Financial Accounting 4th Edition Chapter 2
Financial Accounting 4th Edition Chapter 2
Financial Accounting 4th Edition Chapter 2
Prepared by
Gregory K. Lowery
Mercer University
Marianne Bradford
The University of Tennessee
Trial Balance
PREVIEW OF CHAPTER 2
THE RECORDING
PROCESS
Cash
Debits Credits
15,000
Cash
Debits Credits
7,000
Debits Credits
Increase assets Decrease assets
Decrease liabilities Increase liabilities
NORMAL BALANCE
Assets Liabilities
Increase Decrease Decrease Increase
Debit Credit Debit Credit
Normal Normal
Balance Balance
ILLUSTRATION 2-5
DEBIT AND CREDIT EFFECT - COMMON STOCK
Debits Credits
Decrease common stock Increase common stock
ILLUSTRATION 2-6
NORMAL BALANCE - COMMON STOCK
Common Stock
Decrease Increase
Debit Credit
Normal
Balance
ILLUSTRATION 2-7
DEBIT AND CREDIT EFFECT AND
NORMAL BALANCE - RETAINED EARNINGS
Retained Earnings
Decrease Increase
Debit Credit
Normal
Balance
ILLUSTRATION 2-8
DEBIT AND CREDIT EFFECT AND
NORMAL BALANCE - DIVIDENDS
Dividends
Increase Decrease
Debit Credit
Normal
Balance
ILLUSTRATION 2-9
DEBIT AND CREDIT EFFECTS - REVENUES AND EXPENSES
Debits Credits
Decrease revenues Increase revenues
Increase expenses Decrease expenses
ILLUSTRATION 2-10
NORMAL BALANCES - REVENUES AND EXPENSES
Revenues Expenses
Decrease Increase Increase Decrease
Debit Credit Debit Credit
Normal Normal
Balance Balance
ILLUSTRATION 2-11
STOCKHOLDERS’ EQUITY RELATIONSHIPS
Balance Sheet
Stockholders’ Equity
- Dividends - Expenses
Dr. Cr. Dr. Cr.
+ - + -
STEPS IN THE
RECORDING PROCESS
The basic steps in the recording process are:
1 Analyze each transaction in terms of its
effect on the accounts.
2 Enter the transaction information in a
journal (book of original entry).
3 Transfer the journal information to the
appropriate accounts in the ledger (book of
accounts).
ILLUSTRATION 2-13
THE RECORDING
PROCESS
JOURNAL
LEDGER
JOURNAL
• If an entry involves only two accounts, one debit and one credit, it is considered a
simple entry.
• When three or more accounts are required in one journal entry, the entry is
referred to as a compound entry.
ILLUSTRATION 2-15
COMPOUND JOURNAL ENTRY
2002
July 1 Delivery Equipment
14,000
Cash 8,000
Accounts Payable
6,000
(Purchased truck for cash with
balance on account)
3
1 2
Inaacompound
In compoundentry,
entry,the
thetotal
totaldebit
debitand
and
creditamounts
credit amountsmust
mustequal
equal
COMPOUND JOURNAL ENTRY
This
Thisisisthe
thewrong
wrongformat;
format;allalldebits
debitsmust
mustbe
belisted
listed
before
beforethe
thecredits
creditsare
arelisted.
listed.
THE LEDGER
The entire group of accounts maintained by a
company is referred to as the ledger.
A general ledger contains all the assets, liabilities,
and stockholder’s equity accounts.
GENERAL
LEDGER
ILLUSTRATION 2-16
THE GENERAL LEDGER
Individual
Individual Individual
Stockholders’
Assets Liabilities
Equity
In
Inthe
theledger,
ledger,enter
enterin
inthe
theappropriate
appropriatecolumns
columnsof
ofthe
theaccount
account(s)
(s)
debited
debitedthe
thedate,
date,journal
journalpage,
page,and
anddebit
debitamount
amountshown
shownininthe
thejournal.
journal.
ILLUSTRATION 2-18
POSTING A JOURNAL ENTRY
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 101 15,000
Common Stock 311 15,000
(issued shares of stock for
cash)
GENERAL LEDGER
CASH NO. 101
Date Explanation Ref. Debit Credit Balance
2002
Sept
Sept.1 1 J1 15,000 15,000
COMMONSTOCK
STOCK NO. 311
COMMON
Date Explanation Ref. Debit Credit Balance
2001
2002 1
Sept.
Sept 1 J1 15,000 15,000
In
Inthe
thereference
referencecolumn
columnof
ofthe
thejournal,
journal,write
writethe
theaccount
account
number
numberto towhich
whichthe
thedebit
debitamount
amountwas
wasposted.
posted.
ILLUSTRATION 2-18
POSTING A JOURNAL ENTRY
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 101 15,000
Common Stock 311 15,000
(issued shares of stock for
cash)
GENERAL LEDGER
CASH NO. 101
Date Explanation Ref. Debit Credit Balance
2002
Sept. 1 J1 15,000 15,000
In
Inthe
theledger,
ledger,enter
enterin
inthe
theappropriate
appropriatecolumns
columnsof
ofthe
theaccount(s)
account(s)
credited
creditedthe
thedate,
date,journal
journalpage,
page,and
andcredit
creditamount
amountshown
shownininthe
thejournal.
journal.
ILLUSTRATION 2-18
POSTING A JOURNAL ENTRY
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 101 15,000
Common Stock 311 15,000
(issued shares of stock for
cash)
GENERAL LEDGER
CASH NO. 101
Date Explanation Ref. Debit Credit Balance
2002
Sept. 1 J1 15,000 15,000
In
Inthe
thereference
referencecolumn
columnofofthe
thejournal,
journal,write
writethe
theaccount
account
number
numberto towhich
whichthe
thecredit
creditamount
amountwas
wasposted.
posted.
ILLUSTRATION 2-19
CHART OF
ACCOUNTS
Most
Mostcompanies
companieshave
haveaachart
chartof
ofaccounts
accountsthat
thatlists
liststhe
the
accounts
accountsand
andthe
theaccount
accountnumbers
numberswhich
whichidentify
identifytheir
their
location
locationin
inthe
theledger.
ledger.
ILLUSTRATION 2-20
INVESTMENT OF CASH BY STOCKHOLDERS
5,000
Journal 5,000
Entry
Posting 5,000
5,000
ILLUSTRATION 2-22
RECEIPT OF CASH FOR FUTURE SERVICE
1,200
Journal
1,200
Entry
Journal 900
900
Entry
Journal 600
600
Entry
Cash 101
Oct. 1 10,000 Oct. 3 900 600
Posting 2 1,200 4 600
ILLUSTRATION 2-25
PURCHASE OF SUPPLIES ON CREDIT
2,500
Journal 2,500
Entry
500
Journal 500
Entry
Dividends 332
Posting Oct. 20
500
500
ILLUSTRATION 2-28
PAYMENT OF
SALARIES
October 26, employee salaries of $4,000 are owed and
Transaction paid in cash. (See October 9 transaction.)
4,000
Journal 4,000
Entry
4,000
Posting
4,000
ILLUSTRATION 2-29
RECEIPT OF CASH FOR FEES EARNED
10,000
Journal 10,000
Entry
Service Revenue
400Oct. 31
10,000
Posting
10.000
THE TRIAL BALANCE
A trial balance is a list of accounts and their balances at
a given time.
The primary purpose of a trial balance is to prove the
mathematical equality of debits and credits after
posting.
A trial balance also uncovers errors in journalizing and
posting.
The steps for preparing a trial balance are:
1 List the account titles and their balances.
2 Total the debit and credit columns.
3 Prove the equality of the two columns.
ILLUSTRATION 2-32
A TRIAL BALANCE
PIONEER ADVERTISING AGENCY
Trial Balance
October 31, 2002
Debit Credit
Cash $ 15,200
Advertising Supplies The total debits 2,500
Prepaid Insurance
Office Equipment
must equal the 600
5,000
Notes Payable total credits. $ 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
Common Stock 10,000
Dividends 500
Service Revenue 10,000
Salaries Expense 4,000
Rent Expense 900
$ 28,700 $ 28,700
LIMITATIONS OF A
TRIAL BALANCE
A trial balance does not prove that all transactions have
been recorded or that the ledger is correct.
Numerous errors may exist even though the trial balance
columns agree.
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,
5 offsetting errors are made in recording the amount of
the transaction.
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CHAPTER 2
THE RECORDING PROCESS