2.recording process

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The Recording

Process


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Learning Objectives

1. Explain what an account is and how it helps in therecording process.

2. Define debits and credits and explain how they areused to record economic events.

3. Explain what a journal is and how it helps in therecording process.

4. Explain what a general ledger is and how it helpsin the recording process.

5. Explain what posting is and how it helps in therecording process.

6. Explain the purpose and limitations of a trialbalance.


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Event Analysis Summary (Review) An economic event is analysed.

If recognised, the event will be two-sided,affecting assets, liabilities and/or equity.

Before, during, and after recognition, there isequality in terms of the accounting equation


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Account NameDebit / Dr. Credit / Cr.

Record of increases and decreasesin a specific asset, liability, equity,income, or expense item.

Account

An Account canbe illustrated in aT-Account form.

LO 1: The Account

Debit = Left Credit = Right


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Account Name

Debit / Dr. Credit / Cr.

If Debits are greater than Credits, the account willhave a debit balance.

$10,000 Transaction #2$3,000

$15,000

8,000Transaction #3

Balance

Transaction #1

LO 1: The Account


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Account Name


If Credits are greater than Debits, the account willhave a credit balance.

$10,000 Transaction #2$3,000

Balance

Transaction #1

LO 1: The Account

$1,000

8,000 Transaction #3


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Double entry system:

Each recordable event affects at least twoaccounts.

The increase or decrease to an account isrecorded with a debit or a credit, dependingon the account.

For each recordable event, total dollar debitsmust equal total dollar credits.

LO 2: Debits and Credits


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Rules of double entry bookkeeping:A = L + OEA = L + Share Capital + Income Expenses Dividends

Assets are on the left, so increase them with debits.

Liabilities and equity are on the right, so increase them

with credits. Equity is increased with share capital and income (including

revenues), so increase these accounts with credits. But expenses and the Dividends account decrease equity, so

increase these accounts with debits.



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Chapter3-23

AssetsAssetsDebit / Dr. Credit / Cr.

Normal BalanceNormal Balance

Chapter3-24

LiabilitiesLiabilitiesDebit / Dr. Credit / Cr.


Chapter3-25


Normal Balance

Equity

NormalBalanceCredit

Normal

BalanceDebit



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Issuance of share capital,reserves, and income increaseequity (credit).

Dividends and expenses decrease equity (debit).


Chapter3-25



Share CapitalShare Capital

Chapter3-23

DividendsDividendsDebit / Dr. Credit / Cr.


Chapter3-25



EquityEquity

Chapter3-25


Normal Balance

Reserves


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What is the normal balance of each of thefollowing accounts?

Advertising Expense. Dividend Revenue. Dividends Receivable.

Share Capital. Dividends. Dividends Payable.

LO 2: Debits and Credits Credits BE2-1, p. 78(adapted)


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Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

Review Question

LO 2: Debits and CreditsSummary

Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.


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Business documents , such as an invoice, a cheque, or acash register tape, provide evidence of a recordableevent.

Journal = book of original entry.

Events are recorded in the journal in chronological order.

Journals contributions to the recording process:

1. Discloses the complete effects of an event.

2. Provides a chronological record.

3. Helps to prevent or locate errors because the debitand credit amounts can be easily compared.

LO 3: Journalising


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For each part of a recordable event, firstdetermine the appropriate account affected(conceptual framework/residual analysis), then

apply the rules of debit and credit:1. The ____ account has incr/decr, which incr/decr A,L, or OE.

2. An incr/decr to A,L, or OE is recorded with a DR/CR.

3. Therefore, DR/CR the ____ account.

LO 3: Journalising


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Account Title Ref. Debit CreditDate

Share capital

Journalizing Simple journal entries.On September 1, stockholders invested $15,000 cash inexchange for ordinary shares, and Softbyte purchasedcomputer equipment for $7,000 cash.

CashSept. 1 15,000

15,000

General Journal

Computer equipment

Cash

7,000

7,000

Illustration 2-14

LO 3: Journalising


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Account Title Ref. Debit CreditDate

8,000

Delivery equipment

Cash

14,000

6,000Accounts payable

Sept. 1

On July 1, Butler Company purchased a delivery truckcosting $14,000. It paid $8,000 cash and agreed to pay theremaining $6,000 on account.

General Journal

Illustration 2-15

Compound Journal Entry

LO 3: Journalising


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The following transactions occurred during August ofthe current year. Determine which accounts areaffected, apply the rules of debit and credit, and

journalise the transactions.

4/8 Paid insurance in advancefor 6 months, $1800.

16/8 Received $9000 from clients

for services rendered inAugust.

27/8 Paid secretary $500 salaryfor August.

LO 3: Journalising BE2-5, p. 79 (adapted)


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General Ledger

Contains all accounts maintained by a business.

All asset, liability, equity, income and expense

accounts.

LO 4: The Ledger

Illustration 2-16


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LO 4: The Ledger

Illustration 2-18Chart of Accounts


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T-account form used in accounting textbooks.

Ledger form used in practice.

Illustration 2-17

LO 4: The Ledger

Standard Form of Account


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Posting:

a. normally occurs before journalizing.

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.d. transfers journal entries to ledger accounts.

Review Question

LO 5: Posting

Posting:

a. normally occurs before journalising.

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.d. transfers journal entries to ledger accounts.


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Katherine Turner recorded the followingtransactions during the month of March.

LO 5: Posting

Post these entries to the Cash account.


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A list of accountsand theirbalances at a

given time.Purpose is toprove that debitsequal credits.

LO 6: The Trial BalanceIllustration 2-32


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The accountscome from the

ledger ofChristel Ltd atDecember 31,2011.

L O 6 : The Tr i al B a l an ce

Christel LtdTrial Balance (in thousands)December 31, 2011


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Selected transactions from the journal of TeresaGonzales, investment broker, are presented here:Date Account titles Debit CreditAug 1 Cash 5 000

Share Capital 5 00010 Cash 2 400

Service Revenue 2 40012 Office Equipment 5 000

Cash 1 000Notes Payable 4 000

25 Accounts Receivable 1 600Service Revenue 1 600

31 Cash 900Accounts Receivable 900

Required(a) Post the transactions to T accounts.(b) Prepare a trial balance as at 31 August 2011.

LO 6: The Trial Balance E2-9, p. 82


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CashAug. 1 5,000 Aug. 12 1,000

10 2,40031 900

Bal. 7,300

Accounts ReceivableAug. 25 1,600 Aug. 31 900Bal. 700

Office EquipmentAug. 12 5,000

Notes PayableAug. 12 4,000

Share Capital OrdinaryAug. 1 5,000

Service RevenueAug. 10 2,400

25 1,600Bal. 4,000



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TERESA GONZALEZ, INVESTMENT BROKERTrial Balance

August 31, 2011

Debit Credit Cash $7,300Accounts ReceivableOffice EquipmentNotes Payable

Share Capital

OrdinaryService Revenue 4,000

$13,000 $13,000



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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 orposting, or

5. offsetting errors are made in recording the amountof a transaction.

LO 6: The Trial Balance

Limitations of a Trial Balance


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A bookkeeper made these errors in journalising and posting:

1. A credit posting of $400 to Accounts Receivable was omitted.2. A debit posting of $750 for Prepaid Insurance was debited to

Insurance Expense.3. A collection on account of $100 was journalised and posted as a

debit to Cash $100 and a credit to Service Revenue $100.4. A credit posting of $300 to Property Taxes Payable was made

twice.5. A cash purchase of supplies for $250 was journalised and posted

as a debit to Supplies $25 and a credit to Cash $25.6. A debit of $465 to Advertising Expense was posted as $456.

Required:For each error, indicate (a) whether the trial balance willbalance; if the trial balance will not balance, indicate (b)the amount of the difference and (c) the trial balancecolumn that will have the greater total. Consider each

error separately

LO 6: The Trial Balance-- E2-13,p. 83

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