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After studying this chapter, you should be able to:

CHAPTER 2 THE RECORDING PROCESS. 1 Explain what an account is and how it helps in the recording process. 2 Define debits and credits and explain how they are used to record business transactions. 3 Identify the basic steps in the recording process.

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After studying this chapter, you should be able to:

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  1. CHAPTER 2 THE RECORDING PROCESS 1 Explain what an account is and how it helps in the recording process. 2Define debits and credits and explain how they are used to record 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. After studying this chapter, you should be able to:

  2. The Recording Process PREVIEW OF CHAPTER 2 Steps in the Recording Process The Account Debits and credits Expansion of basic equation Journal Ledger

  3. The Recording Process The Recording Process Illustrated The Trial Balance Limitations of a trial balance Locating errors Use of dollar signs Summary illustration of journalizing and posting PREVIEW OF CHAPTER 2

  4. THE ACCOUNT • An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. • A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on.

  5. Title of Account Left or debit side Right or credit side Debit balance Credit balance ILLUSTRATION 2-1 BASIC FORM OF ACCOUNT • In its simplest form, an account consists of 1 the title of the account, 2 a left or debit side, and 3 a right or credit side. • The alignment of these parts resembles the letter T, and therefore the account form is called a T account.

  6. DR CR DEBITS AND CREDITS • The term debit means left and credit means right respectively. • The act of entering an amount on the left side of an account is called debiting the account and making an entry on the right side is crediting the account. • When the debit amounts exceed the credits, an account has a debit balance; when the reverse is true, the account has a credit balance.

  7. Tabular Summary Account Form Cash Cash Debit Credit $15,000 - 7,000 15,000 7,000 1,200 1,200 1,700 1,500 1,500 250 - 1,700 600 1,300 - 250 Balance 600 - 1,300 ILLUSTRATION 2-2 TABULAR SUMMARY COMPARED TO ACCOUNT FORM $ 8,050 $8,050 (Debit)

  8. Cash Debits Credits 15,000 DEBITING AN ACCOUNT Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited as the owner’s Capital is credited.

  9. Cash Debits Credits 7,000 CREDITING AN ACCOUNT Example: Monthly rent of $7,000 is paid. Cash is credited as Rent Expense is debited.

  10. Cash Debits Credits 15,000 7,000 8,000 DEBITING AND CREDITING AN ACCOUNT Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.

  11. Assets Liabilities Equity DOUBLE-ENTRY SYSTEM • In a double-entry system, equal debits and credits are made in the accounts for each transaction. • Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance.

  12. ILLUSTRATION 2-3 DEBIT AND CREDIT EFFECTS — ASSETS AND LIABILITIES Increase assets Decrease assets Decrease liabilities Increase liabilities Debits Credits

  13. NORMAL BALANCE • Every account classification has a normal balance, whether it is a debit or credit. • For that particular account, the opposite side entries should never exceed the normal balance.

  14. Assets Increase Decrease Debit Credit Liabilities Decrease Increase Debit Credit ILLUSTRATION 2-4 NORMAL BALANCES — ASSETS AND LIABILITIES Normal Balance Normal Balance

  15. ILLUSTRATION 2-5 DEBIT AND CREDIT EFFECTS — OWNER’S CAPITAL Decrease owner’s capital Increase owner’s capital Debits Credits

  16. ILLUSTRATION 2-6 NORMAL BALANCE — OWNER’S CAPITAL Normal Balance Owner’s Capital Decrease Increase Debit Credit

  17. ILLUSTRATION 2-7 DEBIT AND CREDIT EFFECTS — OWNER’S DRAWING Increase owner’s drawing Decrease owner’s drawing Debits Credits

  18. ILLUSTRATION 2-8 NORMAL BALANCE — OWNER’S DRAWING Normal Balance Owner’s Drawing Increase Decrease Debit Credit

  19. ILLUSTRATION 2-9 DEBIT AND CREDIT EFFECTS — REVENUES AND EXPENSES Decrease revenues Increase revenues Increase expenses Decrease expenses Debits Credits

  20. Revenues Decrease Increase Debit Credit Expenses Increase Decrease Debit Credit ILLUSTRATION 2-10 NORMAL BALANCES — REVENUES AND EXPENSES NormalBalance NormalBalance

  21. Liabilities Assets Owner’s Equity = + Owner’s Capital Owner’s Drawing = + - Assets Liabilities Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. + - - + - + + - + Revenues - Expenses Dr. Cr. Dr. Cr. - + + - ILLUSTRATION 2-11 EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS

  22. STEPS IN THE RECORDING PROCESS The basic steps in the recording process are: 1Analyze each transaction for its effect on the accounts. 2Enter the transaction information in a journal (book of original entry). 3Transfer the journal information to the appropriate accounts in the ledger (book of accounts).

  23. JOURNAL LEDGER JOURNAL ILLUSTRATION 2-12 THE RECORDING PROCESS 1Analyze each transaction 2Enter transaction in a journal 3Transfer journal information to ledger accounts

  24. THE JOURNAL • Transactions are initially recorded in chronological order in a journal before being transferred to the accounts. • Every company has a general journal which contains: 1 spaces for dates, 2 account titles and explanations, 3 references, and 4 two amount columns.

  25. THE JOURNAL The journal makes several significant contributions to the recording process: 1 It discloses in one place the complete effect of a transaction. 2 It provides a chronological record of transactions. 3 It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

  26. JOURNALIZING • Entering transaction data in the journal is known as journalizing. • Separate journal entries are made for each transaction. • A complete entry consists of: 1 the date of the transaction, 2 the accounts and amounts to be debited and credited, and 3 a brief explanation of the transaction.

  27. ILLUSTRATION 2-13 TECHNIQUE OF JOURNALIZING The date of the transaction is entered in the date column.

  28. ILLUSTRATION 2-13 TECHNIQUE OF JOURNALIZING The debit account title is entered at the extreme left margin of the Account Titles and Explanation column. The credit account title is indented on the next line.

  29. ILLUSTRATION 2-13 TECHNIQUE OF JOURNALIZING The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column.

  30. ILLUSTRATION 2-13 TECHNIQUE OF JOURNALIZING A brief explanation of the transaction is given.

  31. ILLUSTRATION 2-13 TECHNIQUE OF JOURNALIZING A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read.

  32. ILLUSTRATION 2-13 TECHNIQUE OF JOURNALIZING The column entitled Ref. is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts.

  33. SIMPLE AND COMPOUND JOURNAL ENTRIES If an entry involves only two accounts, one debit and one credit, it is considered a simple entry.

  34. ILLUSTRATION 2-14 COMPOUND JOURNAL ENTRY When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. 1 2 3

  35. COMPOUND JOURNAL ENTRY This is the wrong format; all debits must be listed before the credits are listed.

  36. GENERAL LEDGER THE LEDGER • The entire group of accounts maintained by a company is called the ledger. • A general ledger contains all the assets, liabilities, and owner’s equity accounts.

  37. ILLUSTRATION 2-17 POSTING A JOURNAL ENTRY In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.

  38. ILLUSTRATION 2-17 POSTING A JOURNAL ENTRY In the reference column of the journal, write the account number to which the debit amount was posted.

  39. ILLUSTRATION 2-17 POSTING A JOURNAL ENTRY In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in the journal.

  40. ILLUSTRATION 2-17 POSTING A JOURNAL ENTRY In the reference column of the journal, write the account number to which the credit amount was posted.

  41. ILLUSTRATION 2-18 CHART OF ACCOUNTS Most companies have a chart of accounts that lists the accounts and the account numbers which identify their location in the ledger.

  42. October 1, C.R. Byrd invests $10,000 cash in an advertising venture to be known as the Pioneer Advertising Agency. Transaction Basic Analysis The asset Cash is increased $10,000, and owner’s equity C. R. Byrd, Capital is increased $10,000. Debits increase assets: debit Cash $10,000. Credits increase owner’s equity: credit C.R. Byrd, Capital $10,000. Debit-Credit Analysis ILLUSTRATION 2-19 INVESTMENT OF CASH BY OWNER

  43. ILLUSTRATION 2-19 INVESTMENT OF CASH BY OWNER JOURNAL ENTRY POSTING

  44. October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable. Transaction Basic Analysis The asset Office Equipment is increased $5,000, and the liability Notes Payable is increased $5,000. Debits increase assets: debit Office Equipment $5,000. Credits increase liabilities: credit Notes Payable $5,000. Debit-Credit Analysis ILLUSTRATION 2-20 PURCHASE OF OFFICE EQUIPMENT

  45. ILLUSTRATION 2-20 PURCHASE OF OFFICE EQUIPMENT JOURNAL ENTRY POSTING

  46. October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed by December 31. Transaction The asset Cash is increased $1,200; the liability Unearned Fees is increased $1,200 because the service has not been rendered yet. Note that although many liabilities have the word “payable” in their title, unearned fees are considered a liability even though the word payable is not used. Basic Analysis Debits increase assets: debit Cash $1,200. Credits increase liabilities: credit Unearned Fees $1,200. Debit-Credit Analysis ILLUSTRATION 2-21 RECEIPT OF CASH FOR FUTURE SERVICE

  47. ILLUSTRATION 2-21 RECEIPT OF CASH FOR FUTURE SERVICE JOURNAL ENTRY POSTING

  48. October 3, office rent for October is paid in cash, $900. Transaction Basic Analysis The expense Rent is increased $900 because the payment pertains only to the current month; the asset Cash is decreased $900. Debit-Credit Analysis Debits increase expenses: debit Rent Expense $900. Credits decrease assets: credit Cash $900. ILLUSTRATION 2-22 PAYMENT OF MONTHLY RENT

  49. ILLUSTRATION 2-22 PAYMENT OF MONTHLY RENT JOURNAL ENTRY POSTING

  50. October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30. Transaction The asset Prepaid Insurance is increased $600 because the payment extends to more than the current month; the asset Cash is decreased $600. Note that payments of expenses that will benefit more than one accounting period are identified as prepaid expenses or prepayments. When a payment is made, an asset account is debited in order to show the service or benefit that will be received in the future. Basic Analysis Debit-Credit Analysis Debits increase assets: debit Prepaid Insurance $600. Credits decrease assets: credit Cash $600. ILLUSTRATION 2-23 PAYMENT FOR INSURANCE

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