ch02 - Chapter 2 Chapter 2 Chapter Chapter The Recording...

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Unformatted text preview: Chapter 2 Chapter 2 Chapter Chapter The Recording Process Chapter 2-1 Study Objectives Study Objectives 1. Exp la in wh a t a n a c c o un t is a n d h o w it h e lp s in th e re c o rd in g p ro c e s s . 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. Chapter 2-2 The Recording Process The Recording Process The Account 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 Steps Steps in the Recording Process Process Journal Ledger The The Recording Process Illustrated Illustrated Summary Summary illustration of journalizing and posting and The The Trial Balance Balance Limitations of a Limitations trial balance trial Locating errors Use of dollar Use signs signs The Account The Account Account Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = “Left” Credit = “Right” An Account can An be illustrated in a T-Account form. T-Account Chapter 2-4 Account Name Debit / Dr. Credit / Cr. SO 1 Explain what an account is and how it helps in the recording process. Debits and Credits Debits and Credits Double-entry accounting system Double-entry Each transaction must affect two or more accounts to keep the basic accounting equation in balance.Eg; Earned $11,000 for services rendered:$3,000 cash is received from customers and the balance of $8,000 is billed to customers on account. Recording done by debiting at least one account and crediting another. DEBITS must equal CREDITS (eg next slide). must Chapter 2-5 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Debits and Credits 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 $10,000 Transaction #3 8,000 Balance c/d $15,000 $18,000 $18,000 Balance b/d Chapter 2-6 $3,000 Transaction #2 $15,000 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Debits and Credits Debits and Credits If Credits are greater than Debits, the account will greater have a credit balance. Account Name Debit / Dr. Transaction #1 Chapter 2-7 $3,000 Transaction #2 8,000 Balance $10,000 Credit / Cr. Transaction #3 $1,000 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Debits and Credits Summary Debits and Credits Summary Liabilit ies Normal Normal Balance Balance Debit Debit Normal Normal Balance Balance Credit Credit Asset s Credit / Cr. Normal Balance Normal Chapter 3-24 St ockholders’ Equit y Credit / Cr. Debit / Dr. Debit / Dr. Debit / Dr. Credit / Cr. Normal Balance Normal Normal Balance Normal Chapter 3-23 Expense Debit / Dr. Revenue Chapter 3-25 Credit / Cr. Debit / Dr. Normal Balance Normal Chapter 3-27 Chapter 2-8 Credit / Cr. Normal Balance Normal Chapter 3-26 SO 2 SO Debits and Credits Summary Debits and Credits Summary Ba la n c e S h e e t Inc o m e S ta te m e nt Asset = Liability + Equity 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 Assets and Liabilities Asset s Debit / Dr. Credit / Cr. Assets ­ Debits should exceed credits. Normal Balance Normal Liabilities – Credits should exceed debits. Chapter 3-23 Liabilit ies Debit / Dr. Credit / Cr. The normal balance is on the increase side. 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 Stockholders’ Equity Owner’s investments and revenues increase stockholder’s equity (credit). St ockholders’ Equit y Debit / Dr. Credit / Cr. Dividends and expenses decrease stockholder’s equity (debit). Normal Balance Normal Chapter 3-25 Common St ock Debit / Dr. Ret ained Earnings Credit / Cr. Chapter 2-11 Chapter 3-25 Credit / Cr. Debit / Dr. Normal Balance Normal Debit / Dr. Normal Balance Normal Chapter 3-25 Dividends Credit / Cr. Normal Balance Normal Chapter 3-23 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Revenue and Expense Revenue and Expense Revenue Debit / Dr. Credit / Cr. Normal Balance Normal Chapter 3-26 Expense 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. Normal Balance Normal Chapter 3-27 Chapter 2-12 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Debits and Credits Summary Debits and Credits Summary Review Question Accounts that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and equity. c. assets, liabilities, and dividends. d. assets, dividends, and expenses. Chapter 2-13 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Stockholders’ Equity Relationships Stockholders’ Equity Relationships Illustration 2-11 Chapter 2-14 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Expansion of the Basic Equation Expansion of the Basic Equation Relationship among the assets, liabilities and stockholders’ equity of a business: Illustration 2­12 Basic Equation Assets = Liabilities + Stockholders’ Equity Expanded Basic Equation The equation must be in balance after every transaction. For every Debit there must be a Credit. Chapter 2-15 SO 2 Define debits and credits and explain their use SO in recording business transactions. in Steps in the Recording Process 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 2-16 SO 3 Identify the basic steps in the recording process. The Journal The Journal 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. Chapter 2-17 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing Journalizing ­ En te rin g tra n s a c tio n d a ta in th e jo urna l. 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. 3 Purchases office furniture for $1,900, on account. 6 Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. 27 Pays $700 on balance related to transaction of Oct. 3. 30 Pays the administrative assistant $2,500 salary for Oct. E2-5 Instructions ­ Journalize the transactions for E2­4. Chapter 2-18 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Pete Hanshew begins business as a real estate agent with a cash investment of $15,000. Oct. 1 General Journal Dat e O c t. Account Tit le 1 Ca s h C o mmo n s to c k Ref . Debit Credit 15 ,0 0 0 15 ,0 0 0 ( O wne r s inve s tme nt) Chapter 2-19 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Purchases office furniture for $1,900, on account. Oct. 3 General Journal Dat e O ct. Account Tit le 3 O f f ic e f ur nit ur e Ac c o unt s pa y a b le Ref . Debit Credit 1,9 0 0 1,9 0 0 (Pur c ha s e f ur nit ur e ) Chapter 2-20 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. Oct. 6 General Journal Dat e O ct. Account Tit le 6 Ref . Ac c o unt s r e c e iva b le S e r vic e r e ve nue Debit Credit 3 ,2 0 0 3 ,2 0 0 (Re a lt y s e r vic e s pr o vid e d ) Chapter 2-21 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Pays $700 on balance related to transaction of Oct. 3. Oct. 27 General Journal Dat e Account Tit le O ct. 27 Ac c o unt s pa y a b le Ca s h Ref . Debit Credit 7 0 0 7 0 0 (Pa y m e nt o n a c c o unt ) Chapter 2-22 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Pays the administrative assistant $2,500 salary for Oct. Oct. 30 General Journal Dat e Account Tit le O ct. 30 S a la r y e x pe ns e Ca s h Ref . Debit Credit 2 ,5 0 0 2 ,5 0 0 (Pa y m e nt f o r s a la r ie s ) Chapter 2-23 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing Simple Entry – T wo a c c o u nts , o n e d e b it a nd o ne c re d it. Compound Entry – T h re e o r m o re a c c o unts . Example – On June 15, H. Burns, purchased equipment for $15,000 by paying cash of $10,000 and the balance on account (to be paid within 30 days). General Journal Dat e J une 15 Account Tit le Eq uipm e nt Ref . Debit Credit 15 ,0 0 0 Ca s h 10 ,0 0 0 Ac c o unt s pa y a b le 5 ,0 0 0 (Pur c ha s e d e q uipm e nt ) Chapter 2-24 SO 4 Explain what a journal is and how it helps in the recording process. The Ledger The Ledger Ledger contains the entire group of accounts maintained by a company. A general ledger contains all the asset, liability, stockholder’s equity, revenue, and expense accounts. Chart of Accounts Chapter 2-25 SO 5 Explain what a ledger is and how it helps in the recording process. Chart of Accounts 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 Cash Accounts receivable Supplies Prepaid insurance 150 158 Office furniture Accumulated depreciation Stockholders' Equity 300 306 350 Revenues 400 Liabilities 200 201 209 212 230 Chapter 2-26 Accounts payable Notes payable Unearned revenue Salaries payable Interest payable Common stock Retained earnings Dividends Service revenue Expenses 631 711 722 726 729 905 Supplies expense Depreciation expense Insurance expense Salaries expense Rent expense Interest expense SO 6 Explain what posting is and how it helps in the recording process. Standard Form of Account Standard Form of Account T­account form used in accounting textbooks. In practice, the account forms used in ledgers are much more structured. Cash Date Oct. Chapter 2-27 Explanation 1 27 30 Ref. No. 101 Debit Credit 15,000 700 2,500 Balance 15,000 14,300 11,800 SO 5 Explain what a ledger is and how it helps in the recording process. Posting Posting Posting – the process of transferring amounts from the journal to the Posting ledger accounts. General Journal Dat e O c t. Account Tit le J1 Debit 101 Cas h Ref . 15 ,0 0 0 C o mmo n s to c k 15 ,0 0 0 General Ledger Cash Dat e Oct. 1 Chapter 2-28 Explanat ion Owner investment Credit Ref . Debit J1 15,000 Acct . No. 101 Credit Balance 15,000 SO 6 Explain what posting is and how it helps in the recording process. Posting Posting Review Question 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. Chapter 2-29 SO 6 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated The Recording Process Illustrated Follow these steps: Illustration 2-20 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. Chapter 2-30 SO 6 Explain what posting is and how it helps in the recording process. The Trial Balance The Trial Balance A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. Chapter 2-31 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 $ 2,500 $ 19,400 1,200 15,000 3,200 $ 19,400 SO 7 Prepare a trial balance and explain its purposes. The Trial Balance The Trial Balance Limitations of a Trial Balance 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. Chapter 2-32 SO 7 Prepare a trial balance and explain its purposes. ...
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