CHAPTER

THE RECORDING PROCESS

 THE
THE ACCOUNT
ACCOUNT

 An account is an individual accounting

record of increases and decreases in a
specific asset, liability, or owner’s equity
item.
 A company will have separate accounts for
such items as cash, salaries expense,
accounts payable, and so on.
 DEBITS
DEBITS AND
AND CREDITS
CREDITS

 The terms debit and credit mean left and right,

respectively.
 The act of entering an amount on the left side of an
account is called debiting the account and making an
entry on the right side is crediting the account.
 When the debit amounts exceed the credits, an account
has a debit balance; when the reverse is true, the account
has a credit balance.
DR CR
 ILLUSTRATION
ILLUSTRATION 2-1
2-1
BASIC
BASIC FORM
FORM OF
OF ACCOUNT
ACCOUNT
 In its simplest form, an account consists of
1. the title of the account,
2. a left or debit side, and
3. a right or credit side.
 The alignment of these parts resembles the letter T, and
therefore the account form is called a T account.

Title of Account
Left or debit side Right or credit side

Debit balance Credit balance

 ILLUSTRATION
ILLUSTRATION 2-2
2-2
TABULAR
TABULAR SUMMARY
SUMMARY COMPARED
COMPARED TO
TO
ACCOUNT
ACCOUNT FORM
FORM
Tabular Summary Account Form
Cash Cash
$15,000 Debit Credit
- 7,000 15,000 7,000
1,200 1,200 600
1,500 1,500 900
- 600 600 200
- 900 250
- 200 1,300
- 250
600
8,050

Balance
- 1,300
$8,050
 DEBITING
DEBITING AN
AN ACCOUNT
ACCOUNT

Cash
15,000

Example:
Example: The
The owner
owner makes
makes an an initial
initial investment
investment of of
$15,000
$15,000 toto start
start the
the business.
business. Cash
Cash isis debited
debited
and
and the
the owner’s
owner’s Capital
Capital account
account isis credited.
credited.
 CREDITING
CREDITING AN
AN ACCOUNT
ACCOUNT

Cash
7,000

Example:
Example: Monthly
Monthly rent
rent of
of $7,000
$7,000 isis paid.
paid. Cash
Cash isis
credited
credited and
and Rent
Rent Expense
Expense isis debited.
debited.
 DEBITING
DEBITING AND
AND CREDITING
CREDITING
AN
AN ACCOUNT
ACCOUNT

Cash
15,000 7,000
8,000

Example:
Example: Cash
Cash isis debited
debited for
for $15,000
$15,000 and
and credited
credited for
for
$7,000,
$7,000, leaving
leaving aa debit
debit balance
balance of
of $8,000.
$8,000.
 DOUBLE-ENTRY
DOUBLE-ENTRY SYSTEM
SYSTEM
 In a double-entry system, equal debits and
credits are made in the accounts for each
transaction.
 Thus, the total debits will always equal the
total credits and the accounting equation
will always stay in balance.

Assets Liabilities Equity

 NORMAL
NORMAL BALANCE
BALANCE
 Every account classification has a normal
balance, whether it is a debit or credit.
 ILLUSTRATION
ILLUSTRATION 2-3
2-3
NORMAL
NORMAL BALANCES
BALANCES —
— ASSETS
ASSETS AND
AND LIABILITIES
LIABILITIES

Assets
Increase Decrease

Normal
Balance

Liabilities
Decrease Increase
Debit
Credit
Normal
Balance
 ILLUSTRATION
ILLUSTRATION 2-4
2-4
NORMAL
NORMAL BALANCE
BALANCE —
— OWNER’S
OWNER’S CAPITAL
CAPITAL

Owner’s Capital
Decrease Increase

Normal
Balance
Debit
Credit
 ILLUSTRATION
ILLUSTRATION 2-5
2-5
NORMAL
NORMAL BALANCE
BALANCE —
— OWNER’S
OWNER’S DRAWINGS
DRAWINGS

Owner’s Drawings
Increase Decrease

Normal
Balance
Debit
Credit
 ILLUSTRATION
ILLUSTRATION 2-6
2-6
NORMAL
NORMAL BALANCES
BALANCES —
—
REVENUES
REVENUES AND
AND EXPENSES
EXPENSES
Revenues
Decrease Increase

Normal

Balance

Expenses
Increase Decrease
Debit
Credit
Normal

Balance
 ILLUSTRATION
ILLUSTRATION 2-7
2-7
EXPANDED
EXPANDED BASIC
BASIC EQUATION
EQUATION AND
AND
DEBIT/CREDIT
DEBIT/CREDIT RULES
RULES AND
AND EFFECTS
EFFECTS
Assets = Liabilities + Owner’s Equity

Owner’s Owner’s
Assets = Liabilities + -
Capital Drawings
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + + -

+ Revenues - Expenses

Dr. Cr. Dr. Cr.

- + + -
 ILLUSTRATION
ILLUSTRATION 2-9
2-9
THE
THE RECORDING
RECORDING PROCESS
PROCESS
JOURNAL

LEDGER
JOURNAL

1. Analyse each transaction.

2. Enter transaction in a journal.
3. Transfer journal information to ledger accounts.
 THE
THE JOURNAL
JOURNAL
 Transactions are initially recorded in
chronological order in a journal before being
transferred to the accounts.
 Every company has a general journal which
contains
1. spaces for dates,
2. account titles and explanations,
3. references, and
4. two money columns.
 THE
THE JOURNAL
JOURNAL

The journal makes several significant contributions to the

recording process:
1. It discloses, in one place, the complete effect of a
transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and
credit amounts for each entry can be readily compared.
 JOURNALIZING
JOURNALIZING

 Entering transaction data in the journal is known

as journalizing.
 Separate journal entries are made for each
transaction.
 A complete entry consists of
1. the date of the transaction,
2. the accounts and amounts to be debited and
credited, and
3. a brief explanation of the transaction.
 ILLUSTRATION
ILLUSTRATION 2-10
2-10
TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING

The
The date
dateof
of the
the transaction
transaction isis entered
entered in
in the
the date
date column.
column.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 15,000
M. Doucet, Capital 15,000
Invested cash in business.

1 Equipment 7,000
Cash 7,000
Purchased equipment for cash.
 ILLUSTRATION
ILLUSTRATION 2-10
2-10
TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING
The
The debit
debit account
account title
title isis entered
entered at
at the
the extreme
extreme left
left
margin
margin of
of the
the Account
Account Titles
Titles andand Explanation
Explanationcolumn.
column.
The
The credit
credit account
account title
title isis indented
indented on
on the
the next
next line
line..

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 15,000
M. Doucet, Capital 15,000
Invested cash in business.

1 Equipment 7,000
Cash 7,000
Purchased equipment for cash.
 ILLUSTRATION
ILLUSTRATION 2-10
2-10
TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING
The
Theamounts
amountsfor
forthe
thedebits
debitsare
arerecorded
recordedin
inthe
theDebit
Debitcolumn
columnand
and
the
theamounts
amountsfor
forthe
thecredits
creditsare
arerecorded
recordedin
inthe
theCredit
Creditcolumn.
column.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 15,000
M. Doucet, Capital 15,000
Invested cash in business.

1 Equipment 7,000
Cash 7,000
Purchased equipment for cash.
 ILLUSTRATION
ILLUSTRATION 2-10
2-10
TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING

A
A brief
brief explanation
explanation of
of the
thetransaction
transaction isis given.
given.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 15,000
M. Doucet, Capital 15,000
Invested cash in business.

1 Equipment 7,000
Cash 7,000
Purchased equipment for cash.
 ILLUSTRATION
ILLUSTRATION 2-10
2-10
TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING
A
A space
space isis left
left between
between journal
journal entries.
entries. The
The
blank
blank space
space separates
separates individual
individual journal
journal entries
entries
and
and makes
makes the the journal
journal easier
easier to
to read.
read.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 15,000
M. Doucet, Capital 15,000
Invested cash in business.

1 Equipment 7,000
Cash 7,000
Purchased equipment for cash.
 ILLUSTRATION
ILLUSTRATION 2-10
2-10
TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING
The
The column
column entitled
entitled Ref.
Ref. isis left
left blank
blank at at the
the time
time the
the
journal
journal entry
entry isis made
made and
and isis used
used later
later when
when the the
journal
journal entries
entries are
are transferred
transferred to to the
the ledger
ledger accounts.
accounts.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 15,000
M. Doucet, Capital 15,000
Invested cash in business.

1 Equipment 7,000
Cash 7,000
Purchased equipment for cash.
 SIMPLE
SIMPLE AND
AND COMPOUND
COMPOUND
JOURNAL
JOURNAL ENTRIES
ENTRIES

If
If an
an entry
entry involves
involves onlyonly two
two accounts,
accounts, one
one debit
debit and
and
one
one credit,
credit, itit isis considered
considered aa simple
simple entry.
entry.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Oct. 2 Delivery Equipment 14,000
Cash 14,000
Purchased truck for cash.
 ILLUSTRATION
ILLUSTRATION 2-11
2-11
COMPOUND
COMPOUND JOURNAL
JOURNAL ENTRY
ENTRY

When
When three
three or
or more
more accounts
accounts areare required
requiredin in one
one
journal
journal entry,
entry, the
the entry
entryisis referred
referredto to as
as aa compound
compound
entry.
entry.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Oct. 2 Delivery Equipment 34,000
1 Cash 8,000
Note Payable 26,000
2 Purchased truck for cash
and note payable.
3
 COMPOUND
COMPOUND JOURNAL
JOURNAL ENTRY
ENTRY

This
This isis the
the wrong
wrong format;
format; all
all debits
debits must
must be
be listed
listed
before
before thethe credits
credits are
arelisted.
listed.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Oct. 2 Cash 8,000
Delivery Equipment 34,000
Note Payable 26,000
Purchased truck for cash
and note payable.
 THE
THE LEDGER
LEDGER

 The entire group of accounts maintained by a

company is referred to collectively as the ledger.
 A general ledger contains all the assets, liabilities,
and owner’s equity accounts.

GENERAL
LEDGER
 ILLUSTRATION
ILLUSTRATION 2-12
2-12
THE
THE GENERAL
GENERAL LEDGER
LEDGER

Individual Individual Individual

Assets Liabilities Owner’s Equity

Equipment Interest Payable Salaries Expense

Supplies Salaries Payable Service Revenue
Accounts Rec. Accounts Payable Doucet, Drawings
Cash Notes Payable Doucet, Capital
 ILLUSTRATION
ILLUSTRATION 2-14
2-14
POSTING
POSTING A
A JOURNAL
JOURNAL ENTRY
ENTRY
General Journal J1
Date Account Title and Explanation Ref Debit Credit
2002
01-Sep Cash 101 15,000
M. Doucet, Capital 301 15,000
Invested cash in business.
General Ledger
Cash 101
Date Account Title and Explanation Ref Debit Credit Balance
2002
01-Sep J1 15,000 15,000

In the ledger, enter in the appropriate columns of the account(s)

debited the date, journal page, and debit amount shown in the journal
and the account number to which the journal was posted.
 ILLUSTRATION
ILLUSTRATION 2-14
2-14
POSTING
POSTING A
A JOURNAL
JOURNAL ENTRY
ENTRY
General Journal J1
Date Account Title and Explanation Ref Debit Credit
2002
01-Sep Cash 101 15,000
M. Doucet, Capital 301 15,000
Invested cash in business.
General Ledger
M. Doucet, Capital 301
Date Account Title and Explanation Ref Debit Credit Balance
2002
1-Sep J1 15,000 15,000

In the ledger, enter in the appropriate columns of the account(s)

credited the date, journal page, and credit amount shown in the
journal and the account number to which the journal was posted.
 THE
THE TRIAL
TRIAL BALANCE
BALANCE
 A trial balance is a list of accounts and their balances at
a given time.
 The primary purpose of a trial balance is to prove the
mathematical equality of debits and credits after posting.
 A trial balance also uncovers errors in journalizing and
posting.
 The procedures for preparing a trial balance consist of
1. listing the account titles and their balances,
2. totaling the debit and credit columns, and
3. proving the equality of the two columns.
 ILLUSTRATION
ILLUSTRATION 2-28
2-28
A
A TRIAL
TRIAL BALANCE
BALANCE
PIONEER ADVERTISING AGENCY
Trial Balance
October 31, 2002
Debit Credit
Cash $ 15,200
Advertising Supplies 2,500
Prepaid Insurance 600
Office Equipment The total debits 5,000
Notes Payable
Accounts Payable
must equal the $ 5,000
2,500
Unearned Revenue total credits. 1,200
C. R. Byrd, Capital 10,000
C. R. Byrd, Drawings 500
Service Revenue 10,000
Salaries Expense 4,000
Rent Expense 900
$ 28,700 $ 28,700
 LIMITATIONS
LIMITATIONS OF
OF A
A
TRIAL
TRIAL BALANCE
BALANCE
 A 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.
 The trial balance may balance even when
1. a transaction is not journalized,
2. a correct journal entry is not posted,
3. a journal entry is posted twice,
4. incorrect accounts are used in journalizing or posting,
5. offsetting errors are made in recording the amount of
the transaction.