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AAccounting

ccounting Principles

Principles

A A ccounting Principles
A A ccounting Principles

CHAPTER CHAPTER 22

THE RECORDING

THE

RECORDING PROCESS

PROCESS

After studying this chapter, you should be able to:

1 Explain what an account is and how it helps in the recording process.

  • 2 Define debits and credits and explain how they are used to record 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.

CHAPTER 2 2 THE RECORDING THE RECORDING PROCESS PROCESS After studying this chapter, you should be

CHAPTER CHAPTER 22

THE RECORDING

THE

RECORDING PROCESS

PROCESS

After studying this chapter, you should be able to:

  • 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 purpose.

CHAPTER 2 2 THE RECORDING THE RECORDING PROCESS PROCESS After studying this chapter, you should be
CHAPTER 2 2 THE RECORDING THE RECORDING PROCESS PROCESS After studying this chapter, you should be
CHAPTER 2 2 THE RECORDING THE RECORDING PROCESS PROCESS After studying this chapter, you should be
CHAPTER 2 2 THE RECORDING THE RECORDING PROCESS PROCESS After studying this chapter, you should be
CHAPTER 2 2 THE RECORDING THE RECORDING PROCESS PROCESS After studying this chapter, you should be
Trial Balance
Trial Balance

PREVIEW OFOF CHAPTER

PREVIEW

CHAPTER 22

The Recording Process

OF OF CHAPTER PREVIEW 2 2 The Recording Process The Account Steps in the Recording
OF OF CHAPTER PREVIEW 2 2 The Recording Process The Account Steps in the Recording
The Account Steps in the Recording Process   Debits and credits Expansion of basic equation
The Account
Steps in the
Recording Process
Debits and credits
Expansion of basic
equation
Journal
Ledger

PREVIEW OFOF CHAPTER

PREVIEW

CHAPTER 22

The Recording Process

OF OF CHAPTER PREVIEW 2 2 The Recording Process The Recording Process Illustrated The Trial
OF OF CHAPTER PREVIEW 2 2 The Recording Process The Recording Process Illustrated The Trial
The Recording Process Illustrated The Trial Balance   Summary illustration of journalizing and posting 
The Recording
Process Illustrated
The Trial Balance
 Summary illustration of
journalizing and posting
Limitations of a trial
balance
Locating errors
Use of dollar signs

STUDY OBJECTIVE

STUDY

OBJECTIVE 11

OBJECTIVE STUDY 1 1 Explain Explain what what an an account account is is and

Explain Explain what what an an account account is is and and how how it it

helps helps in in the the recording recording process. process.

THE ACCOUNT

THE

ACCOUNT

An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item.

A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on.

STUDY OBJECTIVE

STUDY

OBJECTIVE 22

OBJECTIVE STUDY 2 2 Define Define debits debits and and credits credits and and explain

Define Define debits debits and and credits credits and and explain explain how how

they they are are used used to to record record business business transactions. transactions.

ILLUSTRATION

ILLUSTRATION 2-1

2-1

BASIC FORM

BASIC

FORM OFOF ACCOUNT

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
Title of Account
Left or debit side
Right or credit side
Debit balance
Credit balance

DEBITS

DEBITS AND

AND CREDITS

CREDITS

The term debit means left and credit means 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
DR
CR

ILLUSTRATION

ILLUSTRATION 2-2

2-2

TABULAR SUMMARY

TABULAR

SUMMARY COMPARED

COMPARED TOTO

ACCOUNT FORM

ACCOUNT

FORM

Tabular Summary

Cash $15,000 - 7,000 1,200 1,500 - 1,700 - 250 600 - 1,300 $ 8,050
Cash
$15,000
-
7,000
1,200
1,500
-
1,700
-
250
600
-
1,300
$ 8,050
Account Form Cash Debit Credit 15,000 7,000 1,200 1,700 1,500 250 600 1,300 Balance $8,050 (Debit)
Account Form
Cash
Debit
Credit
15,000
7,000
1,200
1,700
1,500
250
600
1,300
Balance
$8,050
(Debit)

DEBITING ANAN ACCOUNT

DEBITING

ACCOUNT

Cash Debits Credits 15,000
Cash
Debits
Credits
15,000

Example: Example: The The owner owner makes makes an an initial initial

investment investment of of $15,000 $15,000 to to start start

the the business. business. Cash Cash is is debited debited as as

the the owner’s owner’s Capital Capital is is credited. credited.

CREDITING ANAN ACCOUNT

CREDITING

ACCOUNT

Cash Debits Credits 7,000
Cash
Debits
Credits
7,000

Example: Example: Monthly Monthly rent rent of of $7,000 $7,000 is is paid. paid.

Cash Cash is is credited credited as as Rent Rent Expense Expense is is

debited. debited.

DEBITING

DEBITING AND

AND

CREDITING ANAN ACCOUNT

CREDITING

ACCOUNT

Cash Debits Credits 15,000 7,000 8,000
Cash
Debits
Credits
15,000
7,000
8,000

Example: Example: Cash Cash is is debited debited for for $15,000 $15,000 and and

credited credited for for $7,000, $7,000, leaving leaving a a debit debit

balance balance of of $8,000. $8,000.

DOUBLE-ENTRY SYSTEM

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
Assets
Liabilities
Equity

ILLUSTRATION

ILLUSTRATION 2-3

2-3

DEBIT AND

DEBIT

AND CREDIT

CREDIT EFFECTS

EFFECTS

ASSETS

ASSETS AND

AND LIABILITIES

LIABILITIES

Debits Credits Increase assets Decrease liabilities Decrease assets Increase liabilities
Debits
Credits
Increase assets
Decrease liabilities
Decrease assets
Increase liabilities
ILLUSTRATION ILLUSTRATION 2-3 2-3 AND DEBIT CREDIT EFFECTS — — ASSETS ASSETS AND AND LIABILITIES LIABILITIES

NORMAL BALANCE

NORMAL

BALANCE

Every account classification has a

normal balance, whether it is a debit

or credit.

For that particular account, the

opposite side entries should never

exceed the normal balance.

ILLUSTRATION

ILLUSTRATION 2-4

2-4

NORMAL BALANCES

NORMAL

BALANCES ASSETS

ASSETS AND

AND LIABILITIES

LIABILITIES

Assets Increase Decrease Normal Balance Liabilities Decrease Debit Increase Credit Normal Balance
Assets
Increase
Decrease
Normal
Balance
Liabilities
Decrease Debit
Increase
Credit
Normal
Balance

ILLUSTRATION

ILLUSTRATION 2-5

2-5

DEBIT AND

DEBIT

AND CREDIT

CREDIT EFFECTS

EFFECTS OWNER’S

OWNERS CAPITAL

CAPITAL

Debits Credits Decrease owner’s capital Increase owner’s capital
Debits
Credits
Decrease owner’s capital
Increase owner’s capital
ILLUSTRATION ILLUSTRATION 2-5 2-5 AND DEBIT CREDIT EFFECTS — — OWNER’S CAPITAL Debits Credits Decrease owner’s

ILLUSTRATION

ILLUSTRATION 2-6

2-6

NORMAL BALANCE

NORMAL

BALANCE OWNER’S

OWNERS CAPITAL

CAPITAL

Owner’s Capital Decrease Increase Normal Balance Debit Credit
Owner’s Capital
Decrease
Increase
Normal
Balance
Debit
Credit
ILLUSTRATION ILLUSTRATION 2-6 2-6 BALANCE NORMAL — — OWNER’S CAPITAL Owner’s Capital Decrease Increase Normal Balance

ILLUSTRATION

ILLUSTRATION 2-7

2-7

DEBIT AND

DEBIT

AND CREDIT

CREDIT EFFECTS

EFFECTS OWNER’S

OWNERS DRAWING

DRAWING

Debits Credits Increase owner’s drawing Decrease owner’s drawing
Debits
Credits
Increase owner’s drawing
Decrease owner’s drawing
ILLUSTRATION ILLUSTRATION 2-7 2-7 AND DEBIT CREDIT EFFECTS — — OWNER’S DRAWING Debits Credits Increase owner’s

ILLUSTRATION

ILLUSTRATION 2-8

2-8

NORMAL BALANCE

NORMAL

BALANCE OWNER’S

OWNERS DRAWING

DRAWING

Owner’s Drawing Increase Decrease Normal Balance Debit Credit
Owner’s Drawing
Increase
Decrease
Normal
Balance
Debit
Credit
ILLUSTRATION ILLUSTRATION 2-8 2-8 BALANCE NORMAL — — OWNER’S DRAWING Owner’s Drawing Increase Decrease Normal Balance

ILLUSTRATION

ILLUSTRATION 2-9

2-9

DEBIT AND

DEBIT

AND CREDIT

CREDIT EFFECTS

EFFECTS REVENUES

REVENUES AND

AND EXPENSES

EXPENSES

Debits Credits Decrease revenues Increase expenses Increase revenues Decrease expenses
Debits
Credits
Decrease revenues
Increase expenses
Increase revenues
Decrease expenses
ILLUSTRATION ILLUSTRATION 2-9 2-9 AND DEBIT CREDIT EFFECTS — — REVENUES AND EXPENSES Debits Credits Decrease

ILLUSTRATION

ILLUSTRATION 2-10

2-10

NORMAL BALANCES

NORMAL

BALANCES REVENUES

REVENUES AND

AND EXPENSES

EXPENSES

Revenues Decrease Increase Normal Balance Expenses Debit Increase Decrease Credit Normal Balance
Revenues
Decrease
Increase
Normal
Balance
Expenses
Debit
Increase
Decrease
Credit
Normal
Balance

ILLUSTRATION

ILLUSTRATION 2-11

2-11

EXPANDED BASIC

EXPANDED

BASIC EQUATION

EQUATION AND

AND DEBIT/CREDIT

DEBIT/CREDIT

RULES

RULES AND

AND EFFECTS

EFFECTS

Assets
Assets
Assets Dr. Cr. + -
Assets
Dr.
Cr.
+
-
= Liabilities + = Liabilities + Dr. Cr. - +
=
Liabilities
+
=
Liabilities
+
Dr.
Cr.
-
+

+

Owner’s Equity
Owner’s Equity
Owner’s - Capital Dr. Cr. - + Revenues - Dr. Cr. - +
Owner’s
-
Capital
Dr.
Cr.
-
+
Revenues
-
Dr.
Cr.
-
+
Owner’s Drawing Dr. Cr. + -
Owner’s
Drawing
Dr.
Cr.
+
-
Expenses Dr. Cr. + -
Expenses
Dr.
Cr.
+
-

STUDY OBJECTIVE

STUDY

OBJECTIVE 33

OBJECTIVE STUDY 3 3 Identify Identify the the basic basic steps steps in in the

Identify Identify the the basic basic steps steps in in the the recording recording process. process.

STEPS

STEPS ININ THE

THE

RECORDING PROCESS

RECORDING

PROCESS

The basic steps in the recording process are:

1 Analyze each transaction for 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

ILLUSTRATION 2-12

2-12

THE RECORDING

THE

RECORDING

PROCESS

PROCESS

ILLUSTRATION ILLUSTRATION 2-12 2-12 THE RECORDING THE RECORDING PROCESS PROCESS JOURNAL LEDGER JOURNAL 1 Analyze each
JOURNAL LEDGER JOURNAL
JOURNAL
LEDGER
JOURNAL

1 Analyze each transaction

2 Enter transaction in a journal

3 Transfer journal information to ledger accounts

STUDY OBJECTIVE

STUDY

OBJECTIVE 44

OBJECTIVE STUDY 4 4 Explain Explain what what a a journal journal is is and

Explain Explain what what a a journal journal is is and and how how it it helps helps

in in the the recording recording process. process.

THE JOURNAL

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,

THE JOURNAL THE JOURNAL  Transactions are initially recorded in chronological order in a journal before
  • 2 account titles and explanations,

  • 3 references, and

  • 4 two amount columns.

THE JOURNAL

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.

THE JOURNAL THE JOURNAL The journal makes several significant contributions to the recording process: 1 It

JOURNALIZING

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

ILLUSTRATION 2-13

2-13

TECHNIQUE OFOF

TECHNIQUE

JOURNALIZING

JOURNALIZING

The The date date of of the the transaction transaction is is entered entered in in
The The date date of of the the transaction transaction is is entered entered in in the the date date column. column.
ILLUSTRATION ILLUSTRATION 2-13 2-13 OF OF TECHNIQUE JOURNALIZING JOURNALIZING The The date date of of the

ILLUSTRATION

ILLUSTRATION 2-13

2-13

TECHNIQUE OFOF

TECHNIQUE

JOURNALIZING

JOURNALIZING

The The debit debit account account title title is is entered entered at at the the extreme extreme left left

margin margin of of the the Account Account Titles Titles and and Explanation Explanation column. column.

The The credit credit account account title title is is indented indented on on the the next next line. line.

ILLUSTRATION ILLUSTRATION 2-13 2-13 OF OF TECHNIQUE JOURNALIZING JOURNALIZING The The debit debit account account title

ILLUSTRATION

ILLUSTRATION 2-13

2-13

TECHNIQUE OFOF

TECHNIQUE

JOURNALIZING

JOURNALIZING

The The amounts amounts for for the the debits debits are are recorded recorded in in the the Debit Debit

column column and and the the amounts amounts for for the the credits credits are are recorded recorded in in

the the Credit Credit column. column.

ILLUSTRATION ILLUSTRATION 2-13 2-13 OF OF TECHNIQUE JOURNALIZING JOURNALIZING The The amounts amounts for for the

ILLUSTRATION

ILLUSTRATION 2-13

2-13

TECHNIQUE OFOF

TECHNIQUE

JOURNALIZING

JOURNALIZING

A A brief brief explanation explanation of of the the transaction transaction is is given. given.
A A brief brief explanation explanation of of the the transaction transaction is is given. given.
ILLUSTRATION ILLUSTRATION 2-13 2-13 OF OF TECHNIQUE JOURNALIZING JOURNALIZING A A brief brief explanation explanation of

ILLUSTRATION

ILLUSTRATION 2-13

2-13

TECHNIQUE OFOF

TECHNIQUE

JOURNALIZING

JOURNALIZING

A A space space is is left left between between journal journal entries. entries. The The blank blank

space space separates separates individual individual journal journal entries entries and and makes makes

the the entire entire journal journal easier easier to to read. read.

ILLUSTRATION ILLUSTRATION 2-13 2-13 OF OF TECHNIQUE JOURNALIZING JOURNALIZING A A space space is is left

ILLUSTRATION

ILLUSTRATION 2-13

2-13

TECHNIQUE OFOF

TECHNIQUE

JOURNALIZING

JOURNALIZING

The The column column entitled entitled Ref. Ref. is is left left blank blank at at the the time time

journal journal entry entry is is made made and and is is used used later later when when the the

journal journal entries entries are are transferred transferred to to the the ledger ledger accounts. accounts.

ILLUSTRATION ILLUSTRATION 2-13 2-13 OF OF TECHNIQUE JOURNALIZING JOURNALIZING The The column column entitled entitled Ref.

SIMPLE

SIMPLE AND

AND COMPOUND

COMPOUND

JOURNAL ENTRIES

JOURNAL

ENTRIES

If If an an entry entry involves involves only only two two accounts, accounts, one one debit debit and and

one one credit, credit, it it is is considered considered a a simple simple entry. entry.

SIMPLE SIMPLE AND AND COMPOUND COMPOUND JOURNAL ENTRIES JOURNAL ENTRIES If If an an entry entry

ILLUSTRATION

ILLUSTRATION 2-14

2-14

COMPOUND JOURNAL

COMPOUND

JOURNAL ENTRY

ENTRY

When When three three or or more more accounts accounts are are required required in in one one

journal journal entry, entry, the the entry entry is is referred referred to to as as a a

compound compound entry. entry.

1 2 3
1
2
3

COMPOUND JOURNAL

COMPOUND

JOURNAL ENTRY

ENTRY

This is the wrong format; all debits must be listed before

This is the wrong format; all debits must be listed before

the credits are listed.

the credits are listed.

COMPOUND JOURNAL COMPOUND JOURNAL ENTRY ENTRY This is the wrong format; all debits must be listed

STUDY OBJECTIVE

STUDY

OBJECTIVE 55

OBJECTIVE STUDY 5 5 Explain Explain what what a a ledger ledger is is and

Explain Explain what what a a ledger ledger is is and and how how it it helps helps

in in the the recording recording process. process.

THE LEDGER

THE

LEDGER

The entire group of accounts maintained by a company is called the ledger.

A general ledger contains all the assets, liabilities, and owner’s equity accounts.

THE LEDGER THE LEDGER  The entire group of accounts maintained by a company is called

GENERAL

LEDGER

THE LEDGER THE LEDGER  The entire group of accounts maintained by a company is called

ILLUSTRATION

ILLUSTRATION 2-15

2-15

THE GENERAL

THE

GENERAL LEDGER

LEDGER

Individual

Assets

Individual

Liabilities

Individual

Owner’s Equity

Equipment Land Supplies Cash
Equipment
Land
Supplies
Cash
Interest Payable Salaries Expense Salaries Payable Fees Earned Accounts Payable J. Lind, Drawing Notes Payable J.
Interest Payable
Salaries Expense
Salaries Payable
Fees Earned
Accounts Payable
J. Lind, Drawing
Notes Payable
J. Lind, Capital

STUDY OBJECTIVE

STUDY

OBJECTIVE 66

OBJECTIVE STUDY 6 6 Explain Explain what what posting posting is is and and how

Explain Explain what what posting posting is is and and how how it it helps helps

in in the the recording recording process. process.

ILLUSTRATION

ILLUSTRATION 2-17

2-17

POSTING AA JOURNAL

POSTING

JOURNAL ENTRY

ENTRY

ILLUSTRATION ILLUSTRATION 2-17 2-17 A A JOURNAL POSTING ENTRY In the ledger, enter in the appropriate
ILLUSTRATION ILLUSTRATION 2-17 2-17 A A JOURNAL POSTING ENTRY In the ledger, enter in the appropriate

In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.

ILLUSTRATION

ILLUSTRATION 2-17

2-17

POSTING AA JOURNAL

POSTING

JOURNAL ENTRY

ENTRY

ILLUSTRATION ILLUSTRATION 2-17 2-17 A A JOURNAL POSTING ENTRY In the reference column of the journal,
ILLUSTRATION ILLUSTRATION 2-17 2-17 A A JOURNAL POSTING ENTRY In the reference column of the journal,
ILLUSTRATION ILLUSTRATION 2-17 2-17 A A JOURNAL POSTING ENTRY In the reference column of the journal,

In the reference column of the journal, write the account number to which the debit amount was posted.

ILLUSTRATION ILLUSTRATION 2-17 2-17 POSTING POSTING AA JOURNAL JOURNAL ENTRY ENTRY
ILLUSTRATION
ILLUSTRATION 2-17
2-17
POSTING
POSTING AA JOURNAL
JOURNAL ENTRY
ENTRY
ILLUSTRATION ILLUSTRATION 2-17 2-17 POSTING POSTING AA JOURNAL JOURNAL ENTRY ENTRY In the ledger, enter in

In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in the journal.

ILLUSTRATION

ILLUSTRATION 2-17

2-17

POSTING AA JOURNAL

POSTING

JOURNAL ENTRY

ENTRY

ILLUSTRATION ILLUSTRATION 2-17 2-17 A A JOURNAL POSTING ENTRY In the reference column of the journal,
ILLUSTRATION ILLUSTRATION 2-17 2-17 A A JOURNAL POSTING ENTRY In the reference column of the journal,
ILLUSTRATION ILLUSTRATION 2-17 2-17 A A JOURNAL POSTING ENTRY In the reference column of the journal,

In the reference column of the journal, write the account number to which the credit amount was posted.

ILLUSTRATION

ILLUSTRATION 2-18

2-18

CHART OFOF

CHART

ACCOUNTS

ACCOUNTS

Most Most companies companies have have a a chart chart of of accounts accounts that that lists lists the the accounts accounts and and

the the account account numbers numbers which which identify identify their their location location in in the the ledger. ledger.

ILLUSTRATION ILLUSTRATION 2-18 2-18 OF OF CHART ACCOUNTS ACCOUNTS Most Most companies companies have have a

ILLUSTRATION

ILLUSTRATION 2-19

2-19

INVESTMENT OFOF CASH

INVESTMENT

CASH BYBY OWNER

OWNER

Transaction

Basic

Analysis

Debit-Credit

Analysis

October 1, C.R. Byrd invests $10,000 cash in an

advertising venture to be known as the Pioneer

Advertising Agency.

The asset Cash is increased $10,000, and owner’s

equity C. R. Byrd, Capital is increased $10,000.

Debits increase assets: debit Cash $10,000.

Credits increase owner’s equity: credit C.R. Byrd,

Capital $10,000.

ILLUSTRATION

ILLUSTRATION 2-19

2-19

INVESTMENT OFOF CASH

INVESTMENT

CASH BYBY OWNER

OWNER

JOURNAL ENTRY JOURNAL ENTRY
JOURNAL ENTRY
JOURNAL ENTRY
POSTING POSTING
POSTING
POSTING

ILLUSTRATION

ILLUSTRATION 2-20

2-20

PURCHASE OFOF OFFICE

PURCHASE

OFFICE EQUIPMENT

EQUIPMENT

Transaction

Basic

Analysis

Debit-Credit

Analysis

October 1, office equipment costing $5,000 is

purchased by signing a 3-month, 12%, $5,000 note

payable.

The asset Office Equipment is increased $5,000,

and the liability Notes Payable is increased $5,000.

Debits increase assets: debit Office Equipment

$5,000. Credits increase liabilities: credit Notes

Payable $5,000.

ILLUSTRATION

ILLUSTRATION 2-20

2-20

PURCHASE OFOF OFFICE

PURCHASE

OFFICE EQUIPMENT

EQUIPMENT

JOURNAL ENTRY JOURNAL ENTRY
JOURNAL ENTRY
JOURNAL ENTRY
POSTING POSTING
POSTING
POSTING

ILLUSTRATION

ILLUSTRATION 2-21

2-21

RECEIPT OFOF CASH

RECEIPT

CASH FOR

FOR FUTURE

FUTURE SERVICE

SERVICE

Transaction

October 2, a $1,200 cash advance is received from

R. Knox, a client, for advertising services that are

expected to be completed by December 31.

Basic

Analysis

The asset Cash is increased $1,200; the liability

Unearned Fees is increased $1,200 because the

service has not been rendered yet. Note that

although many liabilities have the word “payable” in

their title, unearned fees are considered a liability

even though the word payable is not used.

Debit-Credit

Analysis

Debits increase assets: debit Cash $1,200.

Credits increase liabilities: credit Unearned Fees

$1,200.

ILLUSTRATION

ILLUSTRATION 2-21

2-21

RECEIPT OFOF CASH

RECEIPT

CASH FOR

FOR FUTURE

FUTURE SERVICE

SERVICE

JOURNAL ENTRY JOURNAL ENTRY
JOURNAL ENTRY
JOURNAL ENTRY
POSTING POSTING
POSTING
POSTING

ILLUSTRATION

ILLUSTRATION 2-22

2-22

PAYMENT OFOF MONTHLY

PAYMENT

MONTHLY RENT

RENT

Transaction

Basic

Analysis

Debit-Credit

Analysis

October 3, office rent for October is paid in cash,

$900.

The expense Rent is increased $900 because the

payment pertains only to the current month; the

asset Cash is decreased $900.

Debits increase expenses: debit Rent Expense $900.

Credits decrease assets: credit Cash $900.

ILLUSTRATION

ILLUSTRATION 2-22

2-22

PAYMENT OFOF MONTHLY

PAYMENT

MONTHLY RENT

RENT

JOURNAL ENTRY JOURNAL ENTRY
JOURNAL ENTRY
JOURNAL ENTRY
POSTING POSTING
POSTING
POSTING
ILLUSTRATION ILLUSTRATION 2-22 2-22 OF OF MONTHLY PAYMENT RENT JOURNAL ENTRY JOURNAL ENTRY POSTING POSTING
ILLUSTRATION ILLUSTRATION 2-22 2-22 OF OF MONTHLY PAYMENT RENT JOURNAL ENTRY JOURNAL ENTRY POSTING POSTING
ILLUSTRATION ILLUSTRATION 2-22 2-22 OF OF MONTHLY PAYMENT RENT JOURNAL ENTRY JOURNAL ENTRY POSTING POSTING

ILLUSTRATION

ILLUSTRATION 2-23

2-23

PAYMENT FOR

PAYMENT

FOR INSURANCE

INSURANCE

Transaction

Basic

Analysis

Debit-Credit

Analysis

October 4, $600 is paid for a one-year insurance

policy that will expire next year on September 30.

The asset Prepaid Insurance is increased $600

because the payment extends to more than the

current month; the asset Cash is decreased $600.

Note that payments of expenses that will benefit more

than one accounting period are identified as prepaid

expenses or prepayments. When a payment is made,

an asset account is debited in order to show the

service or benefit that will be received in the future.

Debits increase assets: debit Prepaid Insurance

$600. Credits decrease assets: credit Cash $600.

ILLUSTRATION

ILLUSTRATION 2-23

2-23

PAYMENT FOR

PAYMENT

FOR INSURANCE

INSURANCE

JOURNAL ENTRY JOURNAL ENTRY
JOURNAL ENTRY
JOURNAL ENTRY
POSTING POSTING Prepaid Insurance 130 Oct. 4 600
POSTING
POSTING
Prepaid Insurance
130
Oct.
4
600

ILLUSTRATION

ILLUSTRATION 2-24

2-24

PURCHASE OFOF SUPPLIES

PURCHASE

SUPPLIES ONON CREDIT

CREDIT

Transaction

Basic

Analysis

Debit-Credit

Analysis

October 5, an estimated 3-month supply of

advertising materials is purchased on account from

Aero Supply for $2,500.

The asset Advertising Supplies is increased $2,500;

the liability Accounts Payable is increased $2,500.

Debits increase assets: debit Advertising Supplies

$2,500. Credits increase liabilities: credit

Accounts Payable $2,500.

ILLUSTRATION

ILLUSTRATION 2-24

2-24

PURCHASE OFOF SUPPLIES

PURCHASE

SUPPLIES ONON CREDIT

CREDIT

JOURNAL ENTRY JOURNAL ENTRY
JOURNAL ENTRY
JOURNAL ENTRY
POSTING POSTING
POSTING
POSTING

ILLUSTRATION

ILLUSTRATION 2-25

2-25

HIRING OFOF EMPLOYEES

HIRING

EMPLOYEES

Transaction

Basic

Analysis

Debit-Credit

Analysis

October 9, hire four employees to begin work on

October 15. Each employee is to receive a weekly

salary of $500 for a 5-day work week, payable every

2 weeks

-- first payment made on October 26.

A business transaction has not occurred. There is

only an agreement between the employer and the

employees to enter into a business transaction

beginning on October 15.

A debit-credit analysis is not needed because there is

no accounting entry.

ILLUSTRATION

ILLUSTRATION 2-26

2-26

WITHDRAWAL OFOF CASH

WITHDRAWAL

CASH BYBY OWNER

OWNER

Transaction

Basic

Analysis

Debit-Credit

Analysis

October 20, C. R. Byrd withdraws $500 cash for

personal use.

The owner’s equity account C. R. Byrd, Drawing is

increased $500; the asset Cash is decreased $500.

Debits increase drawings: debit C. R. Byrd,

Drawing $500. Credits decrease assets: credit

Cash $500.

ILLUSTRATION

ILLUSTRATION 2-26

2-26

WITHDRAWAL OFOF CASH

WITHDRAWAL

CASH BYBY OWNER

OWNER

JOURNAL ENTRY JOURNAL ENTRY
JOURNAL ENTRY
JOURNAL ENTRY
POSTING POSTING
POSTING
POSTING
ILLUSTRATION ILLUSTRATION 2-26 2-26 OF OF CASH WITHDRAWAL BY BY OWNER JOURNAL ENTRY JOURNAL ENTRY POSTING
ILLUSTRATION ILLUSTRATION 2-26 2-26 OF OF CASH WITHDRAWAL BY BY OWNER JOURNAL ENTRY JOURNAL ENTRY POSTING
ILLUSTRATION ILLUSTRATION 2-26 2-26 OF OF CASH WITHDRAWAL BY BY OWNER JOURNAL ENTRY JOURNAL ENTRY POSTING

ILLUSTRATION

ILLUSTRATION 2-27

2-27

PAYMENT OFOF SALARIES

PAYMENT

SALARIES

Transaction

Basic

Analysis

Debit-Credit

Analysis

October 26, employee salaries of $4,000 are owed

and paid in cash. (See October 9 transaction.)

The expense account Salaries Expense is increased

$4,000; the asset Cash is decreased $4,000.

Debits increase expenses: debit Salaries Expense

$4,000. Credits decrease assets: credit Cash $4,000.

ILLUSTRATION

ILLUSTRATION 2-27

2-27

PAYMENT OFOF SALARIES

PAYMENT

SALARIES

JOURNAL ENTRY JOURNAL ENTRY
JOURNAL ENTRY
JOURNAL ENTRY
POSTING POSTING Salaries Expense 726 Oct. 26 4,000
POSTING
POSTING
Salaries Expense
726
Oct. 26
4,000

ILLUSTRATION

ILLUSTRATION 2-28

2-28

RECEIPT OFOF CASH

RECEIPT

CASH FOR

FOR FEES

FEES EARNED

EARNED

Transaction

Basic

Analysis

Debit-Credit

Analysis

October 31, received $10,000 in cash from Copa

Company for advertising services rendered in

October.

The asset Cash is increased $10,000; the revenue

Fees Earned is increased $10,000.

Debits increase assets: debit Cash $10,000. Credits

increase revenues: credit Fees Earned $10,000.

ILLUSTRATION

ILLUSTRATION 2-28

2-28

RECEIPT OFOF CASH

RECEIPT

CASH FOR

FOR FEES

FEES EARNED

EARNED

JOURNAL ENTRY JOURNAL ENTRY
JOURNAL ENTRY
JOURNAL ENTRY
POSTING POSTING
POSTING
POSTING

STUDY OBJECTIVE

STUDY

OBJECTIVE 77

OBJECTIVE STUDY 7 7 Prepare Prepare a a trial trial balance balance and and explain

Prepare Prepare a a trial trial balance balance and and explain explain its its purposes. purposes.

THE TRIAL

THE

TRIAL BALANCE

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 (check) that the debits equal the credits after posting.

If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting.

The procedures for preparing a trial balance consist of:

1 List the account titles and their balances. 2 Total the debit and credit columns. 3 Prove the equality of the two columns.

ILLUSTRATION

ILLUSTRATION 2-31

2-31

AA TRIAL

TRIAL BALANCE

BALANCE

The total debits The total debits must must equal equal the the total credits. total credits.
The total debits
The total debits
must must equal equal the the
total credits.
total credits.