Chapter-2 : The Recording Process

The Account
It’s an individual accounting record of increases and decreases in a specific asset, liability or
owner’s equity item.
An account consists of three parts:
1. A title
2. A left or debit side and
3. A right or credit side
Title of Account

Left or debit side Right or credit side

Debits and Credits

The term debit (Dr.) indicates the left side of an account, and credit (Cr.) indicates the right side
of an account. For each transaction, debits must equal credits. The equality of debits and credits
provides the basis for the double-entry system of recording transactions.

Accounting Equation and the rules of Debit and Credit:

Assets = Liabilities + Owner’s Capital - Drawings
Dr. for Cr. for Dr. for Cr. for Dr. for Cr. for Dr. for Cr. for
increase decrease decrease increase decrease increase increase decrease
(+) (-) (-) (+) (-) (+) (+) (-)

+ Revenues - Expenses
Dr. for Cr. for Dr. for Cr. for
decrease increase increase decrease
(-) (+) (+) (-)
 Chart of Accounts

Assets
Liabilities
1. Cash
1. Notes Payable
2. Accounts Receivable
2. Accounts Payable
3. Supplies
3. Unearned Service Revenue
4. Prepaid Insurance
4. Salaries and Wages
5.Equipment
Payable
5. Interest Payable
Owner’s Equity 6.Accumulated Depreciation Account-
Equipment
1. Owner’s Capital
2. Owner’s Drawings
3. Income Summary

Revenues
1. Service revenue

Expenses
1. Supplies expense
2. Depreciation expense
3. Insurance expense
4. Salaries and wages expense
5. Rent expense
6. Utilities expense
7. Interest expense

Journal:
Journal is referred to as the book of original entry. For each transaction, the journal shows the debit
and credit effects on specific accounts.

Recording Transactions in Journals:

Five steps for recording :
1. Identify from source documents
2. Specify each account affected by the transaction.
3. Determine whether each account is increased or decreased.
4. Apply the rules of debit and credit.
5. Enter the transaction in the journal.
Examples of Transaction and Journal:
1. On October 1, C. R. Byrd invests $10,000 cash in an advertising company called
Pioneer Advertising.
2. On October1, Pioneer purchases office equipment costing $5000 by signing a 3-month,
12%, $5000 notes payable.
3. On October 2, Pioneer receives a $1,200 cash advance from R. 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 October4, 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.
7. On October 20, C. R. Byrd withdraws $500 cash for personal use.
8. On October 26, Pioneer owes employee salaries of $4,000 and pays them in cash.
9. On October 31, Pioneer receives $10,000 in cash from Copa Company for
advertising services performed in October.

Solution:
Journal Entries
Date Accounts Title and Explanation Debit Credit
2019 Cash 10,000
Oct. 1 Owner’s Capital 10,000
(Owner’s investment of cash in business)
1 Equipment 5,000
Note’s Payable 5,000
(Issued 3-moth, 12% note for office equipment)
2 Cash 1,200
Unearned Service Revenue 1,200
(Received cash from R. Knox for future service)
 3 Rent Expense 900
Cash 900
(Paid October rent)
4 Prepaid Insurance 600
Cash 600
(Paid one year policy, effective date October1)
5 Supplies 2,500
Accounts Payable 2,500
(Purchased supplies on account from Aero Supply)
20 Owner’s Drawings 500
Cash 500
(Withdraw cash for personal use)
26 Salaries and Wages Expense 4,000
Cash 4,000
(Paid salaries to date)
31 Cash 10,000
Service Revenue 10,00
(Received cash for services performed)

Ledger
A general ledger represents the record-keeping system for a company's financial data with debit
and credit account records validated by a trial balance. The general ledger provides a record of each
financial transaction that takes place during the life of an operating company.
 Trial Balance
A trial balance is a list of accounts and their balances at a given time. A trial balance may also
uncover errors in journalizing and posting.

Limitations of Trial Balance:

A trial balance generally agree with debit and credit balance in total. However, it does not give the
guarantee of accuracy. It may balance even when:
4. A transaction is not journalized.
5. A correct journal is not posted.
6. A journal is posted twice.
7. Incorrect accounts are used in journalizing and posting.
8. Offsetting errors are made in recording the amount of a transaction.

Math
P2-1A:

Holz Disc Golf Course was opened on March 1 by Ian Holz. The following selected events
and transactions occurred during March:

March 1 Invested $20,000 cash in the business,

3 Purchased Rainbow Golf Land for $15,000 cash. The price consists of land

$12,000, Shed $2000, and equipment $1,000.

5 Paid advertising expense of $900.

6. Paid cash $600 for a one year insurance policy.

10 Purchased golf discs and other equipment for $1050 from Stevenson Company payable

in 30 days.

18 Received $1,100 in cash for golf fees .

19 Sold 150 coupon books for $10 each .Each book contains 4 coupons that enable the
 holder to play one round of disc golf.

25 Withdrew $800 cash for personal use.

30 Paid salaries of $250.

30 Paid Stevenson Company in full.

31 Received $2,700 cash for golf fees.

Holz Disc Golf uses the following accounts: Cash , Prepaid Insurance, Land, Buildings, Equipment,
Accounts Payable, Unearned Service Revenue, Service Revenue , Owner’s Capital, Owner’s
Drawings, Advertising Expense, Salaries and Wages Expense.

Instructions:

1. Journalize the March transactions.

2. Prepare a ledger and a trial balance.

Solution:

1.
Holz Disc Golf
Journal Entries
Date Accounts Title and Explanation Debit ($) Credit ($)
March 1 Cash 20,000
Capital 20,000
3 Land 12,000
Building 2000
Equipment 1000
Cash 15,000
5 Advertising Expense 900
Cash 900
6 Prepaid Insurance 600
Cash 600
10 Equipments 1050
Accounts Payable 1050
 18 Cash 1100
Service Revenue 1100
19 Cash 1500
Unearned Service Revenue (150 x 10) 1500
25 Drawing 800
Cash 800
30 Salary expenses 250
Cash 250
30 Accounts Payable 1050
Cash 1050
31 Cash 2700
Service Revenue 2700

2. Ledger Accounts:
Cash Owner’s Capital
March 1 20,000 March 3 15,000 March1 20,000
18 1100 5 900
19 1500 6 600 Balance 20,000
31 2700 25 800
30 250 Drawings
30 1050 March 25, 800
Balance 6,700
Balance 800

Equipment Land
March 3, 1000 March 3, 12000
10 1050
Balance 2050 Balance 12,000
 Accounts Payable Building
March 3, 1050 March 10 1050 March 3, 2000

Balance 2000

Unearned Service Revenue Service Revenue

March 19, 1500 March 8, 1100

March 31, 2700

Balance 1500 Balance 3800

Salaries and Wages Advertising

March 3, 250 March 5, 900

Balance 250 Balance 900

Prepaid Insurance

March 6, 600

Balance 600
 Holz Disc Golf
Trial Balance
as on 31st March
S. N. Accounts Title Dr. Cr.
1 Cash 6,700
2 Owner’s Capital 20,000
3 Drawings 800
4 Equipment 2050
5 Land 12000
6 Building 2,000
7 Accounts Payable ----
8 Unearned Service Revenue 1500
9 Service Revenue 3800
10 Salary expense 250
11 Advertising 900
12 Prepaid Insurance 600
Total 25,300 25,300