chapter 2-1 the recording process financial accounting, sixth edition chapter 2

Chapter 2-1

The Recording Process

The Recording Process

Financial Accounting, Sixth Edition

Chapter Chapter 22Chapter Chapter 22

Chapter 2-2

1. Explain what an account is and how it helps in the recording process.

2. Define debits and credits and explain their use in recording 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.

5. Explain what a ledger is and how it helps in the recording process.

6. Explain what posting is and how it helps in the recording process.

7. Prepare a trial balance and explain its purposes.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 2-3

The AccountThe AccountThe AccountThe Account

Debits and Debits and creditscredits

Debit and Debit and credit credit procedureprocedure

Stockholders’ Stockholders’ equity equity relationshipsrelationships

Expansion of Expansion of basic equationbasic equation

Steps in the Steps in the

Recording Recording

ProcessProcess

Steps in the Steps in the

Recording Recording

ProcessProcess

The Recording The Recording

Process Process

IllustratedIllustrated

The Recording The Recording

Process Process

IllustratedIllustrated

The Trial The Trial

BalanceBalanceThe Trial The Trial

BalanceBalance

Limitations of a Limitations of a trial balancetrial balance

Locating errorsLocating errors

Use of dollar Use of dollar signssigns

Summary Summary illustration of illustration of journalizing journalizing and postingand posting

The Recording ProcessThe Recording ProcessThe Recording ProcessThe Recording Process

JournalJournal

LedgerLedger

Chapter 2-4

Account Name

Debit / Dr. Credit / Cr.

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Debit = “Left”

Credit = “Right”

AccounAccountt

An Account can An Account can be illustrated be illustrated

in a T-Account in a T-Account form.form.

SO 1 Explain what an account is and how it helps in the recording SO 1 Explain what an account is and how it helps in the recording process.process.

The AccountThe AccountThe AccountThe Account

Chapter 2-5

Double-entry 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.

DEBITS must equalmust equal CREDITS.

SO 2 Define debits and credits and explain SO 2 Define debits and credits and explain their use in recording business their use in recording business transactions.transactions.

Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits

Chapter 2-6

Account Name


If Debits are greater thangreater than Credits, the account will have a debit balance.

$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1



Chapter 2-7

Account Name


If Credits are greater thangreater than Debits, the account will have a credit balance.

$10,000 Transaction #2$3,000

Balance

Transaction #1



$1,000$1,000

8,000 Transaction #3

Chapter 2-8

Chapter 3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter 3-27



ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25



StockholdersStockholders’’ EquityEquity

Chapter 3-26



RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance Debit

Normal Balance Debit

Debits and Credits Debits and Credits SummarySummaryDebits and Credits Debits and Credits SummarySummary

SO 2 SO 2

Chapter 2-9

Balance Sheet Balance Sheet Income StatementIncome Statement

= + =-Asset Liability

Equity Revenue

Expense

Debit

Credit

Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary


Chapter 2-10

Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

Review QuestionReview Question



Chapter 2-11

Discussion Question

Q4. Maria Alvarez, a beginning accounting

student, believes debit balances are

favorable and credit balances are

unfavorable. Is Maria correct? Discuss.

See notes page for discussion



Chapter 2-12

Assets - Debits should exceed credits.

Liabilities – Credits should exceed debits.

The normal balance is on the increase side.


Assets and LiabilitiesAssets and LiabilitiesAssets and LiabilitiesAssets and Liabilities

Chapter 3-23

AssetsAssets



Chapter 3-24

LiabilitiesLiabilities



Chapter 2-13

Owner’s investments and revenues increase stockholder’s equity (credit).

Dividends and expenses decrease stockholder’s equity (debit).


Stockholders’ EquityStockholders’ EquityStockholders’ EquityStockholders’ Equity

Chapter 3-25



Common StockCommon Stock

Chapter 3-23

DividendsDividends



Chapter 3-25



StockholdersStockholders’’ EquityEquity

Chapter 3-25



Retained EarningsRetained Earnings

Chapter 2-14

The purpose of earning revenues is to benefit the stockholders.

The effect of debits and credits on revenue accounts is the same as their effect on stockholders’ equity.

Expenses have the opposite effect: expenses decrease stockholders’ equity.


Revenue and ExpenseRevenue and ExpenseRevenue and ExpenseRevenue and Expense

Chapter 3-27



ExpenseExpense

Chapter 3-26



RevenueRevenue

Chapter 2-15

Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.




Chapter 2-16

Stockholders’ Equity RelationshipsStockholders’ Equity RelationshipsStockholders’ Equity RelationshipsStockholders’ Equity Relationships


Illustration 2-11

Chapter 2-17

Expansion of the Basic EquationExpansion of the Basic EquationExpansion of the Basic EquationExpansion of the Basic Equation

Relationship among the assets, liabilities and Relationship among the assets, liabilities and stockholders’ equity of a business: stockholders’ equity of a business:

The equation must be in balance after every The equation must be in balance after every transaction. For every transaction. For every DebitDebit there must be a there must be a CreditCredit..

Illustration 2-12

Assets Liabilities= Stockholders’ EquityBasic Equation

Expanded Basic Equation


+

Chapter 2-18

Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.

Steps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording Process

SO 3 Identify the basic steps in the recording process.SO 3 Identify the basic steps in the recording process.

Illustration 2-13

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger

accounts

Chapter 2-19

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.

The JournalThe JournalThe JournalThe Journal

SO 4 Explain what a journal is and how it helps in the recording SO 4 Explain what a journal is and how it helps in the recording process.process.

Chapter 2-20

Journalizing - Entering transaction data in the journal.

JournalizingJournalizingJournalizingJournalizing

E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency.


Pete Hanshew begins business as a real estate agent with a cash investment of $15,000.

Oct. 1

Purchases office furniture for $1,900, on account.3

Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.

6

Pays $700 on balance related to transaction of Oct. 3.

27

Pays the administrative assistant $2,500 salary for Oct.

30

E2-5 Instructions - Journalize the transactions for E2-4.

Chapter 2-21

Account Title Ref. Debit Credit

Oct. 1 Cash 15,000

Common stock 15,000

(Owners investment)

Date


General Journal



Pete Hanshew begins business as a real estate agent with a cash investment of $15,000.

Oct. 1

Chapter 2-22


Oct. 3 Offi ce f urniture 1,900

Accounts payable 1,900

(Purchase f urniture)

Date


General Journal



Purchases office furniture for $1,900, on account.

Oct. 3

Chapter 2-23


Oct. 6 Accounts receivable 3,200

Service revenue 3,200

(Realty services provided)

Date


General Journal



Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.

Oct. 6

Chapter 2-24


Oct. 27 Accounts payable 700

Cash 700

(Payment on account)

Date


General Journal



Pays $700 on balance related to transaction of Oct. 3.

Oct. 27

Chapter 2-25


Oct. 30 Salary expense 2,500

Cash 2,500

(Payment f or salaries)

Date


General Journal



Pays the administrative assistant $2,500 salary for Oct.

Oct. 30

Chapter 2-26

Simple Entry – Two accounts, one debit and one credit.

Compound Entry – Three or more accounts.


Example – On June 15, H. Burns, purchased equipment for $15,000 by paying cash of $10,000 and the balance on account (to be paid within 30 days).



J une 15 Equipment 15,000

Cash 10,000

Accounts payable 5,000

(Purchased equipment)

Date

General Journal

Chapter 2-27

Ledger contains the entire group of accounts maintained by a company.

A general ledger contains all the asset, liability, stockholder’s equity, revenue, and expense accounts.

Chart of Accounts

The LedgerThe LedgerThe LedgerThe Ledger

SO 5 Explain what a ledger is and how it helps in the recording SO 5 Explain what a ledger is and how it helps in the recording process.process.

Chapter 2-28

Accounts arranged in sequence in which they are presented in the financial statements.

Chart of AccountsChart of AccountsChart of AccountsChart of Accounts

SO 6 Explain what posting is and how it helps in the recording SO 6 Explain what posting is and how it helps in the recording process.process.

Hanshew Real Estate AgencyChart of Accounts

101 Cash 300 Common stock112 Accounts receivable 306 Retained earnings126 Supplies 350 Dividends130 Prepaid insurance

150 Office furniture158 Accumulated depreciation 400 Service revenue

200 Accounts payable 631 Supplies expense201 Notes payable 711 Depreciation expense209 Unearned revenue 722 Insurance expense212 Salaries payable 726 Salaries expense230 Interest payable 729 Rent expense

905 Interest expense

Liabilities

Assets Stockholders' Equity

Revenues

Expenses

Chapter 2-29

T-account form used in accounting textbooks.

In practice, the account forms used in ledgers aremuch more structured.

Standard Form of AccountStandard Form of AccountStandard Form of AccountStandard Form of Account

Explanation Ref. Debit CreditOct. 1 15,000 15,000

27 700 14,300 30 2,500 11,800

CashDate

No. 101Balance

SO 5 Explain what a ledger is and how it helps in the recording SO 5 Explain what a ledger is and how it helps in the recording process.process.

Chapter 2-30

Posting Posting – the process of transferring amounts from the journal to the ledger accounts.

Cash Acct. No. 101

Date Explanation Ref. Debit Credit Balance

General Ledger


Oct. Cash 15,000

Common stock 15,000

Date

General Journal

Oct. 1 Owner investment

J1 15,000 15,000

101

J1

PostingPostingPostingPosting


Chapter 2-31

Posting:

a. normally occurs before journalizing.

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.

d. transfers journal entries to ledger accounts.


PostingPostingPostingPosting


Chapter 2-32

The Recording Process IllustratedThe Recording Process IllustratedThe Recording Process IllustratedThe Recording Process Illustrated


Follow these steps:

1. Determine what type of account is involved.

2. Determine what items increased or decreased and by how much.

3. Translate the increases and decreases into debits and credits.

Illustration 2-20

Chapter 2-33

A list of accounts and their balances at a given time.

Purpose is to prove that debits equal credits.

The Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

SO 7 Prepare a trial balance and explain its purposes.SO 7 Prepare a trial balance and explain its purposes.

Debit CreditCash 11,800$ Accounts receivable 3,200 Office furniture 1,900 Accounts payable 1,200$ Common stock 15,000 Service revenue 3,200 Salaries expense 2,500

19,400$ 19,400$

Hanshew Real Estate AgencyTrial Balance

October 31, 2008

Chapter 2-34

The 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, or

5. offsetting errors are made in recording the amount of a transaction.



Limitations of a Trial Balance

Chapter 2-35

A trial balance will not balance if:

a. a correct journal entry is posted twice.

b. the purchase of supplies on account is debited to Supplies and credited to Cash.

c. a $100 cash dividends is debited to the Dividends account for $1,000 and credited to Cash for $100.

d. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.




Chapter 2-36

Q2-19. Jim Benes is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows.

a. Debits and credits posted to the ledger.b. Business transaction occurs. c. Information entered in the journal.d. Financial statements are prepared.e. Trial balance is prepared.

Is Jim correct? If not, indicate to Jim the proper flow of the information.

See notes page for discussion

Recording ProcessRecording ProcessRecording ProcessRecording Process

Discussion QuestionDiscussion Question


Chapter 2-37

A résumé is your opportunity to create a positivefirst impression. It is important that it be impressive and accurate.

Consider the following:

Chief financial officer of Veritas Software lied about having an M.B.A. from Stanford University.

Former president of the U.S. Olympic Committee, lied about having a Ph.D. from Arizona State University. She resigned.

All About YouAll About YouAll About YouAll About You

Your Personal Annual ReportYour Personal Annual Report

Chapter 2-38

Consider the following:

The University of Notre Dame discovered that its football coach, George O’Leary, lied about his education and football history. He resigned.

Edmondson, the president and CEO of Radio Shack, claimed he had earned a bachelor’s of science degree, when he had not.

What should the company have done when it learned of the falsehoods on Mr. Edmondson’s résumé? Should Radio Shack have fired him?


Your Personal Annual ReportYour Personal Annual Report

Chapter 2-39


Source: “Equity Society for Human Resource Management, press release,

August 31, 2004, http://www.shrm.org/press/ntu_publised/cms_009624.as.

“When investigating the backgrounds of job candidates, how important or unimportant is the discovery of inaccuracies in the job candidate’s résumé on your decision to extend a job offer?”

Chapter 2-40

What Do You Think?What Do You Think?

Using Radio Shack as an example, what should the company have done when it learned of the falsehoods on Mr. Edmondson’s résumé? Should Radio Shack have fired him?


YES: Radio Shack is a publicly traded company. Investors, creditors, employees, and others doing business with the company will not trust it if itsleader is known to have poor integrity.

NO: Mr. Edmondson had been a Radio Shack employee for 11 years. He had served the company in a wide variety of positions, and had earned the position of CEO through exceptional performance.

Chapter 2-41

Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

CopyrightCopyrightCopyrightCopyright

chapter 2-1 the recording process financial accounting, sixth edition chapter 2

Documents

credits slide

assets debits

account debits

credits debit

liabilities credits

credits summary

effect of debits

discussion debits