Chapter 2: The Recording Process - PowerPoint Presentation

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Chapter 2:

The Recording ProcessSlide3

The Recording Process

The Account

Debits and creditsDouble-entry accountingAnalyzing and Recording TransactionsThe accounting cycle and steps in the recording processThe journalThe LedgerPostingThe recording process illustratedSummary illustration of journalizing and postingThe Trial BalanceLimitations of a trial balanceLocating errorsSome process explanations

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Chapter 2: The Recording Process

LEARNING OBJECTIVES

4Describe how accounts, debits, and credits are used to record business transactions.State how a journal is used in the recording process and journalize transactions.Explain how a ledger helps in the recording process and post transactions.Prepare a trial balance.Slide5

The Account

An individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item

Examples: cash, accounts payable, service revenue, salaries expenseThree parts: title, debit side, credit sideIn its simplest form, these parts are positioned like the letter TTherefore called a T account

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Debits & Credits

Debit (Dr.) indicates left; Credit (Cr.) indicates right

Entering an amount on the left side is called debiting the accountEntering an amount on the right side is crediting the accountDebit balanceDebit amounts exceed the creditsCredit balanceCredit amounts exceed the debits

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Tabular Versus Account Form

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Debit & Credit Procedure

Debit does not mean increase or decrease

Can be either depending on the type accountCredit also does not mean increase or decreasealso depends on account typeAssets are on the debit side of the equationIncreases are also on debit side; decreases on credit sideLiabilities are on the credit side of the equationIncreases are on the

credit

side; decreases on the

debit

side

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Assets, Liabilities & Owner’s Capital

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Drawings, Revenues, Expenses

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Accounting Equation Expanded

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Double-Entry Accounting System

Each transaction is recorded with equal debits and credits

Total debits always equals total creditsAccounting equation will always stay in balanceAssets = Liabilities + Owner’s EquityEvery account has a normal balanceEither debit or credit

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Chapter 2:

LEARNING OBJECTIVES

13Describe how accounts, debits, and credits are used to record business transactions.

State how a journal is used in the recording process and journalize transactions.

Explain how a ledger helps in the recording process and post transactions.

Prepare a trial balance.Slide14

The Accounting Cycle

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Steps 1 to 314Slide15

The Recording Process

The first three steps in the accounting cycle:

Analyze Business TransactionsDetermine effect on accountsJournalize the TransactionsThe book of original entryPost to Ledger Accounts

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The Journal

Where transactions are first recorded

Every company has a general journalContributes to recording process:Discloses complete effect of a transaction in one placeProvides a chronological recordHelps prevent and locate errors

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Journalizing

Entering transaction data in the journal

Separate journal entry for each transactionA complete entry consists ofTransaction dateAccounts & amounts to be debited and creditedBrief explanation of transaction

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Journalizing Technique

Transaction date

is entered in date columnDebit account title is entered at the left margin of the “Account Titles and Explanation” columnCredit account title is indented on the next line

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Journalizing Technique (cont’d)

Debit

amounts are recorded in the Debit (left) columnCredit amounts are recorded in the Credit (right) columnA brief explanation of the transaction is provided

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Journalizing Technique (cont’d)

Separate entries with a

blank lineRef column is used later when transferred to ledgerList all debits in each entry before listing credits

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Journalizing Technique (cont’d)

Simple entry:

involves two accountsCompound entry: involves three or more accounts

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Chapter 2:

LEARNING OBJECTIVES

22Describe how accounts, debits, and credits are used to record business transactions.

State how a journal is used in the recording process and journalize transactions.

Explain how a ledger helps in the recording process and post transactions.

Prepare a trial balance.Slide23

The Ledger

Ledger:

entire group of accounts maintained by a company General ledger: contains all the assets, liabilities, and owner’s equity accountsArranged in financial statement orderAssets, liabilities, owner’s capital, drawings, revenues and expensesPosting: procedure of transferring journal entries to the ledger accounts

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Standard Form of Account

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Posting

Post to debit account: date, journal page number, amount

Enter debit account number in journal reference columnPost to credit account: journal page number, amountEnter credit account number in journal reference column

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Chart of Accounts

List of accounts and their account numbers

Indicates where accounts are found in the ledgerUsually starts with balance sheet accounts, followed by income statement accountsVaries by companyNumber of accountsTypes of accountsNumbering system

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Chapter 2:

LEARNING OBJECTIVES

27Describe how accounts, debits, and credits are used to record business transactions.

State how a journal is used in the recording process and journalize transactions.

Explain how a ledger helps in the recording process and post transactions.

Prepare a trial balance.Slide28

The Accounting Cycle – Steps 1 to 4

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The Trial Balance

List of accounts and their balances at a specific time

Proves that debits equal credits after postingUncovers errors in journalizing and postingTo prepare a trial balance:List accounts and their balancesTotal the debit and credit columnsEnsure the two column totals are equal

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Example Trial Balance

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Limitations of a Trial Balance

Does not prove:

That all transactions have been recorded, or That the ledger is correctNumerous errors may exist even though the trial balance columns agreeTotal debits and total credits may be equal, but may still be posted to the wrong account or in the wrong amount

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Locating Errors

If trial balance does not balance, then:

If error is an amount such as $1, $100 or $1,000, re-add and re-calculate account balancesIf divisible by two, look for entry (= ½ of the error ) in the wrong columnIf divisible by nine, look for transposition errorsOtherwise, scan to see if an account balance has been omitted

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