ch02 - Chapter 2-1 Chapter 2 Chapter 2 The Recording...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 2-1 Chapter 2 Chapter 2 The Recording Process Financial Accounting, Sixth Edition Chapter 2-2 Study Objectives Study Objectives 1. 2. 3. 4. 5. 6. 7. 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. Chapter 2-3 The Recording Process The Recording Process The Account Steps in the Recording Process Journal Ledger The Recording Process Illustrated Summary illustration of journalizing and posting The Trial Balance Limitations of a trial balance Locating errors Use of dollar signs Debits and credits Debit and credit procedure Stockholders' equity relationships Expansion of basic equation Chapter 2-4 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 be illustrated in a T-Account form. Account Name Debit / Dr. Credit / Cr. Chapter 2-5 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 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. Chapter 2-6 SO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits Debits and Credits If Debits are greater than Credits, the account will have a debit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 Transaction #3 Balance $10,000 8,000 $15,000 $3,000 Transaction #2 Chapter 2-7 SO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits Debits and Credits If Credits are greater than Debits, the account will 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 2-8 SO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits Summary Debits and Credits Summary Liabilit ies Normal Normal Balance Balance Debit Debit Asset s Debit / Dr. Credit / Cr. Normal Normal Balance Balance Credit Credit Chapter 3-24 Debit / Dr. Credit / Cr. Normal Balance St ockholders' Equit y ockholders' Debit / Dr. Credit / Cr. Normal Balance Normal Balance Chapter 3-23 Expense Debit / Dr. Credit / Cr. Chapter 3-25 Revenue Debit / Dr. Credit / Cr. Normal Balance Normal Balance Chapter 3-27 Chapter 3-26 Chapter 2-9 SO 2 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 Debit Revenu - Expens = e e Credit Chapter 2-10 SO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits Summary Debits and Credits Summary Review Question 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. Chapter 2-11 SO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits Summary Debits and Credits Summary Discussion Question Q4. Maria Alvarez, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Maria correct? Discuss. See notes page for discussion Chapter 2-12 SO 2 Define debits and credits and explain their use in recording business transactions. Assets and Liabilities Assets and Liabilities Asset s Debit / Dr. Credit / Cr. Assets Debits should exceed credits. Liabilities Credits should exceed debits. Normal Balance Chapter 3-23 Liabilit ies Debit / Dr. Credit / Cr. The normal balance is on the increase side. Normal Balance Chapter 3-24 Chapter 2-13 SO 2 Define debits and credits and explain their use in recording business transactions. Stockholders' Equity Stockholders' Equity St ockholders' Equit y Debit / Dr. Credit / Cr. Owner's investments and revenues increase stockholder's equity (credit). Dividends and expenses decrease stockholder's equity (debit). Ret ained Earnings Debit / Dr. Credit / Cr. Normal Balance Chapter 3-25 Common St ock Debit / Dr. Credit / Cr. Dividends Debit / Dr. Credit / Cr. Normal Balance Normal Balance Normal Balance Chapter 3-25 Chapter 3-25 Chapter 3-23 Chapter 2-14 SO 2 Define debits and credits and explain their use in recording business transactions. Revenue and Expense 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. Normal Balance Chapter 3-26 Expense Debit / Dr. Credit / Cr. Normal Balance Chapter 3-27 Chapter 2-15 SO 2 Define debits and credits and explain their use in recording business transactions. 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 2-16 SO 2 Define debits and credits and explain their use in recording business transactions. Stockholders' Equity Relationships Stockholders' Equity Relationships Illustration 2-11 Chapter 2-17 SO 2 Define debits and credits and explain their use in recording business transactions. Expansion of the Basic Equation Expansion of the Basic Equation Relationship among the assets, liabilities and stockholders' equity of a business: Basic Equation Expanded Basic Equation Assets = Liabilities + Stockholders' Equity Illustration 212 The equation must be in balance after every transaction. For every Debit there must be a Credit. Chapter 2-18 SO 2 Define debits and credits and explain their use in recording business transactions. 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 2-19 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 2-20 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing Journalizing Entering transaction data in the journal. 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 2-21 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. Oct. 1 Pete Hanshew begins business as a real estate agent with a cash investment of $15,000. General Journal Account Tit le Ca s h C o mmo n s to c k ( O wne r s inve s tme nt) Ref . Debit 15 ,0 0 0 15 ,0 0 0 Credit Dat e O c t. 1 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. Oct. 3 Purchases office furniture for $1,900, on account. General Journal Dat e O ct. 3 Account Tit le O f f ic e f ur nit ur e Ac c o unt s pa y a b le (Pur c ha s e f ur nit ur e ) Ref . Debit 0 0 1,9 Credit 0 0 1,9 Chapter 2-23 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. Oct. 6 Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. General Journal Account Tit le Ac c o unt s r e c e iva b le S e r vic e r e ve nue (Re a lt y s e r vic e s pr o vid e d ) Ref . Debit 3 ,2 0 0 3 ,2 0 0 Credit Dat e O ct. 6 Chapter 2-24 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. Oct. 27 Pays $700 on balance related to transaction of Oct. 3. General Journal Dat e O ct. 27 Account Tit le Ac c o unt s pa y a b le Ca s h (Pa y m e nt o n a c c o unt ) Ref . Debit 7 0 0 Credit 7 0 0 Chapter 2-25 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. Oct. 30 Pays the administrative assistant $2,500 salary for Oct. General Journal Dat e O ct. 30 Account Tit le S a la r y e x pe ns e Ca s h (Pa y m e nt f o r s a la r ie s ) Ref . Debit 2 ,5 0 0 Credit 2 ,5 0 0 Chapter 2-26 SO 4 Explain what a journal is and how it helps in the recording process. Journalizing Journalizing Simple Entry Two accounts, one debit and one credit. Compound Entry Three or more accounts. 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 Ca s h Ac c o unt s pa y a b le (Pur c ha s e d e q uipm e nt ) Chapter 2-27 Ref . Debit ,0 0 0 15 Credit ,0 0 0 10 5 ,0 0 0 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 2-28 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 101 112 126 130 150 158 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 2-29 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. 1 27 30 No. 101 Debit 15,000 700 2,500 Explanation Ref. Credit Balance 15,000 14,300 11,800 Chapter 2-30 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 ledger accounts. General Journal Dat e O c t. Account Tit le Cas h C o mmo n s to c k Ref . 101 J1 Debit 15 ,0 0 0 Credit 15 ,0 0 0 General Ledger Cash Dat e Explanat ion Ref . Debit Acct . No. 101 Credit Balance Oct. 1 Owner investment J1 15,000 15,000 Chapter 2-31 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 2-32 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: 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 Chapter 2-33 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. 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 2-34 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 2-35 SO 7 Prepare a trial balance and explain its purposes. The Trial Balance The Trial Balance Review Question 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 dividends is debited to the Dividends account for $1,000 and credited to Cash for $100. $45 and credited to Cash for $45. d. a $450 payment on account is debited to Accounts Payable for Chapter 2-36 SO 7 Prepare a trial balance and explain its purposes. Recording Process Recording Process Discussion Question Q2-19. Jim Benes is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows. a. Debits and credits posted to the ledger. b. Business transaction occurs. c. Information entered in the journal. d. Financial statements are prepared. e. Trial balance is prepared. Is Jim correct? If not, indicate to Jim the proper flow of the information. See notes page for discussion Chapter 2-37 SO 7 Prepare a trial balance and explain its purposes. ...
View Full Document

This note was uploaded on 02/13/2012 for the course ACCT 2000 taught by Professor Holmes during the Fall '08 term at LSU.

Ask a homework question - tutors are online