CHAPTER 2: Recording Process ( SWD: Lecture Review)
What is an account?
An account is an accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. For example, Softbyte (the company discussed in Chapter 1) would have separate accounts for Cash, Accounts
Receivable, Accounts Payable, Service Revenue, and Salaries Expense. In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account resembles the letter T, we refer to it as a T account.
Debits and Credits
The terms debit and credit are directional signals: Debit indicates left, and credit indicates right.They indicate which side of a T account a number will be recorded on. Entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account.We commonly abbreviate debit as Dr. and credit as Cr.
Double-entry accounting system
• 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.
• DEBITS must equal CREDITS.
If Debits are greater than Credits, the account will have a debit balance.
If Credits are greater than Debits, the account will have a credit balance.

The normal balance of an account is on the side where an increase in the account is recorded.

The Journal
Companies initially record transactions in chronological order (the order in which they occur). Thus, the journal is referred to as the book of original entry. For each transaction the journal shows the debit and credit effects on specific accounts.
Ledger: A General Ledger contains the entire group of accounts maintained by a company
Trial Balance: A list of accounts and their balances at a given time.

Use of Dollar Signs
Note that dollar signs do not appear in journals or ledgers. Dollar signs are typically used only in the trial balance and the financial statements. Generally, a dollar sign is shown only for the first item in the column and for the total of that column.
A single line (a totaling rule) is placed under the column of figures to be added or subtracted. Total amounts are double-underlined to indicate they are final sums.

Class Exercise – 1
For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance.
Increase (+), Decrease (–).
Debit_

_Credit_

Normal Balance

1. Salary expense.

_______

_______

________

2. Accounts receivable.

_______

_______

________

3. Service revenue.

_______

_______

________

4. Smith, Capital.

_______

_______

________

5. Smith, Drawing.

_______

_______

________

Class Exercise – 2
Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction.
1. Kevin Diaz invested £50,000 cash to start an appliance repair business.
2. Hired an employee to be paid £400 per week, starting tomorrow.
3. Paid two years’ rent in advance, £7,200.
4. Paid the worker’s weekly wage.
5. Recorded revenue earned and received for the week, £1,500.
Date

Account Title & Explanation

Ref

Debit (£)

Credit (£)

Class Exercise – 3
For each of the following transactions of Chen Inc., identify the account to be debited and the account to be credited. 1. Purchased 18-month insurance policy for cash.
2. Paid weekly payroll.
3. Purchased supplies on account.
4. Received utility bill to be paid at later date.

Class Exercise – 4
Journalize the following transactions for Mercado Company for June 2010, the company’s first month of operations.
You may omit explanations for the transactions.
1. Purchased equipment on account for £3,000.
2. Billed customers £5,000 for services performed.
3. Made payment of £1,500 on account for equipment purchased earlier in month.
4. Collected £2,900 on customer accounts.

Class Exercise – 5
Use the information of Class Exercise – 5 to answer the following questions.
1. What is the balance in Accounts Payable at June 30, 2010?
2. What is the balance in Accounts Receivable at June 30, 2010?

Class Exercise – 6
The transactions of the Buy It Now Store are recorded in the general journal below. You are to post the journal entries to general ledger.
General Journal
____________________________________________________________________________________
Date
Account Titles
Debit Credit
____________________________________________________________________________________
2010
Aug.
5
Accounts Receivable
2,800
Service Revenue
2,800
10
Cash
3,000
Service Revenue
3,000
19
Rent Expense
1,000
Cash
1,000
25
Cash
1,400
Accounts Receivable
1,400

Class Exercise – 7
Prepare a trial balance from the ledger accounts of Attica Company as of January 31, 2010.
Accounts Payable
£ 500
Rent Expense
Accounts Receivable
2,000
Service Revenue
Cash
1,000
Supplies
Attica, Capital
2,200
Wages Expense
Attica, Drawing
1,000

£ 500
3,000
200
1,000

Class Exercise – 8
Under a double-entry system, show how the entry in each statement is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account.
Debit or Credit
1. An increase in Salary Expense.
DEBIT
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.
___________________
Class Exercise – 9
For the accounts listed below, indicate if the normal balance of the account is a debit or credit.

Accounts
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Service Revenue
Rent Expense
Accounts Receivable
Accounts Payable
Owner's Capital
Office Supplies
Insurance Expense
Owner's Drawing
Office Building
Notes Payable

Normal Balance
Debit or Credit
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Class Exercise – 10
For each of the following accounts, indicate the effects of (a) a debit and (b) the normal account balance.
1
2
3
4
5
6

Notes Payable
Prepaid Insurance
Salaries Expense
Repair Revenue
Equipment
M. Mantle, Capital

Debit Effect
Decrease

Normal Balance
Credit

Class Exercise – 11
For each of the following accounts indicate (a) the type of account (Asset, Liability, Owner's Equity, Revenue, Expense), (b) the debit and credit effects, and (c) the normal account balance.

Account
0
1
2
3
4
5
6
7
8

Cash
Accounts Payable
Accounts Receivable
S. Bleu, Capital
S. Bleu, Drawing
Service Revenue
Insurance Expense
Notes Payable
Equipment

Debit or Credit

Asset

Debit increases, credit decreases
Debit ________, credit ________
Debit ________, credit ________
Debit ________, credit ________
Debit ________, credit ________
Debit ________, credit ________
Debit ________, credit ________
Debit ________, credit ________
Debit ________, credit ________

Normal
Account
Debit

Class Exercise – 12
Match the items below by entering the appropriate code letter in the space provided.
A. Account
F. Journal
B. Normal account balance
G. Posting
C. Debit
H. Chart of accounts
D. Revenue account
I.
Trial balance
E. Compound entry
J. Simple entry
_____ 1. An entry that involves three or more accounts.
_____ 2. Transferring journal entries to ledger accounts.
_____ 3. The side which increases an account.
_____ 4. A list of all the accounts used by an enterprise.
_____ 5. A record of increases and decreases in specific assets, liabilities, and owner's equity items.
_____ 6. Left side of an account.
_____ 7. An entry that involves only two accounts.
_____ 8. A book of original entry.
_____ 9. A list of accounts and their balances at a given time.
_____ 10. Has a credit normal balance