1. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 2 The Recording Process

2. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Recording Process The account The account Debits and creditsDebits and credits Expanding the basic accounting equationExpanding the basic accounting equation The Recording Process The Recording Process The accounting cycleThe accounting cycle The journal and the ledgerThe journal and the ledger The Trial Balance The Trial Balance LimitationsLimitations Locating errorsLocating errors Some simplistic assumptionsSome simplistic assumptions

3. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Account An individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item An individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item Examples: cash, salaries expense, accounts payableExamples: cash, salaries expense, accounts payable Three parts: title, debit side, credit side Three parts: title, debit side, credit side In its simplest form, these parts are positioned like the letter TIn its simplest form, these parts are positioned like the letter T Therefore called a T accountTherefore called a T account

4. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Debits & Credits Debit (Dr.) indicates left; Credit (Cr.) indicates right Debit (Dr.) indicates left; Credit (Cr.) indicates right Entering an amount on the left side is called debiting the accountEntering an amount on the left side is called debiting the account Entering an amount on the right side is crediting the accountEntering an amount on the right side is crediting the account Debit balance Debit balance Debit amounts exceed the creditsDebit amounts exceed the credits Credit balance Credit balance Credit amounts exceed the debitsCredit amounts exceed the debits

5. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Tabular Versus Account Form Balance 8,050 Cash DebitCredit 15,000 1,200 1,500 600 7,000 600 200 900 Account Form 250 1,300 Cash$15,000 - 7,000 1,200 1,500 - 600 - 900 - 200 - 250 $8,050 600 - 1,300 Tabular Summary

6. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Double-entry System Each transaction is recorded with equal debits and credits Each transaction is recorded with equal debits and credits Total debits always equals total creditsTotal debits always equals total credits Accounting equation will always stay in balance Accounting equation will always stay in balance Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity Every account has a normal balance Every account has a normal balance Either debit or creditEither debit or credit

7. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Assets, Liabilities & Owner’s Capital Liabilities Debit for decrease Credit for increase Normal balance Assets Debit for increase Credit for decrease Normal balance Owner’s Capital Debit for decrease Credit for increase Normal balance

8. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Drawings, Revenues, Expenses Expenses Debit for increase Credit for decrease Normal balance Revenues Debit for decrease Credit for increase Normal balance Drawings Debit for increase Credit for decrease Normal balance

9. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Assets Liabilities Assets Liabilities Accounting Equation Expanded Drawings Drawings Dr + Cr - Dr - Cr + Dr + Cr - = Dr + Cr - + Owner’s Equity - + - - + - Owner’s Owner’s Capital Capital Dr - Cr + Dr - Cr + Revenues Revenues Expenses Expenses

10. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Accounting Cycle Analyze business transactions 1 Journalize the transactions 2 Post to general ledger accounts 3 Prepare a trial balance 4 Journalize & post adjusting entries 5 Prepare adjusted trial balance 6 Prepare financial statements 7 Journalize & post closing entries 8 Prepare post-closing trial balance 9

11. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Recording Process The first three steps in the accounting cycle: 1. Analyze each transaction Determine effect on accountsDetermine effect on accounts 2. Enter transaction in a journal Book of original entryBook of original entry 3. Transfer journal information to ledger accounts

12. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Journal Where transactions are first recorded Where transactions are first recorded Every company has a general journal Every company has a general journal Contributes to recording process: Contributes to recording process: Discloses complete transaction in one placeDiscloses complete transaction in one place Provides a chronological recordProvides a chronological record Helps prevent and locate errorsHelps prevent and locate errors Provides explanation and identifies the source documentProvides explanation and identifies the source document

13. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Journalizing Entering transaction data in the journal Entering transaction data in the journal Separate journal entry for each transaction Separate journal entry for each transaction A complete entry consists of A complete entry consists of Transaction dateTransaction date Accounts & amounts to be debited and creditedAccounts & amounts to be debited and credited Brief explanation of transactionBrief explanation of transaction

14. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Journalizing Technique Transaction date is entered in date columnTransaction date is entered in date column Debit account title is entered at the left margin of the “Account Titles and Explanation” columnDebit account title is entered at the left margin of the “Account Titles and Explanation” column Credit account title is indented on the next line.Credit account title is indented on the next line. GENERAL JOURNAL J1 DateAccount Titles and ExplanationRef.DebitCredit 2011 Sept. 1Cash15,000 M. Doucet, Capital 15,000 Invested cash in business. 1Equipment7,000 Cash 7,000 Purchased equipment for cash.

15. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Journalizing Technique 2 Debit amounts are recorded in the Debit column Debit amounts are recorded in the Debit column Credit amounts are recorded in the Credit column Credit amounts are recorded in the Credit column A brief explanation of the transaction is provided A brief explanation of the transaction is provided GENERAL JOURNAL J1 DateAccount Titles and ExplanationRef.DebitCredit 2011 Sept. 1Cash15,000 M. Doucet, Capital 15,000 Invested cash in business. 1Equipment7,000 Cash 7,000 Purchased equipment for cash.

16. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Journalizing Technique 3 Separate entries with a blank line Separate entries with a blank line Ref. column is used later when transferred to ledger Ref. column is used later when transferred to ledger List all debits in each entry before listing credits List all debits in each entry before listing credits GENERAL JOURNAL J1 DateAccount Titles and ExplanationRef.DebitCredit 2011 Sept. 1Cash15,000 M. Doucet, Capital 15,000 Invested cash in business. 1Equipment7,000 Cash 7,000 Purchased equipment for cash.

17. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Journalizing Technique 4 Simple entry: involves two accounts Simple entry: involves two accounts Compound entry: involves three or more accounts Compound entry: involves three or more accounts GENERAL JOURNAL J1 DateAccount Titles and ExplanationRef.DebitCredit 2011 Sept. 9Cash 1,500 Service Revenue 3,500 Performed services for cash and credit Accounts Receivable 2,000

18. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Ledger Ledger: entire group of accounts maintained by a company Ledger: entire group of accounts maintained by a company General ledger: contains all the assets, liabilities, and owner’s equity accounts General ledger: contains all the assets, liabilities, and owner’s equity accounts Arranged in financial statement orderArranged in financial statement order Assets, liabilities, owner’s capital, drawings, revenues and expensesAssets, liabilities, owner’s capital, drawings, revenues and expenses Posting: procedure of transferring journal entries to the ledger accounts Posting: procedure of transferring journal entries to the ledger accounts

19. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Standard Form of Account

20. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Posting 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 1 2 3 4

21. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Chart of Accounts Lists accounts and their account numbers Lists accounts and their account numbers Indicates where accounts are found in the ledgerIndicates where accounts are found in the ledger Usually starts with balance sheet accounts, followed by income statement accountsUsually starts with balance sheet accounts, followed by income statement accounts Varies by company Varies by company Number of accountsNumber of accounts Types of accountsTypes of accounts Numbering systemNumbering system

22. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Trial Balance List of accounts and their balances at a specific time List of accounts and their balances at a specific time Proves that debits equal credits after posting Proves that debits equal credits after posting Uncovers errors in journalizing and posting Uncovers errors in journalizing and posting To prepare a trial balance: 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

23. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Example Trial Balance PIONEER ADVERTISING AGENCY Trial Balance October 31, 2011 DebitCredit Cash$ 14,250 Advertising supplies2,500 Prepaid insurance600 Office equipment5,000 Notes payable$ 5,000 Accounts payable1,750 Unearned revenue1,200 C. Byrd, capital10,000 C. Byrd, drawings500 Service revenue10,800 Salaries expense 900 $ 28,700 Rent expense 4,000 Accounts receivable1,000

24. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Limitations of a Trial Balance Does not prove: Does not prove: That all transactions have been recorded, orThat all transactions have been recorded, or That the ledger is correctThat the ledger is correct Numerous errors may exist even though the trial balance columns agree 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 amountTotal debits and total credits may be equal, but may still be posted to the wrong account or in the wrong amount

25. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Locating Errors If trial balance does not balance, then: 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 balancesIf 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 in wrong columnIf divisible by two, look for entry in wrong column If divisible by nine, look for transposition errorsIf divisible by nine, look for transposition errors Otherwise, scan to see if an account balance has been omittedOtherwise, scan to see if an account balance has been omitted

26. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. COPYRIGHT Copyright © 2010 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.