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Chapter2-1
CHAPTER 2
Understanding the
Recording Process
Accounting Principles, Eighth Edition
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Chapter2-2
1. Explain what an account is and how it helps in therecording process.
2. Define debits and credits and explain their use inrecording 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 Objectives
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Chapter2-3
The Account
Debits andcredits
Expansion ofbasic equation
Steps in the
Recording
Process
The Recording
Process
Illustrated
The Trial
Balance
Limitations of atrial balance
Locating errors
Use of dollarsigns
Summaryillustration of
journalizingand posting
The Recording Process
Journal
Ledger
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Chapter2-4
Account Name
Debit / Dr. Credit / Cr.
Record of increases and decreasesin a specific asset, liability, equity,revenue, or expense item.
Debit = “Left”
Credit = “Right”
Account
An Account canbe illustrated in aT-Account form.
LO 1 Explain what an account is and how it helps in the recording process.
The Account
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Chapter2-5
Double-entry accounting system
Each transaction must affect two or moreaccounts to keep the basic accounting equationin balance.
Recording done by debiting at least one accountand crediting another.
DEBITS must equal CREDITS.
LO 2 Define debits and credits and explain their use in recording business transactions.
Debits and Credits
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Chapter2-6
Account Name
Debit / Dr. Credit / Cr.
If Debits are greater than Credits, the accountwill have a debit balance.
$10,000 Transaction #2$3,000
$15,000
8,000Transaction #3
Balance
Transaction #1
Debits and Credits
LO 2 Define debits and credits and explain their use in recording business transactions.
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Chapter2-7
Account Name
Debit / Dr. Credit / Cr.
If Debits are greater than Credits, the accountwill have a debit balance.
$10,000 Transaction #2$3,000
Balance
Transaction #1
Debits and Credits
LO 2 Define debits and credits and explain their use in recording business transactions.
$1,000
8,000 Transaction #3
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Chapter2-8
Chapter3-23
AssetsAssets
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Chapter3-24
LiabilitiesLiabilities
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owners’ EquityOwners’ Equity
Chapter
3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
Normal
BalanceCredit
Normal
BalanceDebit
Debits and Credits Summary
LO 2
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Chapter2-9
Balance Sheet Income Statement
= + =-Asset Liability Equity Revenue Expense
Debit
Credit
Debits and Credits Summary
LO 2 Define debits and credits and explain their use in recording business transactions.
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Chapter2-10
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 Question
Debits and Credits Summary
LO 2 Define debits and credits and explain their use in recording business transactions.
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Chapter2-11
Discussion QuestionQ4. Maria Alvarez, a beginning accounting
student, believes debit balances are favorable
and credit balances are unfavorable. Is Mariacorrect? Discuss.
See notes page for discussion
Debits and Credits Summary
LO 2 Define debits and credits and explain their use in recording business transactions.
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Chapter2-12
Assets - Debits shouldexceed credits.
Liabilities – Creditsshould exceed debits.
The normal balance is on
the increase side.
LO 2 Define debits and credits and explain their use in recording business transactions.
Assets and Liabilities
Chapter3-23
AssetsAssets
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter
3-24
LiabilitiesLiabilities
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
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Chapter2-13
Owner’s investments andrevenues increase owner’sequity (credit).
Owner’s drawings and expenses
decrease owner’s equity (debit).
LO 2 Define debits and credits and explain their use in recording business transactions.
Owners’ Equity
Chapter3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owners’ CapitalOwners’ Capital
Chapter3-23
Owners’ DrawingOwners’ Drawing
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owners’ EquityOwners’ Equity
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Chapter2-14
The purpose of earningrevenues is to benefit theowner(s).
The effect of debits andcredits on revenue accountsis the same as their effecton Owner’s Capital.
Expenses have the oppositeeffect: expenses decreaseowner’s equity.
LO 2 Define debits and credits and explain their use in recording business transactions.
Revenue and Expense
Chapter
3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Chapter3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
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Chapter2-15
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and owner’s capital.
c. assets, liabilities, and owner’s drawings.
d. assets, owner’s drawings, and expenses.
Review Question
Debits and Credits Summary
LO 2 Define debits and credits and explain their use in recording business transactions.
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Chapter2-16
Expansion of the Basic Equation
Relationship among the assets, liabilities andowners’ equity of a business:
The equation must be in balance after everytransaction. For every Debit there must be a Credit.
Illustration 2-11Assets Liabilities= Owners’ Equity
Basic
Equation
Expanded
Basic
Equation
LO 2 Define debits and credits and explain their use in recording business transactions.
+
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Chapter2-17
Business documents, such as a sales slip, a check, abill, or a cash register tape, provide evidence of thetransaction.
Steps in the Recording Process
LO 3 Identify the basic steps in the recording process.
Illustration 2-12
Analyze each transaction Enter transaction in a journalTransfer journal information
to ledger accounts
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Chapter2-18
Book of original entry (General Ledger).
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 thedebit and credit amounts can be easily compared.
The Journal
LO 3 Identify the basic steps in the recording process.
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Chapter2-19
Journalizing - Entering transaction data in the journal.
Journalizing
E2-4 (Facts) Presented below is information related toHanshew Real Estate Agency.
LO 4 Explain what a journal is and how it helps in the recording process.
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 $3,200for realty services provided.
6
Pays $700 on balance related to transaction of Oct. 3.27Pays the administrative assistant $2,500 salary for Oct.30
E2-5 Instructions - Journalize the transactions for E2-4.
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Chapter2-20
Account Title Ref. Debit Credit
Oct. 1 Cash 15,000
Hanshew, Capital 15,000
(Owners investment)
Date
Journalizing
General Journal
LO 4 Explain what a journal is and how it helps in the recording process.
E2-4 (Facts) Presented below is information relatedto Hanshew Real Estate Agency.
Pete Hanshew begins business as a real estateagent with a cash investment of $15,000.
Oct. 1
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Chapter2-21
Account Title Ref. Debit Credit
Oct. 3 Office furniture 1,900
Accounts payable 1,900
(Purchase furniture)
Date
Journalizing
General Journal
LO 4 Explain what a journal is and how it helps in the recording process.
E2-4 (Facts) Presented below is information relatedto Hanshew Real Estate Agency.
Purchases office furniture for $1,900, onaccount.
Oct. 3
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Chapter2-22
Account Title Ref. Debit Credit
Oct. 6 Accounts receivable 3,200
Service revenue 3,200
(Realty services provided)
Date
Journalizing
General Journal
LO 4 Explain what a journal is and how it helps in the recording process.
E2-4 (Facts) Presented below is information relatedto Hanshew Real Estate Agency.
Sells a house and lot for B. Kidman; bills B.Kidman $3,200 for realty services provided.
Oct. 6
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Chapter2-23
Account Title Ref. Debit Credit
Oct. 27 Accounts payable 700
Cash 700
(Payment on account)
Date
Journalizing
General Journal
LO 4 Explain what a journal is and how it helps in the recording process.
E2-4 (Facts) Presented below is information relatedto Hanshew Real Estate Agency.
Pays $700 on balance related to transaction ofOct. 3.
Oct. 27
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Chapter2-24
Account Title Ref. Debit Credit
Oct. 30 Salary expense 2,500
Cash 2,500
(Payment for salaries)
Date
Journalizing
General Journal
LO 4 Explain what a journal is and how it helps in the recording process.
E2-4 (Facts) Presented below is information relatedto Hanshew Real Estate Agency.
Pays the administrative assistant $2,500salary for Oct.
Oct. 30
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Chapter2-25
Simple Entry – Two accounts, one debit and one credit.Compound Entry – Three or more accounts.
Journalizing
Example – On June 15, H. Burns, purchased equipment
for $15,000 by paying cash of $10,000 and the balanceon account (to be paid within 30 days).
LO 4 Explain what a journal is and how it helps in the recording process.
Account Title Ref. Debit Credit
June 15 Equipment 15,000
Cash 10,000
Accounts payable 5,000
(Purchased equipment)
Date
General Journal
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Chapter2-26
Ledger contains the entire group of accountsmaintained by a company.
A general ledger contains all the asset,
liability, owner’s equity, revenue, and expenseaccounts.
Chart of Accounts
The Ledger
LO 5 Explain what a ledger is and how it helps in the recording process.
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Chapter2-27
Accounts arranged in sequence in which they arepresented in the financial statements.
Chart of Accounts
LO 6 Explain what posting is and how it helps in the recording process.
Hanshew Real Estate AgencyChart of Accounts
101 Cash 300 Hanshew, Capital112 Accounts receivable 306 Hanshew, Drawing
126 Advertising supplies 350 Income summary
130 Prepaid insurance
150 Office equipment
158 Accumulated depreciation 400 Service revenue
200 Accounts payable 631 Advertising supplies expense
201 Notes payable 711 Depreciation expense
209 Unearned revenue 722 Insurance expense
212 Salaries payable 726 Salaries expense
230 Interest payable 729 Rent expense
905 Interest expense
Liabilities
Assets Owner's Equity
Revenues
Expenses
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Chapter2-28
T-account form used in accounting textbooks.In practice, the account forms used in ledgers aremuch more structured.
Standard Form of Account
Explanation Ref. Debit CreditOct. 1 15,000 15,000
27 700 14,300
30 2,500 11,800
Cash
Date
No. 101
Balance
LO 5 Explain what a ledger is and how it helps in the recording process.
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Chapter2-29
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
Account Title Ref. Debit Credit
Oct. 1 Cash 15,000
Hanshew, Capital 15,000
(Owner's investment in business)
Date
General Journal
Oct. 1 Owner investment J1 15,000 15,000
101
J1
Posting
LO 6 Explain what posting is and how it helps in the recording process.
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Chapter2-30
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.
Review Question
Posting
LO 6 Explain what posting is and how it helps in the recording process.
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Chapter2-31
The Recording Process Illustrated
LO 6 Explain what posting is and how it helps in the recording process.
Follow these steps:
1. Determine whattype of accountis involved.
2. Determine what
items increasedor decreasedand by howmuch.
3. Translate theincreases anddecreases intodebits andcredits.
Illustration 2-19
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Chapter2-32
A list of accountsand their balancesat a given time.
Purpose is toprove that debitsequal credits.
The Trial Balance
LO 7 Prepare a trial balance and explain its purposes.
Debit Credit
Cash 11,800$
Accounts receivable 3,200 Office furniture 1,900
Accounts payable 1,200$
Hanshew, Capital 15,000
Service revenue 3,200
Salaries expense 2,500
19,400$ 19,400$
Hanshew Real Estate AgencyTrial Balance
October 31, 2008
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Chapter2-33
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, or5. offsetting errors are made in recording the
amount of a transaction.
The Trial Balance
LO 7 Prepare a trial balance and explain its purposes.
Limitations of a Trial Balance
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Chapter2-34
A trial balance will not balance if:
a. a correct journal entry is posted twice.
b. the purchase of supplies on account is debited toSupplies and credited to Cash.
c. a $100 cash drawing by the owner is debited toOwner’s Drawing 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 Cashfor $45.
Review Question
The Trial Balance
LO 7 Prepare a trial balance and explain its purposes.
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Chapter2-35
Q2-19. Jim Benes is confused about how accountinginformation flows through the accounting system. Hebelieves 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 flowof the information.
See notes page for discussion
Recording Process
Discussion Question
LO 7 Prepare a trial balance and explain its purposes.
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Chapter2 36
Copyright © 2006 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permittedin Section 117 of the 1976 United States Copyright Act withoutthe express written permission of the copyright owner isunlawful. Request for further information should be addressed
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