1. Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems
Accounting I BA 104
Lecture 4
The Recording Process
Dr. Mohamed A. Hamada
Lecturer of Accounting Information Systems

2. Study Objectives
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.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

3. The Recording Process The Account Steps in the Recording Process
The Recording Process Illustrated
The Trial Balance
Debits and credits
Expansion of basic equation
Journal
Ledger
Summary illustration of journalizing and posting
Limitations of a trial balance
Locating errors
Use of dollar signs
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

4. 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.

5. Double-entry accounting system
Debits and Credits
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.
DEBITS must equal CREDITS.

6. Basic Steps in the Recording Process.
When a transaction occurs:
Basic Steps in the Recording Process.
Analyze
Journalize
Post

7. Recording Process Step 1
Analyze each transaction and effect on accounts

8. Accounting Transactions...
are economic events that must be recorded in the financial statements because they affect
assets
liabilities
and/or owners’ equity

9. Transaction Analysis
The process of identifying the specific effects of economic events on the accounting equation.
Each transaction has a dual (double-sided) effect on the accounting equation.

10. Recording Process Step 2
Enter transaction information in a journal, a process called journalizing

11. The Journal...
is an accounting record where the transactions are recorded in chronological order.

12. Recording Process Step 3 (posting)
Copy (post) the journal information to the appropriate accounts in the ledger

13. “T” Accounts
SHAPED
LIKE a “T”
Debit
Credit

14. “T” Accounts
Debit means
Left
Credit means
Right
Debit
Credit

15. “T” Accounts
Abbreviation
for Debit
Abbreviation
for Credit
Dr.
Cr.

16. “T” Accounts
ACCOUNT NAME
CASH
Dr.
Cr.

17. The Ledger Card
Cash
The T Account

18. 7 RULES OF
DEBITS AND CREDITS

19. RULE #1 + Increase on Debit Side Decrease on Credit Side Dr. Cr.
ASSET ACCOUNTS
Increase on
Debit Side
Decrease on
Credit Side
Dr.
Cr. +

20. EXAMPLE:
PURCHASED OFFICE SUPPLIES FOR $800 CASH

21. STEP #1
Name the accounts affected:
OFFICE
SUPPLIES
CASH

22. STEP #2 Determine Classification of Accounts ASSET OFFICE SUPPLIES
CASH
ASSET

23. STEP #3
Now that we know the classification, we can identify increase and decrease sides.
CASH
OFFICE SUPPLIES
DR. +
CR.
DR. +
CR.

24. INCREASED
OFFICE SUPPLIES
DR.
CR. +
$800

25. DECREASED
CASH
DR.
CR. +
$800

26. CASH
DR.
CR. +
$800
OFFICE SUPPLIES
DR.
CR. +
$800

27. IN EVERY TRANSACTION DEBITS MUST EQUAL CREDITS
RULE #2
IN EVERY TRANSACTION DEBITS MUST EQUAL CREDITS

28. DEBITS = CREDITS
OFFICE SUPPLIES
CASH
DR.
CR.
DR.
CR. + +
$800
$800

29. RULE #3 + Decrease on Debit Side Increase on Credit Side Dr. Cr.
LIABILITY ACCOUNTS
Decrease on
Debit Side
Increase on
Credit Side
Dr.
Cr. +

30. EXAMPLE:
PURCHASED EQUIPMENT ON ACCOUNT FOR $3,000.

31. STEP #1
Name the accounts affected:
ACCOUNTS
PAYABLE
EQUIPMENT

32. STEP #2 Determine Classification of Accounts: LIABILITY ASSET ACCOUNTS
PAYABLE
ASSET
EQUIPMENT

33. STEP #3
Now that we know the classification, we can identify increase and decrease sides.
EQUIPMENT
ACCOUNTS PAYABLE
DR. +
CR.
DR.
CR. +

34. INCREASED
EQUIPMENT
DR.
CR. +
$3000

35. INCREASED
ACCOUNTS PAYBLE
DR.
CR. +
$3000

36. DEBITS = CREDITS + + EQUIPMENT ACCOUNTS PAYABLE DR. CR. DR. CR. $3000

37. RULE #4 Dr. Cr. Decrease on Increase on Debit Side Credit Side
CAPITAL ACCOUNT
Decrease on
Debit Side
Increase on
Credit Side
Dr.
Cr. +
JUST LIKE
LIABILITY ACCOUNTS

38. EXAMPLE:
Mohamed , THE OWNER, INVESTED $25,000 IN THE BUSINESS

39. STEPS #1 & 2 Name and classify the accounts affected: ASSET
OWNER’S EQUITY
ASSET
Mohamed, CAPITAL
CASH
DR.
CR.
DR.
CR.

40. STEP #3
Now that we know the classification, we can identify increase and decrease sides.
Mohamed, CAPITAL
CASH + +
DR.
CR.
DR.
CR.

41. INCREASED OR DECREASED?
Mohamed, CAPITAL
CASH +
DR.
CR.
DR.
CR. +
$25,000
$25,000

42. DEBITS = CREDITS CASH Mohamed, CAPITAL DR. CR. DR. CR. $25,000 $25,000+ +
$25,000
$25,000

43. DIVIDEND / DRAWING ACCOUNT
RULE #5
DIVIDEND / DRAWING ACCOUNT
Increase on the
Debit Side
Decrease on the
Credit Side
Dr.
Cr. +
JUST LIKE
ASSET ACCOUNTS

44. EXAMPLE:
Mohamed WITHDREW $1,500 FOR PERSONAL EXPENSES

45. STEPS #1 & #2 Name and classify the accounts affected: ASSET
OWNER’S EQUITY
ASSET
Mohamed, DRAWING
CASH
DR.
CR.
DR.
CR.

46. INCREASED OR DECREASED?
Mohamed, DRAWING
CASH
DR.
CR.
DR.
CR. + +
$1,500
$1,500

47. DEBITS = CREDITS Mohamed, DRAWING CASH DR. CR. DR. CR. $1,500 $1,500 +

48. RULE #6 Dr. Cr. Decrease on Increase on Debit Side Credit Side
REVENUE ACCOUNTS
Decrease on
Debit Side
Increase on
Credit Side
Dr.
Cr. +
JUST LIKE
LIABILITY & CAPITAL
ACCOUNTS

49. EXAMPLE:
Mohamed PERFORMED SERVICES AND RECEIVED $4,500 IN CASH

50. STEPS #1 & #2 Name and classify the accounts affected: ASSET
REVENUE
ASSET
CONSULTING FEES
CASH
DR.
CR.
DR.
CR.

51. STEP #3
Now that we know the classification, we can identify increase and decrease sides.
CONSULTING FEES
CASH
DR.
CR.
DR.
CR. + +

52. INCREASED OR DECREASED?
CONSULTING FEES
CASH
DR.
CR.
DR.
CR. + +
$4,500
$4,500

53. DEBITS = CREDITS CASH CONSULTING FEES DR. CR. DR. CR. $4,500 $4,500 +

54. EXAMPLE:
Mohamed PERFORMED $6,000 OF SERVICES ON ACCOUNT

55. DEBITS = CREDITS ACCOUNTS RECEIVABLE CONSULT. FEES DR. CR. DR. CR.+ +
$6,000
$6,000
ACCOUNTS
RECEIVABLE
INSTEAD OF
CASH

56. RULE #7 Dr. Cr. JUST LIKE ASSET ACCOUNTS EXPENSE ACCOUNTS
Increase on the
Debit Side
Decrease on the
Credit Side
Dr.
Cr. +
JUST LIKE
ASSET ACCOUNTS

57. Mohamed PAID HER ASSISTANT $750 IN WAGES
EXAMPLE
Mohamed PAID HER ASSISTANT $750 IN WAGES

58. STEPS #1 & #2 Name and classify the accounts affected: ASSET CASH
EXPENSE
ASSET
WAGES EXPENSE
CASH
DR.
CR.
DR.
CR.

59. STEP #3
Now that we know the classification, we can identify increase and decrease sides.
WAGES EXPENSE
CASH
DR.
CR.
DR.
CR. + +

60. INCREASED OR DECREASED?
WAGES EXPENSE
CASH
DR.
CR.
DR.
CR. + +
$750
$750

61. DEBITS = CREDITS
WAGES EXPENSE
CASH
DR.
CR.
DR.
CR. + +
$750
$750

62. What is the normal balance for the following accounts?
Review
What is the normal balance for the following accounts?
Cash
Debit
Accounts Payable
Credit
Accounts Receivable
Debit
Service Revenue
Credit
Common Stock
Credit
Salaries Expense
Debit

63. What is the normal balance for the following accounts?
Review
What is the normal balance for the following accounts?
Dividends
Debit
Building
Debit
Taxes Payable
Credit
Revenue
Credit
Prepaid Insurance
Debit
Rent Expense
Debit

64. 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

65. Debits and Credits Transaction #1 $10,000 $3,000 Transaction #2 8,000
If Credits are greater than Debits, the account will have a credit balance.
Transaction #1
$10,000
$3,000
Transaction #2
8,000
Transaction #3
Balance
$1,000

66. Debits and Credits Summary
Normal Balance Debit
Normal Balance Credit
SO 2

67. Debits and Credits Summary
Balance Sheet Income Statement
Asset =
Liability +
Equity
Revenue -
Expense
Debit
Credit

68. Debits and Credits Summary
Review Question
Debits:
increase both assets and liabilities.
decrease both assets and liabilities.
increase assets and decrease liabilities.
decrease assets and increase liabilities.

69. Assets and Liabilities
Assets - Debits should exceed credits.
Liabilities – Credits should exceed debits.
The normal balance is on the increase side.

70. Owners’ Equity
Owner’s investments and revenues increase owner’s equity (credit).
Owner’s drawings and expenses decrease owner’s equity (debit).

71. Revenue and Expense
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.

72. Debits and Credits Summary
Review 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.

73. Expansion of the Basic Equation
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.

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

75. 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.

76. Journalizing Journalizing - Entering transaction data in the journal.
Illustration: On September 1, Mr. Ahmed invested $15,000 cash in the business, and purchased computer equipment for $7,000 cash.
General Journal
Sept. 1
Cash
15,000
Mr.Ahmed, Capital
15,000
Computer equipment
7,000
Cash
7,000

77. Journalizing Simple and Compound Entries
Illustration: Assume that 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
Delivery equipment
14,000
Cash
8,000
Accounts payable
6,000

78. The Ledger
A General Ledger contains the entire group of accounts maintained by a company.
The General Ledger includes all the asset, liability, owner’s equity, revenue and expense accounts.
Illustration 2-15

79. Standard Form of Account
T-account form used in accounting textbooks.
In practice, the account forms used in ledgers are
much more structured.
Illustration 2-16

80. Posting
Posting – the process of transferring amounts from the journal to the ledger accounts.
Illustration 2-17

81. Review Question Posting Posting: normally occurs before journalizing.
transfers ledger transaction data to the journal.
is an optional step in the recording process.
transfers journal entries to ledger accounts.

82. Chart of Accounts
Accounts and account numbers arranged in sequence in which they are presented in the financial statements.
Illustration 2-18

83. 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 Explain what posting is and how it helps in the recording process.

84. The Recording Process Illustrated
Illustration 2-20
LO 6 Explain what posting is and how it helps in the recording process.

85. The Recording Process Illustrated
Illustration 2-21

86. The Recording Process Illustrated
Illustration 2-22

87. The Recording Process Illustrated
Illustration 2-23

88. The Recording Process Illustrated
Illustration 2-24

89. The Recording Process Illustrated
Illustration 2-25

90. The Recording Process Illustrated
Illustration 2-26

91. The Recording Process Illustrated
Illustration 2-27

92. The Recording Process Illustrated
Illustration 2-28

93. The Trial Balance
Illustration 2-31
A list of accounts and their balances at a given time.
Purpose is to prove that debits equal credits.
LO 7 Prepare a trial balance and explain its purposes.

94. Limitations of a Trial Balance
The 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.

95. Review Question The Trial Balance A trial balance will not balance if:
a correct journal entry is posted twice.
the purchase of supplies on account is debited to Supplies and credited to Cash.
a $100 cash drawing by the owner is debited to Owner’s Drawing for $1,000 and credited to Cash for $100.
a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.

96. Discussion Question Recording Process
Q2-19. Jim Benes is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows.
Debits and credits posted to the ledger.
Business transaction occurs.
Information entered in the journal.
Financial statements are prepared.
Trial balance is prepared.
Is Jim correct? If not, indicate to Jim the proper flow of the information.
See notes page for discussion
Question 2-19 (textbook) No, Jim is not correct . The proper sequence is as follows :
( b ) Business transaction occurs.
( c ) Information entered in the journal.
( a ) Debits and credits are posted to the ledger.
( e ) Trial balance is prepared.
( d ) Financial statements are prepared.

99. Very thanks