FINANCIAL ACCOUNTING

Quiz 1:
1. Explain why do we list accounts receivable as
an asset?
2. Write down an expanded accounting equation
and explain why assets always equal to (=)
liabilities plus (+) owner’s equity?
 FINANCIAL ACCOUNTING

CHAPTER 2
ACCOUNTING INFORMATION SYSTEM

SESSION 2: THE RECORDING PROCESS

2 The Recording Process

Learning Objectives
After studying this chapter, you should be able to:
[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.
Preview of Session 2
The Account

 Record of increases and decreases

Account in a specific asset, liability, equity,
revenue, or expense item.
 Debit = “Left”
 Credit = “Right”
Account Name
Debit / Dr. Credit / Cr.
An account can be
illustrated in a T-account
form.

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

The Account

Debits and Credits

Double-entry 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 equal CREDITS.

LO 2 Define debits and credits and explain their use

in recording business transactions.
 Debits and Credits

If Debit amounts are greater than Credit amounts, the

account will have a debit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000

Balance $15,000

LO 2 Define debits and credits and explain their use

in recording business transactions.
 Debits and Credits

If Debit amounts are less than Credit amounts, the

account will have a credit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3

Balance $1,000

LO 2 Define debits and credits and explain their use

in recording business transactions.
 Debits and Credits

Assets  Assets - Debits should exceed

Debit / Dr. Credit / Cr.
credits.

 Liabilities – Credits should

Normal Balance
exceed debits.
Chapter

 Normal balance is on the

3-23

increase side.
Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-24

LO 2 Define debits and credits and explain their use

2-9
in recording business transactions.
 Debits and Credits

Owner’s Equity  Owner’s investments and

Debit / Dr. Credit / Cr.
revenues increase owner’s equity
(credit).
Normal Balance
 Owner’s drawings and expenses
Chapter
3-25
decrease owner’s equity (debit).

Owner’s Capital Owner’s Drawing Helpful Hint Because

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. revenues increase owner’s
equity, a revenue account
has the same debit/credit
rules as the Owner’s
Normal Balance Normal Balance
Capital account. Expenses
have the opposite effect.
Chapter Chapter
3-25 3-23

2-10 LO 2
 Debits and Credits

Revenue  The purpose of earning revenues

Debit / Dr. Credit / Cr.
is to benefit the owner(s).

 The effect of debits and credits on

Normal Balance
revenue accounts is the same as
Chapter
3-26
their effect on Owner’s Capital.

 Expenses have the opposite

Expense
Debit / Dr. Credit / Cr.
effect: expenses decrease owner’s
equity.

Normal Balance

Chapter
3-27

LO 2 Define debits and credits and explain their use

2-11
in recording business transactions.
 Debits/Credits Rules
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter
3-24

Owner’s Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expense Chapter
3-25
Revenue
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

2-12
LO 2
 Summary of Debits/Credits Rules

Relationship among the assets, liabilities and owner’s equity

of a business: Illustration 2-11

Basic
Assets = Liabilities + Owner’s Equity
Equation

Expanded
Basic
Equation

The equation must be in balance after every transaction.

For every Debit there must be a Credit.

LO 2 Define debits and credits and explain their use

in recording business transactions.
Debits/Credits Rules

Question 7, 8 – Page 78
E 2-2 – Page 81

LO 2 Define debits and credits and explain their use

in recording business transactions.
Steps in the Recording Process
Illustration 2-12

Analyze each transaction Enter transaction in a journal Transfer journal information to

ledger accounts

Business documents, such as a sales slip, a check, a bill, or

a cash register tape, provide evidence of the transaction.

LO 3 Identify the basic steps in the recording process.

Steps in the Recording Process

The Journal
 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.

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

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

Date Account Title Ref. Debit Credit

Sept. 1 Cash 15,000
Owner’s Capital 15,000

Equipment 7,000
Cash 7,000
LO 4 Explain what a journal is and how it helps in the recording process.
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

Date Account Title Ref. Debit Credit

July 1 Equipment 14,000
Cash 8,000
Accounts Payable 6,000

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

Steps in the Recording Process

Journalizing Exercise
E 2-7 – Page 82
Steps in the Recording Process

Journalizing Exercise
P 2-1 A – Page 85

LO 2 Define debits and credits and explain their use

in recording business transactions.
Steps in the Recording Process

The Ledger
 General Ledger contains the entire group of accounts
maintained by a company.
Illustration 2-15

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

Steps in the Recording Process

Standard Form of Account

Illustration 2-16

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

 Steps

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

Illustration 2-17

2-23 LO 6 Explain what posting is and how it helps in the recording process.
 The 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 2-19

2-24
LO 6
Posting

Question
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.

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

Steps in the Recording Process

Posting Exercise

Journalizing and Transferring amounts from the

journal in Question 16 – Page 78 to the ledger
accounts.

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

Trial Balance

Illustration 2-31

LO 7 Prepare a trial balance and explain its purposes.

Trial Balance

Limitations of a Trial Balance

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.

LO 7 Prepare a trial balance and explain its purposes.

Trial Balance

Self-Test Questions 15 – Page 78

LO 7 Prepare a trial balance and explain its purposes.

Practice

Journalizing, Posting and Preparing Trial

Balance from business transactions on
exercise P1-2B page 41

LO 7 Prepare a trial balance and explain its purposes.