1. THE RECORDING PROCESS -JOURNALIZING
Lecture 4 & 5
THE RECORDING PROCESS -JOURNALIZING

2. CHAPTER2 The Recording Process STUDY OBJECTIVES:
Explain what an account is and helps in recording process.
2) Define debit and credit.
3) Explain journal and journalizing process

3. PreviewofCHAPTER2

4. The Account
Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Dt Cr

5. Classification of Accounts
The accounts can be classified as:
Assets.
Liabilities.
Owner’s Equity.

6. Assets Resources a business owns Can be divided into : Current Assets.
Long term Assets.

7. Current Assets
Assets that can be converted to cash or used to pay current liabilities within 12 months.
Examples :
Cash
Account Receivables.

8. Fixed Assets
known as a non-current asset which cannot easily be converted into cash.
Examples:
Land.
Building.
Machinery.

9. Liabilities Creditor claims on total assets Can be divided into:
Current Liabilities.
Long Term Liabilities.

10. Current Liabilities
current liabilities are all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle* of a given firm, whichever period is longer.
Examples:
Account Payable.
Rent Payable, Salary Payable.
* An operating cycle for a firm is the average time that is required to
go from cash to cash in producing revenues

11. Long Term Liablities
all liabilities of the business that are to be settled in cash more than one year
Examples:
Debenture.
Bank Loan.

12. Owner’s Equity The ownership claim on total assets. Divided into:
Capital.
Drawing.
Revenue.
Expense.

13. Double Entry Bookkeeping System
Scale or Balance
DEBIT
CREDIT
Luca Pacioli
Founder of Double Entry System

14. Double Entry Bookkeeping System
Cash
An account must have a title

15. The 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.

16. Left side of an account is called debit side.
Cash
Left debit
Left side of an account is called debit side.

17. Right side of an account is called as credit side.
Cash
Left debit
Right credit
Right side of an account is called as credit side.

18. The Account Debit and Credit Procedures
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.
SO 2 Define debits and credits and explain their use in recording business transactions.

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

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

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

22. Debits and Credits
Owner’s investments and revenues increase owner’s equity (credit).
Owner’s drawings and expenses decrease owner’s equity (debit).
SO 2 Define debits and credits and explain their use in recording business transactions.

23. Debits and Credits
Purpose of earning revenues is to benefit the owner(s).
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.
SO 2 Define debits and credits and explain their use in recording business transactions.

24. Debits/Credits Rules
Normal Balance Debit
Normal Balance Credit
SO 2

25. Debit Credit Rule Dt. Cr. Asset + - Liability - + Owner’s equity - +
ASSETS = LIABILITIES O/EQUITY
Dt.
Cr.
Asset + -
Liability - +
Owner’s equity - +

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

27. Debits/Credits Rules Question Debits:
increase both assets and liabilities.
decrease both assets and liabilities.
increase assets and decrease liabilities.
decrease assets and increase liabilities.
SO 2 Define debits and credits and explain their use in recording business transactions.

28. Debits/Credits Rules Question
Accounts that normally have debit balances are:
assets, expenses, and revenues.
assets, expenses, and owner’s capital.
assets, liabilities, and owner’s drawings.
assets, owner’s drawings, and expenses.
SO 2 Define debits and credits and explain their use in recording business transactions.

29. 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.
SO 2 Define debits and credits and explain their use in recording business transactions.

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

31. 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.
SO 4 Explain what a journal is and how it helps in the recording process.

32. Account Titles and Explanation
Journalizing Process
Enter the transaction date in the date column. J1
General Journal
Credit
Debit
Ref.
Account Titles and Explanation
Date
2011
Oct. 1

33. Account Titles and Explanation
Journalizing Process
The debit account title is entered first at the extreme left margin in the “account titles and explanation column and the amount is recorded in the DEBIT column . J1
General Journal
Credit
Debit
Ref.
Account Titles and Explanation
Date
2011
Oct. 1
Cash
15,000

34. Account Titles and Explanation
Journalizing Process
The credit account title is indented and entered at the next line in the “account titles and explanation column and the amount is recoded in the CREDIT column . J1
General Journal
Credit
Debit
Ref.
Account Titles and Explanation
Date
2011
Oct. 1
Cash
15,000
Owner’s Capital
15,000

35. Account Titles and Explanation
Journalizing Process
A brief explanation of the transaction appears on the line below the credit title. J1
General Journal
Credit
Debit
Ref.
Account Titles and Explanation
Date
2011
Oct. 1
Cash
15,000
Owner’s Capital
15,000
(Owner’s investment of cash in the business.)

36. Account Titles and Explanation
Journalizing Process
The column titled Ref. Is left blank when the journal entry is made. This column is used later when journal entry is transferred to the accounts. J1
General Journal
Credit
Debit
Ref.
Account Titles and Explanation
Date
2011
Oct. 1
Cash
15,000
Owner’s Capital
15,000
(Owner’s investment of cash in the business.)

37. Simple and Compound Journal Entries
If an entry involves only two accounts, one debit and one credit, it is considered a simple entry.
When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.

38. 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
SO 4 Explain what a journal is and how it helps in the recording process.

39. 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
SO 4 Explain what a journal is and how it helps in the recording process.

40. 1-40
End of Lecture 4 & 5
End of Chapter 1.