Financial Accounting

IFRS 5th Edition

Weygandt ● Kimmel

Chapter 2

The Recording Process

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Chapter Preview
Companies use a set of procedures and records to
keep track of transaction data more easily than in
tabular format presented in Chapter 1.
This chapter introduces and illustrates these basic
procedures and records.

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Chapter Outline
Learning Objectives
LO 1 Describe how accounts, debits, and credits are
used to record business transactions.
LO 2 Indicated 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.

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Learning Objective 1
Describe how accounts, debits, and
credits are used to record business
transactions.

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Accounts, Debits, and Credits
The Account
An account is an individual accounting record of increases and decreases in a
specific asset, liability, or equity item.
In its simplest form, an account consists of three parts:
(1) a title, (2) a left or debit side (Dr.), and (3) a right or credit side (Cr.).

Illustration 2.1: Basic form of account

Note: Whenever we are referring to a specific account, we capitalize the
name.
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Debits and Credits
Tabular Summary (Chapter 1) and Account Form (this Chapter)

Illustration 2.2: Tabular summary and account form for Softbyte’s Cash account

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Dr./Cr. Procedures for Assets and
Liabilities
Debits Credits
Increase assets Decrease assets
Decrease liabilities Increase liabilities
Illustration 2.3: Debit and credit effects─ assets and liabilities

• Increases in cash (an asset) are entered on the left side and decreases in
cash are entered on the right side
• Both sides of the basic equation (Assets = Liabilities + Equity) must be
equal.
• Increases and decreases in liabilities have to be recorded opposite from
increases and decreases in assets.
• Thus, increases in liabilities are entered on the right or credit side, and
decreases in liabilities are entered on the left or debit side.
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Normal Balances - Assets and
Liabilities

Illustration 2.4: Normal balances─ assets and liabilities

• Asset accounts normally show debit balances.

That is, debits to a specific asset account should exceed credits to that
account.

• Liability accounts normally show credit balances.

That is, credits to a liability account should exceed debits to that account.

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Debits 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.

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Debits – Solution

Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities. (Correct)
d. decrease assets and increase liabilities.

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Dr./Cr. Procedures for Equity
Share Capital—Ordinary.
Debits Credits
Decrease Share Capital—Ordinary Increase Share Capital—Ordinary

Illustration 2.5: Debit and credit effects─ share capital─

ordinary

• Companies issue share capital—ordinary in exchange

for the owners’ investment paid in to the company.
• Credits increase the Share Capital—Ordinary account,
and debits decrease it.
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Normal Balance - Equity
Share Capital—Ordinary.

Illustration 2.6: Normal balance─ share capital─ ordinary

• Knowing the normal balance in an account may help you
trace errors.
• Occasionally, though, an abnormal balance may be correct.
• The cash account, for example, will have a credit balance
when a company has overdrawn its bank balance.

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Normal Balance - Retained Earnings
Retained Earnings.

Illustration 2.7: Debit and credit effects and normal balance─

retained earnings

• Retained earnings is net income that is kept (retained) in the

business. It represents the portion of equity that the company has
accumulated through the profitable operation of the business.

• Credits (net income) increase the Retained Earnings account, and

debits (dividends or net losses) decrease it.
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Normal Balance - Dividends
Dividends.

Illustration 2.8: Debit and credit effect and normal balance─ dividends

Dividends:
A company’s distribution to its shareholders.
The most common form of a distribution is a cash dividend.

Dividends reduce the shareholders’ claims on retained earnings.

Debits increase the Dividends account, and credits decrease it.
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Dr./Cr. Revenues and Expenses
Revenues and Expenses.
Debits Credits
Decrease revenues Increase revenues
Increase expenses Decrease expenses

Illustration 2.9: Debit and credit effects─ revenues and expenses

The purpose of earning revenues is to benefit the shareholders of the

business. When a company recognizes revenues, equity increases.
The effect of debits and credits on revenue accounts is the same as
their effect on Retained Earnings.

Expenses have the opposite effect. Expenses decrease equity.

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Normal Balances – Revenues and
Expenses
Revenues and Expenses.

Illustration 2.10: Normal balances─ revenues and expenses

Revenue accounts are increased by credits and decreased by debits.

Expense accounts are increased by debits and decreased by credits.

Because revenues increase equity, a revenue account has the same

debit/credit rules as the Retained Earnings account. Expenses have
the opposite effect.

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Equity Relationships

Illustration 2.11: Equity relationships

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Summary of Debit/Credit Rules

Illustration 2.12: Summary of debit/credit rules

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DO IT! 1: Normal Account Balances

Julie Loeng has just rented space in a shopping mall. In this space, she will
open a hair salon to be called “Hair It Is.” A friend has advised Julie to set up a
double-entry set of accounting records in which to record all of her business
transactions.
Identify the statement of financial position accounts that Julie will likely need
to record the transactions needed to open her business. Indicate whether the
normal balance of each account is a debit or a credit.

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DO IT! 1: Normal Account Balances –
Solution
Julie would likely need the following accounts in which to record the
transactions necessary to ready her hair salon for opening day:

Cash (debit balance)

Equipment (debit balance)
Supplies (debit balance)
Accounts Payable (credit balance)

If she borrows money:

Notes Payable (credit balance)
If she invests cash:
Share Capital—Ordinary (credit balance)

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Learning Objective 2
Indicate how a journal is used in the
recording process.

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The Recording Process Illustrated

Illustration 2.13: The recording process

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The Journal
Companies initially record transactions in chronological order.
Thus, the journal is referred to as the book of original entry.

The journal makes several significant contributions to the

recording process:
1. It discloses in one place the complete effects of a transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and
credit amounts for each entry can be easily compared.

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Journalizing
Assume: On September 1, Softbyte SA shareholders
invested €15,000 cash in the corporation in exchange
for ordinary shares, and Softbyte purchased computer
equipment for €7,000 cash.

Demonstrate: How do you enter the transaction data

in the journal?

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Journalizing Illustration

Illustration 2.14: Techniques of journalizing

1. Date of the transaction.
2. Debit account title.
3. Credit account title.
4. Brief explanation of the transaction.
5. Reference column, which is left blank when the journal entry is made. This column
is used later when the journal entries are transferred to the individual accounts.

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Simple and Compound Entries
Simple entry: Involves one debit and one credit account.

Compound entry: An entry that requires three or more accounts.

The standard format requires that all debits be listed before the
credits.

Illustration 2.15: Compound journal entry

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DO IT! 2: Recording Business Activities

As president and sole shareholder, Julie Loeng engaged in the following

activities in establishing her beauty salon, Hair It Is.

1. Opened a bank account in the name of Hair It Is and deposited €20,000 of

her own money in this account in exchange for ordinary shares.
2. Purchased equipment on account (to be paid in 30 days) for a total cost of
€4,800.
3. Interviewed three applicants for the position of beautician.

In what form (type of record) should Hair It Is record these three activities?
Prepare the entries to record the transactions.

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DO IT! 2: Recording Business Activities–
Solution
Each transaction that is recorded is entered in the general
journal. The three activities would be recorded as follows.

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Learning Objective 3
Explain how a ledger and posting
help in the recording process.

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The Ledger and Posting

Ledger: The entire group of accounts maintained by a company.

Provides the balance in each of the accounts as well as keeps
track of changes in these balances.
Companies may use various kinds of ledgers, but every
company has a general ledger.

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The Ledger
The General Ledger

Illustration 2.16: The general ledger, which contains all of a company’s

accounts

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Standard Form of Account

Illustration 2.17: Three-column form of account

This format is called the three-column form of account. It has

three money columns—debit, credit, and balance.

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Posting
Illustration 2.18:
Posting a journal
entry

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Chart of Accounts

Illustration 2.19: Chart of accounts

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Chart of Accounts – Numbering
Lists the accounts and the account numbers that identify their
location in the ledger.
Numbering system: Usually starts with the statement of financial
position accounts and follows with the income statement accounts.
Number of accounts: Depends on the amount of detail
management desires.
Companies leave gaps to permit the insertion of new accounts as
needed during the life of the business.

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The Recording Process Illustrated

October transactions of Yazici Advertising A.Ş.

Accounting period: One month

HELPFUL HINT
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.

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Investment of Cash

Illustration 2.20: Investment of cash by shareholders

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Purchase of Office Equipment

Illustration 2.21: Purchase of office equipment

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Receipt of Cash for Future Service

Unearned Service Revenue

is considered a liability
even though the word
payable is not used.

Illustration 2.22: Receipt of cash for future service

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Payment of Monthly Rent

Illustration 2.23: Payment of monthly rent

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Payment for Insurance

Illustration 2.24: Payment for insurance

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Purchase of Supplies on Credit

Illustration 2.25: Purchase of supplies on credit

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Hiring of Employees

Illustration 2.26: Hiring of employees

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Declaration and Payment of Dividend

Illustration 2.27: Declaration and payment of dividend

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Payment of Salaries

Illustration 2.28: Payment of salaries

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Receipt of Cash for Services

Illustration 2.29: Receipt of cash for services provided

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Summary Illustration of Journalizing
and Posting
Illustration 2.30: General
journal entries

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Summary Illustration of General
Ledger
Illustration 2.31:
General ledger

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DO IT! 3: Posting
Como SpA recorded the following transactions in a general
journal during the month of March:

Post these entries to the Cash account of the general ledger to

determine the ending balance in cash. The beginning balance
in Cash on March 1 was €600.

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DO IT! 3: Posting – Solution

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Learning Objective 4
Prepare a trial balance.

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The Trial Balance

A list of accounts and their balances at a given time.

Proves the mathematical equality of debits and credits after
posting.
Three steps of preparation:
1. List the account titles and their balances in the appropriate
debit or credit column.
2. Total the debit and credit columns.
3. Verify the equality of the two columns.
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The Trial Balance Illustrated

Illustration 2.32: A trial balance

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Limitations of a Trial Balance
A trial balance may balance even when:
1 - a transaction not journalized.
2 - a correct journal entry not posted.
3 - a journal entry posted twice.
4 - Incorrect accounts used in journalizing or posting.
5 - Offsetting errors made in recording the amount of a transaction.

ETHICS NOTE
Error: Irregularity:
The result of an unintentional mistake An intentional misstatement
Neither ethical nor unethical Viewed as unethical

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Trial Balance - Locating Errors
1. Determine the amount of the difference between the two
columns of the trial balance.
2. Take one of the commonly useful steps listed below:

If the error is … Then …

€1, €10, €100, or Re-add the trial balance columns and recompute the account
€1,000: balances.
Divisible by 2: Scan the trial balance to see whether a balance equal to half the
error has been entered in the wrong column.
Divisible by 9: Retrace the account balances on the trial balance to see whether
they are incorrectly copied from the ledger. For example, €12
instead of €21, called a transposition error.
Not divisible by 2 or 9: Scan the ledger to see whether an account balance in the amount
of the error has been omitted from the trial balance, and scan the
journal to see whether a posting of that amount has been omitted.

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Currency Signs and Underlining
Currency Signs
• Do not appear in journals or ledgers.
• Typically used only in the trial balance and the financial
statements.
• Shown only for the first item and the total in the column.

Underlining
• A single line is placed under the column of figures to be
added or subtracted.
• Totals are double-underlined.

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DO IT! 4: Trial Balance

The following accounts come from the ledger of Bali Beach

Supply at December 31, 2025.
157 Equipment R$88,000 311 Share Capital —Ordinary R$20,000
332 Dividends 8,000 212 Salaries and Wages Payable 2,000
201 Accounts Payable 22,000 200 Notes Payable (due in 3 19,000
726 Salaries and Wages 42,000 Months)
Expense 732 Utilities Expense 3,000
112 Accounts Receivable 4,000 130 Prepaid Insurance 6,000
400 Service Revenue 95,000 101 Cash 7,000

Prepare a trial balance in good form.

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DO IT! 4: Trial Balance – Solution

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