Chapter 2: The Recording Process
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Chapter 2: The Recording Process ACT 201 Lecture By: Ms. Adina Malik
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Chapter 2: The Recording Process. ACT 201 Lecture By: Ms. Adina Malik. The Account . Record of increases and decreases in a specific asset, liability & owner’s equity item. The format resembles the letter ‘T’, hence referred to as the T Account An Account consists of three parts: A title - PowerPoint PPT Presentation
Transcript of Chapter 2: The Recording Process
Chapter 2: The Recording Process
ACT 201 LectureBy: Ms. Adina Malik
The Account • Record of increases and decreases in a specific asset, liability
& owner’s equity item.• The format resembles the letter ‘T’, hence referred to as the T
Account• An Account consists of three parts:• A title• Left side, known as debit side• Right side, known as credit side
Title of Account
Debit Credit
Accounting custom/rule
Debits & Credits
Double-entry accounting system
• Commonly abbreviate Debit as ‘Dr.’ and Credit as ‘Cr.’
• 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.
Debits & Credits
Debit > Credit = Debit Balance
Title of AccountDebit/Dr. Credit/Cr.$10,000 $ 3,000$ 8,000$ 15,000
Credit > Debit = Credit Balance
Title of Account Debit/Dr. Credit/Cr.$ 10,000 $ 3,000
$ 8,000 $ 1,000
Balance Balance
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Accounting Equation: Reminder
Basis Equation:Assets = Liabilities + Owner’s Equity
Expanded Equation:Assets = Liabilities + (Owner’s Capital Owner’s Drawings + Revenue Expenses)
• The equation must be in balance after every transaction.• For every Debit there must be a Credit.
Debit & Credit Procedure
ASSETS LIABILITIES
Chapter 3-23
AssetsAssetsDebit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-24
LiabilitiesLiabilitiesDebit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Normal Balance is on the increase side
Debit & Credit Procedure: Owner’s Equity
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owners’ EquityOwners’ Equity
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owners’ CapitalOwners’ Capital
Chapter 3-23
Owners’ DrawingOwners’ DrawingDebit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Debit & Credit Procedure: Owner’s Equity
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owners’ EquityOwners’ Equity
Chapter 3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Normal Balance
‘Normal Balance is on the increasing side’ means that:
Normal Balance for Assets, Owner’s Drawings and Expenses is on the Debit side.
Normal Balance for Liabilities, Owner’s Capital and Revenue is on the Credit side.
Debit & Credit Rules
Summary
Question 1
Question 2
Steps in the Recording Process
Source documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.
Three basic steps generally in every business:• Analyze each transaction for its effects on the accounts.• Enter the transaction information in a journal.• Transfer the journal information to the appropriate accounts in the ledger.
Journal• It discloses in one place the complete effects of a transaction
(debit & credit effects)• It provides a chronological record of transactions.• As debit & credit amounts for each entry can be easily
compared, it helps to prevent or locate errors.• Also known as ‘General Journal’ or ‘The Book of Original
Entry’.
GENERAL JOURNAL
Date Account Titles and Explanation Ref. Debit Credit
Simple & Compound Entries
• Entering transaction data in the journal is known as journalizing.• It is important to use ‘correct’ & ‘specific account titles’ in
journalizing. • Simple Entry: entry which involves only two accounts, one debit and
one credit.• Compound Entry: entry that requires more than two accounts in
journalizing. E.g. Butler company purchases a delivery truck costing $14,000. ($8,000 paid in cash now and to pay the remaining $6,000 on account)
Date Ref. Debit Credit1 $14,000
$8,000$6,000
GENERAL JOURNALAccount Titles and Explanation
Delivery Truck Cash Accounts Payable(Purchased truck for cash with balance on account)
JournalProblem: Prepare a General JournalTransaction 1: Kate Browne invested $ 20,000 cash for establishing her salon named ‘Super Salon’.Transaction 2: Purchased equipment on account (to be paid in 30 days) for a total cost of $ 5,000
GENERAL JOURNALDate Account Titles and Explanation Ref. Debit Credit
1Cash $20,000 K. Browne, Capital $20,000 (Owner's investment of cash in business)
2Equipment $5,000 Accounts Payable $5,000 (Purchase of equipment on account)
The Ledger• It is the entire group of accounts maintained by a company.• It keeps in one place all the information about changes in
specific account balances.• A General Ledger contains all the asset, liability & owner’s
equity accounts.
Individual Assets Accounts
• Cash• Land• Equipment• Supplies• Etc.
Individual Liability Accounts
• Accounts Payable• Salaries Payable• Notes Payable• Interest Payable• Etc.
Individual Owner’s Equity Accounts
• Salaries Expense• Service Revenue• K. Browne,
Capital• K. Browne,
Drawings• Etc.
Posting ‘Journal Entry’ into ‘The Ledger’
Transaction 1:
Debit $ Credit $
K. Browne, Capital 20,000
Cash
Debit $ Credit $
Cash 20,000
K. Browne, Capital
Posting ‘Journal Entry’ into ‘The Ledger’
Transaction 2:
Debit $ Credit $ Accounts Payable 5,000
Equipment
Debit $ Credit $ Equipment 5,000
Accounts Payable
Problem (Continued)
During the year, there were other transactions, as given below:Transaction 3: Super Salon pays $ 500 as rent of premise. Transaction 4: Received $ 4,000 for providing customer service.
Date Ref. Debit Credit3 $500
$500
4$4,000
$4,000
Rent Expense Cash (Pays rent of premise in cash)
Cash Service Revenue (Received Revenue in Cash for service provided)
Account Titles and ExplanationGENERAL JOURNAL
Problem (Continued)
Debit $ Credit $ K. Browne, Capital 20,000 Rent Expense 500Service Revenue 4,000
Balance 23,500
Debit $ Credit $ Cash 500
Debit $ Credit $ Cash 4,000
Cash
Rent Expense
Service Revenue
Trial Balance• It is a list of accounts and their balances at a given time.• Prepared at the end of an accounting period.• The primary purpose of a trial balance is to prove (check) that
the debits equal the credits after posting.
Details Debit ($) Credit ($)Cash 23,500K. Browne, Capital 20,000Equipment 5,000Accounts Payable 5,000Rent Expense 500Service Revenue 4000
29,000 29,000
Super SalonTrial Balance
December 31, 2012
Limitations of a Trial Balance
The trial balance may balance even when:
• A transaction is not journalized
• A correct journal entry is not posted
• A journal entry is posted twice
• Incorrect accounts are used in journalizing or posting, or
• Offsetting errors are made in recording the amount of a transaction
Question
QuestionBob Sample opened the Campus Laundromat on September 1, 2010. During the first month of operations, the following transactions occurred.Sept.1 Bob invested $20,000 cash in the businessSept.2 The company paid $1,000 cash for store rent for Sept.Sept.3 Purchased washers & dryers for $25,000, paying $10,000 in cash and $15,000 on accountSept.4 Received a bill from the Daily News for advertising the opening of the Laundromat $200Sept.10 The company owes employee salaries of $2,000 and pays them in cashSept.20 Bob withdraw $700 cash for personal useSept.30 The company determined that cash receipts for laundry services for the month were $6,200
(a) Journalize the September transactions(b) Open ledger accounts and post the September transactions(c) Prepare a trial balance at September 30, 2010
