Chapter-2
The Recording Process
2-1
Describe how accounts, debits, and credits are used to record
business transactions.
Record of increases and decreases
The in a specific asset, liability, owners’
equity, revenue, or expense item.
Account
Debit = “Left”
Credit = “Right”
2-2
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.
2-3
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. Normal Balance is on
the Increase Side.
2-4
Indicate how a journal is used in the 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.
2-5
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.
2-6
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, and Softbyte purchased computer equipment for
$7,000 cash.
Illustration 2-13
GENERAL JOURNAL
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
Owner’s Capital 15,000
Equipment 7,000
Cash 7,000
2-7
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
2-8
Explain how a ledger and posting help in the recording process.
The Ledger
General Ledger contains all the asset, liability, and owner’s
equity accounts.
Illustration 2-15
2-9
The Ledger
STANDARD FORM OF ACCOUNT Illustration 2-16
Three-column form
of account
2-10
Ledger
POSTING
Transferring
journal entries
to the ledger
accounts.
Illustration 2-17
Posting a journal
entry
2-11
Chart of Accounts
Illustration 2-18
2-12
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.
2-13
Prepare a trial balance.
2-14 Illustration 2-31
Trial Balance
2-15
Problem-1
Desiree Clark is a licensed CPA. During the first month of operations
of her business, the following events and transactions occurred.
May 1 Clark invested $20,000 cash in her business.
2 Hired a secretary-receptionist at a salary of $2,000 per month.
3 Purchased $2,500 of supplies on account from Read Supply
Company.
7 Paid office rent of $900 cash for the month.
11 Completed a tax assignment and billed client $3,200 for
services provided.
12 Received $3,500 advance on a management consulting
engagement.
2-16
Problem-1 (Continue)
17 Received cash of $1,200 for services completed for C. Desmond
Co.
31 Paid secretary-receptionist $2,000 salary for the month.
31 Paid 60% of balance due Read Supply Company
Desiree uses the following chart of accounts: No. 101 Cash, No. 112
Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable,
No. 209 Unearned Service Revenue, No. 301 Owner’s Capital, No. 400
Service Revenue, No. 726 Salaries and Wages Expense, and No. 729
Rent Expense.
Instructions
(a)Journalize the transactions.
(b)Post to the ledger accounts.
(c)Prepare a trial balance on May 31, 2012.
2-17
Problem-2
San Jose Services was formed on May 1, 2012. The following
transactions took place during the first month.
Transactions on May 1:
1 Jarron Gilbert invested $40,000 cash in the company, as its sole owner.
[Link] two employees to work in the warehouse. They will each be paid
a salary of $3,050 per month.
3. Signed a 2-year rental agreement on a warehouse; paid $24,000 cash in
advance for the first year.
[Link] furniture and equipment costing $30,000. A cash payment of
$10,000 was made immediately; the remainder will be paid in 6 months.
[Link] $1,800 cash for a one-year insurance policy on the furniture and
equipment.
2-18
Problem-2 (Continue)
[Link] basic office supplies for $500 cash.
[Link] more office supplies for $1,500 on account.
[Link] revenues earned were $20,000—$8,000 cash and $12,000 on
account.
[Link] $400 to suppliers for accounts payable due.
10. Received $3,000 from customers in payment of accounts receivable.
[Link] utility bills in the amount of $350, to be paid next month.
[Link] the monthly salaries of the two employees, totalling $6,100.
Instructions:
(a) Prepare journal entries (b) Post the journal entries
(c) Prepare a trial balance as of May 31, 2012.
2-19