INTERNATIONAL FINANCIAL

ACCOUNTING 1
KHOA KẾ TOÁN – KIỂM TOÁN

2 The Recording Process

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

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

Explain how a ledger and posting help in the recording

3 process.

4 Prepare a trial balance.

LEARNING Describe how accounts, debits, and credits
1
OBJECTIVE are used to record business transactions.

The ◆ Record of increases and decreases

in a specific asset, liability, owners’
Account 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.

2-3 LO 1

The Account

DEBIT AND CREDIT PROCEDURES

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 at least one other account.

◆ DEBITS must equal CREDITS.

LO 1
 Debits and Credits

If the sum of Debit entries are greater than the sum of

Credit entries, 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

LO 1

Debits and Credits

If the sum of Credit entries are greater than the sum of

Debit entries, 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

LO 1
 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

◆
3-23

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

Normal Balance

Chapter
3-24

LO 1

Debits and Credits

Owner’s Equity ◆ Owner’s investments and

Debit / Dr. Credit / Cr.
revenues increase owner’s equity
(credit).
Normal Balance
◆ Owner’s drawings and expenses
Chapter
3-25
decrease owner’s equity (debit).

Owner’s Capital Owner’s Drawing

Helpful Hint Because
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
revenues increase
owner’s
equity, a revenue account
has the same debit/credit
Normal Balance Normal Balance rules as the Owner’s
Capital account. Expenses
Chapter
3-25
Chapter
3-23
have the opposite effect.

LO 1
 Debits and Credits

Revenue ◆ The purpose of earning revenues

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

◆ The effect of debits and credits on

Normal Balance
revenue accounts is the same as
Chapter
3-26
their effect on Owner’s Capital.

◆ Expenses have the opposite

Expense
Debit / Dr. Credit / Cr.
effect: expenses decrease owner’s
equity.

Normal Balance

Chapter
3-27

LO 1

Debits/Credits Rules
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

2-10 LO 1
 Debits/Credits Rules

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit

LO 1

Debits/Credits Rules

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.

LO 1
 Debits/Credits Rules

Question
Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and owner’s drawing.

d. assets, owner’s drawing, and expenses.

LO 1

Summary of Debit/Credit Rules

Relationship among the assets, liabilities and owner’s equity

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

Expanded
Equation
Debit/Credit
Effects

The equation must be in balance after every transaction. Total

Debits must equal total Credits.

LO 1
 DO IT! 1 Normal Account Balances

Kate Browne 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
Kate to set up a double-entry set of accounting records in which to
record all of her business transactions. Identify the balance sheet
accounts that Kate 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.

Assets Liabilities Equity

Cash (debit) Notes payable (credit) Owner’s Capital (credit)

Supplies (debit) Accounts payable
Equipment (debit) (credit)

2-15 LO 1

LEARNING Indicate how a journal is used in the

2
OBJECTIVE recording process.

Steps in the Recording Process

Illustration 2-12

Analyze each transaction Enter transaction in a journal Transfer journal information to

ledger accounts

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

provide evidence of the transaction.
2-16 LO 2
 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.

LO 2

Steps in the Recording Process

JOURNALIZING - Entering transaction data in the journal.

Illustration: On September 1, Ray Neal invested $15,000 cash in
the business, and Softbyte purchased computer equipment for
$7,000 cash.
Illustration 2-13

GENERAL JOURNAL

Date Account Title Ref. Debit Credit

Sept. 1 Cash 15,000
Owner’s Capital 15,000

Equipment 7,000
Cash 7,000
2-18 LO 2
 Steps in the Recording Process

SIMPLE AND COMPOUND ENTRIES

Illustration: On July 1, Butler Company purchases a delivery truck
costing $14,000. It pays $8,000 cash now and agrees to pay the
remaining $6,000 on account. Illustration 2-14
Compound journal entry

GENERAL JOURNAL

Date Account Title Ref. Debit Credit

July 1 Equipment 14,000
Cash 8,000
Accounts payable 6,000

2-19 LO 2

2-20 LO 2
 DO IT! 2 Recording Business Activities

Kate Browne engaged in the following activities in establishing

her 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 as her
initial investment.

2. Purchased equipment on account (to be paid in 30 days)

for a total cost of $4,800.

3. Interviewed three persons for the position of hair stylist.

Prepare the entries to record the transactions.

2-21 LO 2

LEARNING Explain how a ledger and posting help in the

3
OBJECTIVE recording process.

The Ledger
◆ General Ledger contains all the asset, liability, and owner’s
equity accounts.
Illustration 2-15

2-22 LO 3
 LO 3

The Ledger

STANDARD FORM OF ACCOUNT Illustration 2-16

Three-column form
of account

LO 3
 Ledger

POSTING
Transferring
journal entries
to the ledger
accounts.

Illustration 2-17
Posting a journal
entry

2-25 LO 3

Posting

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.

LO 3
 Chart of Accounts
Illustration 2-18

2-27 LO 3

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.

Illustration 2-19

2-28 LO 3
 Illustration 2-20
2-29 Purchase of office equipment LO 3

Illustration 2-21
Receipt of cash
for future service

2-30 LO 3
 Illustration 2-22
2-31 Payment of monthly rent LO 3

Illustration 2-23
Payment for
insurance

2-32 LO 3
 Illustration 2-24
2-33 Purchase of supplies on credit LO 3

The Recording Process Illustrated

Illustration 2-25
Hiring of employees

LO 3
 Illustration 2-26
2-35 Withdrawal of cash by owner LO 3

Illustration 2-27
2-36 Payment of salaries LO 3
 Illustration 2-28
2-37 Receipt of cash for services performed LO 3

Summary Journalizing and Posting

Illustration 2-29

2-38 LO 3
2-39 Illustration 2-29 LO 3

Illustration 2-30
2-40
LO 3
 DO IT! 3 Posting

Kate Brown recorded the following transactions in a general journal

during the month of March. Post these entries to the Cash account.

Mar. 4 Cash 2,280

Service Revenue 2,280
Mar. 15 Salaries and Wages Expense 400
Cash 400
Mar. 19 Utilities Expense 92
Cash 92

2-41 LO 3

LEARNING
OBJECTIVE
4 Prepare a trial balance.

2-42 Illustration 2-31 LO 4

Trial Balance

Limitations of a Trial Balance

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.

5. Offsetting errors are made in recording the amount of a

transaction.

LO 4

Dollar Signs and Underlining

Dollar 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 in the column and for the total
of that column.

Underlining
◆ A single line is placed under the column of figures to be
added or subtracted.
◆ Totals are double-underlined.
LO 4
 Trial Balance

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.

LO 4

2-46 LO 4
 DO IT! 4 Trial Balance

2-47 LO 4

A Look at IFRS

LEARNING Compare the procedures for the accounting

5
OBJECTIVE process under GAAP and IFRS.

Key Points
Similarities
◆ Transaction analysis is the same under IFRS and GAAP.
◆ Both the IASB and the FASB go beyond the basic definitions
provided in the textbook for the key elements of financial
statements, that is assets, liabilities, equity, revenue, and
expenses. The implications of the expanded definitions are
discussed in more advanced accounting courses.

2-48 LO 5
 A Look at IFRS

Key Points
Similarities
◆ As shown in the textbook, dollar signs are typically used only in
the trial balance and the financial statements. The same practice
is followed under IFRS, using the currency of the country where
the reporting company is headquartered.
◆ A trial balance under IFRS follows the same format as shown in
the textbook.

2-49 LO 5

A Look at IFRS

Key Points
Differences
◆ IFRS relies less on historical cost and more on fair value than do
FASB standards.
◆ Internal controls are a system of checks and balances designed
to prevent and detect fraud and errors. While most public U.S.
companies have these systems in place, many non-U.S.
companies have never completely documented the controls nor
had an independent auditors attest to their effectiveness.

2-50 LO 5
 A Look at IFRS

Looking to the Future

The basic recording process shown in this textbook is followed by
companies across the globe. It is unlikely to change in the future. The
definitional structure of assets, liabilities, equity, revenues, and
expenses may change over time as the IASB and FASB evaluate their
overall conceptual framework for establishing accounting standards.

2-51 LO 5

A Look at IFRS

IFRS Self-Test Questions

Which statement is correct regarding IFRS?

a) IFRS reverses the rules of debits and credits, that is, debits
are on the right and credits are on the left.

b) IFRS uses the same process for recording transactions as

GAAP.

c) The chart of accounts under IFRS is different because

revenues follow assets.

d) None of the above statements are correct.

2-52 LO 5
 A Look at IFRS

IFRS Self-Test Questions

A trial balance:

a) is the same under IFRS and GAAP.

b) proves that transactions are recorded correctly.

c) proves that all transactions have been recorded.

d) will not balance if a correct journal entry is posted twice.

2-53 LO 5

A Look at IFRS

IFRS Self-Test Questions

One difference between IFRS and GAAP is that:

a) GAAP uses accrual-accounting concepts and IFRS uses

primarily the cash basis of accounting.

b) IFRS uses a different posting process than GAAP.

c) IFRS uses more fair value measurements than GAAP.

d) the limitations of a trial balance are different between IFRS

and GAAP.

2-54 LO 5