CHAPTER 2

THE RECORDING PROCESS

CHAPTER Learning OBJECTIVES

1. Describe how accounts, debits, and credits are used to record business transactions. Debit means left and credit means right. The normal balance of an asset is a debit because assets are on the left side of the accounting equation. Assets are increased by debits and decreased by credits. The normal balance of liabilities and owner’s capital is a credit because they are on the right side of the accounting equation. Liabilities and owner’s capital are increased by credits and decreased by debits. Revenues increase owner’s equity and therefore are recorded as credits because credits increase owner’s equity. Credits increase revenues and debits decrease revenues. Expenses and drawings decrease owner’s equity and therefore are recorded as debits because debits decrease owner’s equity. Expenses and drawings are increased by debits and decreased by credits.

2. State how a journal is used in the recording process and journalize transactions. The steps in the recording process are the first three steps in the accounting cycle. These steps are: (a) analyze each transaction for its effect on the accounts, (b) record the transaction in a journal, and (c) transfer the journal information to the correct accounts in the ledger.

A journal: (a) discloses the complete effect of a transaction in one place, (b) provides a chronological record of transactions, (c) helps to prevent and locate errors because the debit and credit amounts for each entry can be easily compared, and (d) explains the transaction and, if there is one, identifies the source document.

3. Explain how a ledger helps in the recording process and post transactions. The entire group of accounts maintained by a company is called the ledger. The ledger keeps in one place all the information about changes in each of the specific account balances. Posting is the procedure of transferring journal entries to the ledger accounts. After the journal entries have been posted, the ledger will show all of the increases and decreases that have been made to each account.

4. Prepare a trial balance. A trial balance is a list of the accounts in the ledger and the account balances at a specific time. Its main purpose is to prove that debits and credits are equal after posting. A trial balance uncovers certain types of errors in journalizing and posting, and is useful in preparing financial statements. Preparing a trial balance is the fourth step in the accounting cycle.

Exercises

Exercise 1

Identify each of the following accounts as an asset, liability, equity, revenue or expense.

1. L. Ralph, Capital _____________

2. Consulting Revenue _____________

3. Accounts Payable _____________

4. Office Supplies _____________

5. Prepaid Advertising _____________

6. Machinery _____________

7. Cash _____________

8. L. Ralph, Withdrawals _____________

9. Salaries Expense _____________

10. Repairs & Maintenance _____________

11. Accounts Receivable _____________

12. Unearned Revenue _____________

13. Rent Revenue _____________

Exercise 2

For the accounts listed below, indicate if the normal balance of the account is a debit or credit.

Normal Balance

Accounts Debit or Credit

1. Repairs & Maintenance

2. Interest Receivable

3. Prepaid Insurance

4. Unearned Revenue

5. Insurance Expense

6. Service Revenue

7. Machinery

8. Notes Payable

9. Land

10. Owner Withdrawals

Exercise 3

The following accounts relate to Navdeep’s Auto Sales:

1. Land

2. Installation Revenue

3. Land

4. Notes Receivable

5. Navdeep, Capital

6. Sales

7. Prepaid Insurance

8. Interest Payable

9. Commission Expense

10. Salaries Payable

11. Unearned Revenue

12. Navdeep, Withdrawals

Instructions

Use the form below to identify the type of account and its normal balance. The first one has been completed for you as an example.

Type of Account Normal Balance

Asset Liability Equity Debit Credit

1. __X__ ______ ___ __X__ _____
2. _____ ______ ___ _____ _____
3. _____ ______ ___ _____ _____
4. _____ ______ ___ _____ _____
5. _____ ______ ___ _____ _____
6. _____ ______ ___ _____ _____
7. _____ ______ ___ _____ _____
8. _____ ______ ___ _____ _____
9. _____ ______ ___ _____ _____
10. _____ ______ ___ _____ _____
11. _____ ______ ___ _____ _____
12. _____ ______ ___ _____ _____

Exercise 4

The chart of accounts used by Fortier Copy Company is listed below:

10 Cash 30 D. Fortier, Capital

12 Accounts Receivable 35 D. Fortier, Drawings

15 Paper Supplies 40 Photocopy Revenue

18 Copy Machines 51 Advertising Expense

22 Accounts Payable 53 Rent Expense

25 Notes Payable 54 Wages Expense

28 Unearned Revenue

Instructions

Indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate columns.

——————————————————————————————————————————

Number(s) Number(s)

of account(s) of account(s)

debited credited

——————————————————————————————————————————

1. Dan Fortier invests $90,000 cash to start the business.

——————————————————————————————————————————

2. Purchased three photocopy machines for $200,000, paying $50,000 cash and signing a 5-year, 6% note for the remainder.

——————————————————————————————————————————

3. Purchased $5,000 paper supplies on credit.

——————————————————————————————————————————

4. Cash photocopy revenue amounted to $7,000.

——————————————————————————————————————————

5. Paid $500 cash for radio advertising.

——————————————————————————————————————————

6. Paid $800 on account for paper supplies purchased in transaction 3.

——————————————————————————————————————————

7. Dan Fortier withdrew $1,500 from the business for personal expenses.

——————————————————————————————————————————

8. Paid $1,200 cash for rent for the current month.

——————————————————————————————————————————

9. Received $2,000 cash advance from a customer for future copying.

——————————————————————————————————————————

10. Billed a customer for $450 for photocopy work done.

——————————————————————————————————————————

11. Paid $400 for wages for the month.

——————————————————————————————————————————

Exercise 5

Indicate whether you would use a debit or a credit to record the following changes:

Debit or Credit

1. An increase in Salary Expense

2. A decrease in Accounts Payable

3. An increase in Prepaid Insurance

4. An increase in Owner's Capital

5. A decrease in Office Supplies

6. An increase in Owner's Drawings

7. An increase in Service Revenue

8. A decrease in Accounts Receivable

9. An increase in Rent Expense

10. A decrease in Store Equipment

Exercise 6

For the accounts listed below, indicate if the normal balance of the account is a debit or credit.

Normal Balance

Accounts Debit or Credit

1. Service Revenue

2. Cash

3. Accounts Receivable

4. Accounts Payable

5. Owner's Capital

6. Prepaid Insurance

7. Insurance Expense

8. Owner's Drawings

9. Office Building

10. Notes Receivable

Exercise 7

Using the accounts listed below, state the account to be debited and the account to be credited for each of the following transactions:

1. Owner invested cash in the business.

2. Purchased equipment for cash.

3. Invoiced for services provided .

4. Purchased supplies on account.

5. Paid for supplies purchased in 4.

6. Received payment from customer in 3.

7. Paid employee salaries.

8. Owner withdrew cash for personal use.

9. Purchased equipment on credit.

10. Owner used personal funds to purchase a new computer for use in the business.

ACCOUNTS

Cash Owner’s Capital

Accounts Receivable Owner’s Drawings

Supplies Revenue

Equipment Salaries Payable

Accounts Payable Salaries Expense

Exercise 8

Identify the account to be debited and the account to be credited for each of the following transactions:

1. Purchased equipment for cash and a note payable.

2. Accepted a cash deposit from a customer for a service to be provided next month.

3. Provided services on account.

4. Purchased supplies on account.

5. Received payment form the client in 3.

6. Provided services to customer in 2 and collected cash for the remaining work done.

7. Owner paid himself.

8. Paid in full for equipment purchased in 1.

Exercise 9

Eight transactions are recorded in the following T accounts:

Cash Accounts Receivable

(1) 35,000 (2) 3,500 (5) 27,500 (7) 22,500

(7) 22,500 (3) 1,950

(4) 2,225

(6) 8,000

(8) 4,500

Supplies Equipment

(3) 1,950 (2) 13,500

T. Shaw, Capital Service Revenue

(1) 35,000 (5) 27,500

Accounts Payable T. Shaw, Drawings

(6) 8,000 (2) 10,000 (8) 4,500

Salaries Expense

(4) 2,225

Instructions

Indicate for each debit and each credit:

a) whether an asset, liability, capital, drawings, revenue, or expense account was affected, and

b) whether the account was increased (+) or decreased (–).