Chapter 2: The Recording Process

1. Chapter 2: The Recording Process ACT 201 Lecture By: Ms. Adina Malik

2. The Account • Record of increases and decreases in a specific asset, liability & owner’s equity item. • The format resembles the letter ‘T’, hence referred to as the T Account • An Account consists of three parts: • A title • Left side, known as debit side • Right side, known as credit side Title of Account Debit Credit Accounting custom/rule

3. Debits & Credits Double-entry accounting system • Commonly abbreviate Debit as ‘Dr.’ and Credit as ‘Cr.’ • 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.

4. Debits & Credits Debit > Credit = Debit Balance Credit > Debit = Credit Balance Title of Account Debit/Dr. Credit/Cr. $ 10,000 $ 3,000 $ 8,000 $ 1,000 Title of Account Debit/Dr.Credit/Cr. $10,000 $ 3,000 $ 8,000 $ 15,000 1 2 3 Balance Balance

5. Accounting Equation: Reminder Basis Equation: Assets = Liabilities + Owner’s Equity Expanded Equation: Assets = Liabilities + (Owner’s Capital Owner’s Drawings + Revenue Expenses) • The equation must be in balance after every transaction. • For every Debit there must be a Credit.

6. Debit & Credit Procedure ASSETS LIABILITIES Normal Balance is on the increase side

7. Debit & Credit Procedure: Owner’s Equity

8. Debit & Credit Procedure: Owner’s Equity

9. Normal Balance ‘Normal Balance is on the increasing side’ means that: • Normal Balance for Assets, Owner’s Drawings and Expenses is on the Debit side. • Normal Balance for Liabilities, Owner’s Capital and Revenue is on the Credit side.

10. Debit & Credit Rules Summary

11. Question 1

12. Question 2

13. Steps in the Recording Process Source documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. Three basic steps generally in every business: • Analyze each transaction for its effects on the accounts. • Enter the transaction information in a journal. • Transfer the journal information to the appropriate accounts in the ledger.

14. Journal • It discloses in one place the complete effects of a transaction (debit & credit effects) • It provides a chronological record of transactions. • As debit & credit amounts for each entry can be easily compared, it helps to prevent or locate errors. • Also known as ‘General Journal’ or ‘The Book of Original Entry’.

15. Simple & Compound Entries • Entering transaction data in the journal is known as journalizing. • It is important to use ‘correct’ & ‘specific account titles’ in journalizing. • Simple Entry: entry which involves only two accounts, one debit and one credit. • Compound Entry: entry that requires more than two accounts in journalizing. E.g. Butler company purchases a delivery truck costing $14,000. ($8,000 paid in cash now and to pay the remaining $6,000 on account)

16. Journal Problem: Prepare a General Journal Transaction 1: Kate Browne invested $ 20,000 cash for establishing her salon named ‘Super Salon’. Transaction 2: Purchased equipment on account (to be paid in 30 days) for a total cost of $ 5,000

17. The Ledger • It is the entire group of accounts maintained by a company. • It keeps in one place all the information about changes in specific account balances. • A General Ledger contains all the asset, liability & owner’s equity accounts.

18. Posting ‘Journal Entry’ into ‘The Ledger’ Transaction 1:

19. Posting ‘Journal Entry’ into ‘The Ledger’ Transaction 2:

20. Problem (Continued) During the year, there were other transactions, as given below: Transaction 3: Super Salon pays $ 500 as rent of premise. Transaction 4: Received $ 4,000 for providing customer service.

21. Problem (Continued)

22. Trial Balance • It is a list of accounts and their balances at a given time. • Prepared at the end of an accounting period. • The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting.

23. Limitations of a Trial Balance The trial balance may balance even when: • Atransaction is not journalized • A correct journal entry is not posted • A journal entry is posted twice • Incorrect accounts are used in journalizing or posting, or • Offsetting errors are made in recording the amount of a transaction

24. Question

25. Question Bob Sample opened the Campus Laundromat on September 1, 2010. During the first month of operations, the following transactions occurred. Sept.1 Bob invested $20,000 cash in the business Sept.2 The company paid $1,000 cash for store rent for Sept. Sept.3 Purchased washers & dryers for $25,000, paying $10,000 in cash and $15,000 on account Sept.4 Received a bill from the Daily News for advertising the opening of the Laundromat $200 Sept.10 The company owes employee salaries of $2,000 and pays them in cash Sept.20 Bob withdraw $700 cash for personal use Sept.30 The company determined that cash receipts for laundry services for the month were $6,200 • Journalize the September transactions • Open ledger accounts and post the September transactions • Prepare a trial balance at September 30, 2010