THE RECORDING PROCES S

CHAPTER 2

THE RECORDING PROCES S

CHAPTER LEARNING OBJECTIVES

• Describe how accounts, debits, and credits are used to record business transactions .

An account is a record of increases and decreases in specific asset, liability, and owner’s equity items. The terms debit and credit are synonymous with left and right. Assets, drawings, and expenses are increased by debits and decreased by credits. Liabilities, owner’s capital, and revenues are increased by credits and decreased by debits.

• Indicate how a journal is used 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, and (c) transfer the journal information to the appropriate accounts in the ledger. 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 easily compared.

• Explain how a ledger and posting help in the recording process. The ledger is the entire

group of accounts maintained by a company. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances. 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. 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.

TRUE-FALSE STATEMENTS

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

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• 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 drawing account is a subdivision of the owner’s capital account and appears as an

expense on the income statement.

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• Revenues are a subdivision of owner’s capital.

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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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• 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.

The Recording Process

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• The account titles used in journalizing transactions do not need to 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 balance sheet 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 be filled

in.

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

is correct.

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• The double-entry system is a logical method for recording transactions and results in

equal amounts for debits and credits for each transaction.

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• The normal balance of an expense is a credit.

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• The journal provides a chronological record of transactions.

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• The ledger is merely a bookkeeping device and therefore does not provide much useful

data for management.

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• The chart of accounts is a listing of the accounts and the account numbers which identify

their location in the ledger.

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• The primary purpose of a trial balance is to prove the mathematical equality of the debits

and credits after posting.

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• The trial balance will not balance when incorrect account titles are used in journalizing or

posting.

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