chapter 2 the recording process

Chapter 2 The Recording Process

Prepared by Chih-Liang Julian Liu

Department of Industrial and Business Management

Chang Gung University

Chapter 2 The Recording ProcessLearning Objectives

After studying this chapter, you should be able to:

[1] Explain what an account (帳戶 ) is and how it helps in the recording process (記錄程序 ).

[2] Define debits (借方 ) and credits (貸方 ) and explain their use in recording business transactions.

[3] Identify the basic steps in the recording process.

[4] Explain what a journal (日記簿 ) is and how it helps in the recording process.

Chapter 2 The Recording ProcessLearning Objectives

[5] Explain what a ledger (分類帳 ) is and how it helps in the recording process.

[6] Explain what posting (過帳 ) is and how it helps in the recording process.

[7] Prepare a trial balance (試算表 ) and explain its purposes.

Preview of Chapter 2

Account Name

Debit / Dr. Credit / Cr.

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Debit = “Left”

Credit = “Right”

AccountAccount

An account can be An account can be illustrated in a T-illustrated in a T-

account form.account form.

The Account ((帳戶；會計科目帳戶；會計科目 ))

• Debit (left) and credit (right) are directional signals.

• They indicate which side of a T account a number will be recorded on.

• Entering an amount on the left side of an account (debiting the account; 借記該帳戶 )

• Making an entry on the right side is crediting the account (貸記該帳戶 )

• Debit (Dr.) and Credit (Cr.)

The Account ((帳戶；會計科目帳戶；會計科目 ))

Account Name


If Debit amounts are greater than Credit amounts, the

account will have a debit balance.

$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1

Debits and Credits

• Debits on the left and credits on the right are an accounting rule.

• The rule applies to all accounts.

Cash$15,000

7,000

1,200

1,500

1,700

250

600

1,300

$8,050

Cash

(Debits) (Credits)

15,000 1,200 1,500 600

7,000 1,700 250 1,300

Balance 8,050

Debits and Credits (Cont.)

Account Name


$10,000 Transaction #2$3,000

Balance

Transaction #1

$1,000$1,000

8,000 Transaction #3

If Debit amounts are less than Credit amounts, the

account will have a credit balance.


• Debit balance (借餘 )

• Credit balance(貸餘 )

Account Name

(Debits) (Credits)

Account Name

(Debits) (Credits)

Debit balance Credit balance

> <


Assets - Debits should exceed

credits.

Liabilities – Credits should

exceed debits.

Normal balance is on the

increase side.

Chapter 3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter 3-24

LiabilitiesLiabilities




Equity – Credits should exceed debits.

Chapter 3-25



EquityEquity


Issuance of share capital, retained

earnings and revenues increase

equity (credit).

Chapter 3-25



Share CapitalShare Capital

Chapter 3-25



EquityEquity

Chapter 3-25



Retained EarningsRetained Earnings


Chapter 3-26



RevenueRevenue

Chapter 3-27



ExpenseExpense

Dividends and Expenses have

the opposite effect: decrease

equity (debit).


Chapter 3-23

DividendsDividends



Chapter 3-23

AssetsAssets



Chapter 3-27



ExpenseExpense

Normal Balance Credit

Normal Balance Credit

Normal Balance

Debit

Normal Balance

Debit

Debit/Credit Rules

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25



EquityEquity

Chapter 3-26



RevenueRevenue

Income Statement

= + -Asset Liability Equity Revenue Expense

Debit

Credit

Debit/Credit Rules (Cont.)Statement of

Financial Position

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.

Debit/Credit Rules

Question

Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

Debit/Credit Rules

Question

Equity RelationshipsIllustration 2-11

Illustration 2-12

Summary of Debit/Credit Rules

Relationship among the assets, liabilities and equity of a business:

The equation must be in balance after every transaction. For every Debit there must be a Credit.

Double-entry Double-entry system (複式簿記制度 )

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.

The sum of all the debits must equalmust equal the sum of the credits.

This system is much more efficient than procedure used in Chapter 1.

Debit and Credit Procedure

Steps in the Recording Process

Transactions(交易 )

AccountingEquation

Journal(日記簿 )

Ledger (分類帳 )

Analysis

Journalizing(記錄 )

Posting(過帳 )

Double Entry(Debit/Credit)

Business documents ( 交易憑証 ), , such as a sales slip,

a check, a bill, or a cash register tape, provide evidence

of the transaction.

Illustration 2-13

Analyze each transaction Enter transaction in a journalTransfer journal information to

ledger accounts


Book of original entry (原始分錄簿 ).

Transactions recorded in chronological order (時間順序 ).

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.

The Journal ( 日記簿 )


Entry (分錄 )

• Companies make separate journal entries for each transaction.

• A complete entry consists of

(1) the date of the transaction

(2) the accounts and amounts to be

debited and credited

(3) a brief explanation of the transaction.

Entry (Cont.)

• A simple entry (簡單分錄 ) includes only two accounts, one debit and one credit.

• A compound entry (複合分錄 ) requires three or more accounts

(1) three accounts, two debits and one credit,

(2) three accounts, one debit and two credits,

(3) four accounts, two debits and two credits.

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.

Account Title Ref. Debit CreditDate

Cash

Share capital-ordinary

Sept. 1 15,000

15,000

General Journal

Equipment

Cash

7,000

7,000

Illustration 2-14


Transaction AnalysisTransaction (1). Investment by Shareholders. Ray and Barbara Neal

decides to open a computer programming service which he names

Softbyte. On September 1, 2014, they invest €15,000 cash in exchange for

€15,000 of ordinary shares. Illustration 1-10

Transaction Analysis

Illustration 1-10

Transaction (2). Purchase of Equipment for Cash. Softbyte purchases

computer equipment for €7,000 cash.

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.

Account Title Ref. Debit CreditDate

Equipment

Cash

July 1 420,000

240,000

General Journal

180,000Accounts payable

Illustration 2-15


General Ledger ( 總分類帳 ) contains the entire group of accounts (asset, liability, equity, revenue and expense ) maintained by a company.

Illustration 2-16

The Ledger ( 分類帳 )


Illustration 2-17


Standard Form of Account

T-account form used in accounting textbooks.

Ledger form used in practice (three-column form of

account; 三欄式格式 ).

Posting ( 過帳 ) – process of transferring amounts from

the journal to the ledger accounts.

Illustration 2-18

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.

Posting

Question

Accounts and account numbers arranged in sequence in which they are presented in the financial statements.

Illustration 2-19

Chart of Accounts ( 會計科目表 )

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

The Recording Process Illustrated

The Recording Process IllustratedIllustration

2-21


2-22


2-23


2-24


2-25

The Recording Process Illustrated

Illustration 2-26


2-27


2-28


2-29

Basel Company 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

Illustration 2-31

Illustration 2-32

Trial Balance (試算表 )A list of accounts and their balances at a given time.

Purpose is to prove that debits equal credits.

=

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.

Trial Balance

Limitations of a Trial Balance

chapter 2 the recording process

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