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CHAPTER 2
THE RECORDING PROCESS

CHAPTER STUDY OBJECTIVES

1. Explain what an account is and how it helps in the recording process. An account is an individual
accounting record of increases and decreases in specific asset, liability, and owner's equity items.
2. Define debits and credits and explain how they are used to record business transactions. The
terms debt and credit are synonymous with left and right. Assets, drawings, and expenses are increased by
debits and decreased by credits. Liabilities, owner's capital, and revenues are increased by credits and
decreased by debits.
3. Identify the basic steps in the recording process. The basic steps in the recording process are: (a)
analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a
journal, (c) transfer the journal information to the appropriate accounts in the ledger.
4. Explain what a journal is and how it helps in the recording process. The initial accounting record of a
transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in
one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c)
prevents or locates errors because the debit and credit amounts for each entry can be readily compared.
5. Explain what a ledger is and how it helps in the recording process. The entire group of accounts
maintained by a company is referred to collectively as a ledger. The ledger keeps in one place all the
information about changes in specific account balances.
6. Explain what posting is and how it helps in the recording process. Posting is the procedure of
transferring journal entries to the ledger accounts. This phase of the recording process accumulates the
effects of journalized transactions in the individual accounts.
7. Prepare a trial balance and explain its purposes. A trial balance is a list of accounts and their balances
at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and
credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in
preparing financial statements.
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REVIEW Problem: (Chapter 2)

Problem

The following is a list of accounts and identification letters A through J for Shannon Management Co.:

Use the form below to identify the type of account and its normal balance. The first item is filled in as an
example.

Solution
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Problem

Leonard Matson completed these transactions during December of the current year:

Prepare general journal entries to record these transactions.

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Solution:
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PROBLEM:

Bob Sample opened the Campus Laundromat on September 1, 2012. During the first month of operations, the
following transactions occurred.
Sept. 1 Bob invested $20,000 cash in the business.
2 The company paid $1,000 cash for store rent for September.
3 Purchased washers and dryers for $25,000, paying $10,000 in cash and signing a $15,000, 6-
month, 12% note payable.
4 Paid $1,200 for a one-year accident insurance policy.
10 Received a bill from the Daily News for advertising the opening of the Laundromat $200.
20 Bob withdrew $700 cash for personal use.
30 The company determined that cash receipts for laundry services for the month were $6,200.

Instructions
(a) Journalize the September transactions. (Use J1 for the journal page number.)
(b) Open ledger accounts and post the September transactions.
(c) Prepare a trial balance at September 30, 2012.
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SOLUTION:
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PROBLEM:
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Solution:
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PROBLEM:

The chart of accounts used by Fast Copy Company is listed below. You are to indicate the proper accounts to
be debited and credited for the following transactions by writing the account number(s) in the appropriate
boxes.
CHART OF ACCOUNTS
101 Cash 209 Unearned Revenue
112 Accounts Receivable 301 Fast, Capital
125 Paper Supplies 306 Fast, Drawing
157 Copy Machines 400 Photocopy Revenue
200 Note Payable 610 Advertising Expense
201 Accounts Payable 729 Rent Expense

Number(s) Number(s)
of account(s) of account(s)
debited credited
1. Tom Fast invests $90,000 cash to start the business.

2. Purchased three photocopy machines for $200,000,

paying $50,000 cash and signing a 5-year, 10% note for the
remainder.

3. Purchased $5,000 paper supplies on credit.

4. Cash photocopy revenue amounted to $7,000.

5. Paid $500 cash for radio advertising.

6. Paid $800 on account for paper supplies purchased in

transaction 3.

7. Owner withdrew $1,500 from the business for

personal expenses.

8. Paid $1,200 cash for rent for the current month.

9. Received $2,000 cash advance from a customer for

future copying.

10. Billed a customer for $450 for photocopy work done.

Solution

Number(s) Number(s)
of account(s) of account(s)
debited credited
1. Tom Fast invests $90,000 cash to start the
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business. 101 301

2. Purchased three photocopy machines for

$200,000, paying $50,000 cash and signing a
5-year, 10% note for the remainder. 157 101,200

3. Purchased $5,000 paper supplies on credit. 125 201

4. Cash photocopy Revenue amounted to $7,000. 101 400

5. Paid $500 cash for radio advertising.610 101

6. Paid $800 on account for paper supplies

purchased in transaction 3. 201 101

7. Owner withdrew $1,500 from the business for

personal expenses. 306 101

8. Paid $1,200 cash for rent for the current month. 729 101

9. Received $2,000 cash advance from a

customer for future copying. 101 209

10. Billed a customer for $450 for photocopy work

done. 112 400
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PROBLEM:
For the accounts listed below, indicate if the normal balance of the account is a debit or credit.
Normal Balance
Accounts Debit or Credit

1. Service Revenue

2. Rent Expense

3. Accounts Receivable

4. Accounts Payable

5. Owner's Capital

6. Office Supplies

7. Insurance Expense

8. Owner's Drawing

9. Office Building

10. Notes Payable

Solution
Normal Balance
Accounts Debit or Credit

1. Service Revenue Credit

2. Rent Expense Debit

3. Accounts Receivable Debit

4. Accounts Payable Credit

5. Owner's Capital Credit

6. Office Supplies Debit

7. Insurance Expense Debit

8. Owner's Drawing Debit

9. Office Building Debit

10. Notes Payable Credit

Problem:
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Eight transactions are recorded in the following T-accounts:
CASH ACCOUNTS RECEIVABLE
(1) 35,000 (2) 3,500 (5) 27,500 (7) 22,500
(7) 22,500 (3) 1,950
(4) 2,225
(6) 8,000
(8) 4,500

SUPPLIES EQUIPMENT
(3) 1,950 (2) 13,500

JEFF MARTIN, CAPITAL SERVICE REVENUE

(1) 35,000 (5) 27,500

ACCOUNTS PAYABLE JEFF MARTIN, DRAWING

(6) 8,000 (2) 10,000 (8) 4,500

SALARIES EXPENSE
(4) 2,225

Indicate for each debit and each credit: (a) whether an asset, liability, capital, drawing, revenue, or expense
account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be
presented in the following chart form:

Transaction Account Debited Account Credited

No. Type Effect Type Effect

(1) (Example) Asset + Capital +

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Solution
Transaction Account Debited Account Credited
No. Type Effect Type Effect
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(1) (Example) Asset + Capital +

(2) Asset + Asset –

Liability +

(3) Asset + Asset –

(4) Expense + Asset –

(5) Asset + Revenue +

(6) Liability – Asset –

(7) Asset + Asset –

(8) Drawing + Asset –

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PROBLEM
For each of the following accounts indicate (a) the type of account (Asset, Liability, Owner's Equity, Revenue,
Expense), (b) the debit and credit effects, and (c) the normal account balance.

Example
0. Cash a. Asset account
b. Debit increases, credit decreases
c. Normal balance - debit

Accounts
1. Accounts Payable 5. Service Revenue
2. Accounts Receivable 6. Insurance Expense
3. Jill Gray, Capital 7. Notes Payable
4. Jill Gray, Drawing 8. Equipment

Solution
1. a. Liability Account. 5. a. Revenue Account.
b. Debit decreases, credit increases. b. Debit decreases, credit increases.
c. Normal balance - credit. c. Normal balance - credit.

2. a. Asset Account. 6. a. Expense Account.

b. Debit increases, credit decreases. b. Debit increases, credit decreases.
c. Normal balance - debit. c. Normal balance - debit.

3. a. Owner's Equity Account. 7. a. Liability Account.

b. Debit decreases, credit increases. b. Debit decreases, credit increases.
c. Normal balance - credit. c. Normal balance - credit.

4. a. Owner's Equity Account. 8. a. Asset Account.

b. Debit increases, credit decreases. b. Debit increases, credit decreases.
c. Normal balance - debit. c. Normal balance - debit.
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PROBLEM
Journalize the following business transactions in general journal form. Identify each transaction by number.
You may omit explanations of the transactions.
1. The owner, Nick Brown, invests $20,000 in cash in starting a real estate office operating as a
sole proprietorship.
2. Purchased $400 of office supplies on credit.
3. Purchased office equipment for $7,500, paying $2,500 in cash and signed a 30-day, $5,000,
note payable.
4. Real estate commissions billed to clients amount to $5,000.
5. Paid $700 in cash for the current month's rent.
6. Paid $200 cash on account for office supplies purchased in transaction 2.
7. Received a bill for $500 for advertising for the current month.
8. Paid $2,200 cash for office salaries.
9. Brown withdrew $1,200 from the business for living expenses.
10. Received a check for $4,000 from a client in payment on account for commissions billed in
transaction 4.

Solution
1. Cash 20,000
Brown, Capital 20,000

2. Office Supplies 400

Accounts Payable 400

3. Office Equipment 7,500

Cash 2,500
Notes Payable 5,000
4. Accounts Receivable 5,000
Real Estate Commission Revenue
5,000

5. Rent Expense 700

Cash 700

6. Accounts Payable 200

Cash 200

7. Advertising Expense 500

Accounts Payable 500

8. Office Salaries Expense 2,200

Cash 2,200

9. Brown, Drawing 1,200

Cash 1,200

10. Cash 4,000

Accounts Receivable 4,000
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PROBLEM
The bookkeeper for Reagan Lawn Mowing Service made a number of errors in journalizing and posting as
described below:
1. A debit posting to accounts receivable for $500 was omitted.
2. A payment of accounts payable for $600 was credited to cash and debited to accounts receivable.
3. A credit to accounts receivable for $450 was posted as $45.
4. A cash purchase of equipment for $683 was journalized as a debit to equipment and a credit to notes
payable. The credit posting was made for $638.
5. A debit posting of $200 for purchase of supplies was credited to supplies.
6. A debit to repairs expense for $492 was posted as $429.
7. A debit posting for wages expense for $600 was made twice.
8. A cash purchase of supplies for $700 was journalized and posted as a debit to supplies for $70 and a credit
to cash for $70.

Instructions
For each error, indicate (a) whether the trial balance will balance; if the trial balance will not balance, indicate
(b) the amount of the difference, and (c) the trial balance column that will have the larger total. Consider each
error separately. Use the following form, in which error (1) is given as an example.
(A) (B) (C)
Error In Balance Difference Larger Column
1 No $500 Credit

Solution
(A) (B) (C)
Error In Balance Difference Larger Column
1 No $500 Credit
2 Yes — —
3 No 405 Debit
4 No 45 Debit
5 No 400 Credit
6 No 63 Credit
7 No 600 Debit
8 Yes — —
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PROBLEM
The trial balance of Greer Company shown below does not balance.

GREER COMPANY
Trial Balance
June 30, 2002

Debit Credit
Cash $ 2,699
Accounts Receivable 7,600
Supplies 600
Equipment 8,300
Accounts Payable $ 9,766
Greer, Capital 1,952
Greer, Drawing 1,500
Service Revenue 15,200
Wages Expense 3,800
Repair Expense 1,600
Totals $26,099 $26,918

An examination of the ledger and journal reveals the following errors:

1. Each of the above listed accounts has a normal balance per the general ledger.

2. Cash of $270 received from a customer on account was debited to Cash $720 and credited to Accounts
Receivable $720.

3. A withdrawal of $300 by the owner was posted as a credit to Greer, Drawing, $300 and credit to Cash
$300.

4. A debit of $300 was not posted to Wages Expense.

5. The purchase of equipment on account for $700 was recorded as a debit to Repair Expense and a credit to
Accounts Payable for $700.

6. Services were performed on account for a customer, $620, for which Accounts Receivable was debited
$620 and Service Revenue was credited $62.

7. A payment on account for $225 was credited to Cash for $225 and credited to Accounts Payable for $252.

Instructions
Prepare a correct trial balance.
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Solution
GREER COMPANY
Trial Balance
June 30, 2002

Debit Credit
Cash [2,699 – 450 (2)] $ 2,249 $
Accounts Receivable [7,600 + 450 (2)] 8,050
Supplies 600
Equipment [8,300 + 700 (5)] 9,000
Accounts Payable [9,766 – 477 (7)] 9,289
Greer Capital 1,952
Greer, Drawings [1,500 + 300 + 300 (3)] 2,100
Service Revenue [15,200 + 558 (6)] 15,758
Wages Expense [3,800 + 300 (4)] 4,100
Repair Expense [1,600 – 700 (5)] 900
Totals $26,999 $26,999
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PROBLEM:

Nancy Cole and Associates is a financial planning service. The account balances at December 31, 2002 are
shown by the following alphabetical list:

Accounts Payable $ 10,000

Accounts Receivable 19,000
Automobiles 27,500
Building 120,000
Cash 20,500
Computer 22,000
Computer Software 4,200
Land 42,000
Nancy Cole, Capital 184,700
Notes Payable 95,000
Notes Receivable 8,100
Office Furniture 23,400
Office Supplies 800
Technical Library 2,200

Instructions
Prepare a trial balance with the accounts arranged in financial statement order.

Solution
NANCY COLE AND ASSOCIATES
Trial Balance
December 31, 2002

Debit Credit
Cash $ 20,500
Accounts Receivable 19,000
Office Supplies 800
Notes Receivable 8,100
Computer 22,000
Computer Software 4,200
Technical Library 2,200
Office Furniture 23,400
Automobiles 27,500
Building 120,000
Land 42,000
Accounts Payable $ 10,000
Notes Payable 95,000
Nancy Cole, Capital 184,700
Totals $289,700 $289,700
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PROBLEM:

Use the following information to calculate for the year ended December 31, 2008 (a) net income (net loss), (b)
ending owner’s equity, and (c) total assets.

Supplies $ 1,000 Revenues $23,000

Operating expenses 12,000 Cash 15,000
Accounts payable 9,000 Drawings 1,000
Accounts receivable 3,000 Notes payable 1,000
Beginning Capital 5,000 Equipment 6,000

Solution

(a) $11,000 (b) $15,000 (c) $25,000

PROBLEM:

Krenz Car Care, owned and operated by Karl Krenz, began business in September of the current year. Karl, a
master mechanic, had no experience with keeping a set of books. As a result, Karl entered all of September's
transactions directly to the ledger accounts. When he tried to locate a particular entry he found it confusing and
time consuming. He has hired you to improve his accounting procedures. The accounts in his General Ledger
follow:

Prepare the general journal entries, in chronological order (a) through (e), from the T-account entries shown.
Include a brief description of the probable nature of each transaction.
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