The Recording Process Accounting
The Recording Process Accounting
3 Define debits and credits and explain how they are used to record business transactions.
Accounting Equation
As per accounting principle the Assets must balance to the claims on assets.
ANALYZING TRANSACTIONS
• Transaction analysis is the process of identifying the specific effects of economic events on the accounting
equation.
• The accounting equation must always balance. Each transaction has a dual (double-sided) effect on the
equation. For example, if an individual asset is increased, there must be a corresponding: Decrease in another
asset, or Increase in a specific liability, or Increase in stockholders’ equity
• Example: if a company purchases a computer for $10,000 by paying $6,000 in cash and signing a note for
$4,000, one asset (equipment) increases $10,000, another asset (cash) decreases $6,000, and a liability (notes
payable) increases $4,000.
Class Activity
(1). INVESTMENT OF CASH BY STOCKHOLDERS. On October 1, cash of $10,000 is invested in the business by investors
(primarily your friends and family) in exchange for $10,000 of common stock. This event is an accounting transaction
because it results in an increase in both assets and stockholders’ equity.
(2). NOTE ISSUED IN EXCHANGE FOR CASH. On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-
month, 12%, $5,000 note payable. This transaction results in an equal increase in assets and liabilities.
(3). PURCHASE OF OFFICE EQUIPMENT FOR CASH. On October 2, Sierra purchased equipment by paying $5,000 cash to
Superior Equipment Sales Co.
(4). RECEIPT OF CASH IN ADVANCE FROM CUSTOMER. On October 2, Sierra received a $1,200 cash advance from R.
Knox, a client. This transaction results in an equal increase in assets and liabilities.
(5). SERVICES PROVIDED FOR CASH. On October 3, Sierra received $10,000 in cash from Copa Company for guide
services performed for a corporate event.
(6). PAYMENT OF RENT. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900
(7). PURCHASE OF INSURANCE POLICY FOR CASH. On October 4, Sierra paid $600 for a one-year insurance policy that
will expire next year on September 30. Payments of expenses that will benefit more than one accounting period are
identified as assets called prepaid expenses or prepayments.
The Account
• An account is an individual accounting record of increases and decreases in a specific asset, liability,
stockholders’ equity, revenue, or expense item.
• An account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit
side. It is normally called T-Account.
DEBITS AND
CREDITS
• They are commonly abbreviated as Dr. for debit and Cr. for credit.
• An account shows a debit balance if the total of the debit amounts exceeds the credits.
• An account shows a credit balance if the credit amounts exceed the debits.
Double-Entry System:
Accounting Cycle
2. The account to be debited is entered first at the left. The account to be credited is then entered on the next line,
indented under the line above. The indentation differentiates debits from credits and decreases the possibility of
switching the debit and credit amounts.
3. The amounts for the debits are recorded in the Debit (left) column, and the amounts for the credits are recorded in
the Credit (right) column.
• On October 1, stockholders invest $10,000 cash in an outdoor by stockholders guide service company to be
known as Sierra Corporation.
• On October 1, Sierra borrows cash of $5,000 by signing a 3-month, 12%, $5,000 note payable.
• On October 2, Sierra received a $1,200 cash advance from R. Knox, a client, for guide services for multi-day trips
that are expected to be completed in the future.
• On October 3, Sierra received $10,000 in cash from Copa Company for guide services provided in October.
• On October 4, Sierra paid $600 for a 1-year insurance policy that will expire next year on September 30.
• On October 5, Sierra purchased an estimated 3 months of supplies on account from Aero Supply for $2,500.
• October 15. Each employee will receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks—
first payment made on October 26.
• The procedure of transferring journal entry amounts to ledger accounts is called posting.
• It simply means updating the ledger accounts for the effects of the transactions recorded in the journal.
• The transactions are first recorded in the journal and ledger accounts are updated later through a process called
posting.
THE LEDGER
• The ledger is an account use for recording increase or decrease in one of the financial statement item. Such as a
particular Asset, a type of liability or owner’s equity. e.g. Cash Account
• A general ledger contains all the assets, liabilities, stockholders’ equity, revenue, and expense accounts.
CHART OF ACCOUNTS
• There are general ledger accounts & the subsidiary accounts. A subsidiary ledger is a group of
similar accounts whose combined balances equal the balance in a specific general ledger account.
• Example Assets, Liabilities, Equity, Revenues, Expenses, Cash, Notes Payable, Common Stock, Service Revenue,
Salaries Expense, Accounts Receivable, Accounts Payable, Retained Earnings, Supplies Expense, Supplies,
Interest Payable, Dividends, Rent Expense, Prepaid Insurance, Unearned Income, Insurance Expense, Equipment
Service Revenue, Interest Expense, Accumulated Depreciation, Salaries Payable & Depreciation Expense.
• The trial balance proves the mathematical equality of debits and credits after posting.