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Introduction to Accountingch02

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The document summarizes accounting concepts related to the recording process. It discusses [1] accounts and how they are used to record transactions, [2] debits and credits and how they affect account balances, and [3] the basic steps in recording transactions, including journalizing, posting to ledgers, and preparing a trial balance.

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John Wiley & Sons, Inc. © 2005 Chapter 2Chapter 2 The Recording Process Prepared by Naomi KarolinskiPrepared by Naomi Karolinski Monroe Community CollegeMonroe Community College andand Marianne BradfordMarianne Bradford Bryant CollegeBryant College Accounting Principles, 7Accounting Principles, 7thth EditionEdition WeygandtWeygandt •• KiesoKieso •• KimmelKimmel
After studying this chapter, you should be able to: CHAPTER 2 THE RECORDING PROCESS 1 Explain what an account is and how it helps in the recording process 2 Define debits and credits and explain how they are used to record 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 purpose After studying this chapter, you should be able to: CHAPTERCHAPTER 22 THE RECORDINGTHE RECORDING PROCESSPROCESS
THE ACCOUNTTHE ACCOUNT STUDY OBJECTIVESTUDY OBJECTIVE 11 • An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. • There are separate accounts for the items we used in transactions such as cash, salaries expense, accounts payable, etc.
BASIC FORM OF ACCOUNTBASIC FORM OF ACCOUNT STUDY OBJECTIVESTUDY OBJECTIVE 22 • The simplest form an account consists of 1 the title of the account 2 a left or debit side 3 a right or credit side • The alignment of these parts resembles the letter T = T account Left or debit side Title of Account Right or credit side Debit balance Credit balance
DEBITS ANDDEBITS AND CREDITSCREDITS • Debit indicates left and Credit indicates right • Recording $ on the left side of an account is debiting the account • Recording $ on the right side is crediting the account • If the total of debit amounts is bigger than credits, the account has a debit balance • If the total of credit amounts is bigger than debits, the account has a credit balance
TABULAR SUMMARYTABULAR SUMMARY COMPARED TO ACCOUNTCOMPARED TO ACCOUNT FORMFORM
Cash Debits Credits 15,000 Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited as the owner’s Capital is credited. Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited as the owner’s Capital is credited. DEBITING ANDEBITING AN ACCOUNTACCOUNT
Example: Monthly rent of $7,000 is paid. Cash is credited as Rent Expense is debited. Example: Monthly rent of $7,000 is paid. Cash is credited as Rent Expense is debited. CREDITING ANCREDITING AN ACCOUNTACCOUNT Cash Debits Credits 7,000
DEBITING / CREDITINGDEBITING / CREDITING AN ACCOUNTAN ACCOUNT Cash Debits Credits 15,000 7,000 8,000 Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000. Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.
DOUBLE-ENTRYDOUBLE-ENTRY SYSTEMSYSTEM • equal debits and credits made accounts for each transaction • total debits always equal the total credits • accounting equation always stays in balance Assets Liabilities Equity
DEBIT AND CREDIT EFFECTS — ASSETS AND LIABILITIES Debits Credits Increase assets Decrease assets Decrease liabilities Increase liabilities
NORMAL BALANCENORMAL BALANCE • every account has a designated normal balance. –It is either a debit or credit. • accounts rarely have an abnormal balance.
NORMAL BALANCES —NORMAL BALANCES — ASSETS AND LIABILITIESASSETS AND LIABILITIES Assets Increase Decrease Debit Credit Decrease Increase Liabilities •Normal Balance
DEBIT AND CREDIT EFFECTSDEBIT AND CREDIT EFFECTS — OWNER’S CAPITAL— OWNER’S CAPITAL Debits Credits Decrease owner’s capital Increase owner’s capital
NORMAL BALANCE — OWNER’SNORMAL BALANCE — OWNER’S CAPITALCAPITAL Owner’s Capital Decrease Increase Debit Credit Normal Balance
DEBIT AND CREDIT EFFECTSDEBIT AND CREDIT EFFECTS — OWNER’S DRAWING— OWNER’S DRAWING Debits Credits Increase owner’s drawing Decrease owner’s drawing Remember, Drawing is a contra-account – an account that is backwards from the account it accompanies (the Capital account). Remember, Drawing is a contra-account – an account that is backwards from the account it accompanies (the Capital account).
NORMAL BALANCE —NORMAL BALANCE — OWNER’S DRAWINGOWNER’S DRAWING Owner’s Drawing Normal Balance Increase Decrease Debit Credit
DEBIT AND CREDIT EFFECTS — REVENUES AND EXPENSES Decrease revenues Increase revenues Increase expenses Decrease expenses Debits Credits
NORMAL BALANCES —NORMAL BALANCES — REVENUES AND EXPENSESREVENUES AND EXPENSES Increase Decrease Expenses Revenues Decrease Increase Debit Credit Normal Balance Normal Balance
EXPANDED BASIC EQUATIONEXPANDED BASIC EQUATION AND DEBIT/CREDIT RULESAND DEBIT/CREDIT RULES AND EFFECTSAND EFFECTS LiabilitiesAssets Owner’s Equity = + - += + - Assets Dr. Cr. + - Liabilities Dr. Cr. - + Dr. Cr. Owner’s Drawing + - Dr. Cr. Revenues - + Dr. Cr. Expenses + - Dr. Cr. Owner’s Capital - +
Chapter 2 Which of the following is not true of the terms debit and credit. a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right.
Chapter 2 Which of the following is not true of the terms debit and credit. a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right.
THE RECORDINGTHE RECORDING PROCESSPROCESS STUDY OBJECTIVESTUDY OBJECTIVE 33 1 analyze each transaction (+, -) 2 enter transaction in a journal 3 transfer journal information to ledger accounts
THE JOURNALTHE JOURNAL STUDY OBJECTIVESTUDY OBJECTIVE 44 • Transactions – Are initially recorded in chronological order before they are transferred to the ledger accounts. • A general journal has 1 spaces for dates 2 account titles and explanations 3 references 4 two amount columns
A journal makes several contributions to recording process: 1 discloses in one place the complete effect of a transaction 2 provides a chronological record of transactions 3 helps to prevent or locate errors as debit and credit amounts for each entry can be compared THE JOURNALTHE JOURNAL
JOURNALIZINJOURNALIZIN GG • Entering transaction data in the journal is known as journalizing. • Separate journal entries are made for each transaction. • A complete entry consists of: 1 the date of the transaction, 2 the accounts and amounts to be debited and credited, 3 a brief explanation of transaction.
TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING The date of the transaction is entered into the date column. The date of the transaction is entered into the date column. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005 Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING The debit account title is entered at the extreme left margin of the Account Titles and Explanation column. The credit account title is indented on the next line. The debit account title is entered at the extreme left margin of the Account Titles and Explanation column. The credit account title is indented on the next line. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005 Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column. The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column.
TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING A brief explanation of the transaction is given.A brief explanation of the transaction is given.
TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read. A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005 Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING The column entitled Ref. is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts. The column entitled Ref. is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts.
If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. SIMPLE ANDSIMPLE AND COMPOUND JOURNALCOMPOUND JOURNAL ENTRIESENTRIES
When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. COMPOUND JOURNALCOMPOUND JOURNAL ENTRYENTRY 2 1 3
COMPOUND JOURNALCOMPOUND JOURNAL ENTRYENTRY This is the wrong format; all debits must be listed before the credits are listed. This is the wrong format; all debits must be listed before the credits are listed.
THETHE LEDGERLEDGER STUDY OBJECTIVESTUDY OBJECTIVE 55 A Group of accounts maintained by a company is called the ledger. A general ledger contains all the assets, liabilities, and owner’s equity accounts
POSTING A JOURNAL ENTRYPOSTING A JOURNAL ENTRY In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.
POSTING A JOURNALPOSTING A JOURNAL ENTRYENTRY In the reference column of the journal, write the account number to which the debit amount was posted.
POSTING A JOURNALPOSTING A JOURNAL ENTRYENTRY In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in the journal. GENERAL LEDGER CASH NO. 10 Date Explanation Ref. Debit Credit Balance 2005 Sept. 1 J1 15,000 15,000
POSTING A JOURNALPOSTING A JOURNAL ENTRYENTRY In the reference column of the journal, write the account number to which the credit amount was posted.
A Chart of Accounts lists the accounts and the account numbers which identify their location in the ledger. A Chart of Accounts lists the accounts and the account numbers which identify their location in the ledger. CHART OF ACCOUNTSCHART OF ACCOUNTS
INVESTMENT OF CASH BY OWNER Basic Analysis Debit-Credit Analysis Transaction October 1, C.R. Byrd invests $10,000 cash in an advertising business known as: The Pioneer Advertising Agency. •The asset Cash is increased $10,000 •Owner’s equity, C. R. Byrd, Capital is increased $10,000. Debits increase assets: debit Cash $10,000. Credits increase owner’s equity: credit C.R. Byrd, Capital $10,000.
PURCHASE OF OFFICEPURCHASE OF OFFICE EQUIPMENTEQUIPMENT JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
INVESTMENT OF CASH BY OWNER Basic Analysis Debit-Credit Analysis Transaction October 1, C. R. Byrd purchases $5,000 of equipment by issuing a 3-month, 12% note payable. •The asset Office Equipment is increased $5,000. •The liability, Notes Payable is increased $5,000. Debits increase assets: debit Office Equipment $5,000. Credits increase liabilities: credit Notes Payable $5,000.
PURCHASE OF OFFICEPURCHASE OF OFFICE EQUIPMENTEQUIPMENT JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
RECEIPT OF CASH FORRECEIPT OF CASH FOR FUTURE SERVICEFUTURE SERVICE Basic Analysis Debit-Credit Analysis Transaction October 2, a $1,200 cash advance is received from a client, for advertising services expected to be completed by December 31. Asset Cash is increased $1,200 Liability Unearned Fees is increased $1,200 •Service has not been rendered yet. Liabilities often have the word “payable” in their title, Unearned fees are a liability. Debits increase assets: debit Cash $1,200. Credits increase liabilities: credit Unearned Fees $1,200.
RECEIPT OF CASH FOR FUTURE SERVICE JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
PAYMENT OFPAYMENT OF MONTHLY RENTMONTHLY RENT Basic Analysis Debit-Credit Analysis Transaction October 3, office rent for October is paid in cash, $900. The expense Rent is increased $900 Payment pertains only to the current month Asset Cash is decreased $900. Debits increase expenses: debit Rent Expense $900. Credits decrease assets: credit Cash $900.
PAYMENT OF RENT EXPENSE JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
PAYMENT FOR INSURANCEPAYMENT FOR INSURANCE -Asset Prepaid Insurance increases $600 -Payment extends to more than the current month -Asset Cash is decreased $600. -Payments of expenses benefiting more than one period are prepaid expenses or prepayments. Transaction October 4, $600 Paid one-year insurance policy- expires next year on September 30. Debit-Credit Analysis Debits increase assets: debit Prepaid Insurance $600. Credits decrease assets: credit Cash $600. Basic Analysis
PAYMENT FORPAYMENT FOR INSURANCEINSURANCE JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING Prepaid Insurance 130 Oct. 4 600
PURCHASE OFPURCHASE OF SUPPLIES ON CREDITSUPPLIES ON CREDIT Basic Analysis Debit-Credit Analysis Transaction October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500. The asset Advertising Supplies is increased $2,500; the liability Accounts Payable is increased $2,500. Debits increase assets: debit Advertising Supplies $2,500. Credits increase liabilities: credit Accounts Payable $2,500.
PURCHASE OFPURCHASE OF SUPPLIES ON CREDITSUPPLIES ON CREDIT JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
HIRING OF EMPLOYEESHIRING OF EMPLOYEES Basic Analysis Debit-Credit Analysis Transaction October 9, hire four employees to begin work on October 15. Each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks -- first payment made on October 26. A business transaction has not occurred only an agreement between the employer and the employees to enter into a business transaction beginning on October 15. A debit-credit analysis is not needed because there is no accounting entry.
WITHDRAWAL OF CASHWITHDRAWAL OF CASH BY OWNERBY OWNER Basic Analysis Debit-Credit Analysis Transaction October 20, C. R. Byrd withdraws $500 cash for personal use. The owner’s equity account C. R. Byrd, Drawing is increased $500. The asset Cash is decreased $500. Debits increase drawings: debit C. R. Byrd, Drawing $500. Credits decrease assets: credit Cash $500.
WITHDRAWAL OF CASHWITHDRAWAL OF CASH BY OWNERBY OWNER JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
PAYMENT OF SALARIESPAYMENT OF SALARIES Basic Analysis Debit-Credit Analysis Transaction October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction.) The expense account Salaries Expense is increased $4,000; the asset Cash is decreased $4,000. Debits increase expenses: debit Salaries Expense $4,000. Credits decrease assets: credit Cash $4,000.
PAYMENT OF SALARIESPAYMENT OF SALARIES JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING Salaries Expense 726 Oct. 26 4,000
RECEIPT OF CASH FOR FEESRECEIPT OF CASH FOR FEES EARNEDEARNED Basic Analysis Debit-Credit Analysis Transaction October 31, received $10,000 in cash from Copa Company for advertising services rendered in October. The asset Cash is increased $10,000; the revenue Fees Earned is increased $10,000. Debits increase assets: debit Cash $10,000. Credits increase revenues: credit Fees Earned $10,000.
RECEIPT OF CASH FOR FEESRECEIPT OF CASH FOR FEES EARNEDEARNED JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
THE TRIAL BALANCETHE TRIAL BALANCE STUDY OBJECTIVESTUDY OBJECTIVE 77 • The trial balance is a list of accounts and their balances at a given time. • The primary purpose of a trial balance is to prove debits = credits after posting. • If debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting.
THE TRIAL BALANCE The Steps in preparing the Trial Balance are: 1. List the account titles and balances 2. Total the debit and credit columns 3. Prove the equality of the two columns
The total debits must equal the total credits. The total debits must equal the total credits. A TRIAL BALANCEA TRIAL BALANCE
LIMITATIONS OF ALIMITATIONS OF A TRIAL BALANCETRIAL BALANCE • A trial balance does not prove all transactions have been recorded or the ledger is correct. • Numerous errors may exist even though the trial balance columns agree. For example, 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 used in journalizing or posting – offsetting errors are made in recording
Chapter 2 Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue - Expenses. b. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenue. c. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenue – Expenses. d. Assets = Revenue + Expenses – Liabilities.
Chapter 2 Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue - Expenses. b. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenue. c. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenue – Expenses. d. Assets = Revenue + Expenses – Liabilities.
COPYRIGHTCOPYRIGHT Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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Introduction to Accountingch02

  • 1. John Wiley & Sons, Inc. © 2005 Chapter 2Chapter 2 The Recording Process Prepared by Naomi KarolinskiPrepared by Naomi Karolinski Monroe Community CollegeMonroe Community College andand Marianne BradfordMarianne Bradford Bryant CollegeBryant College Accounting Principles, 7Accounting Principles, 7thth EditionEdition WeygandtWeygandt •• KiesoKieso •• KimmelKimmel
  • 2. After studying this chapter, you should be able to: CHAPTER 2 THE RECORDING PROCESS 1 Explain what an account is and how it helps in the recording process 2 Define debits and credits and explain how they are used to record 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
  • 3. 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 purpose After studying this chapter, you should be able to: CHAPTERCHAPTER 22 THE RECORDINGTHE RECORDING PROCESSPROCESS
  • 4. THE ACCOUNTTHE ACCOUNT STUDY OBJECTIVESTUDY OBJECTIVE 11 • An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. • There are separate accounts for the items we used in transactions such as cash, salaries expense, accounts payable, etc.
  • 5. BASIC FORM OF ACCOUNTBASIC FORM OF ACCOUNT STUDY OBJECTIVESTUDY OBJECTIVE 22 • The simplest form an account consists of 1 the title of the account 2 a left or debit side 3 a right or credit side • The alignment of these parts resembles the letter T = T account Left or debit side Title of Account Right or credit side Debit balance Credit balance
  • 6. DEBITS ANDDEBITS AND CREDITSCREDITS • Debit indicates left and Credit indicates right • Recording $ on the left side of an account is debiting the account • Recording $ on the right side is crediting the account • If the total of debit amounts is bigger than credits, the account has a debit balance • If the total of credit amounts is bigger than debits, the account has a credit balance
  • 7. TABULAR SUMMARYTABULAR SUMMARY COMPARED TO ACCOUNTCOMPARED TO ACCOUNT FORMFORM
  • 8. Cash Debits Credits 15,000 Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited as the owner’s Capital is credited. Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited as the owner’s Capital is credited. DEBITING ANDEBITING AN ACCOUNTACCOUNT
  • 9. Example: Monthly rent of $7,000 is paid. Cash is credited as Rent Expense is debited. Example: Monthly rent of $7,000 is paid. Cash is credited as Rent Expense is debited. CREDITING ANCREDITING AN ACCOUNTACCOUNT Cash Debits Credits 7,000
  • 10. DEBITING / CREDITINGDEBITING / CREDITING AN ACCOUNTAN ACCOUNT Cash Debits Credits 15,000 7,000 8,000 Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000. Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.
  • 11. DOUBLE-ENTRYDOUBLE-ENTRY SYSTEMSYSTEM • equal debits and credits made accounts for each transaction • total debits always equal the total credits • accounting equation always stays in balance Assets Liabilities Equity
  • 12. DEBIT AND CREDIT EFFECTS — ASSETS AND LIABILITIES Debits Credits Increase assets Decrease assets Decrease liabilities Increase liabilities
  • 13. NORMAL BALANCENORMAL BALANCE • every account has a designated normal balance. –It is either a debit or credit. • accounts rarely have an abnormal balance.
  • 14. NORMAL BALANCES —NORMAL BALANCES — ASSETS AND LIABILITIESASSETS AND LIABILITIES Assets Increase Decrease Debit Credit Decrease Increase Liabilities •Normal Balance
  • 15. DEBIT AND CREDIT EFFECTSDEBIT AND CREDIT EFFECTS — OWNER’S CAPITAL— OWNER’S CAPITAL Debits Credits Decrease owner’s capital Increase owner’s capital
  • 16. NORMAL BALANCE — OWNER’SNORMAL BALANCE — OWNER’S CAPITALCAPITAL Owner’s Capital Decrease Increase Debit Credit Normal Balance
  • 17. DEBIT AND CREDIT EFFECTSDEBIT AND CREDIT EFFECTS — OWNER’S DRAWING— OWNER’S DRAWING Debits Credits Increase owner’s drawing Decrease owner’s drawing Remember, Drawing is a contra-account – an account that is backwards from the account it accompanies (the Capital account). Remember, Drawing is a contra-account – an account that is backwards from the account it accompanies (the Capital account).
  • 18. NORMAL BALANCE —NORMAL BALANCE — OWNER’S DRAWINGOWNER’S DRAWING Owner’s Drawing Normal Balance Increase Decrease Debit Credit
  • 19. DEBIT AND CREDIT EFFECTS — REVENUES AND EXPENSES Decrease revenues Increase revenues Increase expenses Decrease expenses Debits Credits
  • 20. NORMAL BALANCES —NORMAL BALANCES — REVENUES AND EXPENSESREVENUES AND EXPENSES Increase Decrease Expenses Revenues Decrease Increase Debit Credit Normal Balance Normal Balance
  • 21. EXPANDED BASIC EQUATIONEXPANDED BASIC EQUATION AND DEBIT/CREDIT RULESAND DEBIT/CREDIT RULES AND EFFECTSAND EFFECTS LiabilitiesAssets Owner’s Equity = + - += + - Assets Dr. Cr. + - Liabilities Dr. Cr. - + Dr. Cr. Owner’s Drawing + - Dr. Cr. Revenues - + Dr. Cr. Expenses + - Dr. Cr. Owner’s Capital - +
  • 22. Chapter 2 Which of the following is not true of the terms debit and credit. a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right.
  • 23. Chapter 2 Which of the following is not true of the terms debit and credit. a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right.
  • 24. THE RECORDINGTHE RECORDING PROCESSPROCESS STUDY OBJECTIVESTUDY OBJECTIVE 33 1 analyze each transaction (+, -) 2 enter transaction in a journal 3 transfer journal information to ledger accounts
  • 25. THE JOURNALTHE JOURNAL STUDY OBJECTIVESTUDY OBJECTIVE 44 • Transactions – Are initially recorded in chronological order before they are transferred to the ledger accounts. • A general journal has 1 spaces for dates 2 account titles and explanations 3 references 4 two amount columns
  • 26. A journal makes several contributions to recording process: 1 discloses in one place the complete effect of a transaction 2 provides a chronological record of transactions 3 helps to prevent or locate errors as debit and credit amounts for each entry can be compared THE JOURNALTHE JOURNAL
  • 27. JOURNALIZINJOURNALIZIN GG • Entering transaction data in the journal is known as journalizing. • Separate journal entries are made for each transaction. • A complete entry consists of: 1 the date of the transaction, 2 the accounts and amounts to be debited and credited, 3 a brief explanation of transaction.
  • 28. TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING The date of the transaction is entered into the date column. The date of the transaction is entered into the date column. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005 Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
  • 29. TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING The debit account title is entered at the extreme left margin of the Account Titles and Explanation column. The credit account title is indented on the next line. The debit account title is entered at the extreme left margin of the Account Titles and Explanation column. The credit account title is indented on the next line. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005 Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
  • 30. TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column. The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column.
  • 31. TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING A brief explanation of the transaction is given.A brief explanation of the transaction is given.
  • 32. TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read. A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005 Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
  • 33. TECHNIQUE OFTECHNIQUE OF JOURNALIZINGJOURNALIZING The column entitled Ref. is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts. The column entitled Ref. is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts.
  • 34. If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. SIMPLE ANDSIMPLE AND COMPOUND JOURNALCOMPOUND JOURNAL ENTRIESENTRIES
  • 35. When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. COMPOUND JOURNALCOMPOUND JOURNAL ENTRYENTRY 2 1 3
  • 36. COMPOUND JOURNALCOMPOUND JOURNAL ENTRYENTRY This is the wrong format; all debits must be listed before the credits are listed. This is the wrong format; all debits must be listed before the credits are listed.
  • 37. THETHE LEDGERLEDGER STUDY OBJECTIVESTUDY OBJECTIVE 55 A Group of accounts maintained by a company is called the ledger. A general ledger contains all the assets, liabilities, and owner’s equity accounts
  • 38. POSTING A JOURNAL ENTRYPOSTING A JOURNAL ENTRY In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.
  • 39. POSTING A JOURNALPOSTING A JOURNAL ENTRYENTRY In the reference column of the journal, write the account number to which the debit amount was posted.
  • 40. POSTING A JOURNALPOSTING A JOURNAL ENTRYENTRY In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in the journal. GENERAL LEDGER CASH NO. 10 Date Explanation Ref. Debit Credit Balance 2005 Sept. 1 J1 15,000 15,000
  • 41. POSTING A JOURNALPOSTING A JOURNAL ENTRYENTRY In the reference column of the journal, write the account number to which the credit amount was posted.
  • 42. A Chart of Accounts lists the accounts and the account numbers which identify their location in the ledger. A Chart of Accounts lists the accounts and the account numbers which identify their location in the ledger. CHART OF ACCOUNTSCHART OF ACCOUNTS
  • 43. INVESTMENT OF CASH BY OWNER Basic Analysis Debit-Credit Analysis Transaction October 1, C.R. Byrd invests $10,000 cash in an advertising business known as: The Pioneer Advertising Agency. •The asset Cash is increased $10,000 •Owner’s equity, C. R. Byrd, Capital is increased $10,000. Debits increase assets: debit Cash $10,000. Credits increase owner’s equity: credit C.R. Byrd, Capital $10,000.
  • 44. PURCHASE OF OFFICEPURCHASE OF OFFICE EQUIPMENTEQUIPMENT JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
  • 45. INVESTMENT OF CASH BY OWNER Basic Analysis Debit-Credit Analysis Transaction October 1, C. R. Byrd purchases $5,000 of equipment by issuing a 3-month, 12% note payable. •The asset Office Equipment is increased $5,000. •The liability, Notes Payable is increased $5,000. Debits increase assets: debit Office Equipment $5,000. Credits increase liabilities: credit Notes Payable $5,000.
  • 46. PURCHASE OF OFFICEPURCHASE OF OFFICE EQUIPMENTEQUIPMENT JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
  • 47. RECEIPT OF CASH FORRECEIPT OF CASH FOR FUTURE SERVICEFUTURE SERVICE Basic Analysis Debit-Credit Analysis Transaction October 2, a $1,200 cash advance is received from a client, for advertising services expected to be completed by December 31. Asset Cash is increased $1,200 Liability Unearned Fees is increased $1,200 •Service has not been rendered yet. Liabilities often have the word “payable” in their title, Unearned fees are a liability. Debits increase assets: debit Cash $1,200. Credits increase liabilities: credit Unearned Fees $1,200.
  • 48. RECEIPT OF CASH FOR FUTURE SERVICE JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
  • 49. PAYMENT OFPAYMENT OF MONTHLY RENTMONTHLY RENT Basic Analysis Debit-Credit Analysis Transaction October 3, office rent for October is paid in cash, $900. The expense Rent is increased $900 Payment pertains only to the current month Asset Cash is decreased $900. Debits increase expenses: debit Rent Expense $900. Credits decrease assets: credit Cash $900.
  • 50. PAYMENT OF RENT EXPENSE JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
  • 51. PAYMENT FOR INSURANCEPAYMENT FOR INSURANCE -Asset Prepaid Insurance increases $600 -Payment extends to more than the current month -Asset Cash is decreased $600. -Payments of expenses benefiting more than one period are prepaid expenses or prepayments. Transaction October 4, $600 Paid one-year insurance policy- expires next year on September 30. Debit-Credit Analysis Debits increase assets: debit Prepaid Insurance $600. Credits decrease assets: credit Cash $600. Basic Analysis
  • 52. PAYMENT FORPAYMENT FOR INSURANCEINSURANCE JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING Prepaid Insurance 130 Oct. 4 600
  • 53. PURCHASE OFPURCHASE OF SUPPLIES ON CREDITSUPPLIES ON CREDIT Basic Analysis Debit-Credit Analysis Transaction October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500. The asset Advertising Supplies is increased $2,500; the liability Accounts Payable is increased $2,500. Debits increase assets: debit Advertising Supplies $2,500. Credits increase liabilities: credit Accounts Payable $2,500.
  • 54. PURCHASE OFPURCHASE OF SUPPLIES ON CREDITSUPPLIES ON CREDIT JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
  • 55. HIRING OF EMPLOYEESHIRING OF EMPLOYEES Basic Analysis Debit-Credit Analysis Transaction October 9, hire four employees to begin work on October 15. Each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks -- first payment made on October 26. A business transaction has not occurred only an agreement between the employer and the employees to enter into a business transaction beginning on October 15. A debit-credit analysis is not needed because there is no accounting entry.
  • 56. WITHDRAWAL OF CASHWITHDRAWAL OF CASH BY OWNERBY OWNER Basic Analysis Debit-Credit Analysis Transaction October 20, C. R. Byrd withdraws $500 cash for personal use. The owner’s equity account C. R. Byrd, Drawing is increased $500. The asset Cash is decreased $500. Debits increase drawings: debit C. R. Byrd, Drawing $500. Credits decrease assets: credit Cash $500.
  • 57. WITHDRAWAL OF CASHWITHDRAWAL OF CASH BY OWNERBY OWNER JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
  • 58. PAYMENT OF SALARIESPAYMENT OF SALARIES Basic Analysis Debit-Credit Analysis Transaction October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction.) The expense account Salaries Expense is increased $4,000; the asset Cash is decreased $4,000. Debits increase expenses: debit Salaries Expense $4,000. Credits decrease assets: credit Cash $4,000.
  • 59. PAYMENT OF SALARIESPAYMENT OF SALARIES JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING Salaries Expense 726 Oct. 26 4,000
  • 60. RECEIPT OF CASH FOR FEESRECEIPT OF CASH FOR FEES EARNEDEARNED Basic Analysis Debit-Credit Analysis Transaction October 31, received $10,000 in cash from Copa Company for advertising services rendered in October. The asset Cash is increased $10,000; the revenue Fees Earned is increased $10,000. Debits increase assets: debit Cash $10,000. Credits increase revenues: credit Fees Earned $10,000.
  • 61. RECEIPT OF CASH FOR FEESRECEIPT OF CASH FOR FEES EARNEDEARNED JOURNAL ENTRYJOURNAL ENTRY POSTINGPOSTING
  • 62. THE TRIAL BALANCETHE TRIAL BALANCE STUDY OBJECTIVESTUDY OBJECTIVE 77 • The trial balance is a list of accounts and their balances at a given time. • The primary purpose of a trial balance is to prove debits = credits after posting. • If debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting.
  • 63. THE TRIAL BALANCE The Steps in preparing the Trial Balance are: 1. List the account titles and balances 2. Total the debit and credit columns 3. Prove the equality of the two columns
  • 64. The total debits must equal the total credits. The total debits must equal the total credits. A TRIAL BALANCEA TRIAL BALANCE
  • 65. LIMITATIONS OF ALIMITATIONS OF A TRIAL BALANCETRIAL BALANCE • A trial balance does not prove all transactions have been recorded or the ledger is correct. • Numerous errors may exist even though the trial balance columns agree. For example, 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 used in journalizing or posting – offsetting errors are made in recording
  • 66. Chapter 2 Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue - Expenses. b. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenue. c. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenue – Expenses. d. Assets = Revenue + Expenses – Liabilities.
  • 67. Chapter 2 Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue - Expenses. b. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenue. c. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenue – Expenses. d. Assets = Revenue + Expenses – Liabilities.
  • 68. COPYRIGHTCOPYRIGHT Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Editor's Notes

  • #12: Fix the Equation Assets = Liabilities + Equity.
  • #41: This needs some rework.