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Slide 2-1. Slide 2-2 Chapter 2 The Recording Process Financial Accounting, IFRS Edition Weygandt Kimmel Kieso.

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Presentation on theme: "Slide 2-1. Slide 2-2 Chapter 2 The Recording Process Financial Accounting, IFRS Edition Weygandt Kimmel Kieso."— Presentation transcript:

1 Slide 2-1

2 Slide 2-2 Chapter 2 The Recording Process Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

3 Slide Explain what an account is and how it helps in the recording process Define debits and credits and explain their use in recording business transactions Identify the basic steps in the recording process Explain what a journal is and how it helps in the recording process Explain what a ledger is and how it helps in the recording process Explain what posting is and how it helps in the recording process Prepare a trial balance and explain its purposes. Study Objectives

4 Slide 2-4 The Account Debits and credits Debit and credit procedure Equity relationships Summary of debit/credit rules Limitations of a trial balance Locating errors Use of currency signs Summary illustration of journalizing and posting JournalLedgerPosting Steps in the Recording Process The Recording Process Illustrated The Trial Balance The Recording Process

5 Slide 2-5 Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = “Left” Credit = “Right” Account An Account can be illustrated in a T-Account form. SO 1 Explain what an account is and how it helps in the recording process. The Account

6 Slide 2-6 Double-entry Double-entry accounting 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. must equal DEBITS must equal CREDITS. SO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits

7 Slide 2-7 greater than If Debits are greater than Credits, the account will have a debit balance. $10,000Transaction #2$3,000 $15,000 8,000Transaction #3 Balance Transaction #1 Debits and Credits SO 2 Define debits and credits and explain their use in recording business transactions.

8 Slide 2-8 greater than If Credits are greater than Debits, the account will have a credit balance. $10,000Transaction #2$3,000 Balance Transaction #1 Debits and Credits $1,000 8,000Transaction #3 SO 2 Define debits and credits and explain their use in recording business transactions.

9 Slide 2-9 Normal Balance Credit Normal Balance Debit Debits and Credits Summary SO 2

10 Slide 2-10 Balance Sheet Income Statement Balance Sheet Income Statement = + - AssetLiabilityEquityRevenueExpense Debit Credit Debits and Credits Summary SO 2 Define debits and credits and explain their use in recording business transactions.

11 Slide 2-11 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 Solution notes page 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. SO 2 Define debits and credits and explain their use in recording business transactions.

12 Slide 2-12 Assets - Debits should exceed credits. Liabilities – Credits should exceed debits. The normal balance is on the increase side. Assets and Liabilities SO 2 Define debits and credits and explain their use in recording business transactions.

13 Slide 2-13 Issuance of share capital and revenues increase equity (credit). Dividends and expenses decrease equity (debit). Equity Relationships SO 2 Define debits and credits and explain their use in recording business transactions.

14 Slide 2-14 The purpose of earning revenues is to benefit the shareholders. The effect of debits and credits on revenue accounts is the same as their effect on equity. Expenses have the opposite effect: expenses decrease equity. Revenue and Expense SO 2 Define debits and credits and explain their use in recording business transactions.

15 Slide 2-15 Summary of Debit/Credit Rules Relationship among the assets, liabilities and equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit. SO 2 Define debits and credits and explain their use in recording business transactions. Illustration 2-12

16 Slide 2-16 Accounts that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and retained earnings. c. assets, liabilities, and dividends. d. assets, dividends, and expenses. Review Question Solution notes page SO 2 Define debits and credits and explain their use in recording business transactions. Summary of Debit/Credit Rules Accounts that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and retained earnings. c. assets, liabilities, and dividends. d. assets, dividends, and expenses.

17 Slide 2-17 Debit Credit Debit Credit Solution on notes page mall in which she will open and operate a beauty salon. A friend has advised Kathy to set up a double-entry set of accounting records in which to record all of her business transactions. Following are the accounts that Hair It Is Company, will likely need to record the transactions. Indicate whether the normal balance of each account is a debit or a credit. Summary of Debit/Credit Rules Cash Supplies Notes payable Equipment Accounts payable Share capital SO 2 Define debits and credits and explain their use in recording business transactions. Kathy Renee Browne, president of Hair It Is Company has just rented space in a shopping

18 Slide 2-18 Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. Steps in the Recording Process SO 3 Identify the basic steps in the recording process. Analyze each transactionEnter transaction in a journal Transfer journal information to ledger accounts Illustration 2-13

19 Slide 2-19 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. SO 4 Explain what a journal is and how it helps in the recording process. Journalizing

20 Slide 2-20 Share capital Journalizing - Entering transaction data in the journal. SO 4 Illustration: On September 1, stockholders invested $15,000 cash in exchange for ordinary shares, and Softbyte purchased computer equipment for $7,000 cash. Cash Sept. 1 15,000 General Journal Computer equipment Cash 7,000 Illustration 2-14 Solution on notes page Steps in the Recording Process

21 Slide ,000 Delivery equipment Cash 14,000 6,000 Accounts payable Sept. 1 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. General Journal Illustration 2-15 SO 4 Solution on notes page Simple and Compound Entries Steps in the Recording Process

22 Slide 2-22 General Ledger  All accounts maintained by a company.  All asset, liability, equity, revenue and expense accounts. SO 5 Explain what a ledger is and how it helps in the recording process. The Ledger Illustration 2-16

23 Slide 2-23 SO 5 Explain what a ledger is and how it helps in the recording process. Answer on notes page

24 Slide 2-24  T-account form used in accounting textbooks.  Ledger form used in practice. SO 5 Explain what a ledger is and how it helps in the recording process. Illustration 2-17 Standard Form of Account

25 Slide 2-25 The Ledger Illustration 2-18 SO 5 Explain what a ledger is and how it helps in the recording process. Chart of Accounts

26 Slide 2-26 Posting Posting – the process of transferring amounts from the journal to the ledger accounts. Illustration 2-19 SO 6 Explain what posting is and how it helps in the recording process. PostingPosting

27 Slide 2-27 The Recording Process Illustrated 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 SO 6 Explain what posting is and how it helps in the recording process.

28 Slide 2-28 The Recording Process Illustrated Illustration 2-21 SO 6 Explain what posting is and how it helps in the recording process.

29 Slide 2-29 The Recording Process Illustrated Illustration 2-22 SO 6

30 Slide 2-30 The Recording Process Illustrated Illustration 2-23 SO 6

31 Slide 2-31 The Recording Process Illustrated SO 6 Illustration 2-24

32 Slide 2-32 The Recording Process Illustrated SO 6 Illustration 2-25

33 Slide 2-33 The Recording Process Illustrated Illustration 2-26 SO 6 Explain what posting is and how it helps in the recording process.

34 Slide 2-34 The Recording Process Illustrated SO 6 Illustration 2-27

35 Slide 2-35 The Recording Process Illustrated SO 6 Illustration 2-28

36 Slide 2-36 The Recording Process Illustrated SO 6 Illustration 2-29

37 Slide 2-37 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 PostingPosting SO 6 Explain what posting is and how it helps in the recording process. Solution on notes page 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.

38 Slide 2-38 Katherine Turner recorded the following transactions during the month of March. Solution on notes page The Recording Process Illustrated Post these entries to the Cash account. SO 6

39 Slide 2-39 A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. The Trial Balance SO 7 Prepare a trial balance and explain its purposes. Illustration 2-32

40 Slide 2-40 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, or 5.offsetting errors are made in recording the amount of a transaction. The Trial Balance Limitations of a Trial Balance SO 7 Prepare a trial balance and explain its purposes.

41 Slide 2-41 SO 7 Prepare a trial balance and explain its purposes. Answer on notes page

42 Slide 2-42 The accounts come from the ledger of Christel Corporation at December 31, Solution on notes page The Trial Balance SO 7 Christel Corporation Trial Balance (in thousands) December 31, 2011

43 Slide 2-43 Rules for accounting for specific events sometimes differ across countries. For example, IFRS companies rely less on historical cost and more on fair value than U.S. companies. 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. The more substantive definitions, using the FASB definitional structure, are provided in the Chapter 1 “Understanding U.S. GAAP” section. The Recording Process Understanding U.S. GAAP Key Differences

44 Slide 2-44 A trial balance under GAAP follows the same format as shown in the textbook. In the United States, equity is often referred to as either shareholders’ equity or stockholders’ equity, and Share Capital—Ordinary is referred to as Common Stock. The statement of financial position is often called the balance sheet in the United States. Understanding U.S. GAAP Key Differences The Recording Process

45 Slide 2-45 Looking to the Future Understanding U.S. GAAP 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. The Recording Process

46 Slide 2-46 Copyright © 2011 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 permission 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. CopyrightCopyright


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