Chapter_2 - Chapter 2 Chapter The Recording Process...

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Unformatted text preview: Chapter 2 Chapter The Recording Process Financial Accounting, Sixth Edition Chapter 2 -1 Study Objectives 1. Explain what an account is and how it helps in the recording process. Define debits and credits and explain their use in recording business transactions. Identify the basic steps in the recording process. Explain what a journal is and how it helps in the recording process. Explain what a ledger is and how it helps in the recording process. Explain what posting is and how it helps in the recording process. Prepare a trial balance and explain its purposes. 2. 3. 4. 5. 6. 7. Chapter 2 -2 The Recording Process The Account Steps in the Steps Recording Process Process Journal Ledger The Recording The Process Illustrated Illustrated Summary Summary illustration of journalizing and posting and The Trial The Balance Balance Limitations of a Limitations trial balance trial Locating errors Use of dollar Use signs signs Debits and Debits credits credits Debit and Debit credit procedure procedure Stockholders’ Stockholders’ equity relationships relationships Expansion of Expansion basic equation basic Chapter 2 -3 The Account Account Re of incre s and de ase in a spe cord ase cre s cific asse liability, e t, quity, re nue or e nseite . ve , xpe m De = “Le bit ft” C dit = “Right” re An Account can An be illustrated in a T-Account form. T-Account Account Name Debit / Dr. Credit / Cr. Chapter 2 -4 SO 1 Explain what an account is and how it helps in the recording process. Debits and Credits Double-entry accounting syste m Double-entry Each transaction m affe two or m accounts to ke p the ust ct ore e basic accounting e quation in balance . Re cording doneby de biting at le oneaccount and cre ast diting anothe r. DEBITS must equal CREDITS. must Chapter 2 -5 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Debits and Credits If Debits are greater than Credits, the account will greater have a debit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 Transaction #3 $10,000 8,000 $3,000 Transaction #2 Balance $15,000 Chapter 2 -6 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Debits and Credits If Credits are greater than Debits, the account will greater have a credit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 $10,000 $3,000 8,000 Transaction #2 Transaction #3 Balance $1,000 Chapter 2 -7 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Debits and Credits Summary Liabilit ies Norm al Balance Debit Asset s Debit / Dr. Credit / Cr. Norm al Balance Credit Chapter 3-24 Debit / Dr. Credit / Cr. Normal Balance Normal St ockholders’ Equit y Debit / Dr. Credit / Cr. Normal Balance Normal Normal Balance Normal Chapter 3-23 Expense Debit / Dr. Credit / Cr. Chapter 3-25 Revenue Debit / Dr. Credit / Cr. Normal Balance Normal Normal Balance Normal Chapter 3-27 Chapter 3-26 Chapter 2 -8 SO 2 SO Debits and Credits Summary Balance Sheet Asset = Liability + Equity Income Statement Income Revenu - Expens = e e Debit Credit Chapter 2 -9 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Assets and Liabilities Asset s Debit / Dr. Credit / Cr. Assets - De should e e bits xce d cre dits. Liabilities – Cre should dits e e de xce d bits. Normal Balance Normal Chapter 3-23 Liabilit ies Debit / Dr. Credit / Cr. Thenormal balance is on t heincre side ase . Normal Balance Normal Chapter 3-24 Chapter 2-10 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Stockholders’ Equity St ockholders’ Equit y Debit / Dr. Credit / Cr. Owner’s investments and revenues incre stockholde e ase r’s quity (cre dit). Dividends and expenses de ase cre stockholde e r’s quity (de bit). Normal Balance Normal Chapter 3-25 Common St ock Debit / Dr. Credit / Cr. Ret ained Earnings Debit / Dr. Credit / Cr. Dividends Debit / Dr. Credit / Cr. Normal Balance Normal Normal Balance Normal Normal Balance Normal Chapter 3-25 Chapter 3-25 Chapter 3-23 Chapter 2-11 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Revenue and Expense Revenue Debit / Dr. Credit / Cr. The purpose of earning revenues is to benefit the stockholders. The effect of debits and credits on revenue accounts is the same as their effect on stockholders’ equity. Expenses have the opposite effect: expenses decrease stockholders’ equity. SO 2 Define debits and credits and explain their use SO in recording business transactions. in Normal Balance Normal Chapter 3-26 Expense Debit / Dr. Credit / Cr. Normal Balance Normal Chapter 3-27 Chapter 2-12 Stockholders’ Equity Relationships Illustration 2-11 Chapter 2-13 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Expansion of the Basic Equation Re lationship am theasse liabilitie and stockholde e ong ts, s rs’ quity of Re a busine ss: I llustration 2-12 Basic Equation Expanded Basic Equation Assets = Liabilities + Stockholders’ Equity Thee quation m bein balanceafte e ry transaction. For e ry ust r ve ve Debit t he m bea Credit. Debit re ust Credit Chapter 2-14 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Steps in the Recording Process Illustration 2-13 Analyze each transaction Enter transaction in a journal Transfer journal information to ledger accounts Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. Chapter 2-15 SO 3 Identify the basic steps in the recording process. The Journal Book of original e ntry. Transactions re corde in chronological orde d r. C ontributions to there cording proce ss: 1. Disclose thecom tee cts of a transaction. s ple ffe 2. Provide a chronological re s cord of transactions. 3. He to pre nt or locatee lps ve rrors be causethede and cre bit dit am ounts can bee asily com d. pare Chapter 2-16 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing - Entering transaction data in the journal. E2-4 (Facts) Pre nte be is inform se d low ation re d to Hanshe Re Estate late w al Age ncy. Oct. 1 Pe Hanshe be busine as a re e te w gins ss al stateage with a cash inve e nt stm nt of $15,000. 3 Purchase officefurniturefor $1,900, on account. s 6 S lls a houseand lot for B. Kidm bills B. Kidm $3,200 for re e an; an alty se s provide rvice d. 27 Pays $700 on balancere d to transaction of Oct. 3. late 30 Pays theadm inistrativeassistant $2,500 salary for Oct. E2-5 Instructions - Journalizethetransactions for E2-4. Chapter 2-17 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Oct. 1 Pete Hanshew begins business as a real estate agent with a cash investment of $15,000. Ge ral Journal ne Date Oct. 1 Account Tit le C ash C m stock om on (Owners investm ent) R. ef Debit 15,000 C redit 15,000 Chapter 2-18 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Oct. 3 Purchases office furniture for $1,900, on account. Ge ral Journal ne Account Tit le Of f ice f ur nit ur e A ccount s payable (Pur chase f ur nit ur e) Ref . Debit 1,900 1,900 Credit Dat e Oct . 3 Chapter 2-19 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Oct. 6 Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. Ge ral Journal ne Account Tit le Account s r eceivable S er vice r evenue (Realt y ser vices pr ovided) Ref . Debit 3,200 3,200 Credit Dat e Oct . 6 Chapter 2-20 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Oct. 27 Pays $700 on balance related to transaction of Oct. 3. Ge ral Journal ne Account Tit le Account s payable Cash (Payment on account ) Ref . Debit 700 700 Credit Dat e Oct . 27 Chapter 2-21 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Oct. 30 Pays the administrative assistant $2,500 salary for Oct. Ge ral Journal ne Account Tit le Salar y expense Cash (Payment f or salar ies) Ref . Debit 2,500 2,500 Credit Dat e Oct . 30 Chapter 2-22 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Simple Entry – Two accounts, one debit and one credit. Compound Entry – Three or more accounts. Example – On June15, H. Burns, purchase e d quipm nt for $15,000 by e paying cash of $10,000 and thebalanceon account (to bepaid within 30 days). Ge ral Journal ne Dat e J une 15 Account T it le Equipment Cash A ccount s payable (Pur chased equipment ) Chapter 2-23 Ref . Debit 15,000 Credit 10,000 5,000 SO 4 Explain what a journal is and how it helps in the recording process. SO The Ledger Ledger contains thee ntiregroup of accounts m aintaine by a d com pany. A general ledger contains all theasse liability, t, stockholde e r’s quity, re nue and e nseaccounts. ve , xpe Chart of Accounts Chapter 2-24 SO 5 Explain what a ledger is and how it helps in the recording process. Chart of Accounts Accounts arranged in sequence in which they are presented in the financial statements. Hanshew Real Estate Agency Chart of Accounts Assets 101 112 126 130 150 158 Cash Accounts receivable Supplies Prepaid insurance Office furniture Accumulated depreciation 300 306 350 Stockholders' Equity Common stock Retained earnings Dividends Revenues 400 Service revenue Liabilities 200 201 209 212 230 Accounts payable Notes payable Unearned revenue Salaries payable Interest payable 631 711 722 726 729 905 Expenses Supplies expense Depreciation expense Insurance expense Salaries expense Rent expense Interest expense Chapter 2-25 SO 6 Explain what posting is and how it helps in the recording process. Standard Form of Account T-account form used in accounting textbooks. In practice, the account forms used in ledgers are much more structured. Cash Date Oct. 1 27 30 No. 101 Debit 15,000 700 2,500 Explanation Ref. Credit Balance 15,000 14,300 11,800 Chapter 2-26 SO 5 Explain what a ledger is and how it helps in the recording process. Posting Posting – t heproce of transfe ss rring am ounts fromthejournal to the Posting le r accounts. dge General Journal Dat e Oct. Account Tit le Cash Common stock Ref . 101 Debit 15,000 J1 Credit 15,000 General Ledger Cash Dat e Explanat ion Ref . Debit Acct . N o. 101 Credit Balance Oct. 1 Owner investment J1 15,000 15,000 Chapter 2-27 SO 6 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated Illustration 2-20 Follow the ste se ps: 1. De rm what type te ine of account is involve d. 2. De rm what ite s te ine m incre d or de ase ase cre d and by how m uch. 3. Translatethe incre s and ase de ase into de cre s bits and cre dits. Chapter 2-28 SO 6 Explain what posting is and how it helps in the recording process. The Trial Balance A list of accounts and their balances at a given time. Purpose is to check that debits equal credits. Hanshew Real Estate Agency Trial Balance October 31, 2008 Cash Accounts receivable Office furniture Accounts payable Common stock Service revenue Salaries expense Debit $ 11,800 3,200 1,900 $ Credit 1,200 15,000 3,200 2,500 $ 19,400 $ 19,400 Chapter 2-29 SO 7 Prepare a trial balance and explain its purposes. The Trial Balance Limitations of a Trial Balance The trial balance may balance even when 1. a transaction is not journalize d, 2. a corre journal e ct ntry is not poste d, 3. a journal e ntry is poste twice d , 4. incorre accounts areuse in journalizing or posting, or ct d 5. offse tting e rrors arem in re ade cording theam ount of a transaction. Chapter 2-30 SO 7 Prepare a trial balance and explain its purposes. The Recording Process (Revisited) Analyze the transaction Journalize the transaction Post the journal entry to the ledger Prepare an (unadjusted) Trial Balance Prepare and post adjusting entries Prepare adjusted trial balance Prepare financial statements Prepare and post closing entries Prepare a post-close trial balance Chapter 2-31 ...
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