Slide 2-1

Slide 2-2 Chapter 2 The Recording Process Financial Accounting, Seventh Edition

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

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

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

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

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.

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 SO 2 Define debits and credits and explain their use in recording business transactions. $1,000 8,000Transaction #3

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

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.

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

Slide 2-12 Discussion Question Q2-4. 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 SO 2 Define debits and credits and explain their use in recording business transactions.

Slide 2-13 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. Assets and Liabilities

Slide 2-14 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. Stockholders’ Equity

Slide 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 stockholders’ equity. Expenses have the opposite effect: expenses decrease stockholders’ equity. SO 2 Define debits and credits and explain their use in recording business transactions. Revenue and Expense

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

Slide 2-17 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.

Slide 2-18 Debit Credit Debit Credit Kathy Browne, president of Hair It Is, Inc., has just rented space in a shopping mall in which she Solution on notes page 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. Summary of Debit/Credit Rules SO 2 Define debits and credits and explain their use in recording business transactions. Cash Supplies Notes payable Equipment Accounts payable Common stock

Slide 2-19 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

Slide 2-20 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. The Journal SO 4 Explain what a journal is and how it helps in the recording process.

Slide 2-21 Journalizing - Entering transaction data in the journal. JournalizingJournalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. SO 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 in exchange for stock. Oct. 11 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.

Slide 2-22 JournalizingJournalizing General Journal SO 4 Explain what a journal is and how it helps in the recording process. E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency. Pete Hanshew begins business as a real estate agent with a cash investment of $15,000. Oct. 11 Cash Common stock Oct. 1 15,000 (Investment for stock)

Slide 2-23 Journalizing - Entering transaction data in the journal. JournalizingJournalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. SO 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 in exchange for stock. Oct. 11 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.

Slide 2-24 JournalizingJournalizing SO 4 Explain what a journal is and how it helps in the recording process. Purchases office furniture for $1,900, on account. Oct. 33 E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency. General Journal Office furniture Accounts payable Oct. 3 1,900 (Purchase on account)

Slide 2-25 Journalizing - Entering transaction data in the journal. JournalizingJournalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. SO 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 in exchange for stock. Oct. 11 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.

Slide 2-26 JournalizingJournalizing SO 4 Explain what a journal is and how it helps in the recording process. Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. Oct. 66 E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency. General Journal Accounts receivable Service revenue Oct. 6 3,200 (Services provided)

Slide 2-27 Journalizing - Entering transaction data in the journal. JournalizingJournalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. SO 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 in exchange for stock. Oct. 11 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.

Slide 2-28 JournalizingJournalizing SO 4 Explain what a journal is and how it helps in the recording process. Pays $700 on balance related to transaction of Oct. 3. Oct E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency. General Journal Accounts payable Cash Oct (Payment on account)

Slide 2-29 Journalizing - Entering transaction data in the journal. JournalizingJournalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. SO 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 in exchange for stock. Oct. 11 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.

Slide 2-30 JournalizingJournalizing SO 4 Explain what a journal is and how it helps in the recording process. Pays the administrative assistant $2,500 salary for Oct. Oct E2-5 (Facts) Journalize the transactions related to Hanshew Real Estate Agency. General Journal Salaries expense Cash Oct. 30 2,500 (Payment for salaries)

Slide 2-31 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). SO 4 Explain what a journal is and how it helps in the recording process. General Journal Equipment Cash Jun ,000 10,000 (Purchase equipment) Accounts payable5,000

Slide 2-32 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. The Ledger SO 5 Explain what a ledger is and how it helps in the recording process. Illustration 2-16

Slide 2-33 SO 5 Explain what a ledger is and how it helps in the recording process.

Slide 2-34 T-account form used in accounting textbooks. In practice, the account forms used in ledgers are much more structured. Standard Form of Account SO 5 Explain what a ledger is and how it helps in the recording process. Illustration 2-17

Slide 2-35 Accounts and account numbers arranged in sequence in which they are presented in the financial statements. Chart of Accounts SO 5 Explain what a ledger is and how it helps in the recording process.

Slide 2-36 Posting Posting – the process of transferring amounts from the journal to the ledger accounts. PostingPosting Illustration 2-19 SO 6 Explain what posting is and how it helps in the recording process.

Slide 2-37 Posting Posting – the process of transferring amounts from the journal to the ledger accounts. General Ledger General Journal Oct. 1J115, J1 PostingPosting SO 6 Explain what posting is and how it helps in the recording process.

Slide 2-38 General Ledger Oct. 1J115,000 SO 6 Explain what posting is and how it helps in the recording process. Oct. 1J115,000 Cash Acct. No. 101 Common stock Acct. No J1 E2-5 PostingPosting General Journal

Slide 2-39 General Ledger Office Furniture Acct. No. 140 Accounts Payable Acct. No. 200 PostingPosting Oct. 3J11,900 SO 6 Explain what posting is and how it helps in the recording process. Oct. 3J11, J1 1,900 E2-5

Slide 2-40 General Ledger Accounts Receivable Acct. No. 112 Service Revenue Acct. No. 400 Oct. 6J13,200 SO 6 Explain what posting is and how it helps in the recording process. Oct. 6J13, J1 E2-5 PostingPosting

Slide 2-41 SO 6 Explain what posting is and how it helps in the recording process J1 E2-5 General Ledger Accounts Payable Acct. No. 200 Oct. 3J11,900 Oct.27J11, General Ledger Oct. 1J115,000 Cash Acct. No. 101 Oct.27J170014,300 PostingPosting

Slide 2-42 SO 6 Explain what posting is and how it helps in the recording process J1 E2-5 General Ledger Salaries Expense Acct. No. 726 Oct.30J12,500 General Ledger Oct. 1J115,000 Cash Acct. No. 101 Oct.27J170014,300 Oct.30J12,50011,800 PostingPosting

Slide 2-43 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.

Slide 2-44 Kate Turner recorded the following transactions in a general journal during the month of March. Solution on notes page The Recording Process Illustrated Post these entries to the Cash account. SO 6

Slide 2-45 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. E2-5

Slide 2-46 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.

Slide 2-47 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 SO 7 Prepare a trial balance and explain its purposes. Solution on notes page 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.

Slide 2-48 SO 7 Prepare a trial balance and explain its purposes.

Slide 2-49 The accounts come from the ledger of Christel Corporation at December 31, Solution on notes page The Trial Balance SO 7

Slide 2-50  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 r é sum é.  A chief financial officer of Veritas Software lied about having an M.B.A. from Stanford University. Your Personal Annual Report

Slide 2-51  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.

Slide 2-52  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.

Slide 2-53 Using Radio Shack as an example, what should the company have done when it learned of the falsehoods on Mr. Edmondson ’ s r é sum é ? Should Radio Shack have fired him? 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. 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 r é sum é 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.

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