Accounting Principles

The Recording
Process

The
The Account
Account
Account

Record of increases and

decreases in a specific asset,
liability, equity, revenue, or
expense item.
Debit = Left
Credit = Right

An Account can be
illustrated in a TAccount form.

Account Name
Debit / Dr.

Credit / Cr.

Debits
Debits and
and Credits
Credits

Double-entry accounting system

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.
DEBITS must equal CREDITS.

Debits
Debits and
and Credits
Credits
If Debits are greater than Credits, the account will have a
debit balance.

Account Name
Debit / Dr.

Transaction #1

$10,000

Transaction #3

8,000

Balance

$15,000

Credit / Cr.

$3,00
0

Transaction #2

Debits
Debits and
and Credits
Credits
If Credits are greater than Debits, the account will have a
credit balance.

Account Name
Debit / Dr.

Transaction #1

Balance

$10,000

Credit / Cr.

$3,00
0
8,000

$1,000

Transaction #2
Transaction #3

Debits
Debits and
and Credits
Credits Summary
Summary
Normal
Normal
Balance
Balance
Debit
Debit

Normal
Normal
Balance
Balance
Credit
Credit
Owners Equity
Debit / Dr.

Credit / Cr.

Normal Balance

Chapter
3-25

Debits
Debits and
and Credits
Credits Summary
Summary
Balance Sheet
Asset

Debit

Credit

= Liability

Income Statement
+ Equity

Revenue - Expense

Assets
Assets and
and Liabilities
Liabilities
Assets
Debit / Dr.

Credit / Cr.

Normal Balance

Liabilities Credits
should exceed debits.

Chapter
3-23

Liabilities
Debit / Dr.

Credit / Cr.

Normal Balance

Chapter
3-24

Assets - Debits should

exceed credits.

The normal balance

is on the increase side.

Owners
Owners Equity
Equity
Owners investments and
revenues increase owners
equity (credit).

Owners Equity
Debit / Dr.

Credit / Cr.

Owners drawings and

expenses decrease owners
equity (debit).

Normal Balance

Chapter
3-25

Owners Capital
Debit / Dr.

Chapter
3-25

Owners Drawing

Credit / Cr.

Debit / Dr.

Normal Balance

Normal Balance

Chapter
3-23

Credit / Cr.

Revenue
Revenue and
and Expense
Expense
The purpose of earning revenues
is to benefit the owner(s).
The effect of debits and credits on
revenue accounts is the same as
their effect on Owners Capital.
Expenses have the opposite effect:
expenses decrease owners equity.

Expansion
Expansion of
of the
the Basic
Basic Equation
Equation
Relationship among the assets, liabilities and
owners equity of a business:
Basic
Equation

Assets = Liabilities +

Owners Equity

Illustration 211

Expanded
Basic
Equation

The equation must be in balance after every

transaction. For every Debit there must be a
Credit.

Steps
Steps in
in the
the Recording
Recording Process
Process
Illustration 212

Analyze each
transaction

Enter transaction in a
journal

Transfer journal
information to ledger
accounts

Business documents, such as a sales slip, a check, a bill, or a

cash register tape, provide evidence of the transaction.

The
The Journal
Journal
Book of original entry.
Transactions recorded in chronological order.
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.

Journalizing
Journalizing
Journalizing - Entering transaction data in the journal.
E2-4 (Facts) Presented below is information related to
Hanshew Real Estate Agency.
Oct.
1

Pete Hanshew begins business as a real estate agent

with a cash investment of $15,000.
3 Purchases office furniture for $1,900, on account.

6 Sells a house and lot for B. Kidman; bills B. Kidman

$3,200 for realty services provided.
27 Pays $700 on balance related to transaction of Oct. 3.
30 Pays the administrative assistant $2,500 salary for
Oct.
E2-5 Instructions - Journalize the transactions for E2-4.

Journalizing
Journalizing
E2-5 (Facts) Journalize the transactions related to Hanshew Real
Estate Agency.

Oct. 1

Pete Hanshew begins business as a real estate agent with a

cash investment of $15,000.

General Journal
Oct. 1

Cash
Hanshew, capital
(Owners investment)

15,000
15,000

Journalizing
Journalizing
E2-5 (Facts) Journalize the transactions related to Hanshew Real
Estate Agency.

Oct. 3

Purchases office furniture for $1,900, on account.

General Journal
Oct. 3

Office furniture
Accounts payable
(Purchase on account)

1,900
1,900

Journalizing
Journalizing
E2-5 (Facts) Journalize the transactions related to Hanshew Real
Estate Agency.

Oct. 6

Sells a house and lot for B. Kidman; bills B. Kidman $3,200

for realty services provided.

General Journal
Oct. 6

Accounts receivable
Service revenue
(Services provided)

3,200
3,200

Journalizing
Journalizing
E2-5 (Facts) Journalize the transactions related to Hanshew Real
Estate Agency.

Oct.
27

Pays $700 on balance related to transaction of Oct. 3.

General Journal
Oct. 27

Accounts payable
Cash
(Payment on account)

700
700

Journalizing
Journalizing
E2-5 (Facts) Journalize the transactions related to Hanshew Real
Estate Agency.

Oct.
30

Pays the administrative assistant $2,500 salary for Oct.

General Journal
Oct. 30

Salaries expense
Cash
(Payment for salaries)

2,500
2,500

Journalizing
Journalizing
Simple Entry Two accounts, one debit and one credit.
Compound Entry Three or more accounts.
Example On June 15, H. Burns, purchased
equipment for $15,000 by paying cash of $10,000
and the balance on account (to be paid within 30
days).
General Journal

Jun. 15

Equipment
Cash
Accounts payable
(Purchase equipment)

15,000
10,000
5,000

The
The Ledger
Ledger
A General Ledger contains the entire
group of accounts maintained by a
company.
The General Ledger includes all the asset,
liability, owners equity, revenue and
expense accounts.

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

Standard
Standard Form
Form of
of Account
Account
T-account form used in accounting textbooks.
In practice, the account forms used in ledgers are
much more structured.

Cash
Date
Oct.

Explanation
1
27
30

Ref.

No. 101
Debit

Credit

15,000
700
2,500

Balance
15,000
14,300
11,800

Posting
Posting
Posting the process of transferring amounts from
the journal to the ledger accounts.
Date
Oct. 1

General
Journal
Account Title
Cash

J1
Ref.

101

Debit

Credit

15,000

Hanshew, Capital

15,000

(Owner's investment in business)

General
Ledger
Cash
Date

Oct. 1

Explanation

Ref.

J1

Acct. No. 101

Debit

15,000

Credit

Balance

15,000

J1

Postin
Postin
g
g

101
300

General Ledger
Cash
Oct. 1

J1

15,000

General Ledger
Hanshew,
capital
Oct. 1

J1

Acct. No. 101

15,000

Acct. No. 300

15,000 15,000

J1

Posting
Posting
140
200

General Ledger
Office Furniture
Oct. 3

J1

General Ledger
Accounts
Payable
Oct. 3

J1

Acct. No. 140

1,900

1,900

Acct. No. 200

1,900

1,900

SO 6 Explain what posting is and how it helps in the recording

J1

Postin
Postin
g
g

112
400

General Ledger
Accounts
Receivable
Oct. 6

J1

3,200

General Ledger
Service Revenue
Oct. 6

J1

Acct. No. 112

3,200

Acct. No. 400

3,200

3,200

SO 6 Explain what posting is and how it helps in the recording

J1

Postin
Postin
g
g

200
101

General Ledger
Cash
Oct. 1
Oct.2
7

J1
J1

Acct. No. 101

15,000
700

General Ledger
Accounts
Payable
Oct. 3
Oct.27

J1
J1

15,000
14,300

Acct. No. 200

1,900
700

1,900
1,200

SO 6 Explain what posting is and how it helps in the recording

J1

Postin
Postin
g
g

726
101

General Ledger
Cash
Oct. 1
Oct.2
7
Oct.3
0

J1
J1
J1

15,000
700
2,500

General Ledger
Salaries
Expense
Oct.30

J1

Acct. No. 101

2,500

15,000
14,300
11,800

Acct. No. 726

2,500

SO 6 Explain what posting is and how it helps in the recording

The
The Trial
Trial Balance
Balance
A list of accounts and
their balances at a
given time.
Purpose is to prove
that debits equal
credits.

LO 7 Prepare a trial balance and explain its purposes.

The
The Trial
Trial Balance
Balance

Limitations of a Trial
Balance
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.

LO 7 Prepare a trial balance and explain its purposes.