Download - Fundamentals of accounting
Transaction Analysis and the Accounting Equation
CHAPTER2
The Recording
ProcessSTUDY OBJECTIVES:
1)Explain what an account is and helps in recording process.
2) Define debit and credit.
3) Explain journal and journalizing process
PreviewofCHAPTER2
Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.
Dt Cr
The accounts can be classified as:
1. Assets. 2. Liabilities.3. Owner’s Equity.
Resources a business owns
Can be divided into :1. Current Assets. 2. Long term Assets.
Assets that can be converted to cash or used to pay current liabilities within 12 months.
Examples :
1. Cash 2. Account Receivables.
known as a non-current asset which cannot easily be converted into cash.
Examples:
1. Land. 2. Building. 3. Machinery.
Creditor claims on total assets
Can be divided into:1. Current Liabilities. 2. Long Term Liabilities.
current liabilities are all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle* of a given firm, whichever period is longer.
Examples:1. Account Payable. 2. Rent Payable, Salary Payable.
* An operating cycle for a firm is the average time that is required to go from cash to cash in producing revenues
all liabilities of the business that are to be settled in cash more than one year
Examples:1. Debenture. 2. Bank Loan.
The ownership claim on total assets.
Divided into:1. Capital. 2. Drawing. 3. Revenue. 4. Expense.
Luca PacioliFounder of Double Entry
System
Scale or Balance
DEBIT CREDIT
An account must have a titleAn account must have a title
Cash
Account Name
Debit / Dr. Credit / Cr.
An Account can be An Account can be illustrated in a T-illustrated in a T-Account form.Account form.
SO 1 Explain what an account is and how it helps in the recording process.
The Account
Left side of an account is called debit side.
Left side of an account is called debit side.
Cash
Left debit
Right side of an account is called as Right side of an account is called as credit side.credit side.
Right side of an account is called as Right side of an account is called as credit side.credit side.
Cash
Left debit
Right credit
Double-entry system
► Each transaction must affect two or more accounts to
keep the basic accounting equation in balance.
► Recording done by debiting at least one account and
crediting another.
► DEBITS must equal CREDITS.
SO 2 Define debits and credits and explain their use in recording business transactions.
Debit and Credit Procedures
The Account
Account Name
Debit / Dr. Credit / Cr.
If Debits are greater than Credits, the account will have
a debit balance.
$10,000 Transaction #2$3,000
$15,000$15,000
8,000Transaction #3
Balance
Transaction #1
Debits and Credits
SO 2 Define debits and credits and explain their use in recording business transactions.
Account Name
Debit / Dr. Credit / Cr.
$10,000 Transaction #2$3,000
Balance
Transaction #1
$1,000$1,000
8,000 Transaction #3
If Debits are less than Credits, the account will have a
credit balance.
Debits and Credits
SO 2 Define debits and credits and explain their use in recording business transactions.
Assets - Debits should exceed
credits.
Liabilities – Credits should
exceed debits.
Normal balance is on the
increase side.
Chapter 3-23
AssetsAssets
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-24
LiabilitiesLiabilities
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Debits and Credits
SO 2 Define debits and credits and explain their use in recording business transactions.
Owner’s investments and
revenues increase owner’s equity
(credit).
Owner’s drawings and expenses
decrease owner’s equity (debit).
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
OwnerOwner’’s Capitals Capital
Chapter 3-23
OwnerOwner’’s Drawings Drawing
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
OwnerOwner’’s Equitys Equity
Debits and Credits
SO 2 Define debits and credits and explain their use in recording business transactions.
Purpose of earning revenues is to
benefit the owner(s).
Effect of debits and credits on
revenue accounts is the same as
their effect on Owner’s Capital.
Expenses have the opposite effect:
expenses decrease owner’s
equity.
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Chapter 3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
Debits and Credits
SO 2 Define debits and credits and explain their use in recording business transactions.
Chapter 3-23
AssetsAssets
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Normal Balance Credit
Normal Balance Credit
Normal Balance Debit
Normal Balance Debit
Debits/Credits Rules
Chapter 3-24
LiabilitiesLiabilities
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
OwnersOwners’’ EquityEquity
SO 2
Chapter 3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
Cr.Dt.
+-Owner’s equity
+-Liability
-+Asset
ASSETS = LIABILITIES + O/EQUITYASSETS = LIABILITIES + O/EQUITY
Balance Sheet Income Statement
= + =-Asset Liability Equity Revenue Expense
Debit
Credit
Debits/Credits Rules
SO 2 Define debits and credits and explain their use in recording business transactions.
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.
Debits/Credits Rules
Question
SO 2 Define debits and credits and explain their use in recording business transactions.
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and owner’s capital.
c. assets, liabilities, and owner’s drawings.
d. assets, owner’s drawings, and expenses.
Debits/Credits Rules
Question
SO 2 Define debits and credits and explain their use in recording business transactions.
Relationship among the assets, liabilities and owner’s equity of a business:
The equation must be in balance after every transaction. For every Debit there must be a Credit.
Assets Liabilities= Owner’s EquityBasic Equation
Expanded Basic Equation
+Illustration 2-11
Summary of Debits/Credits Rules
SO 2 Define debits and credits and explain their use in recording business transactions.
Source documents, such as a sales slip, a check, a bill, or a
cash register tape, provide evidence of the transaction.
SO 3 Identify the basic steps in the recording process.SO 3 Identify the basic steps in the recording process.
Illustration 2-12
Analyze each transaction Enter transaction in a journalTransfer journal information to ledger accounts
Steps in the Recording Process
Book of original entry.
Transactions recorded in chronological order.
Contributions to the recording process:
1. Discloses the complete effects of a transaction.
2. Provides a chronological record of transactions.
3. Helps to prevent or locate errors because the debit
and credit amounts can be easily compared.
SO 4 Explain what a journal is and how it helps in the recording process.
The Journal
Steps in the Recording Process
Enter the transaction date in the date column.
J1General Journal
CreditDebitRef.Account Titles and ExplanationDate
2011
Oct. 1
The debit account title is entered first at the extreme left margin in the “account titles and explanation column and the amount is recorded in the DEBIT column .
J1General Journal
CreditDebitRef.Account Titles and ExplanationDate
2011
Oct. 1 Cash 15,000
The credit account title is indented and entered at the next line in the “account titles and explanation column and the amount is recoded in the CREDIT column .
J1General Journal
CreditDebitRef.Account Titles and ExplanationDate
2011
Oct. 1 Cash 15,000
Owner’s Capital 15,000
A brief explanation of the transaction appears on the line below the credit title.
J1General Journal
CreditDebitRef.Account Titles and ExplanationDate
2011
Oct. 1 Cash 15,000
Owner’s Capital 15,000
(Owner’s investment of cash in the business.)
The column titled Ref. Is left blank when the journal entry is made. This column is used later when journal entry is transferred to the accounts.
J1General Journal
CreditDebitRef.Account Titles and ExplanationDate
2011
Oct. 1 Cash 15,000
Owner’s Capital 15,000
(Owner’s investment of cash in the business.)
If an entry involves only two accounts, one debit and one credit, it is considered a simple entry.
When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.
Journalizing - Entering transaction data in the journal.
SO 4 Explain what a journal is and how it helps in the recording process.SO 4 Explain what a journal is and how it helps in the recording process.
Illustration: On September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash.
Account Title Ref. Debit CreditDate
Cash
Owner’s, Capital
Sept. 1 15,000
15,000
General Journal
Equipment
Cash
7,000
7,000
Illustration 2-13
Steps in the Recording Process
Simple and Compound Entries
SO 4 Explain what a journal is and how it helps in the recording process.SO 4 Explain what a journal is and how it helps in the recording process.
Illustration: On July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000 cash now and agrees to pay the remaining $6,000 on account.
Account Title Ref. Debit CreditDate
Equipment
Cash
July 1 14,000
8,000
General Journal
6,000Accounts payable
Illustration 2-14
Steps in the Recording Process