2

Chapter TWO
The Recording process and Debit – Credit Rule
Accounting: Is the process of identifying, recording, summarizing, and reporting
economic information (Transactions) to help us to prepare financial reports to Decision
makers.

Accounting
Accounting
Accounting is Accounting Accountants
Accounting records:
the process: summarizes: prepare the
information in
This indicate that identifies information from reports: in the
different
accounting has (Analyze): diffrent activities form of financial
accounting
many steps information that should be statements to
records for the
without this steps should be included summarized provide
future and utilize
we cannot achieve in the accounting before reporting information about
it in preparing the
the accounting records to decision the results of
accounting
objectives makers. activities
records needed

(1) Steps in the recording process )‫(خطوات عملية التسجيل‬

1- Analyze each transaction, enter transaction in a journal then transfer journal
information to ledger accounts.
2- Business documents, such as a sales slip, a check, or a bill, provide evidence of
the transaction.
3- 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 transaction.
3. Helps to prevent or locate errors because the debit and credit
amounts can be easily compared.
So, the 1st step: is to analyze the entries by the equation analysis.
• 2nd step: is to debit and credit the accounts in the journal.
• 3rd step: is to post it in the Ledger by using the T-account.
3

(2) The Journal entry and the double entry system

A. Journal Entry
For each transaction the journal shows the debit and credit effects on specific accounts.
DR&CR ‫عمليه تحليل العمليات اللتى تتم داخل الشركه وتوضيحها فى صوره‬
General Journal form: ‫شكل الدفاتر‬
Date Account Title explanation Debit Credit

Summary of Debit / Credit Rules:

Assets = Liabilities + Owner Equity

Assets = Liabilities + Owner’s - Owner’s + Revenues - Expenses

Capital Drawings

Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
+ - - + - + + - - + + -

B. Double entry system (Debit and Credit Rule)

The Account has two sides. The left side is called DEBIT side and the right side called the
CREDIT side Now we should determine whether the change in the account should be recorded in
the debit or credit side. To answer this question, let us determine first the meaning of each
them. The debit and credit have different meanings in real life. Which the normal balance of
the assets is debit and the normal balance of the liabilities is credit but the owner's equity
divided into four accounts Capital and Revenue the normal balance is credit and the Expenses
and Drawing the normal balance is debit. Record it by two steps (Analysis before applying).

Note: The double entry system states that ''Each transaction has two sides. One debit
and one credit. The debit should be equal to the credit''

Example (1):
On Jan1, Ahmed invested $ 15,000 cash in the business card and Purchased computer
equipment for $7,000 cash.
REQUIRED: Record the above transactions in general journal.
General journal
Date Account Title explanation Debit Credit
Jan1, Cash 15,000
Owner’s Capital 15,000
(Owner’s investment of cash in business)
Equipment 7,000
Cash 7,000
(Purchase of equipment for cash)
4

(3) Post to Ledger (T-Account) )‫(دفتر االستاذ‬

An account: is the record of increases and decreases in specific assets, liability or owners’
equity items. So, any company would have a separate account for cash, accounts receivable,
Account payable revenue, expense & so on.
The form of an T.Account:
Title of the account
Left or Debit side Right or credit side

The account takes the form of letter “T”, so it’s called the “T-account”
Example (2):
Prepare T-account for cash.
+ 15,000
- 5,000
+ 10,000
- 2,000
+ 7,000
Solution
Debit Cash
Credit
15,000 5,000
10,000 2,000
7,000
Balance 25,000

The account takes the form of letter “T”, so it’s called the “T-account”
How to post from Journal to Ledger?
Example (For previous example on journal):
Posting a journal entry
Dr Cash Cr Dr Owner’s Equity Cr
15,000 15,000
.
(4) Trial balance )‫(ميزان المراجعة‬
Trial balance: Is a list of accounts and their balances at a given time in order to prove that
Debit side is equal to Credit Side after posting.
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The Form of the trial balance:

Title Dr Cr

Must Be Equal

xxx xxx

Imp Arrange items in the trial balance as follows:

1. Assets
2. Liabilities
3. Capital
4. Drawings
5. Revenues
6. Expenses

Problems
Problem (1):
Barnes Industries had the f ollowing transactions
1. Borrowed $5.000 f rom the b ank by signing a note.
2. Paid $3,100 cash f or equipment in a company.
3. Purchased $850 of supplies on account.
Required
(a) Indicate what accounts are increased and decreased by each transaction
(b) Journalize each transaction
Solution
(a) 1. Increase the asset Cash, increase the liability Notes Payable,
2. Increase the asset Equipment, decrease the asset Cash.
3. Increase the asset Supplies, Increase the liability Accounts Payab le

(b) 1 Cash………………………………………… 5,000

Loan Payable …………………….. 5,000
2 Equipm ent …………………………………. 3,100
Cash………………………………….. 3,100
3 Supplies… …………………………………. 850
Accounts Payable………………... 850
6

Problem (2)
Ali started his own business during January he presents the following information January:
1. Deposit 70,000 cash as capital to start the business.
2. Purchase a land &build for 60,000, paid 25,000 cash and signed a not for 3 Months, 12%
interest for the remaining.
3. Purchase equip for 10,000 on credit.
4. Provide services to customers for 8,000 cash.
5. Provide services for 5,000 on credit.
6. Pay salaries for 4,000 cash.
7. Received a telephone bill for 600 not yet paid.

Required:
a) Enter the transaction in journal
b) Post to the ledger
c) Prepare the trial balance
d) Prepare income statement, balance sheet &O.E stat for January 31st, 2015
Solution
a) Enter Transaction in Journal

Date Account Title explanation Debit Credit

1- Cash 70,000
Capital 70,000
- investing cash in business
2- Land & Building 60,000
Cash 25,000
N / P 35,000
- Purchasing Land & Building
3- Office equipment 10,000
A / P 10,000
- Purchasing Equip on account
4- Cash 8,000
Service Revenue 8,000
- Provide service in cash
5- A / R 5,000
Service Revenue 5,000
- providing services on credit
6- Salaries Expenses 4,000
Cash 4,000
- payment of Salaries
7- Telephone Expenses 600
A / P 600
- Telephone bills not yet paid
7
b) Posting to larger or “ T-account”
Cash Notes payable
70,000 25,000 35,000
8,000 4,000
Bal. 49,000 Bal. 35,000

Land Equipment
30,000 10,000
Bal. 30,000 Bal. 10,000

Building Service Expanses

30,000 4,000

Bal. 30,000 Bal. 4,000

Capital Account Receivable (A/R)

70,000 5,000

Bal. 70,000 Bal. 5,000

Service Revenue Telephone Expenses

8,000 600
5,000 Bal. 600
Bal.
13,000

Account payable (A/P)

10,000
600

Bal.
10,600
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c) Trial Balance
Ali's Company
Jan31, 2015
Title Dr Cr
Cash 49,000
A/R 5,000
Office equipment 10,000
Land 30,000
Building 30,000
N/P 35,000
A/P 10,600
Capital 70,000
Service Revenue 13,000
Service Expenses 4,000
Telephone Expenses 600
128,600 128,600

Problem (3)IMP
Bob samples opened the campus Laundromat on Sep 1, 2005. During the first Month of the
operation the following transactions occurred.
Sep. 1. Invested $20,000 cash in the business
2. Paid $1,000 cash for store rent for the month of September
3. Purchased washers and dryers for $25,000, paying $10,000 in cash and signing a
$15,000, 6 month, 12% note payable.
4. Paid $1200 for one year accident insurance policy.
10. Received bill from the daily news for advertising the opening of Laundromat $200.
20. Withdrew $700 cash for personal use.
30. Determine that cash receipts for laundry service for the month were $6,200.
Required
(a) Journalize the September transaction.
(b) Open ledger accounts and post the September transactions.
(c) Prepare a trial balance on September 30th, 2005.
Solution
A) Journal entry
Date Account Title explanation Debit Credit
1- Cash 20,000
Bob sample , Capital 20,000
2- Rent Expense 1,000
Cash 1,000
3- Washers and dryers 25,000
Cash 10,000
N / P 15,000
4- Prepaid insurance 1,200
9
Cash 1,200
10- Advertising Exp. 200 200
A / P
20- Bob sample, drawing 700
Cash 700
30- cash 6,200
Service Revenue 6,200
B) Post to ledger
Cash Prepaid insurance
Sept. 1 20,000 Sept. 2 1,000 Sept. 1 1,200
Sept. 30 6,200 3 10,000 Bal. 1,200
4 1,200
20 700
Bal. 13,300

Laundry equipment Notes payable

Sept. 3 25,000 Sept. 3 15,000
Bal. 25,000 Bal. 15,000

Account payable Bob capital

Sept. 10 200 Sept. 1 20,000
Bal. 200 Bal. 20,000

Bob Drawings Rent expenses

Sept. 20 700 Sept. 2 1,000
Bal. 700 Bal. 1,000

Service Revenue Advertising Expenses

Sept. 30 6,200 Sept. 10 200
Bal. 6,200 Bal. 200
10

B) Trial balance
Title Dr Cr
Cash 13,300
Prepaid insurance 1,200
Laundry equipment 25,000
Notes payable 15,000
Accounts payable 200
Bob sample, Capital 20,000
Bob sample, Drawings 700
Service Revenue 6,200
Advertising Expenses 200
Rent expenses 1,000
41,400 41,400
Problem (4)
The following accounts are taken from the ledger of Angelo Company at December
31, 2012
200 Notes Payable $20,000 101 Cash 6,000
301 Owner's Capital 28,000 126 Supplies 6,000
157 Equipment 80,000 631 Supplies Expense 4,000
306 Owner's drawing 8,000 212 Salaries and Wages Payable 3,000
726 Salaries and Wages Expense 38,000 201 Accounts Payable 11,000
400 Service Revenue 88,000 112 Accounts Receivable 8,000
Required
Prepare a trial balance in good f orm.

Solution
Debit Credit
C as h …… …… … …… …… … …… …… …… … …… .… … … $ 6 , 000
Acco u n t s R ec e i va bl e …… …… … …… … …… …… … …. 8 ,0 00
S u p pli e s … … …… …… … …… …… …… … …. …… … …… 6 ,0 00
Eq ui pm e n t … …… …… … … …… …… … …… … …… …… . 80 ,000
N o t e s P ay ab le .. .. .. . ... .. .. .. .. .. .. ... .. .. . ... .. .. .. .. .. .. $ 2 0,0 00
Acco u n t s P ay a bl e . .. . ... .. .. .. .. .. .. ... .. .. . ... .. .. .. .. .. .. 11 ,000
S al ar i es a nd W ag e s p ay ab le .. .. .. .. .. .. .. ... .. .. .. .. .. .. . 3,0 00
Ow n er ' s C a pi t al … …… …… …… … …… … …… …… … … 2 8,00 0
Ow n er ’ s Dr aw i ng s …… …… …… … …… … …… …… … …. 8, 000
S er v ic e R e v e n ue …… … …… …… … …… … …… …… …. . 88 ,000
R e nt E xp e n s e … …… … … …… …… … …… … …… .. .… … 4 ,0 00
S al ar i es a nd W ag e s Ex p e n s e … …… … …… …… … …. .. 38 ,000
$150,000 $150,000
11

Multiple Choices Questions (Alone)

1. The Duce Company has five plants nationwide that cost a total of $100 million.
The current fair value of the plants is $500 million. The plants will be recorded
and reported as assets at
a. $100 million.
b. $600 million.
c. $400 million.
d. $500 million.

2. Liabilities
a. Are future economic benefits.
b. Are existing debts and obligations.
c. Possess service potential.
d. Are things of value used by the business in its operation.

3. Collection of a $1,000 on account

a. Increases an asset $1,000; decreases an asset $1,000.
b. Increases an asset $1,000; decreases a liability $1,000.
c. Decreases a liability $1,000; increases owner's equity $1,000.
d. Decreases an asset $1,000; decreases a liability $1,000

4. All of the financial statements are for a period of time except the (imp)
a. Income statement.
b. Owner’s equity statement.
c. Balance sheet.
d. Statement of cash flows.

5. Black Keys Company began the year with owner’s equity of $280,000. During
the year, the company recorded revenues of $375,000, expenses of $285,000,
and had owner drawings of $30,000. What was Black Keys’ owner’s equity at the
end of the year?
a. $280,000.
b. $340,000.
c. $370,000.
d. $400,000.

6. If an individual asset is increased, then

a. there must be an equal decrease in a specific liability.
b. there must be an equal decrease in owner's equity.
c. there must be an equal decrease in another asset.
d. All of these answer choices are possible.
12

7. Mofro’s Computer Repair Shop started the year with total assets of $300,000 and
total liabilities of $200,000. During the year, the business recorded $500,000 in
computer repair revenues, $300,000 in expenses, and Mofro withdrew $50,000.
Mofro's Owner’s Capital balance changed by what amount from the beginning of
the year to the end of the year?
a. $100,000.
b. $150,000.
c. $200,000.
d. $250,000.
8. Barsuk Company began the year with owner’s equity of $108,000. During the
year, Barsuk received additional owner investments of $147,000, recorded
expenses of $420,000, and had owner drawings of$28,000. If Barsuk’s ending
owner’s equity was $290,000, what was the company’s revenue for the year?
a. $455,000.
b. $483,000.
c. $602,000.
d. $630,000.

9. An account consists of
a. One part.
b. Two parts.
c. Three parts.
d. Four parts.
Multiple Choices Questions
1. At the end of the first year of operations, Tamraz company for imports and exports
has total assets of $270,000, and owner's equity of $180,000:
A) Tamraz invested $180,000 at the beginning of activities.
B) This company is profitable.
C) Total liabilities are $450,000.
D) Total liabilities are $90,000

2. Assets of Younis Company increased by $312,000, also its liabilities increased

by$270,000. Owner's equity:
A) Decreased by $42,000
B) Decreased by $582,000
C) Increased by $42,000
D) Increased by $582,000

3. If a note is signed for $10,000 and cash of $32,000 is paid to purchase some office
equipment to be used in the company.
A) Total assets increased.
B) Total liabilities decreased.
C) Total assets decreased.
D) Owner's equity increased
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4. At the end of last year Owner's equity was $348,000. During last year assets
increased by $140,000 liabilities increased by140,000. What was the owner's equity at
the beginning of last year.
A) $348,000 B) $396.000 C)$580,000 D)$116,000
5. If assets increased b $145.000. Liabilities decreased by $35,000. Owner's equity at
the end of the year was $395,000. What was owner's equity at the beginning of the
year?
A) $285,000 B) $215,000 C) $575,000 D)$505.000

6. Net income can be described as:

A) Cash receipts- cash payments during the period.
B) Increase in owner's equity produced during the period from the business activities.
C) Increases of total assets during the period.
D) Earned revenues during the period minus cash payments during the period.
7. If expenses exceed revenues during the period:
A) Assets increase than liabilities.
B) Owner's equity increases than assets.
C) Cash balance decreases
D) The income statement shows net loss.
8. Revenues can be described as:
A) Price of products and services provided to customers during the period.
B) Cash collected from sale of goods during the period.
C)Net increase in owner's equity during the period.
D) Last figure in the income statement.
9. Which of the following items can be considered revenues for the period:
A) Providing legal services to a customer during the period for $4,000 but not collected.
B) Collecting 2,400 from a customer in payment of his account.
C) Deposit $10,000 cash as additional capital.
D) Borrow $5,000 from the bank.
10. Which of the following statements is wrong?
A) All expenses reduce owner's equity.
B) All decreases in owner's equity are expenses.
C) Expenses are the cast of goods and services used to produce revenues
D) All expenses increase assets.
11. An entertainment firm hold a concert and all tickets are sold out. This transaction:
A) Increases revenues, assets and owner's equity.
B) Increases cash and owner's equity.
C)Increases assets and reduces owner's equity.
D) Increases expenses and reduces owner's equity.
14

12. The statement of owner's equity shows:

A) Changes in cash during the period.
B) Revenues, expenses, and withdrawals by owner during the period.
C) Assets purchased from profits of previous years.
D) Changes in owner's equity during the period.

13. The accounting process begins with:

A) Analysis of business transactions and source documents.
B) Preparing financial statements and other reports.
C) Summarizing the recorded effect of business transactions.
D) Presentation of financial information to decision-makers.
E) Preparation of the trial balance.

14. A record of the increases and decreases in a specific asset, liability, equity,
revenue, Or expense is a(n):
A) Journal.
B) Posting.
C) Trial balance.
D) Account.
E) Chart of accounts.
15. The account used to record the transfers of assets from a business to its owner is:
A) A revenue account.
B) The owner's withdrawals account.
C) The owner's capital account.
D) An expense account.
E) A liability account.
16. Unearned revenues are:
A) Revenues that have been earned and received in cash.
B) Revenues that have been earned but not vet collected in cash.
C) Liabilities created when a customer pays in advance for products or services before the
revenue is earned.
D) Recorded as an asset in the accounting records.
E) Increases to owners' capital.
17. Prepaid expenses are:
A) Payments made for products and services that do not ever expire.
B) Classified as liabilities on the balance sheet.
C) Decreases in equity.
D)Assets that represent prepayments of future expenses.
18. A collection of all accounts and their balances used by a business is called a
A) Journal.
B) Book of original entry.
C) General Journal.
D) Ledger.
15

19. A debit is:

A) An increase in an account.
B) The right-hand side of a T-account.
C) A decrease in an account.
D) The left-hand side of a T-account.
E) An increase to a liability account.

20. An account balance iS:

A) The total of the credit side of the account.
B) The total of the debit side of the account.
C) The difference between the total debits and total credits for an account including the
beginning balance.
D) Assets = liabilities + equity.

21. Management Services, Inc. provides services to clients. On May 1, a client prepaid
Management Services $60.000 for 6-months services in advance. Management
Services' general journal entry to record this transaction will include a
A) Debit to Unearned Management Fees for $60,000.
B) Credit to Management Fees Earned for $60,000.
C) Credit to Cash for $60,000.
D) Credit to Unearned Management Fees for $60,000.

22. Wisconsin Rentals purchased office supplies on credit. The general journal entry
made by Wisconsin Rentals will include a:
A) Debit to Accounts Payable.
B) Debit to Accounts Receivable.
C) Credit to Cash.
D) Credit to Accounts Payable.
E) Credit to Wisconsin Rentals, Capital.

Answer the following from 23:24

Andrea Conaway opened Wonderland Photography on January 1 of the current year.
During January, the following transactions occurred and were recorded in the
company's books:(Very Important)(Assignment)
a. Conaway invested $13,500 cash in the business.
b. Conaway contributed $20,000 of photography equipment to the business.
c. The company paid $2,100 cash for an insurance policy covering the next 24
months.
d. The company received $5,700 cash for services provided during January.
e. The company purchased $6,200 of office equipment on credit.
f. The company provided $2,750 of services to customers on account.
g. The company paid cash of $1,500 for monthly rent.
h. The company paid $3,100 on the office equipment purchased in transaction 5
above.
i. Paid $275 cash for January utilities.
16

23. Based on this information, the balance in the cash account at the end of January
would be:
A) $41,450
B) $12,225
C) $18,700
D) $15,250
E) $13,500

24. Based on the information included in Question #11. the balance in the Andrea
Conaway, Capital account reported on the Statement of Owner's Equity at the end of
the month would be:
A) $31,400
B) $39,200
C) $31,150
D) $40,175
E) $30,875
25. Which of the following statements is true?
A) If the trial balance is in balance, it proves that no errors have been made in recording and
posting transactions.
B) The trial balance is a book of original entry.
C) Another name for the trial balance is the chart of accounts.
D) The trial balance is a list of all accounts from the ledger with their balances at a point in
time.
E) The trial balance is another name for the balance sheet as long as debits balance with
credits.

26. If the Debit and Credit column totals of a trial balance are equal, then:
A) All transactions have been recorded correctiy.
B) All entries from the journal have been posted to the ledger correctly.
C) All ledger account balances are correct.
D) The total debit entries and total credit entries are equal.
E) The balance sheet would be correct.
Solutions
1 D 7 D 13 A 19 D 25 D
2 C 8 C 14 A 20 D 26 D
3 A 9 A 15 B 21 D
4 A 10 D 16 C 22 D
5 B 11 A 17 D 23 Alone
6 B 12 D 18 D 24 Alone
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True or False
1. An account is an accounting record of either a specific asset or a
Specific liability only. (False)

2. An account shows only increases, not decreases, in the item it relates

to the business. (False)

3. Some items such as Cash and Accounts Receivable are combined into
one account. (False)

4. An account has a left, or credit side. And a right, or debit side. (False)

5. A simple form of an account consisting of just the account title, the

left side and the right side, is called a T account. (Ture)

A+ MEANING
Dr: emad el-nesr