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OpenerOpener

Sit in your Sit in your NEW TEAMSNEW TEAMS, delegate a , delegate a note takernote taker Get your Get your outlinesoutlines for Chapter 1 out—turn in to me as a group for Chapter 1 out—turn in to me as a group

NAME, Email, phone #, cell phone # NAME, Email, phone #, cell phone # One person, send me and your teammates an One person, send me and your teammates an emailemail BEFORE BEFORE

next class with the above info. Confirm receipt of email.next class with the above info. Confirm receipt of email.

Assign homework chapter 1 (give me their names)Assign homework chapter 1 (give me their names) Give Give transparencytransparency to these people to these people Dim Sum activityDim Sum activity Finish Statements from Ch 1Finish Statements from Ch 1 Finish Ch 1Finish Ch 1 Begin Ch 2Begin Ch 2

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Chapter 2

The Recording The Recording ProcessProcess

Financial Accounting, Seventh Edition

Accounting 201, Instructor: Judith Paquette

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So now we go into the land ofSo now we go into the land of

DEBITSDEBITS && CREDITSCREDITS

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

2. Define debits and credits and explain their use in recording business transactions.

3. Identify the basic steps in the recording process.

4. Explain what a journal is and how it helps in the recording process.

5. Explain what a ledger is and how it helps in the recording process.

6. Explain what posting is and how it helps in the recording process.

7. Prepare a trial balance and explain its purposes.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

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The AccountThe AccountThe AccountThe Account

Debits and Debits and creditscredits

Debit and credit Debit and credit procedureprocedure

Stockholders’ Stockholders’ equity equity relationshipsrelationships

Summary of Summary of debit/credit debit/credit rulesrules

Limitations of a Limitations of a trial balancetrial balance

Locating errorsLocating errors

Use of dollar Use of dollar signssigns

Summary Summary illustration of illustration of journalizing and journalizing and postingposting

JournalJournal

LedgerLedger

PostingPosting

Steps in the Steps in the Recording Recording ProcessProcess

Steps in the Steps in the Recording Recording ProcessProcess

The Recording The Recording Process Process

IllustratedIllustrated

The Recording The Recording Process Process

IllustratedIllustratedThe Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

The Recording ProcessThe Recording ProcessThe Recording ProcessThe Recording Process

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Account Name

Debit / Dr. Credit / Cr.

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Debit = “Left”

Credit = “Right”

AccounAccountt

An Account can An Account can be illustrated be illustrated

in a T-Account in a T-Account form.form.

SO 1 Explain what an account is and how it helps in the recording SO 1 Explain what an account is and how it helps in the recording process.process.

The AccountThe AccountThe AccountThe Account

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Double-entry Double-entry accounting 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 equalmust equal CREDITS.

SO 2 Define debits and credits and explain SO 2 Define debits and credits and explain their use in recording business their use in recording business transactions.transactions.

Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits

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Cash


If Debits are greater thangreater 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



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Accounts Payable


If Credits are greater thangreater than Debits, the account will have a credit balance.

$10,000 Transaction #2$3,000

Balance

Transaction #1



$1,000$1,000

8,000 Transaction #3

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Chapter 3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter 3-27



ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25



EquityEquity

Chapter 3-26



RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance Debit

Normal Balance Debit

Debits and Credits Debits and Credits SummarySummaryDebits and Credits Debits and Credits SummarySummary

SO 2 SO 2

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Balance Sheet Balance Sheet Income StatementIncome Statement

= + -Asset Liability

Equity Revenue

Expense

Debit

Credit

Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary


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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 QuestionReview Question



Solution notes page

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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Assets - Debits should exceed credits.

Liabilities – Credits should exceed debits.

The normal balance is on the increase side.


Assets and LiabilitiesAssets and LiabilitiesAssets and LiabilitiesAssets and Liabilities

Chapter 3-23

AssetsAssets



Chapter 3-24

LiabilitiesLiabilities



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Issuance of stock and revenues increase equity (credit).

Dividends and expenses decrease equity (debit).


Stockholders’ EquityStockholders’ EquityStockholders’ EquityStockholders’ Equity

Chapter 3-25



Common StockCommon Stock

Chapter 3-23

DividendsDividends



Chapter 3-25



EquityEquity

Chapter 3-25



Retained EarningsRetained Earnings

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The purpose of earning revenues is to benefit the owner(s).

The 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.


Revenue and ExpenseRevenue and ExpenseRevenue and ExpenseRevenue and Expense

Chapter 3-27



ExpenseExpense

Chapter 3-26



RevenueRevenue

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ASSETS LIABILITIESSTOCKHOLDERS' EQUITY Revenue Expense

Debit to Increase Credit to Increase Credit to Increase Credit to Increase Debit to Increase

Cash Notes Payable Common Stock Service Revenue Salaries Expense

Accounts Receivable Accounts Payable Additional Paid in Capital Sales Revenue Advertising Expense

Prepaid RentCurrent Portion of Long term debt Preferred Stock

Consulting Fees Earned Utilities Expense

Prepaid InsuranceUnearned Revenue Commissions Earned Rent Expense

Land Long Term Debt Retained Earnings

Ticket Sales Supplies Expense

Building Interest Income Travel Expense

Equipment Interest Expense

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Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and retained earnings.

c. assets, liabilities, and dividends declared.

d. assets, dividends declared, and expenses.




Solution notes page

Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and retained earnings.

c. assets, liabilities, and dividends declared.

d. assets, dividends declared, and expenses.

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Debits & CreditsDebits & Credits

This is called: DOUBLE ENTRY accounting This is called: DOUBLE ENTRY accounting system.system.

For every transaction, there is For every transaction, there is at leastat least one one debit and one credit debit and one credit or the accounting or the accounting equation won’t balance.equation won’t balance.

DEBITSDEBITS must equal must equal CREDITSCREDITS

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Summary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit Rules

Relationship among the assets, liabilities and stockholders’ 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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Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.

Steps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording Process

SO 3 Identify the basic steps in the recording process.SO 3 Identify the basic steps in the recording process.

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger

accounts

Illustration 2-13

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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.

The Journal – see your coursepack The Journal – see your coursepack journaljournalThe Journal – see your coursepack The Journal – see your coursepack journaljournal

SO 4 Explain what a journal is and how it helps in the recording SO 4 Explain what a journal is and how it helps in the recording process.process.

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Journalizing - Entering transaction data in the journal.

JournalizingJournalizingJournalizingJournalizing

SO 4SO 4

Illustration: On September 1, stockholders invested $15,000 cash in exchange for shares of stock, and Softbyte purchased computer equipment for $7,000 cash.

Account Title Ref. Debit CreditDate

Cash

Common stock

Sept. 1 15,000

15,000

General Journal

Computer equipmentCash

7,000

7,000

Illustration 2-14

Solution on notes page

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Account Title Ref. Debit CreditDate

Delivery equipment

Cash

14,000

8,000

6,000Accounts payable

Simple and Compound Entries

JournalizingJournalizingJournalizingJournalizing

Illustration: Assume that 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.

Sept. 1

General Journal

Illustration 2-15

SO 4SO 4Solution on notes page

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A General Ledger contains the entire group of accounts maintained by a company.

The General Ledger includes all the asset, liability, stockholders’ equity, revenue and expense accounts.

The Ledger – see coursepack – T acctsThe Ledger – see coursepack – T acctsThe Ledger – see coursepack – T acctsThe Ledger – see coursepack – T accts

SO 5 Explain what a ledger is and how it helps in the recording SO 5 Explain what a ledger is and how it helps in the recording process.process.

Illustration 2-16

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T-account form used in accounting textbooks.

In practice, the account forms used in ledgers aremuch more structured.

Standard Form of AccountStandard Form of AccountStandard Form of AccountStandard Form of Account


Illustration 2-17

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Accounts and account numbers arranged in sequence in which they are presented in the financial statements.

Chart of AccountsChart of AccountsChart of AccountsChart of Accounts

Illustration 2-18


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Posting Posting – the process of transferring amounts from the journal to the ledger accounts.

PostingPostingPostingPosting

Illustration 2-19

SO 6 Explain what posting is and how it helps in the recording SO 6 Explain what posting is and how it helps in the recording process.process.

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Coursepack - The Recording Process Coursepack - The Recording Process IllustratedIllustratedCoursepack - The Recording Process Coursepack - The Recording Process IllustratedIllustrated

Follow these steps:

1. Determine what type of account is involved.

2. Determine what items increased or decreased and by how much.

3. Translate the increases and decreases into debits and credits.

Illustration 2-20


#1: On October 1, CR Byrd invests $10,000 cash in an

advertising company to be known as Pioneer Advertising Agency,

Inc.# DATE Account Titles AND Description Debit Credit

1 10/1

To record owner’s investment.

# DATE Account Titles AND Description Debit Credit

1 10/1 Cash 10,000

Common Stock 10,000

To record owner’s investment.

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Use coursepack: The Recording Process Use coursepack: The Recording Process IllustratedIllustratedUse coursepack: The Recording Process Use coursepack: The Recording Process IllustratedIllustrated

Illustration 2-21


#2: On October 1, Pioneer purchases office equipment costing $5,000 by signing a 3-

month, 12% note payable.

2 10/1 Office Equipment 5,000

Notes Payable 5,000

To record purchase of equipments, 3 month note, 12%

2 10/1

To record purchase of equipments, 3 month note, 12%

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Illustration 2-21


#3: On October 2, Pioneer receives a $1,200 cash advance from R. Knox, a client, for

advertising services that are expected to be completed by December 31.

3 10/2 Cash 1,200

Unearned Revenue 1,200

To record cash advance

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Illustration 2-21


#4: On October 3, Pioneer pays $900 office rent for October in cash.

4 10/3 Rent Expense 900

Cash 900

To record paying rent.

32


Illustration 2-21


#5: On October 3, Pioneer pays $600 for a one-year insurance policy that will expire

next year on September 30.

5 10/4 Prepaid Insurance 600

Cash 600

To record purchase of one year insurance policy

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Illustration 2-21


#6: On October 5, Pioneer purchases an estimated 3-month supply of advertising

materials on account from Aero Supply for $2,500.

6 10/5 Advertising Supplies 2,500

Accounts Payable 2,500

Purchased supplies on account.

34


Illustration 2-21


#7: On October 9, Pioneer hires four employees to begin work on October 15.

Each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks—first payment made on

October 26.

7 10/9 No entry

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Illustration 2-21


#8: On October 20, Pioneer’s board of directors declares and pays a $500 cash

dividend to stockholders.

8 10/20 Dividends 500

Cash 500

To pay dividend.

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Illustration 2-21


#9: On October 26, Pioneer owes employee salaries of $4,000 and pays them in cash.

9 10/26 Salaries Expense 4,000

Cash 4,000

Paid salaries to employees.

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Illustration 2-21


#10: On October 31, Pioneer receives $10,000 in cash from Copa Company for advertising services provided in October.

10 10/31 Cash 10,000

Service Revenue 10,000

To record payment for advertising services.

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Use Course pack -Next steps – T AccountsUse Course pack -Next steps – T Accounts

Post to your T AccountsPost to your T Accounts Total your T Accounts – remember which Total your T Accounts – remember which

side to put the totalside to put the total Assets, Expenses – Debit sideAssets, Expenses – Debit side Liabilities, Stockholders’ Equity, Revenues – Liabilities, Stockholders’ Equity, Revenues –

Credit SideCredit Side Dividends – Debit SideDividends – Debit Side

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Use Coursepack - Next steps – Trial Use Coursepack - Next steps – Trial BalanceBalance

List Accounts and their balancesList Accounts and their balances

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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.


PostingPostingPostingPosting



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.

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A list of accounts and their balances at a given time.

Purpose is to prove that debits equal credits.

The Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

SO 7 Prepare a trial balance and explain its purposes.

Illustration 2-32

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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 or posting, or

5. offsetting errors are made in recording the amount of a transaction.


Limitations of a Trial Balance


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A trial balance will not balance if:

a. a correct journal entry is posted twice.

b. the purchase of supplies on account is debited to Supplies and credited to Cash.

c. a $100 cash drawing by the owner is debited to Owner’s Drawing for $1,000 and credited to Cash for $100.

d. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.





A trial balance will not balance if:

a. a correct journal entry is posted twice.

b. the purchase of supplies on account is debited to Supplies and credited to Cash.

c. a $100 cash drawing by the owner is debited to Owner’s Drawing for $1,000 and credited to Cash for $100.

d. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.

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Use coursepack: StatementsUse coursepack: Statements

Income StatementIncome Statement Retained EarningsRetained Earnings Balance SheetBalance Sheet

DO IT!DO IT!

45

End of Chapter 2End of Chapter 2

46

The accounts

come from the

ledger of

Christel

Corporation at

December 31,

2011.



SO 7

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David Edmondson, the president and CEO of well-known electronics retailer Radio Shack, overstated his accomplishments by claiming that he had earned a bachelor’s of science degree, when in fact he had not. Apparently his employer had not done a background check to ensure the accuracy of his résumé.

A chief financial officer of Veritas Software lied about having an M.B.A. from Stanford University.

Your Personal Annual Report

48

A former president of the U.S. Olympic Committee

lied about having a Ph.D. from Arizona State University.

When the truth was discovered, she resigned.

The University of Notre Dame discovered that its

football coach, George O’Leary, lied about his

education and football history. He was forced to resign

after only five days.

49

A survey by Automatic Data Processing reported that 40%

of applicants misrepresented their education or

employment history.

A survey by the

Society for Human

Resource

Management of

human resource

professionals

reported the

following responses

to the following

question.

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Using Radio Shack as an example, what should the company have done when it learned of the falsehoods on Mr. Edmondson’s résumé? Should Radio Shack have fired him?

YES: Radio Shack is a publicly traded company. Investors, creditors, employees, and others doing business with the company will not trust it if its leader is known to have poor integrity. The “tone at the top” is vital to creating an ethical organization.

NO: Mr. Edmondson had been a Radio Shack employee for 11 years. He had served the company in a wide variety of positions, and had earned the position of CEO through exceptional performance. While the fact that he lied 11 years earlier on his résumé was unfortunate, his service since then made this past transgression irrelevant. In addition, the company was in the midst of a massive restructuring, which included closing 700 of its 7,000 stores. It could not afford additional upheaval at this time.

51

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reserved. Reproduction or translation of this work beyond

that permitted in Section 117 of the 1976 United States

Copyright Act without the express written permission of

the copyright owner is unlawful. Request for further

information should be addressed to the Permissions

Department, John Wiley & Sons, Inc. The purchaser may

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distribution or resale. The Publisher assumes no

responsibility for errors, omissions, or damages, caused by

the use of these programs or from the use of the

information contained herein.

CopyrightCopyrightCopyrightCopyright

52

Debit

Debit

Credit

Debit

Credit

Credit

Kathy Browne, president of Hair It Is, Inc., has

just rented space in a shopping mall in which

she


will open and operate a beauty salon. A friend has advised

Kathy to set up a double-entry set of accounting records in

which to record all of her business transactions. Following are

the balance sheet accounts that Hair It Is, Inc., will likely need

to record the transactions. Indicate whether the normal

balance of each account is a debit or a credit.

Summary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit Rules


Cash

Supplies

Notes payable

Equipment

Accounts payable

Common stock

53 SO 5 Explain what a ledger is and how it helps in the recording SO 5 Explain what a ledger is and how it helps in the recording

process.process.

54

Kate Turner recorded the following

transactions in a general journal during the

month of March.


The Recording Process IllustratedThe Recording Process IllustratedThe Recording Process IllustratedThe Recording Process Illustrated

Post these entries to the Cash account.

SO 6SO 6

55 SO 7 Prepare a trial balance and explain its

purposes.

slide 2-1 opener sit in your new teams, delegate a note taker sit in your new teams, delegate a note...

Documents

recording process slide

account slide

account debits

credits debit

equal credits

equal debits

balance transaction

judith paquette slide