Financial Accounting

IFRS 4th Edition

Weygandt ● Kimmel ● Kieso

Chapter 2

The Recording Process

Chapter Preview

Companies use a set of procedures and records to keep

track of transaction data.
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.

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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.).

Note: Whenever we are referring to a specific account, we capitalize the name.

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Dr./Cr. Procedures for Assets
Debit Asset account Credit
Opening
balance
Increase Decrease
Closing
balance

Asset accounts: Debits increase the Assets account, and credits decrease it.
Asset accounts normally show debit balances.
That is, debits to a specific asset account should exceed credits to that account.

Example:
1. The company uses cash to buy material for $1,000
2. The company collects $500 cash for balance due in account receivable

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Dr./Cr. Procedures for 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.
Liability accounts: Credits increase the liability account, and debits decrease it.
Liability accounts normally show credit balances.
That is, credits to a liability account should exceed debits to that account.
Example:
1. The company purchases an equipment cost $5,000 on account
2. The company uses cash to pay off note payable principal for $10,000

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Dr./Cr. Procedures for Equity
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.

Example:
1. Owners invest $10,000 cash in exchange for ordinary shares
2. Owners invest an equipment cost $5,000 in exchange for ordinary shares

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Dr./Cr. Procedures for Equity
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.

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
Dividends.

Dividend:
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.

Example: The company declared and paid cash dividend for $6,000

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Dr./Cr. Procedures for Equity
Revenues and Expenses.

Because revenues increase equity, a revenue account has the same debit/credit rules as the
Retained Earnings account. Expenses have the opposite effect.
Revenue accounts are increased by credits and decreased by debits.
Expense accounts are increased by debits and decreased by credits.
Example:
1. The company performed service for $4,000 cash
2. The company performed service for $3,000 on account
3. The company paid electronic bills of this month for $500
4. The company calculate salaries for employees of this month is $2,000 but
postpone payment until next month

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Equity Relationships

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Summary of Debit/Credit Rules

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

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The Journal
1 2 3

1 2 3

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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?

Continues on next slide

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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.
Format: Dr/Cr/Cr or Dr/Dr/Cr
Do not Dr/Dr/Cr/Cr at the same time  too complicated

Example:
1. The company purchases an equipment cost $5,000, of which $2,000
is paid by cash, the remaining $3,000 is on credit
2. The company purchases material for $1,000 and supplies for $500,
both are paid by cash.
3. The company uses cash to pay off account payable due for $1,000 and
note payable due for $2,000

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 Rule of journalizing
1. Always Debit first, followed by Credit

2. Total debit always equal total credit in a journal entry

3. Accepting form of compound entry: Dr/Dr/Cr or Dr/Cr/Cr.

Do not Debit more than 2 accounts and Credit more than 2
accounts at the same time

4. Should divide compound entry into simple entry but do not

combine simple entry to be compound entry because it will be
too complicated.

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 DO IT! Recording Business Activities

ACTION PLAN
• Understand which activities need to be recorded and which
do not. Any that have economic effect should be recorded in a journal.
• Analyze the effects of transactions on asset, liability, and equity accounts.

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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

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Standard Form of Account
The CB becomes the OB at the next period

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

three money columns—debit, credit, and balance.

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T - Account

Opening balance + Increase – Decrease = Closing balance

Cash
OB: 9,450 (jun 1)
4,200 (jun 3) 7,500 (jun 8,000 (jun 2)
9) 11,000 (jun 17)
250 (jun 20)
7,300 (jun 30)

CB: 9,450 (jun 30)

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Posting

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Chart of Accounts

Continues on next slide

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Chart of Accounts
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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 Unearned Service Revenue
is considered a liability
even though the word
payable is not used.

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Summary Illustration of Journalizing and Posting

Continues on next slide

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Summary Illustration of Journalizing and Posting

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 DO IT! Posting

ACTION PLAN
• Recall that posting involves transferring the journalized debits and credits to specific
accounts in the ledger.
• Determine the ending balance by netting the total debits and credits.

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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

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Limitations of a Trial Balance
A trial balance may balance even when:
1 - Transaction not journalized.
2 - Correct journal entry not posted.
3 - 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 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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The Trial Balance example

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 Homework
P2.2, P2.3, P2.4

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Copyright
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