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CHAPTER

CHAPTER 22

THE
THE RECORDING
RECORDING PROCESS
PROCESS
STUDY OBJECTIVES
After studying this chapter, you should understand:

Accounts

Ledgers

Debits and
credits
The recording
process

Posting

Journals

Trial balance

STUDY
STUDYOBJECTIVE
OBJECTIVE 22

DEBITS
DEBITS AND
AND CREDITS
CREDITS
Debit means left
Credit means right
When the debit amounts exceed the credits,
an account has a debit balance; when the
reverse is true, the account has a credit
balance. DR
CR

DEBIT
DEBIT&
& CREDIT
CREDITEFFECTS
EFFECTS
ON
ONASSETS
ASSETS &
&LIABILITIES
LIABILITIES

Debits
Increase assets
Decrease liabilities

Credits
Decrease assets
Increase liabilities

NORMAL
NORMALBALANCE
BALANCEOF
OF
ASSET
ASSET&
& LIABILITY
LIABILITYACCOUNTS
ACCOUNTS

Assets
Increase
Normal

Decrease
Balance

LiabilitiesDebit
Credit Increase
Decrease
Normal
Balance

DEBIT
DEBIT&
& CREDIT
CREDITEFFECTS
EFFECTS
ON
ON STOCKHOLDERS
STOCKHOLDERSEQUITY
EQUITY
COMMON STOCK/RETAINED EARNINGS

Debits
Decrease equity

Credits
Increase equity

NORMAL
NORMALBALANCE
BALANCEOF
OF
STOCKHOLDERS
STOCKHOLDERS EQUITY
EQUITY
COMMON STOCK/RETAINED EARNINGS

Decrease

Increase

Debit

Normal
Balance
Credit

DEBIT
DEBIT&
& CREDIT
CREDITEFFECTS
EFFECTS
ON
ON DIVIDENDS
DIVIDENDS

DIVIDENDS
Increase

Decrease

Normal
Balance
Debit

Credit

DEBIT
DEBIT&
& CREDIT
CREDITEFFECTS
EFFECTS
ON
ON REVENUES
REVENUES

Debits
Decrease revenues
Increase expenses

Credits
Increase revenues
Decrease expenses

NORMAL
NORMALBALANCES
BALANCES OF
OF
REVENUES
REVENUES &
& EXPENSES
EXPENSES

Revenues
Decrease

Increase
Normal
Balance

ExpensesDebit
Credit Decrease
Increase
Normal
Balance

EXPANDED
EXPANDEDACCOUNTING
ACCOUNTING EQUATION
EQUATION

Assets

Assets
Dr.
+

Cr.
-

= Liabilities

= Liabilities
Dr.
-

Stockholders Equity

Cr.
+

Common
Stock
Dr.
-

Cr.
+

Revenues
Dr.
-

Cr.
+

Dividends

Dr.
+

Cr.
-

Expenses
Dr.
+

Cr.
-

STUDY
STUDYOBJECTIVE
OBJECTIVE 33

THE
THE RECORDING
RECORDING PROCESS
PROCESS
Illustration2-13
2-13
Illustration
JOURNAL
JOURNAL

LEDGER

1. Analyze each transaction

2. Enter transactions in a journal

3. Transfer journal information to the ledgers

STUDY
STUDYOBJECTIVE
OBJECTIVE 44

JOURNALS
JOURNALS
Transactions are initially recorded in chronological order in
a journal before being transferred to the accounts.
The journal records the complete effect of each
transactions, making errors easy to locate
Every company has a general journal which contains
1.
2.
3.
4.

Transaction dates
Account titles
References
Two amount columns

SIMPLE
SIMPLE JOURNAL
JOURNALENTRY
ENTRY
IfIf an
an entry
entryinvolves
involves only
onlytwo
two accounts,
accounts, one
one debit
debit
and
and one
one credit,
credit, itit is
is considered
considered aa simple
simple entry.
entry.

GENERAL JOURNAL
Date
2006
July 1

Account Titles and Explanation


Cash
K. Browne, Capital
(Invested cash in the
business)

Ref.

Debit

J1
Credit

20,000
20,000

COMPOUND
COMPOUND JOURNAL
JOURNALENTRY
ENTRY
When
When three
three or
or more
more accounts
accounts are
are required
required in
in
one
one journal
journal entry,
entry,the
the entry
entryis
is referred
referred to
to as
as aa
compound
compound entry.
entry.

GENERAL JOURNAL
Date
2006
July 1

1
2
3

Account Titles and Explanation


Delivery Equipment
Cash
Accounts Payable
(Purchased truck for cash
with balance on account)

Ref.

J1
Debit

Credit

14,000
8,000
6,000

STUDY
STUDYOBJECTIVE
OBJECTIVE 66

POSTING
POSTING
Posting is the process of transferring entries
from the journals to specific accounts in the
General Ledger
J1

GENERAL JOURNAL
Date
2006
July 1

Account Titles and Explanation


Cash
Common Stock
(Invested cash in the
business)

Ref.

Debit

Credit

20,000
20,000

GENERAL
LEDGER

POSTING
POSTING A
AJOURNAL
JOURNALENTRY
ENTRY
J1

GENERAL JOURNAL
InDate
the ledger,Account
enter in
the and
appropriate
Titles
Explanation
columns
of the account(s) debited
2006
the date,
Sept.
1 journal
Cash page, and debit
amount shown
in the Stock
journal.
Common

Ref.
10
25

Debit

Credit

15,000
15,000

(invested cash in business)

GENERAL LEDGER
CASH
Date
2006
Sept. 1

Explanation

NO. 10

Ref.
J1

Debit

Credit

15,000

15,000

COMMON STOCK
Date
2006
Sept. 1

Explanation

Balance

NO. 25
Ref.
J1

Debit

Credit

Balance

15,000

15,000

Transaction
Transactioninformation
informationisistransferred
transferredtotothe
theindividual
individualledger
ledgeraccounts
accountsaffected.
affected.

CHART
CHART OF
OFACCOUNTS
ACCOUNTS
Most
Mostcompanies
companieshave
haveaachart
chartof
ofaccounts
accountsthat
thatlists
liststhe
theaccounts
accounts
and
andthe
theaccount
accountnumbers
numberswhich
whichidentify
identifytheir
theirlocation
locationin
inthe
the
ledger.
ledger.

INVESTMENT
INVESTMENTOF
OFCASH
CASH
BY
BYSTOCKHOLDERS
STOCKHOLDERS

Transaction

Basic
Analysis

Debit-Credit
Analysis

October 1, C.R. Byrd invests $10,000 cash in


exchange for ownership interest in Pioneer
Advertising Agency, Inc.

The asset Cash is increased $10,000, and Common


Stock is increased $10,000.

Debits increase assets: debit Cash $10,000.


Credits increase stockholders equity: credit
Common Stock, $10,000.

INVESTMENT
INVESTMENTOF
OFCASH
CASH
BY
BYSTOCKHOLDERS
STOCKHOLDERS
JOURNAL
JOURNALENTRY
ENTRY
Date
Oct. 1

Account Titles and Explanation


Cash
Common Stock
(Issued shares of stock for
cash )

Ref.
101
311

Debit
10,000

Credit
10,000

POSTING
POSTING
Cash
Oct. 1

101
10,000

Common Stock
Oct. 1

311
10,000

PURCHASE
PURCHASEOF
OF
OFFICE
OFFICEEQUIPMENT
EQUIPMENT

Transaction

October 1, office equipment costing $5,000 is


purchased by signing a 3-month, 12%, $5,000 note
payable.

Basic
Analysis

The asset Office Equipment is increased $5,000,


and the liability Notes Payable is increased $5,000.

Debit-Credit
Analysis

Debits increase assets: debit Office Equipment


$5,000. Credits increase liabilities: credit Notes
Payable $5,000.

PURCHASE
PURCHASE OF
OF
OFFICE
OFFICE EQUIPMENT
EQUIPMENT
JOURNAL
JOURNALENTRY
ENTRY
Date
Oct. 1

Account Titles and Explanation


Office Equipment
Notes Payable
(Issued 3-month, 12% note
for office equipment)

Ref.
157
200

Debit
5,000

Credit
5,000

POSTING
POSTING
Office Equipment
Oct. 1
5,000

157

Notes Payable
Oct. 1

200
5,000

RECEIPT
RECEIPTOF
OFCASH
CASH
FOR
FOR FUTURE
FUTURE SERVICES
SERVICES

Transaction

Basic
Analysis

Debit-Credit
Analysis

October 2, a $1,200 cash advance is received from


R. Knox, a client, for advertising services that are
expected to be completed by December 31.
The asset Cash is increased $1,200; the liability
Unearned Fees is increased $1,200 because the
service has not been rendered yet. Note that
although many liabilities have the word payable in
their title, unearned fees are considered a liability
even though the word payable is not used.
Debits increase assets: debit Cash $1,200.
Credits increase liabilities: credit Unearned Fees
$1,200.

RECEIPT
RECEIPTOF
OFCASH
CASH
FOR
FOR FUTURE
FUTURE SERVICES
SERVICES
JOURNAL
JOURNALENTRY
ENTRY
Date
Oct. 2

Account Titles and Explanation


Cash
Unearned Fees
(Received advance from R.
Knox for future services)

Ref.
101
209

Debit
1,200

Credit
1,200

POSTING
POSTING
Oct. 1
2

Cash
10,000
1,200

101

Unearned Fees
Oct. 2

209
1,200

PAYMENT
PAYMENTOF
OF
MONTHLY
MONTHLYRENT
RENT

Transaction

October 3, office rent for October is paid in cash,


$900.

Basic
Analysis

The expense Rent is increased $900 because the


payment pertains only to the current month; the
asset Cash is decreased $900.

Debit-Credit
Analysis

Debits increase expenses: debit Rent Expense $900.


Credits decrease assets: credit Cash $900.

PAYMENT
PAYMENTOF
OF
MONTHLY
MONTHLYRENT
RENT
JOURNAL
JOURNALENTRY
ENTRY
Date
Oct. 3

Account Titles and Explanation


Rent Expense
Cash
(Paid October rent)

Ref.
729
101

Debit
900

Credit
900

POSTING
POSTING
Oct. 1
2

Cash
10,000 Oct. 3
1,200

101
900

Rent Expense
Oct. 3
900

729

PAYMENT
PAYMENT FOR
FOR INSURANCE
INSURANCE

Transaction

Basic
Analysis

Debit-Credit
Analysis

October 4, $600 is paid for a one-year insurance


policy that will expire next year on September 30.
The asset Prepaid Insurance is increased $600
because the payment extends to more than the
current month; the asset Cash is decreased $600.
Note that payments of expenses that will benefit more
than one accounting period are identified as prepaid
expenses or prepayments. When a payment is made,
an asset account is debited in order to show the
service or benefit that will be received in the future.
Debits increase assets: debit Prepaid Insurance
$600. Credits decrease assets: credit Cash $600.

PAYMENT
PAYMENT FOR
FOR INSURANCE
INSURANCE
JOURNAL
JOURNALENTRY
ENTRY
Date
Oct. 4

Account Titles and Explanation


Prepaid Insurance
Cash
(Paid one -year policy;
effective date October 1)

Ref.
130
101

Debit
600

Credit
600

POSTING
POSTING
Oct. 1
2

Cash
10,000 Oct. 3
1,200
4

101
900
600

Prepaid Insurance
Oct. 4
600

130

PURCHASE
PURCHASEOF
OFSUPPLIES
SUPPLIES
ON
ON CREDIT
CREDIT

Transaction

October 5, an estimated 3-month supply of


advertising materials is purchased on account from
Aero Supply for $2,500.

Basic
Analysis

The asset Advertising Supplies is increased $2,500;


the liability Accounts Payable is increased $2,500.

Debit-Credit
Analysis

Debits increase assets: debit Advertising Supplies


$2,500. Credits increase liabilities: credit
Accounts Payable $2,500.

PURCHASE
PURCHASEOF
OFSUPPLIES
SUPPLIES
ON
ON CREDIT
CREDIT
JOURNAL
JOURNALENTRY
ENTRY
Date
Oct. 5

Account Titles and Explanation


Advertising Supplies
Accounts Payable
(Purchased supplies on
account from Aero Supply)

Ref.
126
201

Debit
2,500

Credit
2,500

POSTING
POSTING
Advertising Supplies
Oct. 5
2,500

126

Accounts Payable
Oct. 5

201
2,500

REVIEW
REVIEWQUESTION
QUESTION
PURCHASE
PURCHASEOF
OFSUPPLIES
SUPPLIESFOR
FORCASH
CASH
What are the journal/ledger entries if the $2,500 of
advertising supplies was purchased with cash?

HIRING
HIRING EMPLOYEES
EMPLOYEES

Transaction

Basic
Analysis

Debit-Credit
Analysis

October 9, hire four employees to begin work on


October 15. Each employee is to receive a weekly
salary of $500 for a 5-day work week, payable every
2 weeks -- first payment made on October 26.
A business transaction has not occurred. There is
only an agreement between the employer and the
employees to enter into a business transaction
beginning on October 15.

A debit-credit analysis is not needed because there is


no accounting entry.

DECLARATION
DECLARATIONAND
AND PAYMENT
PAYMENT
OF
OFDIVIDEND
DIVIDEND

Transaction

Basic
Analysis

Debit-Credit
Analysis

October 20, the board of directors declares and


pays a $500 cash dividend to stockholders.

The dividends account is increased $500; the asset


Cash is decreased $500.

Debits increase dividends: debit Dividends


$500. Credits decrease assets: credit Cash
$500.

DECLARATION
DECLARATIONAND
AND PAYMENT
PAYMENT
OF
OFDIVIDEND
DIVIDEND
JOURNAL
JOURNALENTRY
ENTRY
Date
Oct. 20

Account Titles and Explanation


Dividends
Cash
(Withdrew cash for personal
use)

Ref.
332
101

Debit Credit
500
500

POSTING
POSTING
Oct. 1
2

Cash
10,000 Oct. 3
1,200
4
20

101
900
600
500

Oct. 20

Dividends
500

332

PAYMENT
PAYMENT OF
OFSALARIES
SALARIES

Transaction

October 26, employee salaries of $4,000 are owed


and paid in cash. (See October 9 transaction.)

Basic
Analysis

The expense account Salaries Expense is increased


$4,000; the asset Cash is decreased $4,000.

Debit-Credit
Analysis

Debits increase expenses: debit Salaries Expense


$4,000. Credits decrease assets: credit Cash $4,000.

PAYMENT
PAYMENT OF
OFSALARIES
SALARIES
JOURNAL
JOURNALENTRY
ENTRY
Date
Oct. 26

Account Titles and Explanation


Salaries Expense
Cash
(Paid salaries to date)

Ref.
726
101

Debit
4,000

Credit
4,000

POSTING
POSTING
Oct. 1
2

Cash
10,000 Oct. 3
1,200
4
20
26

101
900
600
500
4,000

Salaries Expense
Oct. 26
4,000

726

RECEIPT
RECEIPTOF
OFCASH
CASH
FOR
FOR SERVICES
SERVICES PROVIDED
PROVIDED

Transaction

October 31, received $10,000 in cash from Copa


Company for advertising services rendered in
October.

Basic
Analysis

The asset Cash is increased $10,000; the revenue


Fees Earned is increased $10,000.

Debit-Credit
Analysis

Debits increase assets: debit Cash $10,000. Credits


increase revenues: credit Fees Earned $10,000.

RECEIPT
RECEIPTOF
OFCASH
CASH
FOR
FOR SERVICES
SERVICES PROVIDED
PROVIDED
JOURNAL
JOURNALENTRY
ENTRY
Date
Oct. 31

Account Titles and Explanation


Cash
Fees Earned
(Received cash for fees
earned)

Ref.
101
400

Debit
10,000

Credit
10,000

POSTING
POSTING
Oct. 1
2
31

Cash
10,000 Oct. 3
1,200
4
10,000
20
26

101
900
600
500
4,000

Fees Earned
Oct. 31

400
10,000

STUDY
STUDYOBJECTIVE
OBJECTIVE 77

THE
THE TRIAL
TRIALBALANCE
BALANCE
1. A trial balance is a list of accounts and their balances at a
given time.
2. The primary purpose of a trial balance is to prove (check)
that the debits equal the credits after posting.
3. If the debits and credits do not agree, the trial balance can
be used to uncover errors in journalizing and posting.
4. The procedures for preparing a trial balance consist of:
1 List the account titles and their balances.
2 Total the debit and credit columns.
3 Prove the equality of the two columns.

TRIAL
TRIALBALANCE
BALANCE
PIONEER ADVERTISING AGENCY
Trial Balance
October 31, 2006
Cash
Advertising Supplies
Prepaid Insurance
Office Equipment
Notes Payable
Accounts Payable
Unearned Fees
Common Stock
Dividends
Fees Earned
Salaries Expense
Rent Expense

The total debits


must equal the
total credits.

Debit
$ 15,200
2,500
600
5,000

Credit

$ 5,000
2,500
1,200
10,000
500
10,000
4,000
900
$ 28,700

$ 28,700