Understanding the Recording Process in Accounting

1. Lecture 4 & 5 THE RECORDING PROCESS -JOURNALIZING

2. CHAPTER2 The Recording Process • STUDY OBJECTIVES: • Explain what an account is and helps in recording process. • 2) Define debit and credit. • 3) Explain journal and journalizing process

3. PreviewofCHAPTER2

4. The Account • Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Dt Cr

5. Classification of Accounts • The accounts can be classified as: • Assets. • Liabilities. • Owner’s Equity.

6. Assets • Resources a business owns • Can be divided into : • Current Assets. • Long term Assets.

7. Current Assets • Assets that can be converted to cash or used to pay current liabilities within 12 months. • Examples : • Cash • Account Receivables.

8. Fixed Assets • known as a non-current asset which cannot easily be converted into cash. • Examples: • Land. • Building. • Machinery.

9. Liabilities • Creditor claims on total assets • Can be divided into: • Current Liabilities. • Long Term Liabilities.

10. Current Liabilities • current liabilities are all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle* of a given firm, whichever period is longer. • Examples: • Account Payable. • Rent Payable, Salary Payable. * An operating cycle for a firm is the average time that is required to go from cash to cash in producing revenues

11. Long Term Liablities • all liabilities of the business that are to be settled in cash more than one year • Examples: • Debenture. • Bank Loan.

12. Owner’s Equity • The ownership claim on total assets. • Divided into: • Capital. • Drawing. • Revenue. • Expense.

13. Double Entry Bookkeeping System Scale or Balance DEBIT CREDIT Luca Pacioli Founder of Double Entry System

14. Double Entry Bookkeeping System Cash An account must have a title

15. The Account An Account can be illustrated in a T-Account form. SO 1 Explain what an account is and how it helps in the recording process.

16. Cash Left debit Left side of an account is called debit side.

17. Cash Left debit Right credit Right side of an account is called as credit side.

18. The Account Debit and Credit Procedures • Double-entrysystem • 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. • DEBITSmust equalCREDITS. SO 2 Define debits and credits and explain their use in recording business transactions.

19. Debits and Credits If Debits are greater than Credits, the account will have a debit balance. Transaction #1 $10,000 $3,000 Transaction #2 Transaction #3 8,000 Balance $15,000 SO 2 Define debits and credits and explain their use in recording business transactions.

20. Debits and Credits If Debits are less than Credits, the account will have a credit balance. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance $1,000 SO 2 Define debits and credits and explain their use in recording business transactions.

21. Debits and Credits • Assets - Debits should exceed credits. • Liabilities – Credits should exceed debits. • Normal balance is on the increase side. SO 2 Define debits and credits and explain their use in recording business transactions.

22. Debits and Credits • Owner’s investments and revenues increase owner’s equity (credit). • Owner’s drawings and expenses decrease owner’s equity (debit). SO 2 Define debits and credits and explain their use in recording business transactions.

23. Debits and Credits • Purpose of earning revenues is to benefit the owner(s). • Effect of debits and credits on revenue accounts is the same as their effect on Owner’s Capital. • Expenses have the opposite effect: expenses decrease owner’s equity. SO 2 Define debits and credits and explain their use in recording business transactions.

24. Debits/Credits Rules Normal Balance Debit Normal Balance Credit SO 2

25. Debit Credit Rule ASSETS = LIABILITIES + O/EQUITY Dt. Cr. Asset + - Liability - + Owner’s equity - +

26. Debits/Credits Rules Balance Sheet Income Statement - + Asset Liability Equity Revenue Expense = = Debit Credit SO 2 Define debits and credits and explain their use in recording business transactions.

27. Debits/Credits Rules Question Debits: • increase both assets and liabilities. • decrease both assets and liabilities. • increase assets and decrease liabilities. • decrease assets and increase liabilities. SO 2 Define debits and credits and explain their use in recording business transactions.

28. Debits/Credits Rules Question Accounts that normally have debit balances are: • assets, expenses, and revenues. • assets, expenses, and owner’s capital. • assets, liabilities, and owner’s drawings. • assets, owner’s drawings, and expenses. SO 2 Define debits and credits and explain their use in recording business transactions.

29. Summary of Debits/Credits Rules Relationship among the assets, liabilities and owner’s equity of a business: Illustration 2-11 Basic Equation Assets = Liabilities + Owner’s Equity Expanded Basic Equation The equation must be in balance after every transaction. For every Debit there must be a Credit. SO 2 Define debits and credits and explain their use in recording business transactions.

30. Steps in the Recording Process Illustration 2-12 Transfer journal information to ledger accounts Analyze each transaction Enter transaction in a journal Source documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. SO 3 Identify the basic steps in the recording process.

31. Steps in the Recording Process The Journal • Book of original entry. • Transactions recorded in chronological order. • Contributions to the recording process: • Discloses the complete effects of a transaction. • Provides a chronological record of transactions. • Helps to prevent or locate errors because the debit and credit amounts can be easily compared. SO 4 Explain what a journal is and how it helps in the recording process.

32. General Journal J1 Date Account Titles and Explanation Ref. Debit Credit Journalizing Process • Enter the transaction date in the date column. 2011 Oct. 1

33. General Journal J1 Date Account Titles and Explanation Ref. Debit Credit Journalizing Process • The debit account title is entered first at the extreme left margin in the “account titles and explanation column and the amount is recorded in the DEBIT column . 2011 Oct. 1 Cash 15,000

34. General Journal J1 Date Account Titles and Explanation Ref. Debit Credit Journalizing Process • The credit account title is indented and entered at the next line in the “account titles and explanation column and the amount is recoded in the CREDIT column . 2011 Oct. 1 Cash 15,000 Owner’s Capital 15,000

35. General Journal J1 Date Account Titles and Explanation Ref. Debit Credit Journalizing Process • A brief explanation of the transaction appears on the line below the credit title. 2011 Oct. 1 Cash 15,000 Owner’s Capital 15,000 (Owner’s investment of cash in the business.)

36. General Journal J1 Date Account Titles and Explanation Ref. Debit Credit Journalizing Process • The column titled Ref. Is left blank when the journal entry is made. This column is used later when journal entry is transferred to the accounts. 2011 Oct. 1 Cash 15,000 Owner’s Capital 15,000 (Owner’s investment of cash in the business.)

37. Simple and Compound Journal Entries • If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. • When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.

38. 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 Sept. 1 Cash 15,000 • Owner’s, Capital 15,000 Equipment 7,000 • Cash 7,000 SO 4 Explain what a journal is and how it helps in the recording process.

39. 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 General Journal July 1 Equipment 14,000 • Cash 8,000 6,000 • Accounts payable SO 4 Explain what a journal is and how it helps in the recording process.

40. End of Lecture 4 & 5