Chapter

2-1
 CHAPTER 2

THE RECORDING
PROCESS

Accounting Principles, Eighth Edition

Chapter
2-2
 Study Objectives
1. Explain what an account is and how it helps in the
recording process.
2. Define debits and credits and explain their use in
recording 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.
Chapter
2-3
 The Recording Process

Steps in the The Recording

The Trial
The Account Recording Process
Balance
Process Illustrated

Debits and Journal Summary Limitations of a

credits Ledger illustration of trial balance
Expansion of journalizing Locating errors
basic equation and posting
Use of dollar
signs

Chapter
2-4
 The Account
Record of increases and decreases
Account in a specific asset, liability, equity,
revenue, or expense item.
Debit = “Left”
Credit = “Right”

An Account can Account Name

be illustrated in a Debit / Dr. Credit / Cr.
T-Account
form.

Chapter
2-5 LO 1 Explain what an account is and how it helps in the recording process.
 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 LO 2 Define debits and credits and explain their

2-6
use in recording business transactions.
 Debits and Credits

If Debits are greater than Credits, the account

will have a debit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000

Balance $15,000

Chapter LO 2 Define debits and credits and explain their

2-7
use in recording business transactions.
 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 Transaction #2

8,000 Transaction #3

Balance $1,000

Chapter LO 2 Define debits and credits and explain their

2-8
use in recording business transactions.
 Debits and Credits Summary
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter
3-24

Owner’s Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expense Chapter
3-25
Revenue
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

Chapter
2-9 LO 2
 Debits and Credits Summary

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit

Chapter LO 2 Define debits and credits and explain their

2-10
use in recording business transactions.
 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 LO 2 Define debits and credits and explain their

2-11
use in recording business transactions.
 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 LO 2 Define debits and credits and explain their
2-12
use in recording business transactions.
 Assets and Liabilities

Assets

Assets - Debits should

Debit / Dr. Credit / Cr.

exceed credits.
Normal Balance

Chapter
3-23
Liabilities – Credits
should exceed debits.
Liabilities

The normal balance is on

Debit / Dr. Credit / Cr.

the increase side.

Normal Balance

Chapter
3-24

Chapter LO 2 Define debits and credits and explain their

2-13
use in recording business transactions.
 Owners’ Equity

Owner’s Equity Owner’s investments and

Debit / Dr. Credit / Cr.
revenues increase owner’s
equity (credit).

Owner’s drawings and expenses

Normal Balance

Chapter
3-25
decrease owner’s equity (debit).

Owner’s Capital Owner’s Drawing

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance

Chapter Chapter
3-25 3-23

Chapter LO 2 Define debits and credits and explain their

2-14
use in recording business transactions.
 Revenue and Expense

Revenue The purpose of earning

Debit / Dr. Credit / Cr.
revenues is to benefit the
owner(s).
Normal Balance

Chapter
The effect of debits and
credits on revenue accounts
3-26

Expense
is the same as their effect
Debit / Dr. Credit / Cr.
on Owner’s Capital.

Expenses have the opposite

effect: expenses decrease
Normal Balance

Chapter
3-27
owner’s equity.
Chapter LO 2 Define debits and credits and explain their
2-15
use in recording business transactions.
 Debits and Credits Summary

Review Question
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.

Chapter LO 2 Define debits and credits and explain their

2-16
use in recording business transactions.
 Expansion of the Basic Equation

Relationship among the assets, liabilities and

owner’s equity of a business:
Illustration 2-11
Basic
Assets = Liabilities + Owner’s Equity
Equation

Expanded
Basic
Equation

The equation must be in balance after every

transaction. For every Debit there must be a Credit.

Chapter LO 2 Define debits and credits and explain their

2-17
use in recording business transactions.
 Steps in the Recording Process
Illustration 2-12

Transfer journal information

Analyze each transaction Enter transaction in a journal 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
2-18 LO 3 Identify the basic steps in the recording process.
 The Journal

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 the

debit and credit amounts can be easily compared.

Chapter
2-19 LO 3 Identify the basic steps in the recording process.
 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 E2-4.

Chapter
2-20 LO 4 Explain what a journal is and how it helps in the recording process.
 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
Date Account Title Ref. Debit Credit
Oct. 1 Cash 15,000
Hanshew, Capital 15,000
(Owners investment)

Chapter
2-21 LO 4 Explain what a journal is and how it helps in the recording process.
 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
Date A c c ount T itle Ref . Deb it Cred it
O c t. 3 Off ic e Furniture 1,9 00
Ac coun ts Pa ya b le 1,90 0
(Purcha se f urniture)

Chapter
2-22 LO 4 Explain what a journal is and how it helps in the recording process.
 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
Date A c c ount T itle Ref . Deb it Cred it
Oc t. 6 Ac c ounts Rec eiva b le 3,2 00
S ervic e Revenue 3 ,200
(Rea lty servic es provid ed )

Chapter
2-23 LO 4 Explain what a journal is and how it helps in the recording process.
 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
Date A c c ount T itle Ref . Deb it Cred it
Oc t. 27 Ac c ounts Pa ya b le 700
C a sh 70 0
(Pa yment on a cc ount)

Chapter
2-24 LO 4 Explain what a journal is and how it helps in the recording process.
 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
Date A c c ount T itle Ref . Deb it Cred it
Oc t. 30 S a la ry Ex pense 2 ,50 0
C a sh 2,500
(Pa yment f or sa la ries)

Chapter
2-25 LO 4 Explain what a journal is and how it helps in the recording process.
 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
Date A c count Title Ref . Deb it Cred it
J une 15 Eq uipment 15,000
C ash 10,00 0
Ac c ounts Pa yab le 5,0 00
(Purc ha sed equipment)

Chapter
2-26 LO 4 Explain what a journal is and how it helps in the recording process.
 The Ledger

A General Ledger contains the entire group of

accounts maintained by a company.

The General Ledger includes all the asset,

liability, owner’s equity, revenue and expense
accounts.

Chapter
2-27 LO 5 Explain what a ledger is and how it helps in the recording process.
 Chart of Accounts
Accounts and account numbers arranged in sequence in
which they are presented in the financial statements.
Hanshew Real Estate Agency
Chart of Accounts
Assets Owner's Equity
101 Cash 300 Hanshew, Capital
112 Accounts receivable 306 Hanshew, Drawing
126 Advertising supplies 350 Income summary
130 Prepaid insurance
150 Office equipment Revenues
158 Accumulated depreciation 400 Service revenue

Liabilities Expenses
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

Chapter
2-28 LO 6 Explain what posting is and how it helps in the recording process.
 Standard Form of Account

T-account form used in accounting textbooks.

In practice, the account forms used in ledgers are
much more structured.

Cash No. 101

Date Explanation Ref. Debit Credit Balance
Oct. 1 15,000 15,000
27 700 14,300
30 2,500 11,800

Chapter
2-29 LO 5 Explain what a ledger is and how it helps in the recording process.
 Posting
Posting – the process of transferring amounts from the
journal to the ledger accounts.

General Journal J1
Date Account Title Ref. Debit Credit
Oct. 1 Cash 101 15,000
Hanshew, Capital 15,000
(Owner's investment in business)

General Ledger
Cash Acct. No. 101
Date Explanation Ref. Debit Credit Balance
Oct. 1 J1 15,000 15,000

Chapter
2-30 LO 6 Explain what posting is and how it helps in the recording process.
 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
2-31 LO 6 Explain what posting is and how it helps in the recording process.
 The Recording Process Illustrated
Illustration 2-19
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.
Chapter
2-32 LO 6 Explain what posting is and how it helps in the recording process.
 The Trial Balance

A list of accounts Hans he w R e al E s tate A g e nc y

Trial B alanc e
and their balances O c tober 31, 2008
at a given time. Debit Credit
Cas h $ 11,800
Purpose is to A c c ounts rec eivable 3,200
O ffic e furniture 1,900
prove that debits A c c ounts pay able $ 1,200
Hans hew, Capital 15,000
equal credits. S ervic e revenue 3,200
S alaries ex pens e 2,500
$ 19,400 $ 19,400

Chapter
2-33 LO 7 Prepare a trial balance and explain its purposes.
 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
2-34 LO 7 Prepare a trial balance and explain its purposes.
 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 drawing by the owner is debited to
Owner’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 Cash
for $45.
Chapter
2-35 LO 7 Prepare a trial balance and explain its purposes.
 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
2-36 LO 7 Prepare a trial balance and explain its purposes.
 Copyright

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Chapter
2-37