Financial Accounting

with IFRS 5th Edition

Wiley Custom Edition

Chapter 2
The Recording Process
Weygandt ● Kimmel
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Ch 2 The Recording Process Copyright © John Wiley & Sons, Inc. 1
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

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

4
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
• The term debit indicates the left side of an account, and credit
indicates the right side.
• Abbreviated as Dr. for debit and Cr. for credit.
• We use the terms debit and credit repeatedly in the recording
process to describe where entries are made in accounts.

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Debits and Credits
• Entering an amount on the left side of an account is called debiting
the account.
• Making an entry on the right side is crediting the account.
• Debit balance: if the total of the debit amounts exceeds the credits
• Credit balance: if the credit amounts exceed the debits.

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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

ILLUSTRATION 2.3 Debit and credit effects—assets and liabilities

• 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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Dr./Cr. Procedures for 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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Dr./Cr. Procedures for Equity
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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Dr./Cr. Procedures for 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.

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Dr./Cr. Procedures for Equity
Retained Earnings

ILLUSTRATION 2.7 Debit and credit effects and normal balance—retained earnings

• Share capital—ordinary, retained earnings and liabilities:

• Same rules apply for debit and credit and the normal balances.

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Dr./Cr. Procedures for Equity
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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Dr./Cr. Procedures for Equity
Dividends

ILLUSTRATION 2.8 Debit and credit effect and normal balance—dividends

• A company’s distribuGon to its shareholders.

• The most common form of a distribuGon 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. Procedures for Equity
Revenues and 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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Dr./Cr. Procedures for Equity
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 RelaConships

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 transac5ons
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.

22
The Journal
1 2 3

1 2 3

ILLUSTRATION 2.13 The recording process

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The Recording Process

1. Analyze each transaction in terms of its effect on the accounts.

2. Enter the transaction information in a journal.

3. Transfer the journal information to the appropriate accounts in

the ledger.

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The Journal
• Companies iniJally record transacJons in chronological order.
• Journal is referred to as the book of original entry.
• The journal makes several significant contribuJons to the recording
process:
1. It discloses in one place the complete effects of a transacQon.
2. It provides a chronological record of transacQons.
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
General journal has spaces for dates, account titles and
explanations, references, and two amount columns.

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 2.14 Technique of journalizing

Date of the transaction.
Debit account title.
Credit account title.
Brief explanation of the transaction.
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 AcCviCes – SoluCon
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.

31
The Ledger

• 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 entire group of accounts maintained by a company is the ledger.
• The ledger provides the balance in each of the accounts as well as
keeps track of changes in these balances.
• A general ledger contains all the asset, liability, and equity accounts

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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
• The procedure of transferring journal entries to the ledger accounts is
called posting.
• The phase of the recording process accumulates the effects of
journalized transactions into the individual accounts.

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Posting
Posting involves the following steps
1. In the ledger, in the appropriate columns of the account(s) debited, enter
the date, journal page, and debit amount shown in the journal.
2. In the reference column of the journal, write the account number to which
the debit amount was posted.
3. In the ledger, in the appropriate columns of the account(s) credited, enter
the date, journal page, and credit amount shown in the journal.
4. In the reference column of the journal, write the account number to which
the credit amount was posted.

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Posting
• Posting should be performed in chronological order.
• The company should post all the debits and credits of one journal
entry before proceeding to the next journal entry.
• Postings should be made on a timely basis to ensure that the ledger is
up-to-date.

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Posting

ILLUSTRATION 2.18
Posting a journal entry
Continues on next slide

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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.
• gaps to permit the insertion of new accounts as need.

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The Recording Process Illustrated
October transac5ons of Yazici Adver5sing A.Ş.
AccounQng 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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 ILLUSTRATION 2.20
Investment of cash by shareholders

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 ILLUSTRATION 2.21
Purchase of office equipment

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 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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 ILLUSTRATION 2.23
Transaction Payment of
monthly rent
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 ILLUSTRATION 2.24
Payment for insurance
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 ILLUSTRATION 2.25
Purchase of supplies on credit
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 ILLUSTRATION 2.26 Hiring of employees

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 ILLUSTRATION 2.27
Declaration and payment of
dividend

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 ILLUSTRATION 2.28
Payment of salaries

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 ILLUSTRATION 2.29
Receipt of cash for services provided

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 ILLUSTRATION 2.30
General journal entries

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 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 Objec=ve 4
Prepare a trial balance.

58
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

ILLUSTRATION 2.32 A trial balance

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The Trial Balance
• A list of accounts and their balances at a given time.
• Prepare a trial balance at the end of an accounting period.
• List accounts in the order in which they appear in the ledger.
• Debit balances appear in the left column and credit balances in the
right column.
• The totals of the two columns must equal

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The Trial Balance
• Proves the mathematical equality of debits and credits after posting.
• Under the double-entry system, this equality occurs when the sum of
the debit account balances equals the sum of the credit account
balances.
• A trial balance may also uncover errors in journalizing and posting.

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Limitations of a Trial Balance
A trial balance may balance even when:
1. TransacQon not journalized.
2. Correct journal entry not posted.
3. Journal entry posted twice.
4. Incorrect accounts used in journalizing or posQng.
5. Offsebng errors made in recording the amount of a transacQon.

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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 as follows:
If the error is … Then …
€1, €10, €100, or €1,000: Re-add the trial balance columns and recompute the account 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.

Prepare a trial balance in good form.

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DO IT! 4 Trial Balance – Solution

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