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The Recording Process

Financial Accounting, Seventh Edition. The Recording Process. Chapter 2. The Account. An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The general ledger is a record containing all accounts used by the company. –. –. +. +.

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The Recording Process

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  1. Financial Accounting, Seventh Edition The Recording Process Chapter2

  2. The Account An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The general ledger is a record containing all accounts used by the company.

  3. – – + + Owner’s Capital Dividends Revenues Expenses The Accounting Equation = + Assets Liabilities Equity

  4. Knowledge Check # 1:An individual person starting a business made an investment of a building, which is valued at $300,000 with an $180,000 outstanding mortgage payable. The effect of this transaction on the accounting equation of the business would be to: • Increase assets by $120,000. • Increase assets by $180,000. • Increase stockholders’ equity by $120,000. • Increase stockholders’ equity by $300,000.

  5. The Chart of Accounts The ledger is a collection of all accounts for aninformation system. A company’s size anddiversity of operations affect the numberof accounts needed. The chart of accounts is a list of all accounts andincludes an identifying number for each account.

  6. Debits and Credits Debits are simply entries on the left. Remember: Credits are simply entries on the right.

  7. Rule of Debits and Credits Assets Liabilities Expenses Revenues Dividends Owners’ Equity DR CR DR CR (+) (-) (-) (+) Debit is an increase. Credit is a decrease. Debit is a decrease. Credit is an increase.

  8. = + Assets Liabilities Equity EQUITIES ASSETS LIABILITIES Debit Credit Debit Credit Debit Credit +- - + - + Basic Accounting Equation

  9. _ _ Capital Stock Dividends Revenues Expenses + Capital Stock Dividends Revenues Expenses Debit Credit Debit Credit Debit Credit Debit Credit - + +- - + +- Double-Entry bookkeeping Equity

  10. Rule of Debits and 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. • TOTAL DEBITSmust always equalTOTAL CREDITS.

  11. An account’s balance is usually on the side that increases the account. It is referred to as the “Normal Balance.” Accounts with typical debit balances are? Accounts with typical credit balances are? Determining Account Balances Name of Account Debit Credit • Expenses • Assets • Dividends • Owners’ Equity • Liabilities • Revenues Remember the mnemonic memory device,DEAD COLR

  12. Normal Balance Debit Normal Balance Credit Debits and Credits Summary

  13. A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Debits and Credits “Friends don’t let friends do Accounting without t-accounts”

  14. Debits and Credits If Debits are greater than Credits, the account will have a debit balance. Transaction #1 $8,000 $7,000 Transaction #2 Transaction #3 5,000 Balance

  15. Debits and Credits If Credits are greater than Debits, the account will have a credit balance. $6,000 Transaction #1 Transaction #2 3,000 Transaction #3 $4,000 Balance

  16. Knowledge Check # 2:Which of the following accounts normally has a credit balance? • Accounts Receivable. • Dividends. • Rent Expense • Notes Payable.

  17. + = Equity Liabilities Assets Step 1: Analyze transactions and source documents. Step 2: Apply double-entry accounting Step 4: Post entry to ledger Step 3: Record journal entry Journalizing and Posting Transactions

  18. Titles of Affected Accounts • Transaction Date • Transaction explanation • Dollar amount of debits and credits Journalizing Transactions (using Double entry Bookkeeping)

  19. Analyzing Transactions (1) 1. On December 1, 2011, Scott invests $10,000 cash to start a management consulting business (Scott Company). Double entry: Posting:

  20. Analyzing Transactions (2) 2. Scott Company purchased office supplies paying $1,000 cash. Double entry: Posting:

  21. Analyzing Transactions (3) 3. Scott Company purchased Office Supplies of $600 and Computer Equipment of $3,000 on account. Double entry: Posting:

  22. Analyzing Transactions (4) 4. Scott Company borrowed $4,000 from Bank of Maryland. Double entry: Posting:

  23. Analyzing Transactions (5) 5. During the month of December 2011 , Scott Company provided consulting services for $3,500. The company received cash of $1,000, and billed the balance $2,500 to the customers. Double entry: Posting:

  24. Analyzing Transactions (6) 6. During the month of December 2011 , Scott Company paid cash of $800 for Rent, and $1,200 for Salaries to its only employee. Double entry: Posting:

  25. Analyzing Transactions (7) 7. During the month of December 2011 , Scott Company received a bill for $300 from the electric company, but decides to pay the bill at a later date. Double entry: Posting:

  26. Analyzing Transactions (8) 8. Scott Company received a check for $1,500 from a customer who was billed earlier. Double entry: Posting:

  27. Analyzing Transactions (9) 9. Scott Company paid $2,500 for the computer equipment that it had purchased in transaction (3). Double entry: Posting:

  28. Analyzing Transactions (10) 10. Scott Company paid a dividend of $500 to its owner/stockholder. Double entry:

  29. Scott Company Trial Balance December 31, 2011 Debits Credits Cash $ 3,950 The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits. Accounts receivable 1,500 - Supplies 9,650 Prepaid Insurance 2,400 Equipment 23,500 Accounts payable $ 6,200 Unearned consulting revenue 3,000 Common stock 30,000 Dividends 600 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 2,000 Utilities expense 300 Total $ 45,300 After processing its remaining transactions for December, Scott company prepares a Trial Balance. $ 45,300

  30. Knowledge Check # 3:Paying a previously recorded invoice from a supplier (of supplies) involves • Debiting Supplies and crediting Cash. • Debiting Accounts Payable and crediting Cash. • Debiting Supplies and crediting Accounts Payable. • Debiting Cash and crediting Supplies.

  31. The Trial Balance Limitations of a Trial Balance • The trial balance may balance even when • a transaction 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.

  32. Knowledge Check # 4:Atrial balance can be described as • A list of general ledger account titles and balances at a certain date. • A grouping of the accounts used by an organization to prepare its basic financial statements. • A record on which are recorded the increases and decreases of a particular financial statement component, such as cash. • One of the basic financial statements of an organization.

  33. The Trial Balance The accounts come from the ledger of Snow-Go Corporation at December 31, 2011.

  34. Searching for and Correcting Errors If the trial balance does not balance, the error(s) must be found and corrected. Make sure the trial balance columns are correctly added. Recompute each account balance in the ledger. Make sure account balances are correctly entered from the ledger. Verify that each journal entry is posted correctly. See if debit or credit accounts are mistakenly placed on the trial balance. Verify that each original journal entry has equal debits and credits.

  35. Scott Company Trial Balance December 31, 2011 Debits Credits Cash $ 3,950 The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits. Accounts receivable 1,500 - Supplies 9,650 Prepaid Insurance 2,400 Equipment 23,500 Accounts payable $ 6,200 Unearned consulting revenue 3,000 Common stock 30,000 Dividends 600 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 2,000 Utilities expense 300 Total $ 45,300 After processing its remaining transactions for December, Scott company prepares a Trial Balance. $ 45,300

  36. Using a Trial Balance to prepare Financial Statements Stmt. Of Cash Flows Stmt. of Ret. Earnings Income Statement Beginning Balance Sheet Ending Balance Sheet

  37. Use the Trial Balance for Scott company to prepare its financial statements

  38. Income Statement

  39. Statement of Retained Earnings

  40. Balance Sheet

  41. Knowledge Check # 5:An accountant for O’Leary Company enters a transaction in which she debits Accounts Receivable and credits Service Revenue. What type of transaction occurred that results in this entry? • O’Leary collected an Account Receivable. • O’Leary performed a service in exchange for cash. • O’Leary performed a service for a client and sent a bill for services rendered • O’Leary wrote off an Account Receivable that it expects not to collect.

  42. Knowledge Check # 6:If assets and equity have both been reduced by equal amounts in the same journal entry, what is the most likely explanation? • A fixed asset has been purchased on credit. • An invoice has been received from the cell phone company. • A supplier has been paid. • An owner has received a dividend.

  43. Record the following transactions in journal entries for United Delivery Inc. June 1 Shareholders contributed $15,000 cash and a delivery truck worth $12,000. June 2 Paid $4,500 as rent for June, July, and August. June 3 Purchased supplies on account, $1,800. June 9 Billed customers for deliveries made, $3,100. June 14 Received $1,000 cash from a customer as advance payment for deliveries scheduled throughout July. June 17 Paid $1,500 on account to suppliers. June 20 Collected $2,300 on account from customers. June 29 Paid $700 cash dividends to shareholders June 30 Paid salaries for June, $2,000.

  44. Using a Trial Balance to prepare Financial Statements

  45. End of Chapter 2 "That Which We Persist In Doing Becomes Easier - Not that the Nature of the Task Has Changed, But Our Ability to Do Has Increased" - Ralph Waldo Emerson

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