Accounting

Principles

Second Canadian Edition

Weygandt Kieso Kimmel
Trenholm

Prepared by:
Carole Bowman, Sheridan College

CHAPTER

2
THE RECORDING PROCESS

THE ACCOUNT

An account is an individual accounting

record of increases and decreases in a
specific asset, liability, or owners equity
item.
A company will have separate accounts for
such items as cash, salaries expense,
accounts payable, and so on.

DEBITS AND CREDITS

The terms debit and credit mean left and right,
respectively.
The act of entering an amount on the left side of an
account is called debiting the account and making an
entry on the right side is crediting the account.
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

ILLUSTRATION 2-1

BASIC FORM OF ACCOUNT

In its simplest form, an account consists of
1. the title of the account,
2. a left or debit side, and
3. a right or credit side.
The alignment of these parts resembles the letter T, and
therefore the account form is called a T account.

Title of Account
Left or debit side

Right or credit side

Debit balance

Credit balance

ILLUSTRATION 2-2

TABULAR SUMMARY COMPARED TO

ACCOUNT FORM
Tabular Summary

Account Form

Cash
$15,000
- 7,000
1,200
1,500
- 600
- 900
- 200
- 250
600
- 1,300

Cash

$8,050

Debit
15,000
1,200
1,500
600

8,050

Balance

Credit
7,000
600
900
200
250
1,300

DEBITING AN ACCOUNT

Cash
15,000

Example:
Example: The
The owner
ownermakes
makes an
an initial
initial investment
investment of
of
$15,000
$15,000 to
to start
start the
the business.
business. Cash
Cash isis debited
debited
and
and the
the owners
ownersCapital
Capital account
account isiscredited.
credited.

CREDITING AN ACCOUNT

Cash
7,000

Example:
Example: Monthly
Monthly rent
rent of
of $7,000
$7,000 isis paid.
paid. Cash
Cash isis
credited
credited and
and Rent
Rent Expense
Expense isis debited.
debited.

DEBITING AND CREDITING

AN ACCOUNT

Cash
15,000
8,000

7,000

Example:
Example: Cash
Cash isis debited
debited for
for$15,000
$15,000 and
and credited
credited for
for
$7,000,
$7,000, leaving
leaving aa debit
debit balance
balance of
of $8,000.
$8,000.

DOUBLE-ENTRY SYSTEM
In

a double-entry system, equal debits and

credits are made in the accounts for each
transaction.
Thus, the total debits will always equal the
total credits and the accounting equation
will always stay in balance.

Assets

Liabilities

Equity

NORMAL BALANCE
Every

account classification has a normal

balance, whether it is a debit or credit.

ILLUSTRATION 2-3
NORMAL BALANCES ASSETS AND LIABILITIES

Assets
Increase
Normal

Decrease

Balance

Liabilities
Decrease Increase
Debit
Credit
Normal

Balance

ILLUSTRATION 2-4
NORMAL BALANCE OWNERS CAPITAL

Owners Capital
Decrease

Increase

Debit
Credit

Normal
Balance

ILLUSTRATION 2-5
NORMAL BALANCE OWNERS DRAWINGS

Owners Drawings
Increase
Normal
Balance

Credit

Decrease

Debit

ILLUSTRATION 2-6

NORMAL BALANCES
REVENUES AND EXPENSES
Revenues
Decrease Increase
Normal
Balance

Expenses
Increase Decrease
Debit
Credit
Normal
Balance

ILLUSTRATION 2-7

EXPANDED BASIC EQUATION AND

DEBIT/CREDIT RULES AND EFFECTS
Assets

Assets
Dr.
+

Cr.
-

= Liabilities

Liabilities
Dr.
-

Owners Equity

Cr.
+

Owners
Capital
Dr.
-

Cr.
+

Revenues
Dr.
-

Cr.
+

Owners
Drawings
Dr.
+

Cr.
-

Expenses
Dr.
+

Cr.
-

ILLUSTRATION 2-9

THE RECORDING PROCESS

JOURNAL
JOURNAL

LEDGER

1. Analyse each transaction.

2. Enter transaction in a journal.
3. Transfer journal information to ledger accounts.

THE JOURNAL
Transactions

are initially recorded in

chronological order in a journal before being
transferred to the accounts.
Every company has a general journal which
contains
1. spaces for dates,
2. account titles and explanations,
3. references, and
4. two money columns.

THE JOURNAL
The journal makes several significant contributions to the
recording process:
1. It discloses, in one place, the complete effect of a
transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and
credit amounts for each entry can be readily compared.

JOURNALIZING
Entering

transaction data in the journal is known

as journalizing.
Separate journal entries are made for each
transaction.
A complete entry consists of
1. the date of the transaction,
2. the accounts and amounts to be debited and
credited, and
3. a brief explanation of the transaction.

ILLUSTRATION 2-10

TECHNIQUE OF JOURNALIZING
The
The date
date of
of the
the transaction
transaction isis entered
entered in
in the
the date
date column.
column.
J1

GENERAL JOURNAL
Date
2002
Sept. 1

Account Titles and Explanation

Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.

Ref.

Debit

Credit

15,000
15,000

7,000
7,000

ILLUSTRATION 2-10

TECHNIQUE OF JOURNALIZING
The
The debit
debit account
account title
title isis entered
entered at
at the
the extreme
extreme left
left
margin
margin of
of the
theAccount
AccountTitles
Titles and
and Explanation
Explanation column.
column.
The
The credit
credit account
account title
titleisis indented
indentedon
on the
thenext
next line
line..
J1

GENERAL JOURNAL
Date
2002
Sept. 1

Account Titles and Explanation

Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.

Ref.

Debit

Credit

15,000
15,000

7,000
7,000

ILLUSTRATION 2-10

TECHNIQUE OF JOURNALIZING
The
Theamounts
amountsfor
forthe
thedebits
debitsare
arerecorded
recordedin
inthe
theDebit
Debitcolumn
columnand
and
the
theamounts
amountsfor
forthe
thecredits
creditsare
arerecorded
recordedin
inthe
theCredit
Creditcolumn.
column.
J1

GENERAL JOURNAL
Date
2002
Sept. 1

Account Titles and Explanation

Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.

Ref.

Debit

Credit

15,000
15,000

7,000
7,000

ILLUSTRATION 2-10

TECHNIQUE OF JOURNALIZING
A
Abrief
brief explanation
explanation of
of the
the transaction
transaction isis given.
given.
J1

GENERAL JOURNAL
Date
2002
Sept. 1

Account Titles and Explanation

Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.

Ref.

Debit

Credit

15,000
15,000

7,000
7,000

ILLUSTRATION 2-10

TECHNIQUE OF JOURNALIZING
A
Aspace
space isis left
left between
between journal
journal entries.
entries. The
The
blank
blankspace
space separates
separates individual
individual journal
journal entries
entries
and
and makes
makes the
the journal
journal easier
easierto
to read.
read.
J1

GENERAL JOURNAL
Date
2002
Sept. 1

Account Titles and Explanation

Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.

Ref.

Debit

Credit

15,000
15,000

7,000
7,000

ILLUSTRATION 2-10

TECHNIQUE OF JOURNALIZING
The
The column
column entitled
entitled Ref.
Ref. isis left
left blank
blankat
at the
the time
timethe
the
journal
journal entry
entryisis made
made and
and isis used
used later
laterwhen
when the
the
journal
journal entries
entries are
aretransferred
transferred to
to the
theledger
ledgeraccounts.
accounts.
J1

GENERAL JOURNAL
Date
2002
Sept. 1

Account Titles and Explanation

Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.

Ref.

Debit

Credit

15,000
15,000

7,000
7,000

SIMPLE AND COMPOUND

JOURNAL ENTRIES
If
If an
an entry
entryinvolves
involves only
only two
two accounts,
accounts, one
one debit
debit and
and
one
one credit,
credit, itit isis considered
considered aa simple
simple entry.
entry.
J1

GENERAL JOURNAL
Date
2002
Oct. 2

Account Titles and Explanation

Delivery Equipment
Cash
Purchased truck for cash.

Ref.

Debit

Credit

14,000
14,000

ILLUSTRATION 2-11

COMPOUND JOURNAL ENTRY

When
When three
three or
ormore
moreaccounts
accounts are
arerequired
required in
in one
one
journal
journal entry,
entry,the
the entry
entry isis referred
referred to
to as
as aa compound
compound
entry.
entry.
J1

GENERAL JOURNAL
Date
2002
Oct. 2

1
2
3

Account Titles and Explanation

Delivery Equipment
Cash
Note Payable
Purchased truck for cash
and note payable.

Ref.

Debit

Credit

34,000
8,000
26,000

COMPOUND JOURNAL ENTRY

This
This isis the
the wrong
wrong format;
format; all
all debits
debits must
must be
be listed
listed
before
beforethe
the credits
credits are
arelisted.
listed.
J1

GENERAL JOURNAL
Date
2002
Oct. 2

Account Titles and Explanation

Cash
Delivery Equipment
Note Payable
Purchased truck for cash
and note payable.

Ref.

Debit

Credit
8,000

34,000
26,000

THE LEDGER
The

entire group of accounts maintained by a

company is referred to collectively as the ledger.
A general ledger contains all the assets, liabilities,
and owners equity accounts.

GENERAL
LEDGER

ILLUSTRATION 2-12

THE GENERAL LEDGER

Individual
Assets
Equipment
Supplies
Accounts Rec.
Cash

Individual
Liabilities
Interest Payable
Salaries Payable
Accounts Payable
Notes Payable

Individual
Owners Equity
Salaries Expense
Service Revenue
Doucet, Drawings
Doucet, Capital

ILLUSTRATION 2-14

POSTING A JOURNAL ENTRY

General Journal
Account Title and Explanation

Date
2002
01-Sep Cash
M. Doucet, Capital
Invested cash in business.

Date
2002
01-Sep

Ref
101
301

General Ledger
Cash
Account Title and Explanation Ref
J1

Debit

J1
Credit

15,000

Debit
15,000

15,000

Credit

101
Balance
15,000

In the ledger, enter in the appropriate columns of the account(s)

debited the date, journal page, and debit amount shown in the journal
and the account number to which the journal was posted.

ILLUSTRATION 2-14

POSTING A JOURNAL ENTRY

General Journal
Account Title and Explanation

Date
2002
01-Sep Cash
M. Doucet, Capital
Invested cash in business.

General Ledger
M. Doucet, Capital
Date Account Title and Explanation Ref
2002
1-Sep
J1

Ref
101
301

Debit

Debit

J1
Credit

15,000
15,000

Credit
15,000

301
Balance
15,000

In the ledger, enter in the appropriate columns of the account(s)

credited the date, journal page, and credit amount shown in the
journal and the account number to which the journal was posted.

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 procedures for preparing a trial balance consist of
1. listing the account titles and their balances,
2. totaling the debit and credit columns, and
3. proving the equality of the two columns.

ILLUSTRATION 2-28

A TRIAL BALANCE
PIONEER ADVERTISING AGENCY
Trial Balance
October 31, 2002
Cash
Advertising Supplies
Prepaid Insurance
Office Equipment
Notes Payable
Accounts Payable
Unearned Revenue
C. R. Byrd, Capital
C. R. Byrd, Drawings
Service Revenue
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

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.

COPYRIGHT

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