Essay on Chapter 2 Summary

CHAPTER 2 SUMMARY: THE RECORDING PROCESS

STUDY OBJECTIVES

EXPLAIN WHAT AN ACCOUNT IS AND HOW IT HELPS IN THE RECORDING PROCESS.

DEFINE DEBITS AND CREDITS AND ILLUSTRATE HOW THEY ARE USED TO RECORD BUSINESS TRANSACTIONS.

DESCRIBE THE BASIC STEPS IN THE RECORDING PROCESS.

EXPLAIN WHAT A JOURNAL IS AND HOW IT HELPS IN THE RECORDING PROCESS, AND JOURNALIZE BUSINESS TRANSACTIONS.

EXPLAIN WHAT A LEDGER IS AND HOW IT HELPS IN THE RECORDING PROCESS.

EXPLAIN WHAT POSTING IS AND HOW IT HELPS IN THE RECORDING PROCESS.

EXPLAIN THE PURPOSE OF, AND PREPARE A TRIAL BALANCE.

CHAPTER 2 SUMMARY: THE RECORDING PROCESS

1. The Account

An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item.

1.2 An account consists of three parts:

1.2.1 The title of the account.

1.2.2 A left or debit side.

1.2.3 A right or credit side.

1.3 The positioning of these parts resembles the letter T, and therefore the account form is called a T account.

Use ILLUSTRATION 2-1 to explain the concept of an account. Emphasize that a T account is used frequently in the classroom because it can be constructed quickly and it contains the three major parts of an account.

2. Debits and Credits

2.1 The term debit refers to the left side of an account and credit refers to the right, side of an account.When the debit amounts exceed the credits, an account has a debit balance; when the reverse is true, the account has a credit balance.

2.2 In a double-entry system, equal debit and credit amounts are entered in the accounts for each transaction. Thus, the total debits will always equal the total credits

ILLUSTRATION 2-2 can be used to explain the debit and credit rules for increasing and decreasing accounts. Emphasize that the normal balance of an account is the same as the increase side.

2.3 Assets, drawings, and expenses are increased by debits and decreased by credits.

2.4 Liabilities, owner’s capital, and revenues are increased by credits and decreased by debits.

ILLUSTRATION 2-3 is a short exercise that can be used in class to review the normal balances of accounts introduced in Chapters 1 and 2.

2.5 The expanded basic equation is:

Assets = Liabilities + Capital - Drawings + Revenues - Expenses

3. Steps in the Recording Process

3.1 The basic steps in the recording process are:

3.1.1 Analyse each transaction in terms of its effect on the accounts.

3.1.2 Enter the transaction information in a journal (book of original entry).

3.1.3 Transfer the journal information to the appropriate accounts in the ledger (book of accounts).

Use ILLUSTRATION 2-4 to present a conceptual overview of the basic steps in the recording process.

4. The General Journal / Journalizing

4.1 Transactions are initially recorded in a journal (book of original entry). Entering transaction data in the general journal is called journalizing.

ILLUSTRATION 2-5 can be used to demonstrate the proper form and content when entering a transaction in the general journal.

4.2 The general journal:

4.2.1 Discloses in one place the complete effect of a transaction.

4.2.2 Provides a chronological record of transactions.

4.2.3 Helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.

4.2.4 Provides an explanation of the transaction and, where applicable, identifies the source document.

4.2.5 A simple journal entry involves only two accounts (one debit and one credit) whereas a compound journal entry involves three or more accounts.

ILLUSTRATION 2-6 is a short exercise that can be used in class to demonstrate the analysis and recording of business transactions in a general journal.

5. The General Ledger

5.1 The general ledger is the entire group of accounts maintained by a company.

Use ILLUSTRATION 2-7 to discuss the different forms of accounts.

5.1.1 The ledger provides information about changes in specific account balances for

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