1. Prepared by Kurt M. Hull, MBA CPA California State University, Los Angeles Financial A ccounting, 5e John Wiley & Sons, Inc. Weygandt, Kieso, & Kimmel

2. AccountsLedgers Debits and creditsPosting The recording process Trial balance Journals CHAPTER 2 THE RECORDING PROCESS CHAPTER 2 THE RECORDING PROCESS STUDY OBJECTIVES After studying this chapter, you should understand:

3. STUDY OBJECTIVE 1 THE ACCOUNT Left or debit side Title of Account Right or credit side Debit balanceCredit balance An account is an individual record of increases and decreases in a specific asset, liability, or owner’s equity item. Commonly referred to as “T-Accounts.”

4. STUDY OBJECTIVE 2 DEBITS AND CREDITS STUDY OBJECTIVE 2 DEBITS AND CREDITS Debit means left Credit means right When the debit amounts exceed the credits, an account has a debit balance; when the reverse is true, the account has a credit balance. DRCR

5. In a double-entry system, equal debits and credits are made in the accounts for each transaction. Thus, the accounting equation will always stay in balance. AssetsLiabilitiesEquity DOUBLE-ENTRY SYSTEM

6. DebitsCredits Increase assets Decrease assets Decrease liabilities Increase liabilities DEBIT & CREDIT EFFECTS ON ASSETS & LIABILITIES DEBIT & CREDIT EFFECTS ON ASSETS & LIABILITIES

7. REVIEW QUESTION DEBIT & CREDIT EFFECTS ON ASSETS & LIABILITIES REVIEW QUESTION DEBIT & CREDIT EFFECTS ON ASSETS & LIABILITIES Which accounts below are decreased by debits? Inventory Accounts Payable Dividends Cash Notes payable Answer: Accounts payable and Notes payable Why? Both are liabilities, which are increased by credits and decreased by debits.

8. Assets Increase Decrease Debit Credit Decrease Increase Debit Credit Liabilities Normal Balance NORMAL BALANCE OF ASSET & LIABILITY ACCOUNTS NORMAL BALANCE OF ASSET & LIABILITY ACCOUNTS

9. DebitsCredits Decrease equity Increase equity DEBIT & CREDIT EFFECTS ON STOCKHOLDERS’ EQUITY DEBIT & CREDIT EFFECTS ON STOCKHOLDERS’ EQUITY COMMON STOCK/RETAINED EARNINGS

10. Decrease Increase Debit Credit Normal Balance NORMAL BALANCE OF STOCKHOLDERS EQUITY NORMAL BALANCE OF STOCKHOLDERS EQUITY

11. DIVIDENDS Normal Balance Increase Decrease Debit Credit DEBIT & CREDIT EFFECTS ON DIVIDENDS DEBIT & CREDIT EFFECTS ON DIVIDENDS

12. Decrease revenues Increase revenues Increase expenses Decrease expenses DebitsCredits DEBIT & CREDIT EFFECTS ON REVENUES DEBIT & CREDIT EFFECTS ON REVENUES

13. Increase Decrease Debit Credit Expenses Revenues Decrease Increase Debit Credit Normal Balance NORMAL BALANCES OF REVENUES & EXPENSES NORMAL BALANCES OF REVENUES & EXPENSES

14. Liabilities Assets Stockholders’ Equity =+- += +- Assets Dr.Cr. + - Liabilities Dr.Cr. - + Dr.Cr. Dividends + - Dr.Cr. Revenues - + Dr.Cr. Expenses + - Dr.Cr. Common Stock - + EXPANDED ACCOUNTING EQUATION

15. JOURNAL LEDGER STUDY OBJECTIVE 3 THE RECORDING PROCESS STUDY OBJECTIVE 3 THE RECORDING PROCESS 1. Analyze each transaction 2. Enter transactions in a journal 3. Transfer journal information to the ledgers Illustration 2-13

16. Transactions are initially recorded in chronological order in a journal before being transferred to the accounts. The journal records the complete effect of each transactions, making errors easy to locate( 記錄每筆交易對特定科目之借 貸影響和交易重要內容 ) Every company has a general journal which contains 1.Transaction dates 2.Account titles 3.References 4.Two amount columns STUDY OBJECTIVE 4 JOURNALS STUDY OBJECTIVE 4 JOURNALS

17. If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. SIMPLE JOURNAL ENTRY GENERAL JOURNAL DateAccount Titles and ExplanationRef.DebitCredit 2006 July 1Cash20,000 K. Browne, Capital20,000 (Invested cash in the business) J1

18. GENERAL JOURNAL When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. 2 1 3 with balance on account) COMPOUND JOURNAL ENTRY J1

19. Individual Liabilities Individual Assets Individual Stockholders’ Equity Equipment Land Supplies Cash Interest Payable Salaries Payable Accounts Payable Notes Payable Salaries Payable Fees Earned Common Stock Retained Earnings STUDY OBJECTIVE 5 THE LEDGER STUDY OBJECTIVE 5 THE LEDGER The general ledger contains all the assets, liabilities, and stockholders’ equity accounts for a given company Illustration 2-16

20. STUDY OBJECTIVE 6 POSTING STUDY OBJECTIVE 6 POSTING Posting is the process of transferring entries from the journals to specific accounts in the General Ledger GENERAL LEDGER GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2006 July 1 Cash 20,000 Common Stock 20,000 (Invested cash in the business)

21. In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2006 Sept. 1 Cash 10 15,000 Common Stock 25 15,000 (invested cash in business) GENERAL LEDGER CASH NO.10 Date Explanation Ref. Debit Credit Balance 2006 Sept. 1 J1 15,000 POSTING A JOURNAL ENTRY Transaction information is transferred to the individual ledger accounts affected.

22. Most companies have a chart of accounts that lists the accounts and the account numbers which identify their location in the ledger. CHART OF ACCOUNTS

23. Basic Analysis Debit-Credit Analysis Transaction October 1, C.R. Byrd invests $10,000 cash in exchange for ownership interest in Pioneer Advertising Agency, Inc. The asset Cash is increased $10,000, and Common Stock is increased $10,000. Debits increase assets: debit Cash $10,000. Credits increase stockholders’ equity: credit Common Stock, $10,000. INVESTMENT OF CASH BY STOCKHOLDERS INVESTMENT OF CASH BY STOCKHOLDERS

24. JOURNAL ENTRY POSTING Date Account Titles and Explanation Ref. Debit Credit Oct. 1 Cash 101 10,000 Common Stock 311 10,000 (Issued shares of stock for cash) Cash101 Oct. 110,000 Common Stock 311 Oct. 1 10,000 INVESTMENT OF CASH BY STOCKHOLDERS INVESTMENT OF CASH BY STOCKHOLDERS

25. Basic Analysis Debit-Credit Analysis Transaction October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable. The asset Office Equipment is increased $5,000, and the liability Notes Payable is increased $5,000. Debits increase assets: debit Office Equipment $5,000. Credits increase liabilities: credit Notes Payable $5,000. PURCHASE OF OFFICE EQUIPMENT PURCHASE OF OFFICE EQUIPMENT

26. Notes Payable 200 Oct. 1 5,000 Office Equipment157 Oct. 15,000 DateAccount Titles and ExplanationRef.DebitCredit Oct. 1Office Equipment1575,000 Notes Payable2005,000 (Issued 3-month, 12% note for office equipment) JOURNAL ENTRY POSTING PURCHASE OF OFFICE EQUIPMENT PURCHASE OF OFFICE EQUIPMENT

27. Basic Analysis Debit-Credit Analysis Transaction October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed by December 31. The asset Cash is increased $1,200; the liability Unearned Fees is increased $1,200 because the service has not been rendered yet. Note that although many liabilities have the word “payable” in their title, unearned fees are considered a liability even though the word payable is not used. Debits increase assets: debit Cash $1,200. Credits increase liabilities: credit Unearned Fees $1,200. RECEIPT OF CASH FOR FUTURE SERVICES RECEIPT OF CASH FOR FUTURE SERVICES

28. Unearned Fees209 Oct. 21,200 Cash101 Oct. 110,000 21,200 JOURNAL ENTRY POSTING RECEIPT OF CASH FOR FUTURE SERVICES RECEIPT OF CASH FOR FUTURE SERVICES

29. Basic Analysis Debit-Credit Analysis Transaction October 3, office rent for October is paid in cash, $900. The expense Rent is increased $900 because the payment pertains only to the current month; the asset Cash is decreased $900. Debits increase expenses: debit Rent Expense $900. Credits decrease assets: credit Cash $900. PAYMENT OF MONTHLY RENT PAYMENT OF MONTHLY RENT

30. Rent Expense729 Oct. 3900 Cash101 Oct. 110,000 Oct. 3900 21,200 DateAccount Titles and ExplanationRef.DebitCredit Oct. 3Rent Expense 729900 Cash101900 (Paid October rent) JOURNAL ENTRY POSTING PAYMENT OF MONTHLY RENT PAYMENT OF MONTHLY RENT

31. The asset Prepaid Insurance is increased $600 because the payment extends to more than the current month; the asset Cash is decreased $600. Note that payments of expenses that will benefit more than one accounting period are identified as prepaid expenses or prepayments. When a payment is made, an asset account is debited in order to show the service or benefit that will be received in the future. Transaction October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30. Debit-Credit Analysis Debits increase assets: debit Prepaid Insurance $600. Credits decrease assets: credit Cash $600. Basic Analysis PAYMENT FOR INSURANCE

32. Cash101 Oct. 110,000 Oct. 3900 21,200 4600 JOURNAL ENTRY POSTING Prepaid Insurance130 Oct. 4600 PAYMENT FOR INSURANCE

33. Basic Analysis Debit-Credit Analysis Transaction October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500. The asset Advertising Supplies is increased $2,500; the liability Accounts Payable is increased $2,500. Debits increase assets: debit Advertising Supplies $2,500. Credits increase liabilities: credit Accounts Payable $2,500. PURCHASE OF SUPPLIES ON CREDIT PURCHASE OF SUPPLIES ON CREDIT

34. Accounts Payable201 Oct. 52,500 Advertising Supplies126 Oct. 52,500 Date Account Titles and Explanation Ref. Debit Credit Oct. 5 Advertising Supplies 126 2,500 Accounts Payable 201 2,500 (Purchased supplies on account from Aero Supply) JOURNAL ENTRY POSTING PURCHASE OF SUPPLIES ON CREDIT PURCHASE OF SUPPLIES ON CREDIT

35. REVIEW QUESTION PURCHASE OF SUPPLIES FOR CASH REVIEW QUESTION PURCHASE OF SUPPLIES FOR CASH What are the journal/ledger entries if the $2,500 of advertising supplies was purchased with cash?

36. Basic Analysis Debit-Credit Analysis Transaction October 9, hire four employees to begin work on October 15. Each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks -- first payment made on October 26. A business transaction has not occurred. There is only an agreement between the employer and the employees to enter into a business transaction beginning on October 15. A debit-credit analysis is not needed because there is no accounting entry. HIRING EMPLOYEES

37. Basic Analysis Debit-Credit Analysis Transaction October 20, the board of directors declares and pays a $500 cash dividend to stockholders. The dividends account is increased $500; the asset Cash is decreased $500. Debits increase dividends: debit Dividends $500. Credits decrease assets: credit Cash $500. DECLARATION AND PAYMENT OF DIVIDEND DECLARATION AND PAYMENT OF DIVIDEND

38. Dividends332 Oct. 20500 Cash101 Oct. 110,000 Oct. 3900 21,200 4600 20500 DateAccount Titles and ExplanationRef.DebitCredit Oct. 20 Dividends 332500 Cash101500 (Withdrew cash for personal use) JOURNAL ENTRY POSTING DECLARATION AND PAYMENT OF DIVIDEND DECLARATION AND PAYMENT OF DIVIDEND

39. Basic Analysis Debit-Credit Analysis Transaction October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction.) The expense account Salaries Expense is increased $4,000; the asset Cash is decreased $4,000. Debits increase expenses: debit Salaries Expense $4,000. Credits decrease assets: credit Cash $4,000. PAYMENT OF SALARIES

40. DateAccount Titles and ExplanationRef.DebitCredit Oct. 26Salaries Expense7264,000 Cash1014,000 (Paid salaries to date) Cash101 Oct. 110,000 Oct. 3900 21,200 4600 20500 264,000 JOURNAL ENTRY POSTING Salaries Expense726 Oct. 264,000 PAYMENT OF SALARIES

41. Basic Analysis Debit-Credit Analysis Transaction October 31, received $10,000 in cash from Copa Company for advertising services rendered in October. The asset Cash is increased $10,000; the revenue Fees Earned is increased $10,000. Debits increase assets: debit Cash $10,000. Credits increase revenues: credit Fees Earned $10,000. RECEIPT OF CASH FOR SERVICES PROVIDED RECEIPT OF CASH FOR SERVICES PROVIDED

42. Cash101 Oct. 110,000 Oct. 3900 21,200 4600 3110,000 20500 264,000 DateAccount Titles and ExplanationRef.DebitCredit Oct. 31Cash10110,000 Fees Earned40010,000 (Received cash for fees earned) Fees Earned400 Oct. 3110,000 JOURNAL ENTRY POSTING RECEIPT OF CASH FOR SERVICES PROVIDED RECEIPT OF CASH FOR SERVICES PROVIDED

43. STUDY OBJECTIVE 7 THE TRIAL BALANCE STUDY OBJECTIVE 7 THE TRIAL BALANCE 1.A trial balance is a list of accounts and their balances at a given time. 2.The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. 3.If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. 4.The procedures for preparing a trial balance consist of: 1 List the account titles and their balances. 2 Total the debit and credit columns. 3 Prove the equality of the two columns.

44. $ 28,700 The total debits must equal the total credits. TRIAL BALANCE

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46. CHAPTER 2 THE RECORDING PROCESS