CHAPTER 2

RECORDING PROCESS

1
Outlines
2.1 Accounting Equation-Elements of Financial Statements
2.2 Double Entry Rules
2.3 Accounting Cycle

2
The Elements of Financial Statements

3
The Account and Its Analysis

Accounts
Accounts are
are the
the basic
basic storage
storage units
units for
for accounting
accounting data
data
and
and are
are used
used toto accumulate
accumulate amounts
amounts fromfrom similar
similar
transactions.
transactions.

An
An account
account shows
shows the
the effect
effect of
of transactions
transactions on
on aa given
given
asset,
asset,liability,
liability,equity,
equity,revenue,
revenue,oror expense
expenseaccount.
account.

An
An account
account isis aa record
record ofof increases
increases and
and decreases
decreases in
in aa
specific
specificasset,
asset,liability,
liability,equity,
equity,revenue,
revenue,or
or expense
expenseitem.
item.
 The Account and Its Analysis:
DOUBLE-ENTRY SYSTEM

• To do recording in an account, businesses use what is called

the double-entry accounting system. This system is based on
the accounting equation and requires:

• Every business transaction to be recorded in at least 2

accounts.
• The total debits recorded for each transaction to be equal
to the total credits recorded.
RULES of Double-Entry System
• Increases in assets are debited.
• Decreases in assets are credited.
• Increases in liabilities and owner’s equity are credited.
• Decreases in liabilities and owner’s equity are debited.
• Increases in revenues are credited.
• Increases in expenses are debited.
 Double-Entry Accounting

Assets
Assets = Liabilities
Liabilities + Equity
Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +
 Exh.
3.8

Double-Entry Accounting
Equity
Owner’s
Owner’s _ Owner’s
Owner’s _
Capital
Capital Withdrawals
Withdrawals + Revenues
Revenues Expenses
Expenses

Capital Withdrawals Revenues Expenses

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
 Debits and Credits Summary
Statement of Financial
Position Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit

3-9
 The Accounting Equation

Relationship among the assets, liabilities and equity of a

business:

The equation must be in balance after every transaction.

For every Debit there must be a Credit.

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 Double-Entry System Illustration

1. Owners invest $40,000 in exchange for ordinary

shares.

Assets = Liabilities + Equity

+ 40,000 + 40,000

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 Double-Entry System Illustration

2. Disburse $600 cash for secretarial wages.

Assets = Liabilities + Equity

- 600 - 600
(expense)

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 Double-Entry System Illustration

3. Received $4,000 cash for services performed.

Assets = Liabilities + Equity

+ 4,000 + 4,000
(revenue)

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 THE ACCOUNTING CYCLE

Transactions
Transactions

Reversing
Reversing entries
entries Journalization
Journalization

Post-closing
Post-closing trail
trail balance
balance Posting
Posting

Closing
Closing Trial
Trial balance
balance

Work
Statement
Statement preparation
preparation Work
Sheet
Adjustments
Adjustments
Sheet

Adjusted
Adjusted trial
trial balance
balance

3-14
 THE ACCOUNTING CYCLE

Identifying and Recording Transactions and

Other Events
An item should be recognized in the financial statements if it

1. meets the definition of an element,

2. is probable that any future economic benefit

associated with the item will flow to or from the entity,
and

3. has a cost or value that can be measured reliably.

3-15
 Journalizing

General Journal – a chronological list of transactions and other

events, expressed in terms of debits and credits to accounts.
Journal Entries are recorded in the journal.

September 1: Shareholders invested ₺15,000 cash in the

corporation in exchange for ordinary shares.
ILLUSTRATION 3-7

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 Posting
Posting – The process of transferring amounts from the
journal to the ledger accounts.
ILLUSTRATION 3-7

ILLUSTRATION 3-8

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 Posting – Transferring amounts from journal to ledger.

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 Posting

An Expanded Example
The purpose of transaction analysis is
(1) to identify the type of account involved, and
(2) to determine whether a debit or a credit is required.

Keep in mind that every journal entry affects one or more of the
following items: assets, liabilities, equity, revenues, or expense.

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 Posting

1. October 1: Shareholders invest ₺100,000 cash in an

advertising venture to be known as Pioneer Advertising
Agency Inc.
ILLUSTRATION 3-9

Oct. 1 Cash 100,000

Share Capital—Ordinary 100,000

Cash Share Capital—Ordinary

Debit Credit Debit Credit
100,000 100,000

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 Posting

2. October 1: Pioneer purchases office equipment costing

₺50,000 by signing a 3-month, 12%, ₺50,000 note payable.

ILLUSTRATION 3-10

Oct. 1 Equipment 50,000

Notes payable 50,000

Equipment Notes Payable

Debit Credit Debit Credit
50,000 50,000

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 Posting

3. October 2: Pioneer receives a ₺12,000 cash advance from

KC, a client, for advertising services that are expected to be
completed by December 31.

Oct. 2 Cash 12,000

Unearned Service Revenue 12,000

Cash Unearned Service Revenue

Debit Credit Debit Credit
100,000 12,000
12,000

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 Posting

3. October 9: Pioneer signs a contract with a local newspaper

for advertising inserts (flyers) to be distributed starting the
last Sunday in November. Pioneer will start work on the
content of the flyers in November. Payment of ₺7,000 is due
following delivery of the Sunday papers containing the
flyers.

A business transaction has not occurred. There is only an

agreement between Pioneer Advertising and the newspaper for
the services to be provided in November. Therefore, no journal
entry is necessary in October.

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 Trial Balance

A Trial Balance
 List of each account and its balance in the order in
which they appear in the ledger.
 Debit balances listed in the left column and credit
balance in the right column.
 Used to prove the mathematical equality of debit and
credit balances.
 Uncovers errors in journalizing and posting.

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3-25
 Adjusting Entries

Makes it possible to:

 Report on the statement of financial position the
appropriate assets, liabilities, and equity at the statement
date.
 Report on the income statement the proper revenues
and expenses for the period.
► Revenues are recorded in the period in which services
are performed.
► Expenses are recognized in the period in which they are
incurred.

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 Adjusting Accounts
An adjusting entry is recorded to bring an asset or liability account
balance to its proper amount.

Framework for Adjustments

PREPAYMENTS-
PREPAYMENTS- Paid Paid (or
(or ACCRUALS-
ACCRUALS- PaidPaid (or
(or received)
received)
received)
received) cash
cash before
before expense
expense cash
cash after
after expense
expense (or
(or revenue)
revenue)
(or
(or revenue)
revenue) recognized
recognized recognized
recognized

Prepaid
Prepaid Unearned
Unearned
(Deferred)
(Deferred) (Deferred)
(Deferred) Accrued
Accrued Accrued
Accrued
expenses*
expenses* revenues
revenues expense
expense revenues
revenues

3-27
*including depreciation
 Adjusting Entries

Types of Adjusting Entries

Prepayment/Deferrals Accruals

1. Prepaid Expenses. 3. Accrued Revenues.

Expenses paid in cash Revenues for services
before they are used or performed but not yet
consumed. received in cash or
recorded.
2. Unearned Revenues. 4. Accrued Expenses.
Cash received before Expenses incurred but not
services are performed. yet paid in cash or
recorded.

3-28
 Adjusting Entries for Deferrals

Deferrals are expenses or revenues that are recognized at a

date later than the point when cash was originally exchanged.

Two types of deferrals

 Prepaid expenses
 Unearned revenues

If a company does not make an adjustment for these deferrals,

 the asset and liability are overstated, and

 the related expense and revenue are understated.

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3-30
 Adjusting Entries for Prepaid Expenses

Prepaid Expenses. Assets paid for and recorded before a

company uses them.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

 Insurance  Rent
 Supplies  Buildings and equipment
 Advertising

3-31
 Adjusting Entries for Prepaid Expenses

Supplies. Pioneer purchased advertising supplies costing

₺25,000 on October 5. Prepare the journal entry to record the
purchase of the supplies.

Oct. 5 Supplies 25,000

Cash 25,000

Supplies Cash
Debit Credit Debit Credit
25,000 25,000

3-32
 Adjusting Entries for Prepaid Expenses

Supplies. An inventory count at the close of business on

October 31 reveals that ₺10,000 of supplies are still on hand.

Oct. 31 Supplies Expense 15,000

Supplies 15,000

Supplies Supplies Expense

Debit Credit Debit Credit
25,000 15,000 15,000

10,000

3-33
 Adjusting Entries for
Prepaid Expenses

Statement
Presentation:
Supplies identifies that
portion of the asset’s
cost that will provide
future economic benefit.

3-34
 Adjusting Entries for Prepaid Expenses

Statement
Presentation:
Supplies expense
shows a balance of
₺15,000, which
equals the cost of
supplies used in
October

3-35
 Adjusting Entries for Prepaid Expenses

Depreciation. Pioneer estimates depreciation on its office

equipment to be ₺400 per month. Pioneer recognizes
depreciation for October by the following adjusting entry.

Oct. 31 Depreciation Expense 400

Accumulated Depreciation 400

Depreciation Expense Accumulated Depreciation

Debit Credit Debit Credit
400 400

3-36
 Adjusting Entries for
Prepaid Expenses

Statement
Presentation:
Accumulated
Depreciation—is a
contra asset
account.

3-37
 Adjusting Entries for Prepaid Expenses

Statement
Presentation:
Depreciation
expense identifies
that portion of the
asset’s cost that
expired in
October.

3-38
 Adjusting Entries for Unearned Revenues

Receipt of cash before the services are performed is recorded

as a liability called unearned revenues.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

 Rent  Magazine subscriptions

 Airline tickets  Customer deposits
 Tuition

3-39
 Adjusting Entries for Unearned Revenues

Unearned Revenue. Pioneer received ₺12,000 on October 2

from KC for advertising services expected to be completed by
December 31. Show the journal entry to record the receipt on
Oct. 2nd.
Oct. 2 Cash 12,000
Unearned Service Revenue 12,000

Cash Unearned Service Revenue

Debit Credit Debit Credit
12,000 12,000

3-40
 Adjusting Entries for Unearned Revenues

Unearned Revenues. An evaluation of the service Pioneer

performed for Knox during October, the company determines
that it should recognize 4,000 of revenue in October.

Oct. 31 Unearned Service Revenue 4,000

Service Revenue 4,000

Service Revenue Unearned Service Revenue

Debit Credit Debit Credit
100,000 4,000 12,000
4,000
8,000
3-41
 Adjusting Entries for
Unearned Revenues

Statement
Presentation:
Unearned service
revenue represents the
remaining advertising
services expected to be
performed in the future.

3-42
 Adjusting Entries for Unearned Revenues

Statement
Presentation:
Service revenue
shows total revenue
recognized in
October.

3-43
 Adjusting Entries for Accruals

Accruals are made to record

 revenues for services performed and
 expenses incurred in the current accounting period.

Without an accrual adjustment, the

 revenue account (and the related asset account) or the

 expense account (and the related liability account) are

understated.

3-44
3-45
 Adjusting Entries for Accrued Revenues

Revenues recorded for services performed for which cash has

yet to be received at statement date are accrued revenues.

Adjusting entry results in:

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur in regard to:

 Rent
 Interest
 Services performed

3-46
 Adjusting Entries for Accrued Revenues

Accrued Revenues. In October Pioneer performed services

worth ₺2,000 that were not billed to clients on or before
October 31. Pioneer makes the following adjusting entry.

Oct. 31 Accounts Receivable 2,000

Service Revenue 2,000

Accounts Receivable Service Revenue

Debit Credit Debit Credit
72,000 100,000
2,000 4,000
2,000
74,000 106,000
3-47
 ILLUSTRATION 3-35

Adjusting Entries
for Accrued
Revenues

3-48 Statement Presentation

 Adjusting Entries for Accrued Expenses

Expenses incurred but not yet paid in cash or recorded.

Adjusting entry results in:

Expense Recorded BEFORE Cash Payment

Accrued expenses often occur in regard to:

 Rent  Taxes
 Interest  Salaries

3-49
 Adjusting Entries for Accrued Expenses

Accrued Interest. Pioneer signed a three-month, 12%, note

payable in the amount of ₺50,000 on October 1. The note
requires interest at an annual rate of 12 percent. Three factors
determine the amount of the interest accumulation:

1 2 3

3-50
 Adjusting Entries for Accrued Expenses

Accrued Interest. Pioneer signed a three-month, 12%, note

payable in the amount of ₺50,000 on October 1. Prepare the
adjusting entry on Oct. 31 to record the accrual of interest.
Oct. 31 Interest Expense 500
Interest Payable 500

Interest Expense Interest Payable

Debit Credit Debit Credit
500 500

3-51
 Adjusting Entries
for Accrued
Expenses

3-52 Statement Presentation

 Adjusting Entries for Accrued Expenses

Accrued Salaries. At October 31, the salaries and wages for

these days represent an accrued expense and a related liability to
Pioneer. The employees receive total salaries of ₺10,000 for a
five-day work week, or ₺2,000 per day.
3-53
 Adjusting Entries for Accrued Expenses

Accrued Salaries. Employees receive total salaries of ₺10,000

for a five-day work week, or ₺2,000 per day. Prepare the
adjusting entry on Oct. 31 to record accrual for salaries.

Oct. 31 Salaries and Wages Expense 6,000

Salaries and Wages Payable 6,000

Salaries and Wages Expense Salaries and Wages Payable

Debit Credit Debit Credit
40,000 6,000
6,000

46,000
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 ILLUSTRATION 3-35

Adjusting Entries
for Accrued
Expenses

3-55 Statement Presentation

 Adjusting Entries for Accrued Expenses

Accrued Salaries. On November 23, Pioneer will again pay total

salaries of ₺40,000. Prepare the entry to record the payment of
salaries on November 23.
Nov. 23 Salaries and Wages Payable 6,000
Salaries and Wages Expense 34,000
Cash 40,000

Salaries and Wages Expense Salaries and Wages Payable

Debit Credit Debit Credit
34,000 6,000 6,000

3-56
 Adjusting Entries for Accrued Expenses

Bad Debts. Assume Pioneer reasonably estimates a bad debt

expense for the month of ₺1,600. It makes the adjusting entry for
bad debts as follows.
Oct. 31 Bad Debt Expense 1,600
Allowance for Doubtful Accounts 1,600

3-57
 ILLUSTRATION 3-35

Adjusting Entries
for Accrued
Expenses

3-58 Statement Presentation

 Adjusted
Trial
Balance
Shows the balance
of all accounts,
after adjusting
entries, at the end
of the accounting
period.
Proves the equality
of the total debit
and credit balances

3-59
 Preparing Financial Statements

Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
fromthe
the
Adjusted
AdjustedTrial
TrialBalance.
Balance.

Retained Statement
Income
Earnings of Financial
Statement
Statement Position

3-60
 Preparation of the Income Statement and Retained
Earnings Statement from the Adjusted Trial
Balance
3-61
 Preparation of the Statement of Financial Position from the Adjusted Trial Balance
3-62
 Closing Entries

Basic Process
 Reduce the balance of nominal (temporary) accounts to zero
in preparation for the next period’s transactions.
 Transfer all revenue and expense account balances (income
statement accounts) to Retained Earnings.
 Statement of financial position (asset, liability, and equity)
accounts are not closed.
 Dividends are closed directly to Retained Earnings.
 Income Summary account may be used however it has no
effect on the financial statements.

3-63
 Closing Entries

All Revenue accounts

Temporary / CLOSED
All Expense accounts ‘0’
Nominal Accounts A/C Balance
Dividends/Drawings

All Asset accounts

A=L+E
Permanent / Balance
Real Accounts All Liability accounts
Sheet
Owner’s Equity account

3-64
64
 Recording Closing Entries


 Close
CloseRevenue
Revenueaccounts
accounts
Let’s see how the

 Close
CloseExpense
Expenseaccounts
accounts closing process works!


 The
Thedifference
differenceClose
Closeto
to
Retained
RetainedEarnings.
Earnings.


 Close
CloseDividends
Dividendsto
toRetained
Retained
Earnings.
Earnings.

3-65
 Closing Entries
ILLUSTRATION 3-33

Closing Journal Entries:

Retained Earnings 5,000

Dividends 5,000
Service Revenue 106,000
Salaries & Wages Expense
46,000
Supplies Expense 15,000
Rent Expense 9,000
Insurance Expense 500
Interest Expense 500
Depreciation Expense 400
Bad Debt Expense 1,600
Retained Earnings 33,000

3-66
 Post-Closing Trial Balance

 List
List of
ofpermanent
permanent
accounts
accountsandandtheir
their
balances
balancesafter
after posting
posting
closing
closing entries.
entries.

 Total
Total debits
debitsand
andcredits
credits
must
must bebeequal.
equal.

3-67
 Illustration 3-38

3-68
 Accounting Cycle Summarized

1. Enter the transactions of the period in appropriate journals.

2. Post from the journals to the ledger (or ledgers).
3. Prepare an unadjusted trial balance (trial balance).
4. Prepare adjusting journal entries and post to the ledger(s).
5. Prepare a trial balance after adjusting (adjusted trial balance).
6. Prepare the financial statements from the adjusted trial balance.
7. Prepare closing journal entries and post to the ledger(s).
8. Prepare a trial balance after closing (post-closing trial balance).
9. Prepare reversing entries (optional) and post to the ledger(s).

3-69
 Sources:

Weygandt, J. J., Kimmel, P. D., and Kieso, D. E., (2011). Financial Accounting,
IFRS edition, John Wiley & Sons Inc., USA.

Picker, R. Leo, K.J, Loftus, J. Wise, V., Clark, K., and Alfredson, K., (2012).
Applying International Financial Reporting Standards, 3rd Edition, John Wiley &
Sons Inc. , USA.

3-70