The Recording Process
The Recording Process
• The account
– Debits and credits
– Double-entry accounting
• Analyzing and Recording Transactions
– The accounting cycle and steps in the
recording process
– The journal
– The ledger
1. Define debits and credits and illustrate how they are
used to record transactions.
2. Explain the recording process and analyze, journalize,
and post transactions.
3. Explain the purpose of a trial balance, and prepare
one.
• The Trial Balance
– Limitations
– Locating errors
– Some process explanations
1
The Account
2
Debits & Credits
• An individual accounting record of
increases and decreases in a specific
asset, liability, or owner’s equity item
• Debit (Dr.) indicates left;
• Credit (Cr.) indicates right
– Examples: cash, accounts payable, service
revenue, salaries expense
• Three parts: title, debit side, credit side
– In its simplest form, these parts are
positioned like the letter T
– Therefore called a T account
– Entering an amount on the left side is called
debiting the account
– Entering an amount on the right side is crediting
the account
• Debit balance
– Debit amounts exceed the credits
• Credit balance
– Credit amounts exceed the debits
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4
1
Debit & Credit Procedure
Tabular Versus Account Form
Tabular Summary
• Debit does not mean increase or decrease
Account Form
CASH
– Can be either depending on the type account
-7,000
Debit
Credit
1,200
15,000
7,000
1,500
1,200
600
-600
1,500
900
-900
600
200
-200
– also depends on account type
• Assets are on the debit side of the equation
– Increases are also on debit side; decreases on
credit side
250
-250
600
• Credit also does not mean increase or
decrease
CASH
$15,000
1,300
Balance
• Liabilities are on the credit side
8,050
– Increases are on the credit side; decreases on
the debit side
-1,300
$8,050
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Double-Entry Accounting
System
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Assets, Liabilities & Owner’s Capital
• Each transaction is recorded with
equal debits and credits
– Total debits always equals total credits
• Accounting equation will always stay
in balance
– Assets = Liabilities + Owner’s Equity
• Every account has a normal balance
– Either debit or credit
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2
Drawings, Revenues, Expenses
Accounting Equation Expanded
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The Accounting Cycle
The Recording Process
1. Define debits and credits and illustrate how they are
used to record transactions.
2. Explain the recording process and analyze,
journalize, and post transactions.
3. Explain the purpose of a trial balance, and prepare
one.
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12
3
The Recording Process
The Journal
• Where transactions are first recorded
• Every company has a general journal
• Contributes to recording process:
The first three steps in the accounting
cycle:
1. Analyze business transactions
– Determine effect on accounts
– Discloses complete effect of a
transaction in one place
– Provides a chronological record
– Helps prevent and locate errors
– Provides explanation and identifies the
source document
2. Enter transactions in a journal
– The book of original entry
3. Transfer journal information to
ledger accounts
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Journalizing
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Journalizing 1
• Entering transaction data in the journal
• Separate journal entry for each
transaction
• A complete entry consists of
– Transaction date is entered in date column
– Debit account title is entered at the left margin of the
“Account Titles and Explanation” column
– Credit account title is indented on the next line.
– Transaction date
– Accounts & amounts to be debited and
credited
– Brief explanation of transaction
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Journalizing 2
Journalizing 3
• Debit amounts are recorded in the Debit (left) column
• Credit amounts are recorded in the Credit (right) column
• A brief explanation of the transaction is provided
• Separate entries with a blank line
• Ref. column is used later when transferred to ledger
• List all debits in each entry before listing credits
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The Ledger
Journalizing 4
• Ledger: entire group of accounts
maintained by a company
• General ledger: contains all the
assets, liabilities, and owner’s equity
accounts
• Simple entry: involves two accounts
• Compound entry: involves three or more
accounts
– Arranged in financial statement order
– Assets, liabilities, owner’s capital,
drawings, revenues and expenses
• Posting: procedure of transferring
journal entries to the ledger accounts
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Standard Form of Account
Posting
Each account has its own “ledger”, although the Cash Account may have its own book!
1.
2.
3.
4.
Post to debit account: date, journal page number, amount
Enter debit account number in journal reference column
Post to credit account: journal page number, amount
Enter credit account number in journal reference column
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Chart of Accounts
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The Recording Process
• List of accounts and their account
numbers
– Indicates where accounts are found in
the ledger
– Usually starts with balance sheet
accounts, followed by income statement
accounts
1. Define debits and credits and illustrate how they are
used to record transactions.
2. Explain the recording process and analyze, journalize,
and post transactions.
3. Explain the purpose of a trial balance, and prepare
one.
• Varies by company
– Number of accounts
– Types of accounts
– Numbering system
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The Trial Balance
The Trial Balance
•
•
•
•
List of accounts and their balances at a
specific time
Proves that debits equal credits after
posting
Uncovers errors in journalizing and
posting
To prepare a trial balance:
1. List accounts and their balances
2. Total the debit and credit columns
3. Ensure the two columns are equal
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Limitations of a Trial Balance
Example Trial Balance
• Does not prove:
– That all transactions have been recorded,
or
– That the ledger is correct
• Numerous errors may exist even
though the trial balance columns agree
– Total debits and total credits may be equal,
but may still be posted to the wrong
account or in the wrong amount
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Locating Errors
• If trial balance does not balance, then:
– If error is an amount such as $1, $100 or
$1,000, re-add and re-calculate account
balances
– If divisible by two, look for entry (= ½ of
the error) in the wrong column
– If divisible by nine, look for transposition
errors
– Otherwise, scan to see if an account
balance has been omitted
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