2. Financial Accounting, Seventh Edition
Chapter 2
The Recording Process
Financial Accounting, Seventh Edition

3. Study Objectives
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.

4. Steps in the Recording Process The Recording Process Illustrated
The Account
Steps in the Recording Process
The Recording Process Illustrated
The Trial Balance
Debits and credits
Debit and credit procedure
Stockholders’ equity relationships
Summary of debit/credit rules
Journal
Ledger
Posting
Summary illustration of journalizing and posting
Limitations of a trial balance
Locating errors
Use of dollar signs

5. An Account can be illustrated in a T-Account form.
The Account
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.

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

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

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

9. Debits and Credits Summary
Normal Balance Debit
Normal Balance Credit
SO 2

10. Debits and Credits Summary
Balance Sheet Income Statement
Asset =
Liability +
Equity
Revenue -
Expense
Debit
Credit
SO 2 Define debits and credits and explain their use in recording business transactions.

11. Debits and Credits Summary
Review Question
Debits:
increase both assets and liabilities.
decrease both assets and liabilities.
increase assets and decrease liabilities.
decrease assets and increase liabilities.
Debits:
increase both assets and liabilities.
decrease both assets and liabilities.
increase assets and decrease liabilities.
decrease assets and increase liabilities.
Solution notes page
SO 2 Define debits and credits and explain their use in recording business transactions.

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

13. Stockholders’ Equity
Issuance of stock and revenues increase equity (credit).
Dividends and expenses decrease equity (debit).
SO 2 Define debits and credits and explain their use in recording business transactions.

14. Revenue and Expense
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.
SO 2 Define debits and credits and explain their use in recording business transactions.

15. Debits and Credits Summary
Review Question
Accounts that normally have debit balances are:
assets, expenses, and revenues.
assets, expenses, and retained earnings.
assets, liabilities, and dividends declared.
assets, dividends declared, and expenses.
Accounts that normally have debit balances are:
assets, expenses, and revenues.
assets, expenses, and retained earnings.
assets, liabilities, and dividends declared.
assets, dividends declared, and expenses.
Solution notes page
SO 2 Define debits and credits and explain their use in recording business transactions.

16. 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.
SO 2 Define debits and credits and explain their use in recording business transactions.

17. Summary of Debit/Credit Rules
Kathy 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 Kathy to set up a double-entry set of accounting records in which to record all of her business transactions. Following are the balance sheet accounts that Hair It Is, Inc., will likely need to record the transactions. Indicate whether the normal balance of each account is a debit or a credit.
Cash
Debit
Equipment
Debit
Supplies
Debit
Accounts payable
Credit
Notes payable
Credit
Common stock
Credit
Solution on notes page
SO 2 Define debits and credits and explain their use in recording business transactions.

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

19. The Journal Book of original entry.
Transactions recorded in chronological order.
Contributions to the recording process:
Discloses the complete effects of a transaction.
Provides a chronological record of transactions.
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.

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

21. Journalizing Simple and Compound Entries
Illustration: Assume that 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.
Illustration 2-15
General Journal
Sept. 1
Delivery equipment
14,000
Cash
8,000
Accounts payable
6,000
Solution on notes page
SO 4

22. The Ledger
A General Ledger contains the entire group of accounts maintained by a company.
The General Ledger includes all the asset, liability, stockholders’ equity, revenue and expense accounts.
Illustration 2-16
SO 5 Explain what a ledger is and how it helps in the recording process.

23. SO 5 Explain what a ledger is and how it helps in the recording process.

24. Standard Form of Account
T-account form used in accounting textbooks.
In practice, the account forms used in ledgers are
much more structured.
Illustration 2-17
SO 5 Explain what a ledger is and how it helps in the recording process.

25. Chart of Accounts
Accounts and account numbers arranged in sequence in which they are presented in the financial statements.
Illustration 2-18
SO 5 Explain what a ledger is and how it helps in the recording process.

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.

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

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

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

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

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

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

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

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

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

37. Review Question Posting Posting: normally occurs before journalizing.
transfers ledger transaction data to the journal.
is an optional step in the recording process.
transfers journal entries to ledger accounts.
Posting:
normally occurs before journalizing.
transfers ledger transaction data to the journal.
is an optional step in the recording process.
transfers journal entries to ledger accounts.
Solution on notes page
SO 6 Explain what posting is and how it helps in the recording process.

38. The Recording Process Illustrated
Kate Turner recorded the following transactions in a general journal during the month of March.
Post these entries to the Cash account.
Solution on notes page
SO 6

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

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

41. Review Question The Trial Balance A trial balance will not balance if:
a correct journal entry is posted twice.
the purchase of supplies on account is debited to Supplies and credited to Cash.
a $100 cash drawing by the owner is debited to Owner’s Drawing for $1,000 and credited to Cash for $100.
a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.
A trial balance will not balance if:
a correct journal entry is posted twice.
the purchase of supplies on account is debited to Supplies and credited to Cash.
a $100 cash drawing by the owner is debited to Owner’s Drawing for $1,000 and credited to Cash for $100.
a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.
Solution on notes page
SO 7 Prepare a trial balance and explain its purposes.

42. SO 7 Prepare a trial balance and explain its purposes.

43. The Trial Balance
The accounts come from the ledger of Christel Corporation at December 31, 2011.
Solution on notes page
SO 7

44. Your Personal Annual Report
David Edmondson, the president and CEO of well-known electronics retailer Radio Shack, overstated his accomplishments by claiming that he had earned a bachelor’s of science degree, when in fact he had not. Apparently his employer had not done a background check to ensure the accuracy of his résumé.
A chief financial officer of Veritas Software lied about having an M.B.A. from Stanford University.

45. A former president of the U. S
A former president of the U.S. Olympic Committee lied about having a Ph.D. from Arizona State University. When the truth was discovered, she resigned.
The University of Notre Dame discovered that its football coach, George O’Leary, lied about his education and football history. He was forced to resign after only five days.

46. A survey by Automatic Data Processing reported that 40% of applicants misrepresented their education or employment history.
A survey by the Society for Human Resource Management of human resource professionals reported the following responses to the following question.

47. Using Radio Shack as an example, what should the company have done when it learned of the falsehoods on Mr. Edmondson’s résumé? Should Radio Shack have fired him?
NO: Mr. Edmondson had been a Radio Shack employee for 11 years. He had served the company in a wide variety of positions, and had earned the position of CEO through exceptional performance. While the fact that he lied 11 years earlier on his résumé was unfortunate, his service since then made this past transgression irrelevant. In addition, the company was in the midst of a massive restructuring, which included closing 700 of its 7,000 stores. It could not afford additional upheaval at this time.
YES: Radio Shack is a publicly traded company. Investors, creditors, employees, and others doing business with the company will not trust it if its leader is known to have poor integrity. The “tone at the top” is vital to creating an ethical organization.

48. Copyright
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