MUH213U-ACCOUNTING I

Chapter 2: Recording Process

The T-Account
Introduction
An account, in its simplest form, has three parts. First,
This chapter demonstrates how to record financial each account has a title, which is the name of the item
transactions and then combine transaction records to recorded in the account. Second, each account has a space
prepare financial statements. Like all the information for recording increases in the amount of the item. Third,
systems have their own procedures based on defined rules each account has a space for recording decreases in the
for recording the data and reporting the results, accounting amount of the item. T-accounts have a title and include
as a financial information system also uses its own two sides: Debit (left) and credit (right). Debit represents
procedures: debit and credit procedure in recording. the left side of an account. Credit represents the right side
Accounts of an account.
Accounting equation expresses the basic relationships of Debits and Credits
accounting and contains three categories: assets, liabilities, Debiting refers to the act of making an entry on the left
and owner’s equity “Assets = Liabilities + Owner’s side of an account and when debit amount exceeds credits,
Equity” For each category of equation (for each asset, debit balance occurs. Crediting refers to the act of making
each liability, and each element of owner’s equity) we use an entry on the right side of an account and when credit
a record called the account. An account is an individual amount exceeds debits, credit balance occurs.
accounting tool that shows the increases and decreases in a
specific asset, liability, or owner’s equity item during a Double-Entry Accounting System
specified period. In a double-entry system, equal debits and credits are
made in the accounts for each transaction. Equality
Typical Asset Accounts
between the sum of all the debits and the sum of all the
• Cash, credits maintains the balance of accounting equation.
• Accounts Receivable,
• Notes Receivable, Increases and Decreases in the Accounts
• Prepaid Expenses, Debit and credit rules are classified in the groups below;
• Land, • Dr./Cr. Rules for Assets: Assets increase on left
• Buildings, side by debiting while decrease on right side by
• Equipment, Furnitures and Fixtures are typical crediting and normally show debit balance.
asset accounts. • Dr./Cr. Rules for Liabilities: Liabilities increase
Typical Liability Accounts on right side by crediting while decrease on left
side by debiting and normally show credit
• Accounts Payable, balance.
• Notes Payable, • Dr./Cr. Rules for Contributions (Owner’s
• Unearned Revenue (Advances from customers), capital): Contributions increase on right side by
• Accrued Liabilities are typical liability accounts. crediting while decrease on left side by debiting
and normally show credit balance.
Typical Owner’s Equity Accounts • Dr./Cr. Rules for Distributions (Owner’s
• Owner,Capital. withdrawals): Distributions increase on left side
• Owner, Withdrawals. by debiting while decrease on right side by
• Revenues. crediting and normally show debit balance.
• Expenses are typical owner’s equity accounts • Dr./Cr. Rules for Revenues: Revenues increase
on right side by crediting while decrease on left
Chart of Accounts side by debiting and normally show credit
A chart of accounts is a created list of the account names balance.
used by an organization to define each class of items. A • Dr./Cr. Rules for Expenses: Expenses increase on
chart of accounts is used to organize a company’s left side by debiting while decrease on right side
accounts. by crediting and normally show debit balance.
Ledger
The Logic of Debit and Credit Procedure
The ledger is a record of all the accounts that the company
uses the changes in those accounts, and their balances. A The expended basic accounting equation is as follows,
ledger is often defined as a book of accounts. • Assets = Liabilities + Contributions –
Debits, Credıts And Double-Entry Accounting Distributions + Revenues – Expenses
System At the first step, we need to adjust the equation to make all
Each transaction shows a dual effect on the accounting the signs positive. For this, distributions and expenses can
equation.

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 MUH213U-ACCOUNTING I
Chapter 2: Recording Process

be moved to the left hand side of the equation. Thus, the Trial Balance
expended basic accounting equation becomes as follows, A trial balance is a list of all ledger accounts with their
• Assets + Distributions + Expenses = Liabilities + balances at a point in time. A trial balance summarizes the
Contributions + Revenues accounts by listing all the accounts with their balances—
assets first, followed by liabilities, and then owner’s
The sign and the place of elements in the accounting equity. A trial balance has three columns listing the names
equation determine the side of increase and decrease in T- and the balances of all the accounts used in transactions.
account. For instance, if an element on the left hand side Balances are entered into appropriate debit or credit
of the accounting equation has negative sign, that means columns. The total amounts of debit and credit columns
accounts of the element decrease on the left side while show the mathematical equality of debits and credits after
increase by crediting. posting. In this sense, if the sum of debits equal to the sum
Steps in The Recording Process of credits, it means that the recordings are correct under
double-entry system. If not, we must understand that there
There are three main steps which occur repeatedly in the are errors in journalizing and posting then the accountant
recording process: or bookkeeper must determine the reason.
1. Analyze each transaction for its effects on the In addition to proving the equality of debits and credits,
accounts. the trial balance is also used to prepare the financial
2. Enter the transaction information in a journal. statements. The trial balance is normally prepared at the
3. Transfer the journal information to the end of every accounting period and is the basis for
appropriate accounts in the ledger. preparation of financial statements. The income statement
The Journal and Journalizing is prepared using the revenue and expense accounts from
Transactions are first recorded in a journal. Thus, the the trial balance. The net income relates to the increase (or
journal is referred to as the book of original entry. The in the case of a net loss, the decrease) in owner’s equity.
journal is the main book which includes the original
entries of company’s transactions. Typically, a journal
includes dates of transactions, titles and references (codes)
of accounts used to record transactions, column for debit
amount and column for credit amount. Entering
transaction data in the journal is known as journalizing.
Journal contributes to the recording process in terms of
disclosing the details of transactions in one place. In other
words, it helps to prevent and correct errors because it
shows the complete effects of a transaction and provides
chronological order.
In a journal entry, Debits are ALWAYS entered first, and
Credits are INDENTED and listed second.
Posting to Ledger
journal information for each transaction is simultaneously
transferred to individual T-accounts in order to calculate
the balances of each account used in the journal entry.
This act is called posting and the ledger refers to the entire
group of individual T-accounts.
The journalizing and posting process has five steps:
• Step 1: Identify the accounts and the account
types (asset, liability, or equity).
• Step 2: Decide whether each account increases or
decreases and then apply the rules of debits and
credits.
• Step 3: Record the transaction in the journal.
• Step 4: Post the journal entry to the ledger.
• Step 5: Determine whether the accounting
equation is in balance.