1. University of California, Santa Barbara
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College

2. 2 The Recording Process Learning Objectives
After studying this chapter, you should be able to:
1. State the accounting equation, and define its components.
2. Analyze the effects of business transactions on the accounting equation.
3. Understand the four financial statements and how they are prepared.
4. Explain what an account is and how it helps in the recording process.
5. Define debits and credits and explain their use in recording business transactions.
6. Identify the basic steps in the recording process.
7. Explain what a journal is and how it helps in the recording process.
8. Explain what a ledger is and how it helps in the recording process.
9. Explain what posting is and how it helps in the recording process.
10. Prepare a trial balance and explain its purposes.

3. Preview of Unit 2

4. The Basic Accounting Equation
Assets
Liabilities
Owner’s Equity = +
Provides the underlying framework for recording and summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership claims.
LO 6 State the accounting equation, and define its components.

5. The Basic Accounting Equation
Assets
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Assets
Liabilities
Owner’s Equity = +
LO 6 State the accounting equation, and define its components.

6. The Basic Accounting Equation
Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Assets
Liabilities
Owner’s Equity = +
LO 6 State the accounting equation, and define its components.

7. The Basic Accounting Equation
Owner’s Equity
Ownership claim on total assets.
Referred to as residual equity.
Investment by owners and revenues (+)
Drawings and expenses (-).
Assets
Liabilities
Owner’s Equity = +
LO 6 State the accounting equation, and define its components.

8. Owner’s Equity Increases in Owner’s Equity
Illustration 1-6
Increases in Owner’s Equity
Investments by owner are the assets the owner puts into the business.
Revenues result from business activities entered into for the purpose of earning income.
Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.
LO 6 State the accounting equation, and define its components.

9. Owner’s Equity Decreases in Owner’s Equity
Illustration 1-6
Decreases in Owner’s Equity
Drawings An owner may withdraw cash or other assets for personal use.
Expenses are the cost of assets consumed or services used in the process of earning revenue.
Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.
LO 6 State the accounting equation, and define its components.

10. Using the Accounting Equation
Transactions are a business’s economic events recorded by accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the accounting equation.
LO 7 Analyze the effects of business transactions on the accounting equation.

11. Discuss guided trip options with customer
Using the Accounting Equation
Illustration: Are the following events recorded in the accounting records?
Discuss guided trip options with customer
Purchase computer
Event
Pay rent
Is the financial position (assets, liabilities, or owner’s equity) of the company changed?
Criterion
Record/ Don’t Record
LO 7 Analyze the effects of business transactions on the accounting equation.

12. Transaction Analysis
Transaction (1): Ray Neal decides to open a computer programming service which he names Softbyte. On September 1, 2014, Ray Neal invests $15,000 cash in the business.
LO 7

13. Transaction Analysis
Transaction (2): Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.
LO 7

14. Transaction Analysis
Transaction (3): Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months. The purchase is made on account.
LO 7

15. Transaction Analysis
Transaction (4): Softbyte receives $1,200 cash from customers for programming services it has provided.
LO 7

16. Transaction Analysis
Transaction (5): Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.
LO 7

17. Transaction Analysis
Transaction (6): Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.
LO 7

18. Transaction Analysis
Transaction (7): Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.
LO 7

19. Transaction Analysis
Transaction (8): Softbyte pays its $250 Daily News bill in cash.
LO 7

20. Transaction Analysis
Transaction (9): Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].
LO 7

21. Transaction Analysis
Transaction (10): Ray Neal withdraws $1,300 in cash from the business for his personal use.
Illustration 1-8
Tabular summary of
Softbyte transactions
LO 7

22. Financial Statements Companies prepare four financial statements :
Income Statement
Owner’s Equity Statement
Balance Sheet
Statement of Cash Flows
LO 8 Understand the four financial statements and how they are prepared.

23. Financial Statements
Net income is needed to determine the ending balance in owner’s equity.
Illustration 1-9
Financial statements and
their interrelationships
LO 8

24. Financial Statements
The ending balance in owner’s equity is needed in preparing the balance sheet
Illustration 1-9
LO 8

25. Financial Statements LO 8
The balance sheet and income statement are needed to prepare statement of cash flows.
Illustration 1-9
LO 8

26. Financial Statements Income Statement
Reports the revenues and expenses for a specific period of time.
Lists revenues first, followed by expenses.
Shows net income (or net loss).
LO 8 Understand the four financial statements and how they are prepared.

27. Financial Statements Owner’s Equity Statement
Reports the changes in owner’s equity for a specific period of time.
The time period is the same as that covered by the income statement.
LO 8 Understand the four financial statements and how they are prepared.

28. Financial Statements Balance Sheet
Reports the assets, liabilities, and owner’s equity at a specific date.
Lists assets at the top, followed by liabilities and owner’s equity.
Total assets must equal total liabilities and owner’s equity.
Is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year- end).
LO 8 Understand the four financial statements and how they are prepared.

29. Financial Statements Statement of Cash Flows
Information for a specific period of time.
Answers the following:
Where did cash come from?
What was cash used for?
What was the change in the cash balance?
LO 8 Understand the four financial statements and how they are prepared.

30. 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.
LO 1 Explain what an account is and how it helps in the recording process.

31. The Account Debits and Credits Double-entry 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.
LO 2 Define debits and credits and explain their use in recording business transactions.

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

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

34. Debits and Credits Assets - Debits should exceed credits.
Liabilities – Credits should exceed debits.
Normal balance is on the increase side.
LO 2 Define debits and credits and explain their use in recording business transactions.

35. Debits and Credits
Owner’s investments and revenues increase owner’s equity (credit).
Owner’s drawings and expenses decrease owner’s equity (debit).
Helpful Hint Because
revenues increase owner’s
equity, a revenue account
has the same debit/credit
rules as the Owner’s
Capital account. Expenses
have the opposite effect.
LO 2

36. Debits and Credits
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.
LO 2 Define debits and credits and explain their use in recording business transactions.

37. Debits/Credits Rules
Normal Balance Debit
Normal Balance Credit
LO 2

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

39. Summary of Debits/Credits Rules
Relationship among the assets, liabilities and owner’s equity of a business:
Illustration 2-11
Basic Equation
Assets =
Liabilities +
Owner’s Equity
Expanded Basic Equation
The equation must be in balance after every transaction. For every Debit there must be a Credit.
LO 2 Define debits and credits and explain their use in recording business transactions.

40. Steps in the Recording Process
Illustration 2-12
Analyze each transaction
Enter transaction in a journal
Transfer journal information to ledger accounts
Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.
LO 3 Identify the basic steps in the recording process.

41. Steps in the Recording Process
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.
LO 4 Explain what a journal is and how it helps in the recording process.

42. Steps in the Recording Process
Journalizing - Entering transaction data in the journal.
Illustration: On September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash.
Illustration 2-13
General Journal
Sept. 1
Cash
15,000
Owner’s Capital
15,000
Equipment
7,000
Cash
7,000
LO 4 Explain what a journal is and how it helps in the recording process.

43. Steps in the Recording Process
Simple and Compound Entries
Illustration: 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 2-14
General Journal
July 1
Equipment
14,000
Cash
8,000
Accounts payable
6,000
LO 4 Explain what a journal is and how it helps in the recording process.

44. Steps in the Recording Process
The Ledger
General Ledger contains the entire group of accounts maintained by a company.
Illustration 2-15
LO 5 Explain what a ledger is and how it helps in the recording process.

45. Steps in the Recording Process
Standard Form of Account
Illustration 2-16
LO 5 Explain what a ledger is and how it helps in the recording process.

46. Steps
Posting – process of transferring amounts from the journal to the ledger accounts.
Illustration 2-17
LO 6 Explain what posting is and how it helps in the recording process.

47. Chart of Accounts
Accounts and account numbers arranged in sequence in which they are presented in the financial statements.
Illustration 2-18
LO 6 Explain what posting is and how it helps in the recording process.

48. 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 2-19
LO 6

49. The Recording Process Illustrated
Illustration 2-20
LO 6

50. The Recording Process Illustrated
Illustration 2-21
LO 6

51. The Recording Process Illustrated
Illustration 2-22
LO 6

52. The Recording Process Illustrated
Illustration 2-23
LO 6

53. The Recording Process Illustrated
Illustration 2-24
LO 6

54. The Recording Process Illustrated
Illustration 2-25
LO 6

55. The Recording Process Illustrated
Illustration 2-26
LO 6

56. The Recording Process Illustrated
Illustration 2-27
LO 6

57. The Recording Process Illustrated
Illustration 2-28
LO 6

58. Summary of Journalizing and Posting
Illustration 2-29
LO 6

59. Illustration 2-30
LO 6

60. Trial Balance LO 7 Prepare a trial balance and explain its purposes.
Illustration 2-31
LO 7 Prepare a trial balance and explain its purposes.

61. 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.
LO 7 Prepare a trial balance and explain its purposes.