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Last week

 What is accounting?

 Why is accounting necessary for business?

 How to do accounting for business?

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 Last week

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 Chapter 2 The Recording Process
Learning Objectives
After studying this chapter, you should be able to:

[1] Describe how accounts, debits, and credits are used to record business
transactions.
[2] Indicate how a journal is used in the recording process.

[3] Explain how a ledger and posting help in the recording process.

[4] Prepare a trial balance.

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 Preview of Chapter 2

Financial Accounting
IFRS 5th Edition
Weygandt Kimmel
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  How to record the changes of different items?

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 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 be Account Name

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

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 The Account

Debits and Credits

Double-entry 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.

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 Debits and Credits

If Debit amounts are greater than Credit amounts, 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

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 Debits and Credits

If Debit amounts are less than Credit amounts, 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

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 Debits and Credits

Assets  Assets - Debits should exceed

Debit / Dr. Credit / Cr.
credits.

 Liabilities – Credits should

Normal Balance
exceed debits.

Normal balance is on the

Chapter


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increase side.
Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-24

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 Debits and Credits

Equity  Issuance of share capital and

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

 Dividends and expenses

Normal Balance
decrease equity (debit).
Chapter
3-25

Share Capital Retained Earnings Dividends

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

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

3-25 3-25 3-23

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 Debits and Credits

Revenue  The purpose of earning

Debit / Dr. Credit / Cr.
revenues is to benefit the
shareholders.
Normal Balance
 The effect of debits and credits
Chapter
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on revenue accounts is the
same as their effect on equity.
Expense
Debit / Dr. Credit / Cr.
 Expenses have the opposite
effect: expenses decrease
equity.
Normal Balance

Chapter
3-27

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 Debit/Credit Rules
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter
3-24

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

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LO 2
 Debit/Credit Rules

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 Debit/Credit Rules
Statement of
Financial Position Income Statement
Asset = Liability + Equity Revenue - Expense

Debit

Credit

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 Equity Relationships

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 Summary of Debit/Credit Rules

Relationship among the assets, liabilities and equity of a

business:
Illustration 2-12

The equation must be in balance after every transaction.

For every Debit there must be a Credit.

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 Examples of Debit/Credit Rules

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 Steps in the Recording Process

Illustration 2-13

Transfer journal information to

Analyze each transaction Enter transaction in a journal ledger accounts

Business documents, such as a sales slip, a check, a bill, or

a cash register tape, provide evidence of the transaction.

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 Steps in the Recording Process

The Journal
 Book of original entry.

 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.

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 Steps in the Recording Process
Journalizing - Entering transaction data in the journal.

Illustration: On September 1, shareholders’ invested €15,000 cash in

the corporation in exchange for share of stock, and Softbyte purchased
computer equipment for €7,000 cash.

General Journal Illustration 2-14

Date Account Title Ref. Debit Credit

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 Steps in the Recording Process
Simple and Compound Entries

Illustration: On July 1, Tsai Company purchases a delivery truck

costing NT$420,000. It pays NT$240,000 cash now and agrees to pay
the remaining NT$180,000 on account.

General Journal Illustration 2-15

Date Account Title Ref. Debit Credit

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 The Journal

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 Steps in the Recording Process

The Ledger
 General Ledger contains the entire group of accounts
maintained by a company.
Illustration 2-16

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 Standard Form of Account

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 Steps

Posting –
process of
transferring
amounts from
the journal to
the ledger
accounts.

Illustration 2-18

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 Chart of Accounts
Accounts and account numbers arranged in sequence in which
they are presented in the financial statements.
Illustration 2-19

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 The Recording Process Illustrated

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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 The Recording Process Illustrated

The following events incur during October by Pioneer Advertising Inc.

1. On October 1, C. R. Yazici invests $10,000 cash in an advertising
company to be known as Pioneer Advertising Agency Inc.
2. On October 1, Pioneer purchases office equipment costing $5,000 by
signing a 3-month, 12%, $5,000 note payable.
3. On October 2, Pioneer receives a $1,200 cash advance fromR. Knox,
a client, for advertising services that are expected to be completed by
December 31.
4. On October 3, Pioneer pays office rent for October in cash, $900.
5. On October 4, Pioneer pays $600 for a one-year insurance policy that
will expire next year on September 30.
6. On October 5, Pioneer purchases an estimated 3-month supply of
advertising materials on account from Aero Supply for $2,500.
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 The Recording Process Illustrated

7. On October 9, Pioneer hires four employees to begin work

onOctober 15. Each employee is to receive a weekly salary of
$500 for a 5-day work week, payable every 2 weeks—first
payment made on October 26.
8. On October 20, Pioneer’s board of directors declares and pays a
$500 cash dividend to shareholders.
9. On October 26, Pioneer owes employee salaries of $4,000 and
pays them in cash. (See October 9 transaction.)
10. On October 31, Pioneer receives $10,000 in cash from Copa
Company for advertising services provided in October.

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 The Recording Process Illustrated

1. On October 1, C. R. Yazici invests $10,000 cash in an advertising

company to be known as Pioneer Advertising Agency Inc

Date Account Title Ref. Debit Credit

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 The Recording Process Illustrated

2. On October 1, Pioneer purchases office equipment costing $5,000 by

signing a 3-month, 12%, $5,000 note payable

Date Account Title Ref. Debit Credit

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 The Recording Process Illustrated

3. On October 2, Pioneer receives a $1,200 cash advance fromR. Knox, a

client, for advertising services that are expected to be completed by
December 31.

Date Account Title Ref. Debit Credit

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 The Recording Process Illustrated

4. On October 3, Pioneer pays office rent for October in cash, $900.

Date Account Title Ref. Debit Credit

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 The Recording Process Illustrated

5. On October 4, Pioneer pays $600 for a one-year insurance policy that will
expire next year on September 30.

Date Account Title Ref. Debit Credit

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 The Recording Process Illustrated

6. On October 5, Pioneer purchases an estimated 3-month supply of

advertising materials on account from Aero Supply for $2,500.

Date Account Title Ref. Debit Credit

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 The Recording Process Illustrated

7. On October 9, Pioneer hires four employees to begin work

onOctober 15. Each employee is to receive a weekly salary of $500
for a 5-day work week, payable every 2 weeks—first payment made
on October 26.

Date Account Title Ref. Debit Credit

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 The Recording Process Illustrated

8. On October 20, Pioneer’s board of directors declares and pays a

$500 cash dividend to shareholders.

Date Account Title Ref. Debit Credit

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 The Recording Process Illustrated

9. On October 26, Pioneer owes employee salaries of $4,000 and pays

them in cash. (See October 9 transaction.)

Date Account Title Ref. Debit Credit

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 The Recording Process Illustrated

10. On October 31, Pioneer receives $10,000 in cash from Copa

Company for advertising services provided in October.

Date Account Title Ref. Debit Credit

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 The Recording Process Illustrated

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 The Recording Process Illustrated

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 The Recording Process Illustrated

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 Trial Balance
• A trial balance is a list of accounts and their balances at a given
time
• Debit balances are in the left column and credit balances are in
the right column
• Purposes
• Prove the mathematical equality of debits and credits after
posting
• Uncover errors in journalizing and posting
• Used to prepare financial statements
• Steps
• List the account titles and their balances
• Total debit and credit columns

2-45 • Prove the equality of the two columns

 Trial Balance

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 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.

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 Copyright

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