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Chapter 2the recording process (1)

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Accounting PrinciplesThirteenth EditionWeygandt Kimmel KiesoChapter 2The Recording ProcessPrepared byCoby HarmonUniversity of California, Santa BarbaraWestmont College
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Chapter 2The Recording Process
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3Chapter OutlineLearning ObjectivesLO 1Describe how accounts, debits, and credits are used to record business transactions.LO 2Indicate how a journal is used in the recording process.LO 3 Explain how a ledger and posting help in the recording process.LO 4 Prepare a trial balance.Copyright ©2019 John Wiley & Son, Inc.
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4Accounts, Debits, and CreditsCopyright ©2019 John Wiley & Son, Inc. The Account•Record of increases and decreases in a specific asset, liability, owner’s equity, revenue, or expense item.•Debit = “Left”•Credit = “Right”LO 1An account can be illustrated in a T-account form.Account NameDebit / Dr.Credit / Cr.
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5Debits and CreditsCopyright ©2019 John Wiley & Son, Inc. If the sum of Debitentries are greaterthanthe sum of Creditentries, the account will have a debit balance.LO 1Account NameDebit / Dr.Credit / Cr.Transaction #1€10,000€3,000Transaction #2Transaction #38,000 Balance€15,000
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6Debits and CreditsCopyright ©2019 John Wiley & Son, Inc. If the sum of Creditentries are greaterthanthe sum of Debitentries, the account will have a credit balance.LO 1Account NameDebit / Dr.Credit / Cr.Transaction #1€10,000€3,000Transaction #28,000Transaction #3Balance€1,000
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7Copyright ©2019 John Wiley & Son, Inc. Debit and Credit ProcedureDouble-entry system•Each transaction must affect two or more accounts to keep basic accounting equation in balance•Recording done by debiting at least one account and crediting at least one other account•DEBITS must equal CREDITSLO 1Debits and Credits
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8Accounts, Debits, and CreditsCopyright ©2019 John Wiley & Son, Inc. •Assets- Debits should exceed credits•Liabilities– Credits should exceed debits•Normalbalanceis on the increase sideLO 1AssetsDebit / Dr.Credit / Cr.Normal BalanceLiabilitiesDebit / Dr.Credit / Cr.Normal Balance
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9Accounts, Debits, and CreditsCopyright ©2019 John Wiley & Son, Inc. •Owner’s investments and revenuesincrease owner’s equity (credit)•Owner’sdrawingsand expensesdecrease owner’s equity (debit)LO 1Owner’s CapitalDebit / Dr.Credit / Cr.Normal BalanceOwner’s DrawingsDebit / Dr.Credit / Cr.Normal Balance
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10Accounts, Debits, and CreditsCopyright ©2019 John Wiley & Son, Inc. •Earning revenuesis to benefit owner(s)•Effect of debits and credits on revenue accounts is the same as effect on Owner’s Capital•Expenseshave opposite effectLO 1RevenuesDebit / Dr.Credit / Cr.Normal BalanceExpensesDebit / Dr.Credit / Cr.Normal Balance
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11Copyright ©2019 John Wiley & Son, Inc. LO 1Balance SheetIncome StatementAssets=Liabilities+EquityRevenue-ExpenseDebitCreditSummary of Debit / Credit Rules
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12Copyright ©2019 John Wiley & Son, Inc. LO 1Summary of Debit / Credit RulesAssets=Liabilities+Owner’s EquityAssets=Liabilities+Owner's Capital-Owner's Drawing+Revenue-ExpenseDr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.+--+-++--++-Debit/credit rules and effects on each type of account.Equation must be in balance after every transaction. Total Debits must equal total Credits.ILLUSTRATION 2.11
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13Copyright ©2019 John Wiley & Son, Inc. The Recording Processa.Analyze transactionb.Enter transaction in journalc.Transfer journal information to ledger accountsLO 2The JournalJournalize the transactionsAnalyzePostTrial BalanceAdjusting EntriesAdjusted Trial BalanceFinancial StatementsClosing EntriesPost-Closing Trial Balance
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14The JournalCopyright ©2019 John Wiley & Son, Inc. •Book of original entry•Transactions recorded in chronological order•Contributions to the recording process:1.Discloses the complete effects of a transaction2.Provides a chronological recordof transactions3.Helps toprevent or locate errorsbecause the debit and credit amounts can be easily comparedLO 2
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15JournalizingCopyright ©2019 John Wiley & Son, Inc. Journalizing- Entering transaction data in the journal.Illustration:On September 1, Ray Neal invested €15,000 cash in the business, and Softbyte purchased computer equipment for €7,000 cash.LO 2GENERAL JOURNALJ1DateAccount Titles and ExplanationsRef.DebitCreditSept. 1Cash15,000Owner's Capital15,000Equipment7,000Cash7,000ILLUSTRATION 2.13
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16GENERAL JOURNALJ1DateAccount Titles and ExplanationsRef.DebitCreditJuly 1Equipment14,000Cash8,000Accounts Payable6,000JournalizingCopyright ©2019 John Wiley & Son, Inc. Simple and Compound EntriesIllustration:On July 1, Butler Shipping purchases a delivery truck costing £14,000. It pays £8,000 cash now and agrees to pay the remaining £6,000 on account (to be paid later).LO 2ILLUSTRATION 2.14
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17Copyright ©2019 John Wiley & Son, Inc. LO 3The Ledger and PostingJournalizeAnalyzePost to ledger accountsTrial BalanceAdjusting EntriesAdjusted Trial BalanceFinancial StatementsClosing EntriesPost-Closing Trial BalanceThe Ledgera.Entire group of accounts maintained by a companyb.Provides the balance in each accountc.Keeps track of changes in account balances
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18Copyright ©2019 John Wiley & Son, Inc. General ledger contains all asset, liability, and owner’s equity accountsLO 3The LedgerAsset AccountsLiability AccountsOwner's Equity AccountsCashNotes PayableOwner's CapitalSuppliesAccounts PayableOwner's DrawingsEquipmentSalaries and Wages PayableService RevenueLandInterest PayableSalaries and Wages ExpenseILLUSTRATION 2.15
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19Copyright ©2019 John Wiley & Son, Inc. Standard Form of AccountLO 3The LedgerILLUSTRATION 2.16CASHNO. 101DateExplanationRef.DebitCreditBalance2020June 125,00025,00028,00017,00034,20021,20097,50028,7001711,70017,0002025016,750307,3009,450
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20Copyright ©2019 John Wiley & Son, Inc. LO 3The LedgerGENERAL JOURNALJ1DateAccount Titles and ExplanationRef.DebitCredit2020Sept. 1Cash10115,000Owner’s Capital30115,000GENERAL LEDGERCashNO. 101DateExplanationRef.DebitCreditBalance2020Sept. 1J115,00015,000Owner’s CapitalNO. 301DateExplanationRef.DebitCreditBalance2020Sept. 1J115,00015,000ILLUSTRATION 2.17Posting a journal entry
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21Copyright ©2019 John Wiley & Son, Inc. LO 3Chart of AccountsAssetsOwner's Equity101 Cash 301 Owner’s Capital112 Accounts Receivable 306 Owner’s Drawings126 Supplies 350 Income Summary130 Prepaid Insurance157 Equipment Revenues158 Accumulated Depreciation—Equipment400 Service RevenueLiabilitiesExpenses200 Notes Payable 631 Supplies Expense201 Accounts Payable 711 Depreciation Expense209 Unearned Service Revenue 722 Insurance Expense212 Salaries and Wages Payable 726 Salaries and Wages Expense230 Interest Payable 729 Rent Expense732 Utilities Expense905 Interest ExpenseAccounts in Redare used in this chapter.ILLUSTRATION 2.18
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22Copyright ©2019 John Wiley & Son, Inc. 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.LO 3The Recording Process Illustrated
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23Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.19TransactionOn October 1, C. R. Byrd invests ₺10,000 cash in an advertisingcompany called Yazici Advertising.Basic AnalysisThe asset Cash increases ₺10,000; owner’s equity (specifically, Owner's Capital) increases ₺10,000.Equation AnalysisAssets=Liabilities+Owner's EquityCash=Owner's Capital+₺10,000 +₺10,000 Debit-Credit AnalysisDebits increase assets: debit Cash ₺10,000.Credits increase owner's equity: credit Owner's Capital ₺10,000.Journal EntryDateTitlesRef.DebitCreditOct. 1Cash10110,000Owner's Capital30110,000PostingCash 101Owner's Capital 301Oct. 110,000Oct. 110,000
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24TransactionOn October 1, Yazici purchases office equipment costing₺5,000 by signing a 3-month, 12%, ₺5,000 note payable.Basic AnalysisThe asset Equipment increases ₺5,000;the liability Notes Payable increases ₺5,000.Equation AnalysisAssets=Liabilities+Owner's EquityEquipment=Notes Payable+₺5,000 +₺5,000Debit-Credit AnalysisDebits increase assets: debit Equipment ₺5,000.Credits increase liabilities: credit Notes Payable ₺5,000.Journal EntryDateTitlesRef.DebitCreditOct. 1Equipment1575,000Notes Payable2005,000PostingEquipment 157Notes Payable 200Oct. 15,000Oct. 15,000Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.20
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25TransactionOn October 2, Yazici receives a ₺1,200 cash for advertising services that are expected to be completed by December 31.Basic AnalysisThe asset Cash increases 1,200;₺the liability Unearned Revenue increases 1,200.₺Equation AnalysisAssets=Liabilities+Owner's EquityCash=Unearned Revenue+₺1,200 +₺1,200Debit-Credit AnalysisDebits increase assets: debit Cash ₺1,200.Credits increase liabilities: credit Unearned Revenue ₺1,200.Journal EntryDateTitlesRef.DebitCreditOct. 2Cash1011,200Unearned Revenue2091,200PostingCash 101Unearned Revenue 209Oct. 110,000Oct. 21,20021,200Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.21
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26TransactionOn October 3, Yazici pays office rent for October in cash of ₺900.Basic AnalysisThe expense account Rent Expense increases ₺900;the asset Cash decreases ₺900.Equation AnalysisAssets=Liabilities+Owner's EquityCash=Rent Expense-₺900 -₺900Debit-Credit AnalysisDebits increase expenses: debit Rent Expense ₺900.Credits decrease assets: credit Cash ₺900.Journal EntryDateTitlesRef.DebitCreditOct. 3Rent Expense729900Cash101900PostingCash 101Rent Expense 729Oct. 110,000Oct. 3900Oct. 390021,200Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.22
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27TransactionOn October 4, Yazici pays ₺600 for a one-year insurance policy that will expire next year on September 30.Basic AnalysisThe asset Prepaid Insurance increases ₺600;the asset Cash decreases ₺600.Equation AnalysisAssets=Liabilities+Owner's EquityCash+Prepaid Insurance-₺600 +₺600Debit-Credit AnalysisDebits increase assets: debit Prepaid Insurance ₺600.Credits decrease assets: credit Cash ₺600.Journal EntryDateTitlesRef.DebitCreditOct. 4Prepaid Insurance130600Cash101600PostingCash 101Prepaid Insurance 130Oct. 110,000Oct. 3900Oct. 460021,2004600Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.23
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28TransactionOn October 5, Yazici purchases a 3-month supplyof advertising materials on account from Aero Supply for ₺2,500.Basic AnalysisThe asset Supplies increases ₺2,500;the liability Accounts Payable increases ₺2,500.Equation AnalysisAssets=Liabilities+Owner's EquitySupplies=Accounts Payable+2,500 ₺+₺2,500Debit-Credit AnalysisDebits increase assets: debit Supplies ₺2,500.Credits increase liabilities: credit Accounts Payable ₺2,500.Journal EntryDateTitlesRef.DebitCreditOct. 5Supplies1262,500Accounts Payable2012,500PostingSupplies 126Accounts Payable 201Oct. 52,500Oct. 52,500Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.24
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29TransactionOn October 9, Yazici hires four employees to begin work on October 15. Each employee is to receive a weekly salary of ₺500.Basic AnalysisA business transaction has not occurred, there is no need to record an accounting entry.Equation AnalysisAssets=Liabilities+Owner's Equity=Debit-Credit AnalysisJournal EntryDateTitlesRef.DebitCreditPostingCopyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.25
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30TransactionOn October 20, C. R. Byrd withdraws ₺500 cash forpersonal use.Basic AnalysisThe owner’s equity account Owner’s Drawings increases ₺500; the asset Cash decreases ₺500.Equation AnalysisAssets=Liabilities+Owner's EquityCash=Owner’s Drawings-₺500 -₺500Debit-Credit AnalysisDebits increase drawings: debit Owner's Drawings ₺500.Credits decrease assets: credit Cash ₺500.Journal EntryDateTitlesRef.DebitCreditOct. 20Owner’s Drawings306500Cash101500PostingCash 101Owner’s Drawings 306Oct. 110,000Oct. 3900Oct. 20500 21,200460020500Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.26
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31TransactionOn October 26, Yazici owes employee salaries of ₺4,000and pays them in cash (see October 9 event).Basic AnalysisExpense account Salaries and Wages Expense increases ₺4,000; the asset Cash decreases ₺4,000.Equation AnalysisAssets=Liabilities+Owner's EquityCash=Sal. & Wages Expense-₺4,000 -₺4,000Debit-Credit AnalysisDebits increase expenses: debit Salaries and Wages Expense ₺4,000. Credits decrease assets: credit Cash ₺4,000.Journal EntryDateTitlesRef.DebitCreditOct. 26Salaries and Wages Expense7264,000Cash1014,000PostingCash 101Salaries & Wages Expense 726Oct. 110,000Oct. 3900Oct. 264,000 21,200460020500264,000Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.27
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32TransactionOn October 31, Yazici receives ₺10,000 in cash from CopaCompany for advertising services performed in October.Basic AnalysisThe asset Cash increases ₺10,000; the revenue accountService Revenue increases ₺10,000.Equation AnalysisAssets=Liabilities+Owner's EquityCash=Service Revenue+₺10,000 +₺10,000Debit-Credit AnalysisDebits increase assets: debit Cash ₺10,000.Credits increase revenues: credit Service Revenue ₺10,000.Journal EntryDateTitlesRef.DebitCreditOct. 31Cash10110,000Service Revenue40010,000PostingCash 101Service Revenue 400Oct. 110,000Oct. 3900Oct. 3110,00021,20046003110,00020500264,000Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.28
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33GENERAL JOURNALPage J1DateExplanationRef.DebitCredit2020Oct. 1Cash10110,000Owners’ Capital30110,0001Equipment1575,000Notes Payable2005,0002Cash1011,200Unearned Revenue2091,2003Rent Expense729900Cash101900Copyright ©2019 John Wiley & Son, Inc. LO 3Journalizing and Posting SummaryILLUSTRATION 2.29
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34GENERAL JOURNALPage J1DateExplanationRef.DebitCredit2020Oct. 4Prepaid Insurance130600Cash1016005Supplies1262,500Accounts Payable2012,50020Owner’s Drawings306500Cash10150026Salaries and Wages Expense7264,000Cash1014,00031Cash10110,000Service Revenue40010,000Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.29
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35Copyright ©2019 John Wiley & Son, Inc. LO 3ILLUSTRATION 2.30General Ledger
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36Copyright ©2019 John Wiley & Son, Inc. LO 4Yazici AdvertisingTrial BalanceOctober 31, 2020DebitCreditCash ₺15,200Supplies 2,500Prepaid Insurance 600Equipment 5,000Notes Payable ₺5,000Accounts Payable 2,500Unearned Service Revenue 1,200Owner’s Capital 10,000Owner’s Drawings 500Service Revenue 10,000Salaries and Wages Expense 4,000Rent Expense 900₺28,700₺28,700ILLUSTRATION 2.31
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37Copyright ©2019 John Wiley & Son, Inc. 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. 5.Offsetting errors are made in recording the amount of a transaction.LO 4Limitations of a Trial Balance
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38Copyright ©2019 John Wiley & Son, Inc. Locating ErrorsErrors in a trial balance generally result from mathematical mistakes, incorrect postings,or simply transcribing data incorrectly.LO 4Trial Balance
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39Copyright ©2019 John Wiley & Son, Inc. Currency SignsDo not appear in journals or ledgers Typically used only in trial balance and financial statements Shown only for first item in column and for the total of that columnUnderliningSingle line is placed under column of figures to be added or subtractedTotals are double-underlinedLO 4Trial Balance
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40Copyright ©2019 John Wiley & Son, Inc. LO 4Bali Beach SupplyTrial BalanceDecember 31, 2020DebitCreditCash R$ 7,000Accounts Receivable4,000Prepaid Insurance 6,000Equipment 88,000Notes Payable R$ 19,000Accounts Payable 22,000Salaries and Wages Payable2,000Owner’s Capital 20,000Owner’s Drawings 8,000Service Revenue 95,000Utilities Expense 3,000Salaries and Wages Expense 42,000R$158,000R$158,000
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41Copyright ©2019 John Wiley & Son, Inc. Key PointsSimilaritiesTransaction analysis is the same under IFRS and GAAP.Both the IASB and the FASB go beyond the basic definitions provided in this textbook for the key elements of financial statements, that is assets, liabilities, equity, revenues, and expenses. The more substantive definitions, using the FASB definitional structure, are provided in the Chapter 1 A Look at U.S. GAAP section.As shown in the textbook, currency signs are typically used only in the trial balance and the financial statements. The same practice is followed under GAAP, using the U.S. dollar.LO 5A Look at U.S. GAAP
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42Copyright ©2019 John Wiley & Son, Inc. Key PointsSimilaritiesA trial balance under GAAP follows the same format as shown in the textbook.DifferencesIFRS relies less on historical cost and more on fair value than U.S. companies.The statement of financial position is often called the balance sheet in the United States.LO 5A Look at U.S. GAAP
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43Copyright ©2019 John Wiley & Son, Inc. Looking to the FutureThe basic recording process shown in this textbook is followed by companies across the globe. It is unlikely to change in the future. The definitional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing accounting standards.LO 5A Look at U.S. GAAP
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