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Chapter 2: The Recording Process The Account Account: individual accounting record of + and in a specific asset, liability, owners

rs equity item. 3 parts: 1) title, 2) debit, 3) credit. E.g. a T account Debits and Credits Double-entry system: debit (left), credit (right): debits must equal credits in each transaction (dual, two sided). 1) logical method for recording transactions, 2) proves accuracy of recording amounts Normal Balance: every account has normal balance, and it helps you trace errors Assets: Debit +, Credit -, Normal Balance: Debit. (Abnormal balance in Cash: overdraft, deficit) Liabilities: Debit -, Credit +, Normal Balance: Credit Owners Capital: Debit -, Credit +, Normal Balance: Credit Drawings: Debit +, Credit -, Normal Balance: Debit Revenues: Debit -, Credit +, Normal Balance: Credit (identical to effect on owners capital) Expenses: Debit +, Credit -, Normal Balance: Debit Steps in the Recording Process 1. Analyze each transaction (evidence from business doc: sales slip, cheque) in terms of its effect on the accounts 2. Enter transaction info in a journal (book of original entry) 3. Transfer journal info to appropriate accounts in the ledger (book of accounts) Computerized accounting system: difference in entering + transferring info. Input+ processing of info file merging + report generation The Journal Book of original entry. Most companies have general journal Complete effect of a transaction (debits + credits) Chronological record of transactions Prevents + locates errors: DR and CR amounts can be compared Explains transactions + shows source document JOURNALIZING: entering transaction data in the journal Date, accounts and amounts, brief explanation General Journal J1 Date Account Titles and Explanation Ref. Debit Credit 2002 Cash 101 15000 Sept 1 M. Doucet, capital 301 15000 Invested Cash in the business. Space 1 Equipment 7000 Cash 7000 Purchased equipment for cash. Date: year, month, day Explanation: provides reference to source document Computerized systems: account name automatically inserted Use correct and specific titles Simple Entry: 2 accounts. Compound Entry: 3+ accounts. Ledger Entire group of accounts: 1 place with all info about changes in each account (summary of transactions + balance of each) General ledger: assets, liabilities, owners equity. Manual: loose-leaf binder or card file, each account on a separate sheet. Computerized: separate files Order: the way accounts are presented in financial statements. Numbered for identification Three-column form of account: debit, credit, balance (determined after every transaction). Explanation and reference columns (extra info) POSTING: transferring journal entries to ledger accounts Ledger: date, journal page, debit or credit amount from journal Reference column of journal: numbers show which entries have been posted, shows account numbers of accounts posted. Reference column of ledger: journal page Explanation: rarely used, because of journals explanation. Only for detailed analysis of activity Chronological order, postings made on timely basis (normally monthly)

Date 2002 Sept. 1 CHART OF ACCOUNTS First step of designing accounting system: framework for database of info: lists accounts + account numbers, identifying location in the ledger (differs for each enterprise, depending on necessary detail). E.g. 100-199 Assets, 200-299 Liabilities and Owners Equity, 300-399 Revenues, 400-599 Expenses The Recording Process Illustrated Transaction Analysis: purpose: identifying type of account involved, whether a debit/credit to account is required Transaction October 1, C.R. Byrd invests $10,000 cash in an advertising venture to be known as the Pioneer Advertising Agency. Basic The asset Cash is increased by $10,000, and owners equity item C.R. Byrd, Capital, is increased by Analysis $10,000. Debit/Credit Debits increase assets: debit Cash $10,000. Analysis Credits increase owners equity: credit C.R. Byrd, Capital $10,000. The Trial Balance list of accounts and balances at specific time prepared monthly, or end of each accounting period purpose: to prove/check that debits = credits. Can uncover mistakes + be used to prepare financial statements LIMITATIONS Situations where errors exist and the columns agree: 1. transaction is not journalized 2. correct journal entry is not posted 3. journal entry posted twice 4. incorrect amounts used in journalizing or posting 5. offsetting errors in recording amount of transaction LOCATING ERRORS 1. Error in amount like $1, $100, or $1000: recalculate trial balance columns, recalculate account balances 2. Error divisible by two: whether a balance equal to half the error has been entered in the wrong column 3. Error divisible by nine, retrace for transposition error (reversing order of numbers) 4. Error not divisible by two or nine: check if account balance in this amount has been omitted.

Computerized: occurs after each journal entry. Errors are detected + not processed until correction. Initial entries are looked at for subtle errors (such as abnormal account balances) Cash No.101 Explanation Ref. Debit Credit Balance J1 15,000 15000