Chapter 2 The Recording Process

1. Chapter 2 The Recording Process Prepared by Chih-Liang Julian Liu Department of Industrial and Business Management Chang Gung University

2. Learning Objectives After studying this chapter, you should be able to: [1] Explain what an account (帳戶)is and how it helps in the recording process(記錄程序). [2] Define debits (借方) and credits (貸方)and explain their use in recording business transactions. [3] Identify the basic steps in the recording process. [4] Explain what a journal (日記簿)is and how it helps in the recording process. Chapter 2 The Recording Process

3. Learning Objectives [5] Explain what a ledger (分類帳)is and how it helps in the recording process. [6] Explain what posting (過帳)is and how it helps in the recording process. [7] Prepare a trial balance (試算表)and explain its purposes. Chapter 2 The Recording Process

4. Preview of Chapter 2

5. The Account (帳戶；會計科目) • 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.

6. The Account (帳戶；會計科目) • Debit (left) and credit (right) are directional signals. • They indicate which side of a T account a number will be recorded on. • Entering an amount on the left side of an account (debiting the account; 借記該帳戶) • Making an entry on the right side is crediting the account (貸記該帳戶) • Debit (Dr.) and Credit (Cr.)

7. Debits and Credits If Debit amounts are greater than Credit amounts, the account will have a debit balance. Transaction #1 $10,000 $3,000 Transaction #2 Transaction #3 8,000 Balance $15,000

8. Debits and Credits (Cont.) • Debits on the left and credits on the right are an accounting rule. • The rule applies to all accounts. Cash (Debits) (Credits) 15,000 1,200 1,500 600 7,000 1,700 250 1,300 Balance 8,050

9. Debits and Credits (Cont.) If Debit amounts are less than Credit amounts, the account will have a credit balance. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance $1,000

10. Debits and Credits (Cont.) • Debit balance (借餘) • Credit balance(貸餘) Account Name Account Name > < (Debits) (Credits) (Debits) (Credits) Credit balance Debit balance

11. Debits and Credits (Cont.) • Assets - Debits should exceed credits. • Liabilities – Credits should exceed debits. • Normal balance is on the increaseside.

12. Debits and Credits (Cont.) • Equity – Credits should exceed debits.

13. Debits and Credits (Cont.) • Issuance of share capital,retained earningsand revenues increase equity (credit).

14. Debits and Credits (Cont.) • Dividends and Expenses have the opposite effect: decrease equity (debit).

15. Debit/Credit Rules Normal Balance Debit Normal Balance Credit

16. Debit/Credit Rules (Cont.) Statement of Financial Position Income Statement - + Asset Liability Equity Revenue Expense = Debit Credit

17. Debit/Credit Rules Question Debits: • increase both assets and liabilities. • decrease both assets and liabilities. • increase assets and decrease liabilities. • decrease assets and increase liabilities.

18. Debit/Credit Rules Question Accounts that normally have debit balances are: • assets, expenses, and revenues. • assets, expenses, and equity. • assets, liabilities, and dividends. • assets, dividends, and expenses.

19. Equity Relationships Illustration 2-11

20. Summary of Debit/Credit Rules Relationship among the assets, liabilities and equity of a business: Illustration 2-12 The equation must be in balance after every transaction. For every Debit there must be a Credit.

21. Debit and Credit Procedure • Double-entry system (複式簿記制度) • 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. • The sum of all the debitsmust equal the sum of the credits. • This system is much more efficient than procedure used in Chapter 1.

22. Steps in the Recording Process Double Entry (Debit/Credit) Transactions (交易) Journal (日記簿) Ledger (分類帳) Journalizing (記錄) Posting (過帳) Analysis Accounting Equation

23. Steps in the Recording Process Illustration 2-13 Transfer journal information to ledger accounts Analyze each transaction Enter transaction in a journal Business documents (交易憑証),, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.

24. Steps in the Recording Process The Journal (日記簿) • Book of original entry (原始分錄簿). • Transactions recorded in chronological order (時間順序). • Contributions to the recording process: • Discloses the complete effects of a transaction. • Provides a chronological record of transactions. • Helps to prevent or locate errors because the debit and credit amounts can be easily compared.

25. Entry (分錄) • Companies make separate journal entries for each transaction. • A complete entry consists of (1) the date of the transaction (2) the accounts and amounts to be debited and credited (3) a brief explanation of the transaction.

26. Entry (Cont.) • A simple entry (簡單分錄) includes only two accounts, one debit and one credit. • A compound entry (複合分錄) requires three or more accounts (1) three accounts, two debits and one credit, (2) three accounts, one debit and two credits, (3) four accounts, two debits and two credits.

27. Steps in the Recording Process Journalizing - Entering transaction data in the journal. Illustration: On September 1, shareholders’ invested €15,000 cash in the corporation in exchange for share of stock, and Softbyte purchased computer equipment for €7,000 cash. Illustration 2-14 General Journal Sept. 1 Cash 15,000 • Share capital-ordinary 15,000 Equipment 7,000 • Cash 7,000

28. Transaction Analysis Transaction (1). Investment by Shareholders. Ray and Barbara Neal decides to open a computer programming service which he names Softbyte. On September 1, 2014, they invest €15,000 cash in exchange for €15,000 of ordinary shares. Illustration 1-10

29. Transaction Analysis Transaction (2). Purchase of Equipment for Cash. Softbyte purchases computer equipment for €7,000 cash. Illustration 1-10

30. Steps in the Recording Process Simple and Compound Entries Illustration: On July 1, Tsai Company purchases a delivery truck costing NT$420,000. It pays NT$240,000 cash now and agrees to pay the remaining NT$180,000 on account. Illustration 2-15 General Journal July 1 Equipment 420,000 • Cash 240,000 180,000 • Accounts payable

31. Steps in the Recording Process The Ledger (分類帳) • General Ledger(總分類帳)contains the entire group of accounts (asset, liability, equity, revenue andexpense) maintained by a company. Illustration 2-16

32. Steps in the Recording Process Standard Form of Account • T-account form used in accounting textbooks. • Ledger form used in practice (three-column form of account; 三欄式格式). Illustration 2-17

33. Posting (過帳)– process of transferring amounts from the journal to the ledger accounts. Illustration 2-18

34. Posting Question Posting: • normally occurs before journalizing. • transfers ledger transaction data to the journal. • is an optional step in the recording process. • transfers journal entries to ledger accounts.

35. Chart of Accounts (會計科目表) Accounts and account numbers arranged in sequence in which they are presented in the financial statements. Illustration 2-19

36. 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

37. The Recording Process Illustrated Illustration 2-21

38. The Recording Process Illustrated Illustration 2-22

39. The Recording Process Illustrated Illustration 2-23

40. The Recording Process Illustrated Illustration 2-24

41. The Recording Process Illustrated Illustration 2-25

42. The Recording Process Illustrated Illustration 2-26

43. The Recording Process Illustrated Illustration 2-27

44. The Recording Process Illustrated Illustration 2-28

45. The Recording Process Illustrated Illustration 2-29

46. Basel Company recorded the following transactions in a general journal during the month of March. Post these entries to the Cash account. Mar. 4 Cash 2,280 Service Revenue 2,280 Mar. 15 Salaries and Wages Expense 400 Cash 400 Mar. 19 Utilities Expense 92 Cash 92

47. Illustration 2-31

48. Trial Balance (試算表) • A list of accounts and their balances at a given time.Purpose is to prove that debits equal credits. Illustration 2-32 =

49. Trial Balance Limitations of a Trial Balance • The trial balance may balance even when • a transaction is not journalized, • a correct journal entry is not posted, • a journal entry is posted twice, • incorrect accounts are used in journalizing or posting, or • offsetting errors are made in recording the amount of a transaction.