CHAPTER 2
The Recording Process
LEARNING OBJECTIVES
1. DESCRIBE HOW ACCOUNTS, DEBITS, AND CREDITS
ARE USED TO RECORD BUSINESS TRANSACTIONS.
2. INDICATE HOW A JOURNAL IS USED IN THE
RECORDING PROCESS.
3. EXPLAIN HOW A LEDGER AND POSTING HELP IN THE
RECORDING PROCESS.
4. PREPARE A TRIAL BALANCE.
5. COMPARE THE PROCEDURES FOR THE RECORDING
PROCESS UNDER GAAP AND IFRS.
CHAPTER REVIEW
The Account
1. (L.O. 1) An account is an individual accounting record of increases and decreases in a specific
asset, liability, or stockholders’ equity item.
Debits and Credits
3. The terms debit and credit mean left and right, respectively.
a. The act of entering an amount on the left side of an account is called debiting the account and
4. 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.
5. The effects of debits and credits on assets and liabilities and the normal balances are:
Accounts Debits Credits Normal Balance
Assets Increase Decrease Debit
Liabilities Decrease Increase Credit
8. The expanded basic equation is:
Assets = Liabilities + Common Stock + Retained Earnings + Revenues – Expenses – Dividends
The Recording Process
9. (L.O. 2) The basic steps in the recording process are:
The Journal
10. Transactions are initially recorded in a journal.
a. A journal is referred to as a book of original entry.
b. A general journal is the most basic form of journal.
The Ledger
13. (L.O. 3) The general ledger is the entire group of accounts maintained by a company. It keeps in
one place all the information about changes in account balances and it is a source of useful data for
management.
The Chart of Accounts
16. A chart of accounts is a listing of the accounts and the account numbers which identify their location
in the ledger. The numbering system usually starts with the balance sheet accounts and follows with
the income statement accounts.
The Recording Process
17. The basic steps in the recording process are illustrated as follows:
The Trial Balance
18. (L.O. 4) A trial balance is a list of accounts and their balances at a given time. The trial balance
proves the mathematical equality of the debits and credits after posting.
19. A trial balance does not prove that the company has recorded all transactions or that the ledger is
correct because the trial balance may still balance when
a. a transaction is not journalized.
A Look at IFRS
20. (L. O. 5) The following are the key similarities and differences between GAAP and IFRS as related to
the recording process.
a. Similarities:
(1) Transaction analysis is the same under GAAP and IFRS.
LECTURE OUTLINE
A. The Account.
An account is an accounting record of increases and decreases in a specific
asset, liability, or stockholders’ equity item.
An account consists of three parts:
B. Debits and Credits.
The terms debit and credit are directional signals: Debit indicates left, and credit
indicates right.
C. Steps in the Recording Process.
Businesses use three basic steps in the recording process:
1. Analyze each transaction for its effects on the accounts.
D. The General Journal/Journalizing.
Entering transaction data in the general journal is called journalizing.
The general journal:
1. Discloses in one place the complete effects of a transaction.
E. The Ledger.
The ledger is the entire group of accounts maintained by a company. A general
ledger contains all the assets, liabilities, and stockholders’ equity accounts.
F. Posting/Chart of Accounts.
1. Posting is transferring journal entries to the ledger accounts.
2. Posting involves the following steps:
G. Trial Balance.
A trial balance is a list of accounts and their balances at a given time.
1. It proves the mathematical equality of debits and credits after posting.
ETHICS INSIGHT
Bank regulators fined Bank One Corporation (now Chase) $1.8 million because they
felt the reliability of the bank’s accounting system caused it to violate regulatory
requirements. The financial records of Waste Management, Inc. were in such
disarray that 10,000 employees were receiving pay slips that were in error.
In order for these companies to prepare and issue financial statements, their
accounting equations must have been in balance at year-end. How could these
errors or misstatements have occurred?
IFRS
A Look At IFRS
International companies use the same set of procedures and records to keep track of transaction
data. Thus, the material in Chapter 2 dealing with the account, general rules
of debit and credit, and steps in the recording process—the journal, ledger, and chart of
accounts—is the same under both GAAP and IFRS.
KEY POINTS
Similarities
• Transaction analysis is the same under IFRS and GAAP but, as you will see in later
chapters, different standards sometimes impact how transactions are recorded.
• A trial balance under IFRS follows the same format as shown in the textbook.
Differences
• IFRS relies less on historical cost and more on fair value than due FASB standards.
• Internal controls are a system of checks and balances designed to prevent and detect fraud
LOOKING TO THE FUTURE
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,
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. Assets are increased by debits and liabilities are decreased by credits.
True False
2. The common stock account is increased by credits.
True False
3. An account will have a credit balance if the total debit amounts exceed the total credit
amounts.
True False
4. The ledger is the entire group of accounts maintained by a company.
True False
5. The basic steps in the recording process are (1) to analyze each transaction, (2) to enter the
transaction in a journal, and (3) to transfer the journal entry to the appropriate ledger
accounts.
True False
6. Transferring journal entries to the ledger accounts is called posting and should be performed
in chronological order.
True False
7. Assets = liabilities + common stock + retained earnings + revenues – expenses– dividends is a
correct form of the expanded basic accounting equation.
True False
8. In posting, one should enter “J2” in the Post. Ref. Column on page two of the journal.
True False
9. When the columns of the trial balance equal each other, it proves no errors occurred in
recording and posting.
True False
10. The double-entry system is possible because all business transactions may be expressed in
equal debit and credit entries.
True False
Multiple Choice
1. Transactions are initially recorded in the
a. general ledger.
b. general journal.
c. trial balance.
d. balance sheet.
2. The right side of an account is referred to as the
a. footing.
b. chart side.
c. debit side.
d. credit side.
3. A purchase of office equipment for cash requires a credit to
a. Equipment.
b. Cash.
c. Accounts Payable.
d. Common Stock.
4. The equality of the accounting equation can be proven by preparing a
a. trial balance.
b. journal.
c. general ledger.
d. T-account.
5. Which of the following accounts would be increased with a debit?
a. Rent Payable
b. Common Stock
c. Service Revenue
d. Dividends
ANSWERS TO QUIZ
True/False
Multiple Choice