accounting principle kieso 8e_ch02

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Chapter2-1

CHAPTER 2

Understanding the

Recording Process

Accounting Principles, Eighth Edition



Chapter2-2

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

2. Define debits and credits and explain their use inrecording 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 Objectives



Chapter2-3

The Account

Debits andcredits

Expansion ofbasic equation

Steps in the

Recording

Process

The Recording

Process

Illustrated

The Trial

Balance

Limitations of atrial balance

Locating errors

Use of dollarsigns

Summaryillustration of

journalizingand posting

The Recording Process

Journal

Ledger



Chapter2-4

Account Name

Debit / Dr. Credit / Cr.

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

Debit = “Left”

Credit = “Right”

Account

An Account canbe illustrated in aT-Account form.

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

The Account



Chapter2-5

Double-entry accounting system

Each transaction must affect two or moreaccounts to keep the basic accounting equationin balance.

Recording done by debiting at least one accountand crediting another.

DEBITS must equal CREDITS.

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

Debits and Credits



Chapter2-6

Account Name


If Debits are greater than Credits, the accountwill have a debit balance.

$10,000 Transaction #2$3,000

$15,000

8,000Transaction #3

Balance

Transaction #1

Debits and Credits




Chapter2-7

Account Name


If Debits are greater than Credits, the accountwill have a debit balance.

$10,000 Transaction #2$3,000

Balance

Transaction #1

Debits and Credits


$1,000

8,000 Transaction #3



Chapter2-8

Chapter3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter3-27



ExpenseExpense

Chapter3-24

LiabilitiesLiabilities



Chapter3-25



Owners’ EquityOwners’ Equity

Chapter

3-26



RevenueRevenue

Normal

BalanceCredit

Normal

BalanceDebit

Debits and Credits Summary

LO 2



Chapter2-9

Balance Sheet Income Statement

= + =-Asset Liability Equity Revenue Expense

Debit

Credit





Chapter2-10

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 Question





Chapter2-11

Discussion QuestionQ4. Maria Alvarez, a beginning accounting

student, believes debit balances are favorable

and credit balances are unfavorable. Is Mariacorrect? Discuss.

See notes page for discussion





Chapter2-12

Assets - Debits shouldexceed credits.

Liabilities – Creditsshould exceed debits.

The normal balance is on

the increase side.


Assets and Liabilities

Chapter3-23

AssetsAssets



Chapter

3-24

LiabilitiesLiabilities





Chapter2-13

Owner’s investments andrevenues increase owner’sequity (credit).

Owner’s drawings and expenses

decrease owner’s equity (debit).


Owners’ Equity

Chapter3-25



Owners’ CapitalOwners’ Capital

Chapter3-23

Owners’ DrawingOwners’ Drawing



Chapter3-25



Owners’ EquityOwners’ Equity



Chapter2-14

The purpose of earningrevenues is to benefit theowner(s).

The effect of debits andcredits on revenue accountsis the same as their effecton Owner’s Capital.

Expenses have the oppositeeffect: expenses decreaseowner’s equity.


Revenue and Expense

Chapter

3-27



ExpenseExpense

Chapter3-26



RevenueRevenue



Chapter2-15

Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and owner’s capital.

c. assets, liabilities, and owner’s drawings.

d. assets, owner’s drawings, and expenses.

Review Question





Chapter2-16

Expansion of the Basic Equation

Relationship among the assets, liabilities andowners’ equity of a business:

The equation must be in balance after everytransaction. For every Debit there must be a Credit.

Illustration 2-11Assets Liabilities= Owners’ Equity

Basic

Equation

Expanded

Basic

Equation


+



Chapter2-17

Business documents, such as a sales slip, a check, abill, or a cash register tape, provide evidence of thetransaction.

Steps in the Recording Process

LO 3 Identify the basic steps in the recording process.

Illustration 2-12

Analyze each transaction Enter transaction in a journalTransfer journal information

to ledger accounts



Chapter2-18

Book of original entry (General Ledger).

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 thedebit and credit amounts can be easily compared.

The Journal

LO 3 Identify the basic steps in the recording process.



Chapter2-19

Journalizing - Entering transaction data in the journal.

Journalizing

E2-4 (Facts) Presented below is information related toHanshew Real Estate Agency.

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

Pete Hanshew begins business as a real estate agent with

a cash investment of $15,000.

Oct. 1

Purchases office furniture for $1,900, on account.3

Sells a house and lot for B. Kidman; bills B. Kidman $3,200for realty services provided.

6

Pays $700 on balance related to transaction of Oct. 3.27Pays the administrative assistant $2,500 salary for Oct.30

E2-5 Instructions - Journalize the transactions for E2-4.



Chapter2-20

Account Title Ref. Debit Credit

Oct. 1 Cash 15,000

Hanshew, Capital 15,000

(Owners investment)

Date

Journalizing

General Journal


E2-4 (Facts) Presented below is information relatedto Hanshew Real Estate Agency.

Pete Hanshew begins business as a real estateagent with a cash investment of $15,000.

Oct. 1



Chapter2-21


Oct. 3 Office furniture 1,900

Accounts payable 1,900

(Purchase furniture)

Date

Journalizing

General Journal



Purchases office furniture for $1,900, onaccount.

Oct. 3



Chapter2-22


Oct. 6 Accounts receivable 3,200

Service revenue 3,200

(Realty services provided)

Date

Journalizing

General Journal



Sells a house and lot for B. Kidman; bills B.Kidman $3,200 for realty services provided.

Oct. 6



Chapter2-23


Oct. 27 Accounts payable 700

Cash 700

(Payment on account)

Date

Journalizing

General Journal



Pays $700 on balance related to transaction ofOct. 3.

Oct. 27



Chapter2-24


Oct. 30 Salary expense 2,500

Cash 2,500

(Payment for salaries)

Date

Journalizing

General Journal



Pays the administrative assistant $2,500salary for Oct.

Oct. 30



Chapter2-25

Simple Entry – Two accounts, one debit and one credit.Compound Entry – Three or more accounts.

Journalizing

Example – On June 15, H. Burns, purchased equipment

for $15,000 by paying cash of $10,000 and the balanceon account (to be paid within 30 days).



June 15 Equipment 15,000

Cash 10,000

Accounts payable 5,000

(Purchased equipment)

Date

General Journal



Chapter2-26

Ledger contains the entire group of accountsmaintained by a company.

A general ledger contains all the asset,

liability, owner’s equity, revenue, and expenseaccounts.

Chart of Accounts

The Ledger

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



Chapter2-27

Accounts arranged in sequence in which they arepresented in the financial statements.

Chart of Accounts

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

Hanshew Real Estate AgencyChart of Accounts

101 Cash 300 Hanshew, Capital112 Accounts receivable 306 Hanshew, Drawing

126 Advertising supplies 350 Income summary

130 Prepaid insurance

150 Office equipment

158 Accumulated depreciation 400 Service revenue

200 Accounts payable 631 Advertising supplies expense

201 Notes payable 711 Depreciation expense

209 Unearned revenue 722 Insurance expense

212 Salaries payable 726 Salaries expense

230 Interest payable 729 Rent expense

905 Interest expense

Liabilities

Assets Owner's Equity

Revenues

Expenses



Chapter2-28

T-account form used in accounting textbooks.In practice, the account forms used in ledgers aremuch more structured.

Standard Form of Account

Explanation Ref. Debit CreditOct. 1 15,000 15,000

27 700 14,300

30 2,500 11,800

Cash

Date

No. 101

Balance

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



Chapter2-29

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

Cash Acct. No. 101

Date Explanation Ref. Debit Credit Balance

General Ledger


Oct. 1 Cash 15,000


(Owner's investment in business)

Date

General Journal

Oct. 1 Owner investment J1 15,000 15,000

101

J1

Posting




Chapter2-30

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.

Review Question

Posting




Chapter2-31

The Recording Process Illustrated


Follow these steps:

1. Determine whattype of accountis involved.

2. Determine what

items increasedor decreasedand by howmuch.

3. Translate theincreases anddecreases intodebits andcredits.

Illustration 2-19



Chapter2-32

A list of accountsand their balancesat a given time.

Purpose is toprove that debitsequal credits.

The Trial Balance

LO 7 Prepare a trial balance and explain its purposes.

Debit Credit

Cash 11,800$

Accounts receivable 3,200 Office furniture 1,900

Accounts payable 1,200$


Service revenue 3,200

Salaries expense 2,500

19,400$ 19,400$

Hanshew Real Estate AgencyTrial Balance

October 31, 2008



Chapter2-33

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, or5. offsetting errors are made in recording the

amount of a transaction.

The Trial Balance


Limitations of a Trial Balance



Chapter2-34

A trial balance will not balance if:

a. a correct journal entry is posted twice.

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

c. a $100 cash drawing by the owner is debited toOwner’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 Cashfor $45.

Review Question

The Trial Balance




Chapter2-35

Q2-19. Jim Benes is confused about how accountinginformation flows through the accounting system. Hebelieves 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 flowof the information.

See notes page for discussion

Recording Process

Discussion Question




Chapter2 36

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