Chapter 2: The Recording Process ACT 201 Lecture By: Ms. Adina Malik

The Account Record of increases and decreases in a specific asset, liability & owner’s equity item. The format resembles the letter ‘T’, hence referred to as the T Account An Account consists of three parts: A title Left side, known as debit side Right side, known as credit side Title of Account DebitCredit Accounting custom/rule

Debits & Credits Double-entry accounting system Commonly abbreviate Debit as ‘Dr.’ and Credit as ‘Cr.’ 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.

Debits & Credits Debit > Credit = Debit Balance Title of Account Debit/Dr.Credit/Cr. $10,000$ 3,000 $ 8,000 $ 15,000 Credit > Debit = Credit Balance Title of Account Debit/Dr. Credit/Cr. $ 10,000 $ 3,000 $ 8,000 $ 1,000 Balance 1 3 2

Accounting Equation: Reminder Basis Equation: Assets = Liabilities + Owner’s Equity Expanded Equation: Assets = Liabilities + (Owner’s Capital Owner’s Drawings + Revenue Expenses) The equation must be in balance after every transaction. For every Debit there must be a Credit.

Debit & Credit Procedure ASSETSLIABILITIES Normal Balance is on the increase side

Debit & Credit Procedure: Owner’s Equity

Normal Balance ‘Normal Balance is on the increasing side’ means that:  Normal Balance for Assets, Owner’s Drawings and Expenses is on the Debit side.  Normal Balance for Liabilities, Owner’s Capital and Revenue is on the Credit side.

Debit & Credit Rules Summary

Question 1

Question 2

Steps in the Recording Process Source documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. Three basic steps generally in every business: Analyze each transaction for its effects on the accounts. Enter the transaction information in a journal. Transfer the journal information to the appropriate accounts in the ledger.

Journal It discloses in one place the complete effects of a transaction (debit & credit effects) It provides a chronological record of transactions. As debit & credit amounts for each entry can be easily compared, it helps to prevent or locate errors. Also known as ‘General Journal’ or ‘The Book of Original Entry’. GENERAL JOURNAL DateAccount Titles and ExplanationRef.DebitCredit

Simple & Compound Entries Entering transaction data in the journal is known as journalizing. It is important to use ‘correct’ & ‘specific account titles’ in journalizing. Simple Entry: entry which involves only two accounts, one debit and one credit. Compound Entry: entry that requires more than two accounts in journalizing. E.g. Butler company purchases a delivery truck costing $14,000. ($8,000 paid in cash now and to pay the remaining $6,000 on account)

Journal Problem: Prepare a General Journal Transaction 1: Kate Browne invested $ 20,000 cash for establishing her salon named ‘Super Salon’. Transaction 2: Purchased equipment on account (to be paid in 30 days) for a total cost of $ 5,000 GENERAL JOURNAL DateAccount Titles and ExplanationRef.DebitCredit 1 Cash $20,000 K. Browne, Capital $20,000 (Owner's investment of cash in business) 2 Equipment $5,000 Accounts Payable $5,000 (Purchase of equipment on account)

The Ledger It is the entire group of accounts maintained by a company. It keeps in one place all the information about changes in specific account balances. A General Ledger contains all the asset, liability & owner’s equity accounts. Individual Assets Accounts Cash Land Equipment Supplies Etc. Individual Liability Accounts Accounts Payable Salaries Payable Notes Payable Interest Payable Etc. Individual Owner’s Equity Accounts Salaries Expense Service Revenue K. Browne, Capital K. Browne, Drawings Etc.

Posting ‘Journal Entry’ into ‘The Ledger’ Transaction 1:

Posting ‘Journal Entry’ into ‘The Ledger’ Transaction 2:

Problem (Continued) During the year, there were other transactions, as given below: Transaction 3: Super Salon pays $ 500 as rent of premise. Transaction 4: Received $ 4,000 for providing customer service.

Problem (Continued)

Trial Balance It is a list of accounts and their balances at a given time. Prepared at the end of an accounting period. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting.

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

Question

Bob Sample opened the Campus Laundromat on September 1, During the first month of operations, the following transactions occurred. Sept.1 Bob invested $20,000 cash in the business Sept.2 The company paid $1,000 cash for store rent for Sept. Sept.3 Purchased washers & dryers for $25,000, paying $10,000 in cash and $15,000 on account Sept.4 Received a bill from the Daily News for advertising the opening of the Laundromat $200 Sept.10The company owes employee salaries of $2,000 and pays them in cash Sept.20Bob withdraw $700 cash for personal use Sept.30The company determined that cash receipts for laundry services for the month were $6,200 (a)Journalize the September transactions (b)Open ledger accounts and post the September transactions (c)Prepare a trial balance at September 30, 2010