1. WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 2 The Recording Process Prepared by: Debbie Musil Kwantlen Polytechnic University 1

2. Copyright John Wiley & Sons Canada, Ltd.2 Chapter 2: The Recording Process Study Objectives 1.Define debits and credits and illustrate how they are used to record transactions. 2.Explain the recording process and analyze, journalize, and post transactions. 3.Explain the purpose of a trial balance, and prepare one.

3. Copyright John Wiley & Sons Canada, Ltd.3 The account –Debits and credits –Double-entry accounting Analyzing and Recording Transactions –The accounting cycle and steps in the recording process –The journal –The ledger The Trial Balance –Limitations –Locating errors –Some process explanations The Recording Process

4. The Account Copyright John Wiley & Sons Canada, Ltd.4 An individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item –Examples: cash, accounts payable, service revenue, salaries expense Three parts: title, debit side, credit side –In its simplest form, these parts are positioned like the letter T –Therefore called a T account

5. Debits & Credits Copyright John Wiley & Sons Canada, Ltd.5 Debit (Dr.) indicates left; Credit (Cr.) indicates right –Entering an amount on the left side is called debiting the account –Entering an amount on the right side is crediting the account Debit balance –Debit amounts exceed the credits Credit balance –Credit amounts exceed the debits

6. Tabular Versus Account Form Copyright John Wiley & Sons Canada, Ltd. 6 Tabular Summary Account Form CASH $15,000 -7,000 1,200 1,500 -600 -900 -200 -250 600 -1,300 $8,050 CASH DebitCredit 15,0007,000 1,200600 1,500900 600200 250 1,300 Balance 8,050

7. Debit & Credit Procedure Copyright John Wiley & Sons Canada, Ltd.7 Debit does not mean increase or decrease –Can be either depending on the type account Credit also does not mean increase or decrease –also depends on account type Assets are on the debit side of the equation –Increases are also on debit side; decreases on credit side Liabilities are on the credit side –Increases are on the credit side; decreases on the debit side

8. Assets, Liabilities & Owner’s Capital Copyright John Wiley & Sons Canada, Ltd.8

9. Drawings, Revenues, Expenses Copyright John Wiley & Sons Canada, Ltd.9

10. Accounting Equation Expanded Copyright John Wiley & Sons Canada, Ltd.10

11. Double-Entry Accounting System Copyright John Wiley & Sons Canada, Ltd.11 Each transaction is recorded with equal debits and credits –Total debits always equals total credits Accounting equation will always stay in balance –Assets = Liabilities + Owner’s Equity Every account has a normal balance –Either debit or credit

12. Copyright John Wiley & Sons Canada, Ltd.12 Chapter 2: The Recording Process Study Objectives 1.Define debits and credits and illustrate how they are used to record transactions. 2.Explain the recording process and analyze, journalize, and post transactions. 3.Explain the purpose of a trial balance, and prepare one.

13. The Accounting Cycle Copyright John Wiley & Sons Canada, Ltd.13

14. The Recording Process Copyright John Wiley & Sons Canada, Ltd.14 The first three steps in the accounting cycle: 1.Analyze business transactions –Determine effect on accounts 2.Enter transactions in a journal –The book of original entry 3.Transfer journal information to ledger accounts

15. The Journal Copyright John Wiley & Sons Canada, Ltd.15 Where transactions are first recorded Every company has a general journal Contributes to recording process: –Discloses complete effect of a transaction in one place –Provides a chronological record –Helps prevent and locate errors –Provides explanation and identifies the source document

16. Journalizing Copyright John Wiley & Sons Canada, Ltd.16 Entering transaction data in the journal Separate journal entry for each transaction A complete entry consists of –Transaction date –Accounts & amounts to be debited and credited –Brief explanation of transaction

17. Journalizing Technique Copyright John Wiley & Sons Canada, Ltd.17 – Transaction date is entered in date column – Debit account title is entered at the left margin of the “Account Titles and Explanation” column – Credit account title is indented on the next line.

18. Journalizing Technique 2 Copyright John Wiley & Sons Canada, Ltd.18 Debit amounts are recorded in the Debit (left) column Credit amounts are recorded in the Credit (right) column A brief explanation of the transaction is provided

19. Journalizing Technique 3 Copyright John Wiley & Sons Canada, Ltd.19 Separate entries with a blank line Ref. column is used later when transferred to ledger List all debits in each entry before listing credits

20. Journalizing Technique 4 Copyright John Wiley & Sons Canada, Ltd.20 Simple entry: involves two accounts Compound entry: involves three or more accounts

21. The Ledger Copyright John Wiley & Sons Canada, Ltd.21 Ledger: entire group of accounts maintained by a company General ledger: contains all the assets, liabilities, and owner’s equity accounts –Arranged in financial statement order –Assets, liabilities, owner’s capital, drawings, revenues and expenses Posting: procedure of transferring journal entries to the ledger accounts

22. Standard Form of Account Copyright John Wiley & Sons Canada, Ltd.22

23. Posting Copyright John Wiley & Sons Canada, Ltd.23 1.Post to debit account: date, journal page number, amount 2.Enter debit account number in journal reference column 3.Post to credit account: journal page number, amount 4.Enter credit account number in journal reference column

24. Chart of Accounts Copyright John Wiley & Sons Canada, Ltd.24 List of accounts and their account numbers –Indicates where accounts are found in the ledger –Usually starts with balance sheet accounts, followed by income statement accounts Varies by company –Number of accounts –Types of accounts –Numbering system

25. Copyright John Wiley & Sons Canada, Ltd.25 1.Define debits and credits and illustrate how they are used to record transactions. 2.Explain the recording process and analyze, journalize, and post transactions. 3.Explain the purpose of a trial balance, and prepare one. Chapter 2: The Recording Process Study Objectives

26. The Trial Balance Copyright John Wiley & Sons Canada, Ltd.26

27. The Trial Balance Copyright John Wiley & Sons Canada, Ltd.27 List of accounts and their balances at a specific time Proves that debits equal credits after posting Uncovers errors in journalizing and posting To prepare a trial balance: 1.List accounts and their balances 2.Total the debit and credit columns 3.Ensure the two columns are equal

28. Example Trial Balance Copyright John Wiley & Sons Canada, Ltd.28

29. Limitations of a Trial Balance Copyright John Wiley & Sons Canada, Ltd.29 Does not prove: –That all transactions have been recorded, or –That the ledger is correct Numerous errors may exist even though the trial balance columns agree –Total debits and total credits may be equal, but may still be posted to the wrong account or in the wrong amount

30. Locating Errors Copyright John Wiley & Sons Canada, Ltd.30 If trial balance does not balance, then: –If error is an amount such as $1, $100 or $1,000, re-add and re-calculate account balances –If divisible by two, look for entry (= ½ of the error ) in the wrong column –If divisible by nine, look for transposition errors –Otherwise, scan to see if an account balance has been omitted

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