Finance and management Accounting
Chapter Two: The Recording Process
Course leader : Million Gizaw (Assistant professor)
Chapter Two: The Recording Process
Learning Objectives
After studying this chapter, you should be able to:
[1] Explain what an account is and how it helps in the recording process.
[2] Define debits and credits and explain their use in recording business
transactions.
[3] Identify the basic steps in the recording process.
[4] Explain what a journal is and how it helps in the recording process.
[5] Explain what a ledger is and how it helps in the recording process.
[6] Explain what posting is and how it helps in the recording process.
[7] Prepare a trial balance and explain its purposes.
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.
LO 1 Explain what an account is and how it helps in the recording process.
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.
LO 2 Define debits and credits and explain their use
in recording business transactions.
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
LO 2 Define debits and credits and explain their use
in recording business transactions.
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
LO 2 Define debits and credits and explain their use
in recording business transactions.
Debits and Credits
Assets Assets - Debits should exceed
Debit / Dr. Credit / Cr.
credits.
Liabilities – Credits should
Normal Balance
exceed debits.
Chapter
3-23
Normal balance is on the
Liabilities increase side.
Debit / Dr. Credit / Cr.
Normal Balance
Chapter
3-24
LO 2 Define debits and credits and explain their use
in recording business transactions.
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
LO 2
Debits and Credits
The purpose of earning
Revenue
Debit / Dr. Credit / Cr. revenues is to benefit the
shareholders.
Normal Balance
The effect of debits and credits
Chapter
on revenue accounts is the
3-26
same as their effect on equity.
Expense
Debit / Dr. Credit / Cr.
Expenses have the opposite
effect: expenses decrease
equity.
Normal Balance
Chapter
3-27
LO 2 Define debits and credits and explain their use
in recording business transactions.
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
LO 2
Debit/Credit Rules
Statement of
Financial Position Income Statement
Asset = Liability + Equity Revenue - Expense
Debit
Credit
LO 2 Define debits and credits and explain their use
in recording business transactions.
Equity Relationships
Illustration 2-11
LO 2
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.
LO 2 Define debits and credits and explain their use
in recording business transactions.
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.
LO 3 Identify the basic steps in the recording process.
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 4 Explain what a journal is and how it helps in the recording process.
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.
Illustration 2-14
General Journal
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
Share capital-ordinary 15,000
Equipment 7,000
Cash 7,000
LO 4 Explain what a journal is and how it helps in the recording process.
Steps in the Recording Process
Simple and Compound Entries
Illustration: On July 1, Tsai Company purchases a delivery truck
costing $420,000. It pays $240,000 cash now and agrees to pay
the remaining $180,000 on account.
Illustration 2-15
General Journal
Date Account Title Ref. Debit Credit
July 1 Equipment 420,000
Cash 240,000
Accounts payable 180,000
LO 4 Explain what a journal is and how it helps in the recording process.
Steps in the Recording Process
The Ledger
General Ledger contains the entire group of accounts
maintained by a company.
Illustration 2-16
LO 5 Explain what a ledger is and how it helps in the recording process.
Steps in the Recording Process
Standard Form of Account
Illustration 2-17
LO 5 Explain what a ledger is and how it helps in the recording process.
Steps
Posting –
process of
transferring
amounts from
the journal to
the ledger
accounts.
Illustration 2-18
LO 6 Explain what posting is and how it helps in the recording process.
Chart of Accounts
Accounts and account numbers arranged in sequence in which
they are presented in the financial statements. Illustration 2-19
LO 6 Explain what posting is and how it helps in the recording process.
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 2-20
LO 6
The Recording Process Illustrated
Illustration 2-21
LO 6
The Recording Process Illustrated
Illustration 2-22
LO 6
The Recording Process Illustrated
Illustration 2-23
LO 6
The Recording Process Illustrated
Illustration 2-24
LO 6
The Recording Process Illustrated
Illustration 2-25
LO 6
The Recording Process Illustrated
Illustration 2-26
LO 6
The Recording Process Illustrated
Illustration 2-27
LO 6
The Recording Process Illustrated
Illustration 2-28
LO 6
The Recording Process Illustrated
Illustration 2-29
LO 6
Illustration 2-31
Trial Balance
Illustration 2-32
LO 7 Prepare a trial balance and explain its purposes.
“Thank you for your attention
