa Barbara
Westmont College
PREVIEW OF CHAPTER 2
Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
2-2
CHAPTER
2 The Recording Process
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Explain what an account is and how it helps in the recording process.
2. Define debits and credits and explain their use in recording business
transactions.
3. Identify the basic steps in the recording process.
4. Explain what a journal is and how it helps in the recording process.
5. Explain what a ledger is and how it helps in the recording process.
6. Explain what posting is and how it helps in the recording process.
7. Prepare a trial balance and explain its purposes.
2-3
The Account
Learning
Objective 1 Record of increases and decreases in
Explain what an a specific asset, liability, stockholders’
account is and equity, revenue, or expense item.
how it helps in the
recording Debit = “Left”
process.
Credit = “Right”
An account can be
illustrated in a T-
account form.
2-4 LO 1
Debits and Credits
Learning
DEBIT AND CREDIT PROCEDURES Objective 2
Define debits and
credits and explain
Double-entry system their use in
recording business
Each transaction must affect two or more transactions.
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.
2-5 LO 2
Debits and Credits
If the sum of Debit entries are greater than the sum of
Credit entries, the account will have a debit balance.
Transaction #1 $10,000 $3,000 Transaction #2
Transaction #3 8,000
Balance $15,000
2-6 LO 2
Debits and Credits
If the sum of Credit entries are greater than the sum of
Debit entries, the account will have a credit balance.
Transaction #1 $10,000 $3,000 Transaction #2
8,000 Transaction #3
Balance $1,000
2-7 LO 2
Debits and Credits
Assets - Debits should exceed
credits.
Liabilities – Credits should
exceed debits.
Normal balance is on the
increase side.
2-8 LO 2
Debits and Credits
Issuance of share capital and
revenues increase equity (credit).
Dividends and expenses decrease
equity (debit).
2-9 LO 2
Debits and Credits
The purpose of earning revenues
is to benefit the shareholders.
The effect of debits and credits on
revenue accounts is the same as
their effect on equity.
Expenses have the opposite effect:
expenses decrease equity.
2-10 LO 2
Debits and Credits
Normal Normal
Balance Balance
Debit Credit
2-11
LO 2
Summary of Debit/Credit Rules
Statement of
Financial Position Income Statement
Asset = Liability + Equity Revenue - Expense
Debit
Credit
2-12 LO 2
Equity
Relationships
Illustration 2-11
Equity relationships
2-13 LO 2
Summary of Debit/Credit Rules
Relationship among the assets, liabilities, and equity of a
business:
Illustration 2-12
Summary of debit/credit rules
The equation must be in balance after every transaction.
Total Debits must equal total Credits.
2-14 LO 2
The Account
Learning
Business documents, such as a sales Objective 3
Identify the basic
receipt, a check, or a bill, provide evidence steps in the
of the transaction. recording
process.
Analyze each transaction Enter transaction in a journal Transfer journal information to
ledger accounts
Illustration 2-13
The recording process
2-15 LO 3
Steps in the Recording Process
Learning
The Journal Objective 4
Explain what a
journal is and how
Book of original entry. it helps in the
recording
Transactions recorded in chronological process.
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 4
The Journal
JOURNALIZING - Entering transaction data in the journal.
Illustration: On September 1, shareholders invested €15,000 cash in
the corporation in exchange for ordinary shares, and Softbyte
purchased computer equipment for €7,000 cash.
Illustration 2-14
GENERAL JOURNAL
Sept. 1 Cash 15,000
Share Capital—Ordinary 15,000
Equipment 7,000
Cash 7,000
2-17 LO 4
The Journal
SIMPLE AND COMPOUND ENTRIES
Illustration: On July 1, Tsai Company purchases a delivery truck
costing NT$420,000. It pays NT$240,000 cash now and agrees to
pay the remaining NT$180,000 on account. Illustration 2-15
Compound journal entry
GENERAL JOURNAL
July 1 Equipment 420,000
Cash 240,000
Accounts Payable 180,000
2-18 LO 4
> DO IT!
As president and sole shareholder, Kate Browne engaged in
the following activities in establishing her salon, Hair It Is
Company SA.
1. Opened a bank account in the name of Hair It Is Company
SA and deposited €20,000 of her own money in this
account in exchange for ordinary shares.
2. Purchased equipment on account (to be paid in 30 days) for
a total cost of €4,800.
3. Interviewed three applicants for the position of beautician.
Prepare the entries to record the transactions.
2-19 LO 4
> DO IT!
Prepare the entries to record the transactions.
1. Opened a bank account and deposited €20,000.
Cash 20,000
Share Capital—Ordinary 20,000
2. Purchased equipment on account (to be paid in 30 days) for
a total cost of €4,800.
Equipment 4,800
Accounts Payable 4,800
3. Interviewed three applicants for the position of beautician.
No entry
2-20 LO 4
Steps in the Recording Process
Learning
The Ledger Objective 5
Explain what a
ledger is and how
General Ledger contains all the asset,
it helps in the
liability, and equity accounts. recording
process.
Illustration 2-16
The general ledger
2-21 LO 5
The Ledger
STANDARD FORM OF ACCOUNT Illustration 2-17
Three-column form
of account
2-22 LO 5
Posting
Learning
Objective 6
Explain what
posting is and
how it helps in the
recording
process.
Transferring
journal entries
to the ledger
accounts.
Illustration 2-18
Posting a journal
entry
2-23 LO 6
Illustration 2-19
Chart of accounts for Yazici Advertising A.S¸ .
2-24 LO 6
2-25
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 2-20
Investment of cash
by shareholders
2-26 LO 6
Illustration 2-21
2-27 Purchase of office equipment LO 6
Illustration 2-22
Receipt of cash
for future service
2-28 LO 6
2-29 Illustration 2-23
Payment of monthly rent LO 6
Illustration 2-24
Payment for
insurance
2-30 LO 6
2-31 Illustration 2-25
Purchase of supplies on credit LO 6
The Recording Process Illustrated
Illustration 2-26
Hiring of employees
2-32 LO 6
Illustration 2-27
2-33 Declaration and payment of dividend LO 6
Illustration 2-28
2-34
Payment of salaries LO 6
2-35 Illustration 2-29
Receipt of cash for services performed LO 6
2-36 Illustration 2-30 LO 6
General journal entries
Illustration 2-30
General journal entries
2-37 LO 6
Illustration 2-31
General ledger
2-38 LO 6
The Trial Balance
Learning
A trial balance Objective 7
Prepare a trial
is a list of accounts and their balances balance and
explain its
at a given time. purposes.
proves the mathematical equality of debits and credits
after posting.
The steps for preparing a trial balance are:
1. List the account titles and their balances.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.
2-39 LO 7
Trial Balance
Illustration 2-32
A trial balance
2-40 LO 7
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.
2-41 LO 7
Currency Signs and Underlining
Currency 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.
2-42 LO 7