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02 The Recording Process

1) An account records increases and decreases in assets, liabilities, and equity. Debits increase asset and expense accounts, and credits increase liability, equity, and revenue accounts. 2) Transactions are recorded in journals and then posted to accounts. Equal debits and credits are recorded to maintain the accounting equation balance. 3) A trial balance lists account balances and proves the equality of total debits and credits, but does not ensure all transactions were recorded correctly.

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76 views9 pages

02 The Recording Process

1) An account records increases and decreases in assets, liabilities, and equity. Debits increase asset and expense accounts, and credits increase liability, equity, and revenue accounts. 2) Transactions are recorded in journals and then posted to accounts. Equal debits and credits are recorded to maintain the accounting equation balance. 3) A trial balance lists account balances and proves the equality of total debits and credits, but does not ensure all transactions were recorded correctly.

Uploaded by

Muhammed Hasan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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02 The Recording Process

THE 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 AND 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.
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.

DEBITING AN ACCOUNT

Cash
15,000

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Example: The owner makes an initial investment of $15,000 to start the
business. Cash is debited and the owner’s Capital account is credited.

CREDITING AN ACCOUNT

Cash
7,000

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

Cash
15,000 7,000
8,000

Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit
balance of $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.

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

NORMAL BALANCE — OWNER’S CAPITAL

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NORMAL BALANCE — OWNER’S DRAWINGS

NORMAL BALANCES — REVENUES AND EXPENSES

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EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS

THE RECORDING PROCESS


1. Analyze each transaction.
2. Enter transaction in a journal.
3. Transfer journal information to ledger accounts
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 money columns.
The journal makes several significant contributions to the recording process:

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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.

TECHNIQUE OF JOURNALIZING

If an entry involves only two accounts, one debit and one credit, it is considered
a simple entry.

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When three or more accounts are required in one journal entry, the entry is
referred to as a compound entry.

THE LEDGER (Posting)


 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.

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THE GENERAL LEDGER

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 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.

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LIMITATIONS OF A TRIAL 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.

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