Accounting Principles

CHAPTER 2
THE RECORDING PROCESS
After studying this chapter, you should be able to:
1 Explain what an account is and how it helps
in the recording process.
2 Define debits and credits and explain how
they are used to record business
transactions.
3 Identify the basic steps in the recording
process.
4 Explain what a journal is and how it helps
in the recording process.

CHAPTER 2
THE RECORDING PROCESS
After studying this chapter, you should be able to:
5 Explain what a ledger is and how it helps in the
recording process.
6 Explain what posting is and how it helps in the
recording process.
7 Prepare a trial balance and explain its purpose.
Trial Balance

PREVIEW OF CHAPTER 2
The Recording Process

Steps in the
Recording Process

The Account

Debits and credits

Journal

Expansion of basic
equation

Ledger

PREVIEW OF CHAPTER 2
The Recording Process

The Recording
Process Illustrated

Summary illustration of
journalizing and posting

The Trial Balance

Limitations of a trial
balance

Locating errors

Use of dollar signs

STUDY OBJECTIVE 1

Explain
Explain what
what an
an account
account isis and
and how
how itit
helps
helps in
in the
the recording
recording process.
process.

THE ACCOUNT
An account is an individual accounting
record of increases and decreases in a
specific asset, liability, or owners
equity item.
A company will have separate accounts
for such items as cash, salaries
expense, accounts payable, and so on.

STUDY OBJECTIVE 2

Define
Define debits
debits and
and credits
credits and
and explain
explain how
how
they
they are
are used
used to
to record
record business
business transactions.
transactions.

ILLUSTRATION 2-1
BASIC FORM OF 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

DEBITS AND CREDITS

The term debit means left and credit means 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 2-2
TABULAR SUMMARY COMPARED TO
ACCOUNT FORM
Tabular Summary

Account Form

Cash
$15,000
- 7,000
1,200
1,500
- 1,700
- 250
600
- 1,300

Cash

$ 8,050

Debit
15,000
1,200
1,500
600
Balance $8,050
(Debit)

Credit
7,000
1,700
250
1,300

DEBITING AN ACCOUNT
Cash
Debits
15,000

Credits

Example:
Example: The
Theowner
ownermakes
makesan
aninitial
initial
investment
investmentof
of$15,000
$15,000to
tostart
start
the
thebusiness.
business. Cash
Cashisisdebited
debitedas
as
the
theowners
ownersCapital
Capitalisiscredited.
credited.

CREDITING AN ACCOUNT
Cash
Debits

Credits
7,000

Example:
Example: Monthly
Monthlyrent
rentof
of$7,000
$7,000isispaid.
paid.
Cash
Cashisiscredited
creditedas
asRent
RentExpense
Expenseisis
debited.
debited.

DEBITING AND
CREDITING AN ACCOUNT
Cash
Debits
15,000
8,000

Credits
7,000

Example:
Example: Cash
Cashisisdebited
debitedfor
for$15,000
$15,000and
and
credited
creditedfor
for$7,000,
$7,000,leaving
leavingaadebit
debit
balance
balanceof
of$8,000.
$8,000.

DOUBLE-ENTRY 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

ILLUSTRATION 2-3
DEBIT AND CREDIT EFFECTS
ASSETS AND LIABILITIES

Debits
Increase assets
Decrease liabilities

Credits
Decrease assets
Increase liabilities

NORMAL BALANCE
Every account classification has a
normal balance, whether it is a debit
or credit.
For that particular account, the
opposite side entries should never
exceed the normal balance.

ILLUSTRATION 2-4
NORMAL BALANCES ASSETS AND LIABILITIES

Assets
Increase
Normal

Decrease
Balance

Liabilities
Debit
Decrease
Increase
Credit
Normal
Balance

ILLUSTRATION 2-5
DEBIT AND CREDIT EFFECTS OWNERS CAPITAL

Debits
Decrease owners capital

Credits
Increase owners capital

ILLUSTRATION 2-6
NORMAL BALANCE OWNERS CAPITAL

Owners Capital
Decrease

Increase
Normal
DebitBalance

Credit

ILLUSTRATION 2-7
DEBIT AND CREDIT EFFECTS OWNERS DRAWING

Debits
Increase owners drawing

Credits
Decrease owners drawing

ILLUSTRATION 2-8
NORMAL BALANCE OWNERS DRAWING

Owners Drawing
Increase
Normal
Balance
Debit

Decrease

Credit

ILLUSTRATION 2-9
DEBIT AND CREDIT EFFECTS REVENUES AND EXPENSES

Debits
Decrease revenues
Increase expenses

Credits
Increase revenues
Decrease expenses

ILLUSTRATION 2-10
NORMAL BALANCES REVENUES AND EXPENSES

Revenues
Decrease

Increase
Normal
Balance

Expenses
IncreaseDebit
Decrease
Credit
Normal
Balance

ILLUSTRATION 2-11
EXPANDED BASIC EQUATION AND DEBIT/CREDIT
RULES AND EFFECTS

Assets

Assets
Dr.
+

Cr.
-

= Liabilities

Liabilities
Dr.
-

Owners Equity

Cr.
+

Owners
Capital
Dr.
-

Cr.
+

Revenues
Dr.
-

Cr.
+

Owners
Drawing
Dr.
+

Cr.
-

Expenses
Dr.
+

Cr.
-

STUDY OBJECTIVE 3

Identify
Identify the
the basic
basic steps
steps in
in the
the recording
recording process.
process.

STEPS IN THE
RECORDING PROCESS
The basic steps in the recording process are:
1 Analyze each transaction for its effect on
the accounts.
2 Enter the transaction information in a
journal (book of original entry).
3 Transfer the journal information to the
appropriate accounts in the ledger (book of
accounts).

ILLUSTRATION 2-12
THE RECORDING
PROCESS
JOURNAL

JOURNAL

LEDGER

1 Analyze each transaction

2 Enter transaction in a journal
3 Transfer journal information to ledger accounts

STUDY OBJECTIVE 4

Explain
Explain what
what aa journal
journal isis and
and how
how itit helps
helps
in
in the
the recording
recording process.
process.

THE 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 amount columns.

THE 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
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 2-13
TECHNIQUE OF
JOURNALIZING
The
Thedate
dateof
ofthe
thetransaction
transactionisisentered
enteredin
inthe
thedate
datecolumn.
column.

ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
The
Thedebit
debitaccount
accounttitle
titleisisentered
enteredat
atthe
theextreme
extremeleft
left
margin
marginof
ofthe
theAccount
AccountTitles
Titlesand
andExplanation
Explanationcolumn.
column.
The
Thecredit
creditaccount
accounttitle
titleisisindented
indentedon
onthe
thenext
nextline.
line.

ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
The
Theamounts
amountsfor
forthe
thedebits
debitsare
arerecorded
recordedin
inthe
theDebit
Debit
column
columnand
andthe
theamounts
amountsfor
forthe
thecredits
creditsare
arerecorded
recordedin
in
the
theCredit
Creditcolumn.
column.

ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
AAbrief
briefexplanation
explanationof
ofthe
thetransaction
transactionisisgiven.
given.

ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
AAspace
spaceisisleft
leftbetween
betweenjournal
journalentries.
entries. The
Theblank
blank
space
spaceseparates
separatesindividual
individualjournal
journalentries
entriesand
andmakes
makes
the
theentire
entirejournal
journaleasier
easierto
toread.
read.

ILLUSTRATION 2-13
TECHNIQUE OF
JOURNALIZING
The
Thecolumn
columnentitled
entitledRef.
Ref.isisleft
leftblank
blankat
atthe
thetime
time
journal
journalentry
entryisismade
madeand
andisisused
usedlater
laterwhen
whenthe
the
journal
journalentries
entriesare
aretransferred
transferredto
tothe
theledger
ledgeraccounts.
accounts.

SIMPLE AND COMPOUND

JOURNAL ENTRIES
IfIfan
anentry
entryinvolves
involvesonly
onlytwo
twoaccounts,
accounts,one
onedebit
debitand
and
one
onecredit,
credit,ititisisconsidered
consideredaasimple
simpleentry.
entry.

ILLUSTRATION 2-14

COMPOUND JOURNAL ENTRY

When
Whenthree
threeor
ormore
moreaccounts
accountsare
arerequired
requiredin
inone
one
journal
journalentry,
entry,the
theentry
entryisisreferred
referredto
toas
asaa
compound
compoundentry.
entry.

1
2
3

COMPOUND JOURNAL ENTRY

This
Thisisisthe
thewrong
wrongformat;
format;all
alldebits
debitsmust
mustbe
belisted
listedbefore
before
the
thecredits
creditsare
arelisted.
listed.

STUDY OBJECTIVE 5

Explain
Explain what
what aa ledger
ledger isis and
and how
how itit helps
helps
in
in the
the recording
recording process.
process.

THE LEDGER
The entire group of accounts maintained by a
company is called the ledger.
A general ledger contains all the assets, liabilities,
and owners equity accounts.
GENERAL
LEDGER

ILLUSTRATION 2-15

THE GENERAL LEDGER

Individual
Assets

Equipment
Land
Supplies
Cash

Individual
Liabilities

Interest Payable
Salaries Payable
Accounts Payable
Notes Payable

Individual
Owners Equity

Salaries Expense
Fees Earned
J. Lind, Drawing
J. Lind, Capital

STUDY OBJECTIVE 6

Explain
Explain what
what posting
posting isis and
and how
how itit helps
helps
in
in the
the recording
recording process.
process.

ILLUSTRATION 2-17

POSTING A JOURNAL ENTRY

In the ledger, enter in the appropriate columns of the account(s) debited the date,
journal page, and debit amount shown in the journal.

ILLUSTRATION 2-17

POSTING A JOURNAL ENTRY

In the reference column of the journal, write the account

number to which the debit amount was posted.

ILLUSTRATION 2-17

POSTING A JOURNAL ENTRY

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

the date, journal page, and credit amount shown in the journal.

ILLUSTRATION 2-17

POSTING A JOURNAL ENTRY

In the reference column of the journal, write the account number to

which the credit amount was posted.

ILLUSTRATION 2-18

CHART OF
ACCOUNTS
Most
Mostcompanies
companieshave
haveaachart
chartof
ofaccounts
accountsthat
thatlists
liststhe
theaccounts
accountsand
and
the
theaccount
accountnumbers
numberswhich
whichidentify
identifytheir
theirlocation
locationin
inthe
theledger.
ledger.

ILLUSTRATION 2-19
INVESTMENT OF CASH BY OWNER

Transaction

October 1, C.R. Byrd invests $10,000 cash in an

advertising venture to be known as the Pioneer
Advertising Agency.

Basic
Analysis

The asset Cash is increased $10,000, and owners

equity C. R. Byrd, Capital is increased $10,000.

Debit-Credit
Analysis

Debits increase assets: debit Cash $10,000.

Credits increase owners equity: credit C.R. Byrd,
Capital $10,000.

ILLUSTRATION 2-19
INVESTMENT OF CASH BY OWNER
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING

ILLUSTRATION 2-20
PURCHASE OF OFFICE EQUIPMENT

Transaction

October 1, office equipment costing $5,000 is

purchased by signing a 3-month, 12%, $5,000 note
payable.

Basic
Analysis

The asset Office Equipment is increased $5,000,

and the liability Notes Payable is increased $5,000.

Debit-Credit
Analysis

Debits increase assets: debit Office Equipment

$5,000. Credits increase liabilities: credit Notes
Payable $5,000.

ILLUSTRATION 2-20
PURCHASE OF OFFICE EQUIPMENT
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING

ILLUSTRATION 2-21
RECEIPT OF CASH FOR FUTURE SERVICE

Transaction

Basic
Analysis

Debit-Credit
Analysis

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.

ILLUSTRATION 2-21
RECEIPT OF CASH FOR FUTURE SERVICE
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING

ILLUSTRATION 2-22

PAYMENT OF MONTHLY RENT

Transaction

October 3, office rent for October is paid in cash,

$900.

Basic
Analysis

The expense Rent is increased $900 because the

payment pertains only to the current month; the
asset Cash is decreased $900.

Debit-Credit
Analysis

Debits increase expenses: debit Rent Expense $900.

Credits decrease assets: credit Cash $900.

ILLUSTRATION 2-22

PAYMENT OF MONTHLY RENT

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING

ILLUSTRATION 2-23

PAYMENT FOR INSURANCE

Transaction

Basic
Analysis

Debit-Credit
Analysis

October 4, $600 is paid for a one-year insurance

policy that will expire next year on September 30.
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.
Debits increase assets: debit Prepaid Insurance
$600. Credits decrease assets: credit Cash $600.

ILLUSTRATION 2-23

PAYMENT FOR INSURANCE

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
Prepaid Insurance
Oct. 4
600

130

ILLUSTRATION 2-24
PURCHASE OF SUPPLIES ON CREDIT

Transaction

October 5, an estimated 3-month supply of

advertising materials is purchased on account from
Aero Supply for $2,500.

Basic
Analysis

The asset Advertising Supplies is increased $2,500;

the liability Accounts Payable is increased $2,500.

Debit-Credit
Analysis

Debits increase assets: debit Advertising Supplies

$2,500. Credits increase liabilities: credit
Accounts Payable $2,500.

ILLUSTRATION 2-24
PURCHASE OF SUPPLIES ON CREDIT
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING

ILLUSTRATION 2-25

HIRING OF EMPLOYEES

Transaction

Basic
Analysis

Debit-Credit
Analysis

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.

ILLUSTRATION 2-26
WITHDRAWAL OF CASH BY OWNER

Transaction

Basic
Analysis

Debit-Credit
Analysis

October 20, C. R. Byrd withdraws $500 cash for

personal use.

The owners equity account C. R. Byrd, Drawing is

increased $500; the asset Cash is decreased $500.

Debits increase drawings: debit C. R. Byrd,

Drawing $500. Credits decrease assets: credit
Cash $500.

ILLUSTRATION 2-26
WITHDRAWAL OF CASH BY OWNER
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING

ILLUSTRATION 2-27

PAYMENT OF SALARIES
Transaction

October 26, employee salaries of $4,000 are owed

and paid in cash. (See October 9 transaction.)

Basic
Analysis

The expense account Salaries Expense is increased

$4,000; the asset Cash is decreased $4,000.

Debit-Credit
Analysis

Debits increase expenses: debit Salaries Expense

$4,000. Credits decrease assets: credit Cash $4,000.

ILLUSTRATION 2-27

PAYMENT OF SALARIES
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
Salaries Expense
Oct. 26
4,000

726

ILLUSTRATION 2-28
RECEIPT OF CASH FOR FEES EARNED

Transaction

October 31, received $10,000 in cash from Copa

Company for advertising services rendered in
October.

Basic
Analysis

The asset Cash is increased $10,000; the revenue

Fees Earned is increased $10,000.

Debit-Credit
Analysis

Debits increase assets: debit Cash $10,000. Credits

increase revenues: credit Fees Earned $10,000.

ILLUSTRATION 2-28
RECEIPT OF CASH FOR FEES EARNED
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING

STUDY OBJECTIVE 7

Prepare
Prepare aa trial
trial balance
balance and
and explain
explain its
its purposes.
purposes.

THE TRIAL 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 (check)
that the debits equal the credits after posting.
If the debits and credits do not agree, the trial balance
can be used to uncover errors in journalizing and posting.
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.

ILLUSTRATION 2-31

A TRIAL BALANCE

The total debits

must equal the
total credits.