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2-2
Preview of Chapter 2
Financial Accounting
Ninth Edition
Weygandt Kimmel Kieso

2-3
2
2
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.
The Recording Process

2-4
Account Name
Debit / Dr. Credit / Cr.
 A record of increases and decreases
in a specific asset, liability, equity,
revenue, or expense item.
 Debit = “Left”
 Credit = “Right”
Account
Account
An account can be
An account can be
illustrated in a
illustrated in a
T-account form.
T-account form.
LO 1
The Account

2-5
2
2
Learning Objectives
[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.

2-6
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.
Debit and Credit Procedure
The Account
LO 2

2-7
Account Name
If Debit amounts are greater than Credit amounts, the
account will have a debit balance.
$10,000 Transaction #2
$3,000
$15,000
$15,000
8,000
Transaction #3
Balance
Transaction #1
Debits and Credits
LO 2

2-8
Account Name
$10,000 Transaction #2
$3,000
Balance
Transaction #1
$1,000
$1,000
8,000 Transaction #3
If Debit amounts are less than Credit amounts, the
account will have a credit balance.
Debits and Credits
LO 2

2-9
 Assets - Debits should exceed
credits.
 Liabilities – Credits should
exceed debits.
 Normal balance is on the
increase side.
Chapter
3-23
Assets
Assets
Normal Balance
Normal Balance
Chapter
3-24
Liabilities
Liabilities
Normal Balance
Normal Balance
Debits and Credits
LO 2

2-10
 Owner’s investments and
revenues increase stockholders’
equity (credit).
 Dividends and expenses decrease
stockholders’ equity (debit).
Chapter
3-25
Normal Balance
Normal Balance
Common Stock
Common Stock
Chapter
3-23
Dividends
Dividends
Normal Balance
Normal Balance
Chapter
3-25
Normal Balance
Normal Balance
Stockholders
Stockholders’
’ Equity
Equity
Chapter
3-25
Normal Balance
Normal Balance
Retained Earnings
Retained Earnings
Debits and Credits
LO 2

2-11
Chapter
3-27
Normal Balance
Normal Balance
Expense
Expense
Chapter
3-26
Normal Balance
Normal Balance
Revenue
Revenue
Debits and Credits
 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.
LO 2

2-12
Chapter
3-23
Assets
Assets
Normal Balance
Normal Balance
Chapter
3-27
Normal Balance
Normal Balance
Expense
Expense
Normal
Balance
Credit
Normal
Balance
Debit
Debits/Credits Rules
Chapter
3-24
Liabilities
Liabilities
Normal Balance
Normal Balance
Chapter
3-25
Normal Balance
Normal Balance
Stockholders
Stockholders’
’ Equity
Equity
LO 2
Chapter
3-26
Normal Balance
Normal Balance
Revenue
Revenue

2-13
Balance Sheet Income Statement
= + -
Asset Liability Equity Revenue Expense
Debit
Credit
LO 2

2-14
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.
Question
LO 2

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.
Question
LO 2

2-17
Stockholders’ Equity Relationships
LO 2
Illustration 2-11

2-18
Illustration 2-12
Assets Liabilities
= Stockholders’ Equity
Basic
Equation
Expanded
Equation
Debit/Credit
Effects
+
Summary of Debit/Credit Rules
Relationship among the assets, liabilities and stockholders’
equity of a business:
The equation must be in balance after every transaction.
For every Debit there must be a Credit.
LO 2

2-19
Kate Browne, president of Hair It Is, Inc., has just rented space in a
shopping mall in which she will open and operate a beauty salon. A
friend has advised Kate to set up a double-entry set of accounting
records in which to record all of her business transactions. Identify the
balance sheet accounts that Hair It Is, Inc., will likely need to record
the transactions needed to establish and open the business. Also,
indicate whether the normal balance of each account is a debit or a
credit.
LO 2
Assets
Cash (debit)
Supplies (debit)
Equipment (debit)
Liabilities
Notes payable (credit)
if the business borrows money
Accounts payable (credit)
Equity
Common stock (credit)

2-20
2
2
Learning Objectives
transactions.

2-21
Business documents, such as a sales slip, a check, a bill, or
a cash register tape, provide evidence of the transaction.
Illustration 2-13
Analyze each transaction Enter transaction in a journal Transfer journal information to
ledger accounts
Steps in the Recording Process
LO 3

2-22
2
2
Learning Objectives
transactions.

2-23
 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 Journal
LO 4

2-24
Account Title Ref. Debit Credit
Date
Journalizing - Entering transaction data in the journal.
Illustration: On September 1, stockholders’ invested $15,000 cash
in the corporation in exchange for shares of stock, and Softbyte
purchased computer equipment for $7,000 cash.
Cash
Common stock
Sept. 1 15,000
15,000
General Journal
Equipment
Cash
7,000
7,000
Illustration 2-14
LO 4

2-25
Account Title Ref. Debit Credit
Date
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.
LO 4
Equipment
July 1 14,000
Accounts Payable 6,000
Cash 8,000
General Journal
Illustration 2-15

2-26
2
2
Learning Objectives
transactions.

2-27
 General Ledger contains the entire group of accounts
maintained by a company.
Illustration 2-16
The Ledger
LO 5

2-29
Illustration 2-17
Standard Form of Account
LO 5

2-30
2
2
Learning Objectives
transactions.

2-31
Posting –
process of
transferring
amounts from
the journal to
the ledger
accounts.
Illustration 2-18
Steps
LO 6

2-32
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.
Posting
Question
LO 6

2-33
Accounts and account numbers arranged in sequence in which
they are presented in the financial statements.
Illustration 2-19
Chart of Accounts
LO 6

2-34
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
The Recording Process Illustrated
LO 6

2-35
Illustration 2-21
LO 6

2-36
Illustration 2-22
LO 6

2-37
Illustration 2-23
LO 6

2-38
Illustration 2-24
LO 6

2-39
Illustration 2-25
LO 6

2-40
Illustration 2-26
LO 6

2-41
Illustration 2-27
LO 6

2-42
Illustration 2-28
LO 6

2-43
LO 6
Illustration 2-29

2-44
Kate Brown recorded the following transactions in a general journal
during the month of March. Post these entries to the Cash account.
Mar. 4 Cash 2,280
Service Revenue 2,280
Mar. 15 Salaries and Wages Expense 400
Cash 400
Mar. 19 Utilities Expense 92
Cash 92
LO 6

2-46
2
2
Learning Objectives
transactions.

2-47
Illustration 2-32
Trial Balance
LO 7

2-48
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.
5. Offsetting errors are made in recording the amount of a
transaction- an accounting error that cancels out another
error.
Trial Balance
Limitations of a Trial Balance
LO 7

2-49
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 drawing by the owner is debited to Owner’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 Cash for $45.
Trial Balance
Question
LO 7

2-51
Key Points
 Transaction analysis is the same under IFRS and GAAP but, as you
will see in later chapters, different standards sometimes impact how
transactions are recorded.
 Rules for accounting for specific events sometimes differ across
countries. Despite the differences, the double-entry accounting
system is the basis of accounting systems worldwide.
 Both the IASB and FASB go beyond the basic definitions provided in
this textbook for the key elements of financial statements, that is,
assets, liabilities, equity, revenues, and expenses.
LO 8

2-52
Key Points
 A trial balance under IFRS follows the same format as shown in the
textbook.
 As shown in the textbook, dollars signs are typically used only in the
trial balance and the financial statements. The same practice is
followed under IFRS, using the currency of the country that the
reporting company is headquartered.
 In February 2010, the SEC expressed a desire to continue working
toward a single set of high-quality standards.
LO 8

2-53
The basic recording process shown in this textbook is followed by
companies across the globe. It is unlikely to change in the future. The
definitional structure of assets, liabilities, equity, revenues, and expenses
may change over time as the IASB and FASB evaluate their overall
conceptual framework for establishing accounting standards.
Looking to the Future
LO 8

2-54
Which statement is correct regarding IFRS?
a) IFRS reverses the rules of debits and credits, that is, debits
are on the right and credits are on the left.
b) IFRS uses the same process for recording transactions as
GAAP.
c) The chart of accounts under IFRS is different because
revenues follow assets.
d) None of the above statements are correct.
IFRS Self-Test Questions
LO 8

2-55
A trial balance:
a) is the same under IFRS and GAAP.
b) proves that transactions are recorded correctly.
c) proves that all transactions have been recorded.
d) will not balance if a correct journal entry is posted twice.
LO 8

2-56
One difference between IFRS and GAAP is that:
a) GAAP uses accrual-accounting concepts and IFRS uses
primarily the cash basis of accounting.
b) IFRS uses a different posting process than GAAP.
c) IFRS uses more fair value measurements than GAAP.
d) the limitations of a trial balance are different between IFRS
and GAAP.
LO 8

2-57
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