THE RECORDING PROCES S

CHAPTER 2

THE RECORDING PROCES S

CHAPTER LEARNING OBJECTIVES

• Explain what an account is and how it helps in the recording process. An account is a

record of increases and decreases in specific asset, liability, and equity items.

• Define debits and credits and explain their use in recording business transactions. The

terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, share capital-ordinary, retained earnings, and revenues are increased by credits and decreased by debits.

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

are: (a) analyze each transaction for its effects on the accounts, (b) enter the transaction information in a journal, (c) transfer the journal information to the appropriate accounts in the ledger.

• Explain what a journal is and how it helps in the recording process. The initial

accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared.

• Explain what a ledger is and how it helps in the recording process. The ledger is the

entire group of accounts maintained by a company. The ledger keeps in one place all the information about changes in specific account balances.

• Explain what posting is and how it helps in the recording process. Posting is the transfer

of journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts.

• Prepare a trial balance and explain its purposes. A trial balance is a list of accounts and

their balances at a given time. Its primary purpose is to prove the equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.

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Test Bank for Financial Accounting: IFRS Edition, 3e

For Instructor Use Only

• - 2

TRUE-FALSE STATEMENTS

• A new account is opened for each transaction entered into by a business firm.

Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

• The recording process becomes more efficient and informative if all transactions are

recorded in one account.

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• When the volume of transactions is large, recording them in tabular form is more efficient

than using journals and ledgers.

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• An account is often referred to as a T-account because of the way it is constructed.

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• A debit to an account indicates an increase in that account.

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• If a revenue account is credited, the revenue account is increased.

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• The normal balance of all accounts is a debit.

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• Debit and credit can be interpreted to mean increase and decrease, respectively.

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• The double-entry system of accounting refers to the placement of a double line at the end

of a column of figures.

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• A credit balance in a liability account indicates that an error in recording has occurred.

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• The dividends account is a subdivision of the retained earnings account and appears as

an expense on the income statement.

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• Revenues are a subdivision of retained earnings.

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• Under the double-entry system, revenues must always equal expenses.

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• Transactions are entered in the ledger first and then they are analyzed in terms of their

effect on the accounts.

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• All accounts reported in the statement of financial position are increased by using debits

on the left-hand side of the T-account.

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The Recording Process

For Instructor Use Only

• - 3
• The rules for debit and credit and the normal balance of Share Capital–Ordinary are the

same as for assets.

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• Companies report share capital–ordinary and dividends in the equity section of the

statement of financial position.

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• Transaction information may be entered directly into the accounts without using a journal.

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• Business documents can provide evidence that a transaction has occurred.

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• Each transaction must be analyzed in terms of its effect on the accounts before it can be

recorded in a journal.

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• Transactions are entered in the ledger accounts and then transferred to journals.

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• All business transactions must be entered first in the general ledger.

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• A simple journal entry requires only one debit to an account and one credit to an account.

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• A compound journal entry requires several debits to one account and several credits to

one account.

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• Transactions are recorded in alphabetic order in a journal.

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• A journal is also known as a book of original entry.

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• The complete effect of a transaction on the accounts is disclosed in the journal.

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• Entries that impact the income statement are called simple entries, whereas entries that

impact the statement of financial position are called compound entries.

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• The general ledger contains all the accounts that are reported on the statement of

financial position, whereas the general journal contains all the accounts that are reported on the income statement.

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• The chart of accounts lists accounts and the account numbers that identify their location in

the ledger starting with the accounts that are reported on the income statement.

Ans: F LO5 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Test Bank for Financial Accounting: IFRS Edition, 3e

For Instructor Use Only

• - 4
• The account titles used in journalizing transactions need not be identical to the account

titles in the ledger.

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• The chart of accounts is a special ledger used in accounting systems.

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• A general ledger should be arranged in the order in which accounts are presented in the

financial statements, beginning with the statement of financal position accounts.

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• The number and types of accounts used by different business enterprises are the same if

generally accepted accounting principles are being followed by the enterprises.

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• Posting is the process of proving the equality of debits and credits in the trial balance.

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• After a transaction has been posted, the reference column in the journal should not be

blank.

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• Posting involves transferring the journalized debits and credits to the statement of

financial position.

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• The trial balance lists accounts and their balances at a given point in time in the order in

which they appear on the statement of financial position.

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• When debits do not equal credits on the trial balance, this indicates that the company has

net income that needs to be transferred to the retained earnings account.

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• Errors on the statement of financial position are called transpositions and errors on the

income statement are called irregularities.

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• Currency signs are typically used only in the trial balance and the financial statements.

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• The general rules of debit and credit, and the steps in the recording process–the journal,

ledger, and chart of accounts–are the same under both GAAP and IFRS.

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• A trial balance does not prove that all transactions have been recorded or that the ledger

is correct.

Ans: T LO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting