Chapter 2 The Recording Process 1 The Account a Account An accounting record of increases and decreases in a specific asset liability or owner s equity item helps make clear the effects of transactions on individual accounts i Have separate accounts for cash accounts receivable accounts payable service revenue salaries expense etc 1 Consists of three parts A title a left debit side and a right credit side 2 Balance of account will be a debit balance if debit exceeds credit or have a credit balance if credit exceeds debit 3 Debits MUST Credit ii Usually referred to as a T Account b Debit Left increases in account i Increase Assets Decrease Liabilities c Credit Right decreases in account i Decrease Assets Increase Liabilities d Double Entry System The equality of debits and credits e Normal Balance Debits to an asset account should exceed the credits to that account and credits to a liability account should exceed the debits to that account i The normal balance is on the side when an increase in the account is recorded Normal balance is a credit for liabilities a debit for assets f Common Stock Companies issue common stock in exchange for the owner s investment paid into the corporation common stock account i When a company invests cash in the business in exchange for stock it debits cash and credits g Retained Earnings Net income that is retained in the business portion of stockholder s equity that the company has accumulated through the profitable operation of the business i Credits net income increase the account and debits dividends or net losses decrease the h Dividend Company s distribution to its stockholders on a pro rata equal basis most common form is a cash dividend reduces stockholder s claims on retained earnings i Debits increase account and credits decrease it i Revenues Credits increase revenue accounts and debits decrease them i This effect is the same as the effect on stockholder s equity Revenues increase equity j Expenses Debits increase expense accounts and credits decrease them 2 Steps In The Recording Process a There are three i Analyze each transaction for its effects on the accounts 1 Evidence of transactions sales slips checks bills cash register tapes ii Enter the transaction information in a journal iii Transfer the journal information to the appropriate accounts in the ledger b Journal Book of original entry in chronological order that shows the debit and credit effects of specific accounts i Most companies use general journals which consist of the date of the transaction the accounts amounts to be debited and credited and a brief explanation of the transaction per journal entry c Simply Entry An entry that involves only two accounts one debit one credit d Compound Entry An entry that involves more than two accounts i All debits STILL must be listed before credits e Ledger The entire group of accounts maintained by a company keeps in one place all the information about changes in specific account balances i General Ledger Contains all the asset liability and stockholder s equity accounts provides the balances in various accounts 1 Arrange this ledger in the same sequence in which they present the accounts in the financial statements beginning with the balance sheet accounts a Asset accounts then liability accounts then stockholder s equity accounts then revenues expenses ii Arrange ledger in a Three Column Form of Account Three money columns debit credit and balance Balance is determined after each transaction f Chart of Accounts Lists the accounts and the account numbers that identify their location in the ledger i Usually starts with the balance sheet accounts and follows with the income statement accounts g Posting Transferring journal entries to the ledger account 3 Trial Balance List of accounts and their balances at a given time a Usually prepare this at the end of an accounting period by listing the accounts in the order in which they appear in the ledger b Purpose To check that the debits equal the credits after posting c Limitations The trial balance has few times when it may still balance even though it is incorrect i A transaction is not journalized ii A correct journal entry is not posted iii A journal entry is posted twice iv Incorrect accounts are used in journalizing or posting v Offsetting errors are made in recording the amount of a transaction
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