Kieso chapter 2

1. Slide
2-1

2. Slide
2-2
Chapter 2
The Recording
Process
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso

3. Slide
2-3
1. Explain what an account is and how it helps in the recording
process.
2. Define debits and credits and explain their use in recording
business transactions.
3. Identify the basic steps in the recording process.
4. Explain what a journal is and how it helps in the recording
process.
5. Explain what a ledger is and how it helps in the recording
process.
6. Explain what posting is and how it helps in the recording
process.
7. Prepare a trial balance and explain its purposes.
Study Objectives

4. Slide
2-4
The Account
Debits and
credits
Debit and credit
procedure
Equity
relationships
Summary of
debit/credit
rules
Limitations of a
trial balance
Locating errors
Use of currency
signs
Summary
illustration of
journalizing and
posting
Journal
Ledger
Posting
Steps in the
Recording
Process
The Recording
Process
Illustrated
The Trial Balance
The Recording Process

5. Slide
2-5
Account Name
Debit / Dr. Credit / Cr.
Record of increases and decreases in
a specific asset, liability, equity,
revenue, or expense item.
Debit = “Left”
Credit = “Right”
Account
An Account can
be illustrated in a
T-Account form.
SO 1 Explain what an account is and how it helps in the recording process.
The Account

6. Slide
2-6
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.
SO 2 Define debits and credits and explain their
use in recording business transactions.
The Account
Debits and Credits

7. Slide
2-7
Account Name
Debit / Dr. Credit / Cr.
If Debits are greater than Credits, the account will
have a debit balance.
$10,000 Transaction #2
$3,000
$15,000
8,000
Transaction #3
Balance
Transaction #1
Debits and Credits
SO 2 Define debits and credits and explain their
use in recording business transactions.

8. Slide
2-8
Account Name
Debit / Dr. Credit / Cr.
If Credits are greater than Debits, the account will
have a credit balance.
$10,000 Transaction #2
$3,000
Balance
Transaction #1
Debits and Credits
$1,000
8,000 Transaction #3
SO 2 Define debits and credits and explain their
use in recording business transactions.

9. Slide
2-9
Chapter
3-23
Assets
Assets
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-27
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Expense
Expense
Chapter
3-24
Liabilities
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Equity
Equity
Chapter
3-26
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Revenue
Revenue
Normal
Balance
Credit
Normal
Balance
Debit
Debits and Credits Summary
SO 2

10. Slide
2-10
Balance Sheet Income Statement
= + -
Asset Liability Equity Revenue Expense
Debit
Credit
Debits and Credits Summary
SO 2 Define debits and credits and explain their
use in recording business transactions.

11. Slide
2-11
Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.
Review Question
Debits and Credits Summary
Solution
notes page
Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.
SO 2 Define debits and credits and explain their
use in recording business transactions.

12. Slide
2-12
Assets - Debits should
exceed credits.
Liabilities – Credits
should exceed debits.
The normal balance is on
the increase side.
Assets and Liabilities
Chapter
3-23
Assets
Assets
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-24
Liabilities
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
SO 2 Define debits and credits and explain their
use in recording business transactions.

13. Slide
2-13
Issuance of share capital and
revenues increase equity
(credit).
Dividends and expenses
decrease equity (debit).
Equity Relationships
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Share Capital
Share Capital
Chapter
3-23
Dividends
Dividends
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Equity
Equity
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Retained Earnings
Retained Earnings
SO 2 Define debits and credits and explain their
use in recording business transactions.

14. Slide
2-14
The purpose of earning
revenues is to benefit the
shareholders.
The effect of debits and credits
on revenue accounts is the same
as their effect on equity.
Expenses have the opposite
effect: expenses decrease equity.
Revenue and Expense
Chapter
3-27
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Expense
Expense
Chapter
3-26
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Revenue
Revenue
SO 2 Define debits and credits and explain their
use in recording business transactions.

15. Slide
2-15
Summary of Debit/Credit Rules
Relationship among the assets, liabilities and equity
of a business:
The equation must be in balance after every transaction. For
every Debit there must be a Credit.
SO 2 Define debits and credits and explain their
use in recording business transactions.
Illustration 2-12

16. Slide
2-16
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and retained earnings.
c. assets, liabilities, and dividends.
d. assets, dividends, and expenses.
Review Question
Solution
notes page
SO 2 Define debits and credits and explain their
use in recording business transactions.
Summary of Debit/Credit Rules
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and retained earnings.
c. assets, liabilities, and dividends.
d. assets, dividends, and expenses.

17. Slide
2-17
Debit
Debit
Credit
Debit
Credit
Credit
Solution on
notes page
mall in which she will open and operate a beauty salon. A friend
has advised Kathy to set up a double-entry set of accounting
records in which to record all of her business transactions.
Following are the accounts that Hair It Is Company, will likely
need to record the transactions. Indicate whether the normal
balance of each account is a debit or a credit.
Summary of Debit/Credit Rules
Cash
Supplies
Notes payable
Equipment
Accounts payable
Share capital
SO 2 Define debits and credits and explain their
use in recording business transactions.
Kathy Renee Browne, president of Hair It Is
Company has just rented space in a shopping

18. Slide
2-18
Business documents, such as a sales slip, a check, a bill, or
a cash register tape, provide evidence of the transaction.
Steps in the Recording Process
SO 3 Identify the basic steps in the recording process.
Analyze each transaction Enter transaction in a journal
Transfer journal information to
ledger accounts
Illustration 2-13

19. Slide
2-19
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.
SO 4 Explain what a journal is and how it helps in the recording process.
Steps in the Recording Process
Journalizing

20. Slide
2-20
Account Title Ref. Debit Credit
Date
Share capital
Journalizing - Entering transaction data in the journal.
SO 4
Illustration: On September 1, stockholders invested $15,000
cash in exchange for ordinary shares, and Softbyte
purchased computer equipment for $7,000 cash.
Cash
Sept. 1 15,000
15,000
General Journal
Computer equipment
Cash
7,000
7,000
Illustration 2-14
Solution on
notes page
Steps in the Recording Process

21. Slide
2-21
Account Title Ref. Debit Credit
Date
8,000
Delivery equipment
Cash
14,000
6,000
Accounts payable
Sept. 1
Illustration: On July 1, Butler Company purchases a
delivery truck costing $14,000. It pays $8,000 cash now and
agrees to pay the remaining $6,000 on account.
General Journal
Illustration 2-15
SO 4
Solution on
notes page
Simple and Compound Entries
Steps in the Recording Process

22. Slide
2-22
General Ledger
➢ All accounts maintained by a company.
➢ All asset, liability, equity, revenue and expense accounts.
SO 5 Explain what a ledger is and how it helps in the recording process.
The Ledger
Steps in the Recording Process
Illustration 2-16

23. Slide
2-23
SO 5 Explain what a ledger is and how it helps in the recording process.
Answer on
notes page

24. Slide
2-24
➢ T-account form used in accounting textbooks.
➢ Ledger form used in practice.
SO 5 Explain what a ledger is and how it helps in the recording process.
Illustration 2-17
The Ledger
Standard Form of Account

25. Slide
2-25
The Ledger
Illustration 2-18
SO 5 Explain what a ledger is and how it helps in the recording process.
Chart of Accounts

26. Slide
2-26
Posting – the
process of
transferring
amounts from
the journal to
the ledger
accounts.
Illustration 2-19
SO 6 Explain what posting is and how it helps in the recording process.
Posting

27. Slide
2-27
The Recording Process Illustrated
Follow these steps:
1. Determine what
type of account
is involved.
2. Determine what
items increased
or decreased and
by how much.
3. Translate the
increases and
decreases into
debits and
credits.
Illustration 2-20
SO 6 Explain what posting is and how it helps in the recording process.

28. Slide
2-28
The Recording Process Illustrated
Illustration 2-21
SO 6 Explain what posting is and how it helps in the recording process.

29. Slide
2-29
The Recording Process Illustrated
Illustration 2-22
SO 6

30. Slide
2-30
The Recording Process Illustrated
Illustration 2-23
SO 6

31. Slide
2-31
The Recording Process Illustrated
SO 6
Illustration 2-24

32. Slide
2-32
The Recording Process Illustrated
SO 6
Illustration 2-25

33. Slide
2-33
The Recording Process Illustrated
Illustration 2-26
SO 6 Explain what posting is and how it helps in the recording process.

34. Slide
2-34
The Recording Process Illustrated
SO 6
Illustration 2-27

35. Slide
2-35
The Recording Process Illustrated
SO 6
Illustration 2-28

36. Slide
2-36
The Recording Process Illustrated
SO 6
Illustration 2-29

37. Slide
2-37
Posting:
a. normally occurs before journalizing.
b. transfers ledger transaction data to the journal.
c. is an optional step in the recording process.
d. transfers journal entries to ledger accounts.
Review Question
Posting
SO 6 Explain what posting is and how it helps in the recording process.
Solution on
notes page
Posting:
a. normally occurs before journalizing.
b. transfers ledger transaction data to the journal.
c. is an optional step in the recording process.
d. transfers journal entries to ledger accounts.

38. Slide
2-38
Katherine Turner recorded the following
transactions during the month of March.
Solution on
notes page
The Recording Process Illustrated
Post these entries to the Cash account.
SO 6

39. Slide
2-39
A list of accounts
and their
balances at a
given time.
Purpose is to
prove that debits
equal credits.
The Trial Balance
SO 7 Prepare a trial balance and explain its purposes.
Illustration 2-32

40. Slide
2-40
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.
The Trial Balance
Limitations of a Trial Balance
SO 7 Prepare a trial balance and explain its purposes.

41. Slide
2-41 SO 7 Prepare a trial balance and explain its purposes.
Answer on
notes page

42. Slide
2-42
The accounts
come from the
ledger of
Christel
Corporation at
December 31,
2011.
Solution on
notes page
The Trial Balance
SO 7
Christel Corporation
Trial Balance (in thousands)
December 31, 2011

43. Slide
2-43
Rules for accounting for specific events sometimes differ
across countries. For example, IFRS companies rely less on
historical cost and more on fair value than U.S. companies.
Despite the differences, the double-entry accounting system is
the basis of accounting systems worldwide.
Both the IASB and FASB go beyond the basic definitions
provided in this textbook for the key elements of financial
statements, that is, assets, liabilities, equity, revenues, and
expenses. The more substantive definitions, using the FASB
definitional structure, are provided in the Chapter 1
“Understanding U.S. GAAP” section.
The Recording Process
Understanding U.S. GAAP
Key Differences

44. Slide
2-44
A trial balance under GAAP follows the same format as shown
in the textbook.
In the United States, equity is often referred to as either
shareholders’ equity or stockholders’ equity, and Share
Capital—Ordinary is referred to as Common Stock. The
statement of financial position is often called the balance sheet
in the United States.
Understanding U.S. GAAP
Key Differences The Recording Process

45. Slide
2-45
Looking to the Future
Understanding U.S. GAAP
The basic recording process shown in this textbook is followed by
companies across the globe. It is unlikely to change in the future.
The definitional structure of assets, liabilities, equity, revenues,
and expenses may change over time as the IASB and FASB
evaluate their overall conceptual framework for establishing
accounting standards.
The Recording Process

46. Slide
2-46
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
Copyright