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Chapter 2-1. Chapter 2-2 CHAPTER 2 THE RECORDING PROCESS Accounting Principles, Eighth Edition.

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Presentation on theme: "Chapter 2-1. Chapter 2-2 CHAPTER 2 THE RECORDING PROCESS Accounting Principles, Eighth Edition."— Presentation transcript:

1 Chapter 2-1

2 Chapter 2-2 CHAPTER 2 THE RECORDING PROCESS Accounting Principles, Eighth Edition

3 Chapter 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 Chapter 2-4 The Account Debits and credits Expansion of basic equation Steps in the Recording Process The Recording Process Illustrated The Trial Balance Limitations of a trial balance Locating errors Use of dollar signs Summary illustration of journalizing and posting The Recording Process JournalLedger

5 Chapter 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. LO 1 Explain what an account is and how it helps in the recording process. The Account

6 Chapter 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. LO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits

7 Chapter 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 LO 2 Define debits and credits and explain their use in recording business transactions.

8 Chapter 2-8 greater than If Debits are greater than Credits, the account will have a debit balance. $10,000Transaction #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 8,000Transaction #3

9 Chapter 2-9 Normal Balance Credit Normal Balance Debit Debits and Credits Summary LO 2

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

11 Chapter 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 LO 2 Define debits and credits and explain their use in recording business transactions.

12 Chapter 2-12 Discussion Question Q4. Maria Alvarez, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Maria correct? Discuss. See notes page for discussion Debits and Credits Summary LO 2 Define debits and credits and explain their use in recording business transactions.

13 Chapter 2-13 Assets - Debits should exceed credits. Liabilities – Credits should 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

14 Chapter 2-14 Owner’s investments and revenues increase owner’s equity (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

15 Chapter 2-15 The purpose of earning revenues is to benefit the owner(s). The effect of debits and credits on revenue accounts is the same as their effect on Owner’s Capital. Expenses have the opposite effect: expenses decrease owner’s equity. LO 2 Define debits and credits and explain their use in recording business transactions. Revenue and Expense

16 Chapter 2-16 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.

17 Chapter 2-17 Expansion of the Basic Equation Relationship among the assets, liabilities and owners’ equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit. Illustration 2-11 AssetsLiabilities = Owners’ Equity Basic Equation Expanded Basic Equation LO 2 Define debits and credits and explain their use in recording business transactions. +

18 Chapter 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 LO 3 Identify the basic steps in the recording process. Illustration 2-12 Analyze each transactionEnter transaction in a journal Transfer journal information to ledger accounts

19 Chapter 2-19 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 the debit and credit amounts can be easily compared. The Journal LO 3 Identify the basic steps in the recording process.

20 Chapter 2-20 Journalizing - Entering transaction data in the journal. JournalizingJournalizing E2-4 (Facts) Presented below is information related to Hanshew 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 $3,200 for realty services provided. 6 Pays $700 on balance related to transaction of Oct Pays the administrative assistant $2,500 salary for Oct.30 E2-5 Instructions - Journalize the transactions for E2-4.

21 Chapter 2-21 JournalizingJournalizing General Journal LO 4 Explain what a journal is and how it helps in the recording process. E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Pete Hanshew begins business as a real estate agent with a cash investment of $15,000. Oct. 1

22 Chapter 2-22 JournalizingJournalizing General Journal LO 4 Explain what a journal is and how it helps in the recording process. E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Purchases office furniture for $1,900, on account. Oct. 3

23 Chapter 2-23 JournalizingJournalizing General Journal LO 4 Explain what a journal is and how it helps in the recording process. E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. Oct. 6

24 Chapter 2-24 JournalizingJournalizing General Journal LO 4 Explain what a journal is and how it helps in the recording process. E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Pays $700 on balance related to transaction of Oct. 3. Oct. 27

25 Chapter 2-25 JournalizingJournalizing General Journal LO 4 Explain what a journal is and how it helps in the recording process. E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Pays the administrative assistant $2,500 salary for Oct. Oct. 30

26 Chapter 2-26 Simple Entry – Two accounts, one debit and one credit. Compound Entry – Three or more accounts. JournalizingJournalizing Example – On June 15, H. Burns, purchased equipment for $15,000 by paying cash of $10,000 and the balance on account (to be paid within 30 days). LO 4 Explain what a journal is and how it helps in the recording process. General Journal

27 Chapter 2-27 Ledger contains the entire group of accounts maintained by a company. A general ledger contains all the asset, liability, owner’s equity, revenue, and expense accounts. Chart of Accounts The Ledger LO 5 Explain what a ledger is and how it helps in the recording process.

28 Chapter 2-28 Accounts arranged in sequence in which they are presented in the financial statements. Chart of Accounts LO 6 Explain what posting is and how it helps in the recording process.

29 Chapter 2-29 T-account form used in accounting textbooks. In practice, the account forms used in ledgers are much more structured. Standard Form of Account LO 5 Explain what a ledger is and how it helps in the recording process.

30 Chapter 2-30 Posting Posting – the process of transferring amounts from the journal to the ledger accounts. General Ledger General Journal Oct. 1Owner investmentJ115, J1 PostingPosting LO 6 Explain what posting is and how it helps in the recording process.

31 Chapter 2-31 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 LO 6 Explain what posting is and how it helps in the recording process.

32 Chapter 2-32 The Recording Process Illustrated LO 6 Explain what posting is and how it helps in the recording process. 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 2-19

33 Chapter 2-33 A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. The Trial Balance LO 7 Prepare a trial balance and explain its purposes.

34 Chapter 2-34 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 LO 7 Prepare a trial balance and explain its purposes. Limitations of a Trial Balance

35 Chapter 2-35 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. Review Question The Trial Balance LO 7 Prepare a trial balance and explain its purposes.

36 Chapter 2-36 Q2-19. Jim Benes is confused about how accounting information flows through the accounting system. He believes 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 flow of the information. See notes page for discussion Recording Process Discussion Question LO 7 Prepare a trial balance and explain its purposes.

37 Chapter 2-37 Copyright © 2006 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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