Recording Process PDF

Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations The Recording Process STUDY OBJECTIVES 1. EXPLAIN WHAT AN ACCOUNT IS AND HOW IT HELPS IN THE RECORDING PROCESS. 2. DEFINE D...

Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations The Recording Process STUDY OBJECTIVES 1. EXPLAIN WHAT AN ACCOUNT IS AND HOW IT HELPS IN THE RECORDING PROCESS. 2. DEFINE DEBITS AND CREDITS AND EXPLAIN HOW THEY ARE USED TO RECORD BUSINESS TRANSACTIONS. 3. IDENTIFY THE BASIC STEPS IN THE RECORDING PROCESS. 4. EXPLAIN WHAT A JOURNAL IS AND HOW IT HELPS IN THE RECORDING PROCESS. 5. EXPLAIN WHAT A LEDGER IS AND HOW IT HELPS IN THE RECORDING PROCESS. 6. EXPLAIN WHAT POSTING IS AND HOW IT HELPS IN THE RECORDING PROCESS. 7. PREPARE A TRIAL BALANCE AND EXPLAIN ITS PURPOSES. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 1 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations The Account 1. (S.O. 1) An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner's equity item. 2. In its simplest form, an account consists of (a) the title of the account, (b) a left or debit side, and (c) a right or credit side. The alignment of these parts resembles the letter T, and therefore the account form is called a T-account. Debits and Credits 3. (S.O. 2) The terms debit and credit mean left and right, respectively. a. The act of entering an amount on the left side of an account is called debiting the account and making an entry on the right side is crediting the account. b. When the debit amounts exceed the credits, an account has a debit balance; when the reverse is true, the account has a credit balance. 4. In a double-entry system, equal debits and credits are made in the accounts for each trans- action. Thus, the total debits will always equal the total credits. 5. The effects of debits and credits on assets and liabilities and the normal balances are: Accounts Debits Credits Normal Balance Assets Increase Decrease Debit Liabilities Decrease Increase Credit 6. Accounts are kept for each of the four subdivisions of owner's equity: capital, drawings, revenues, and expenses. 7. The effects of debits and credits on the owner's equity accounts and the normal balances are: Accounts Debits Credits Normal Balance Owner's Capital Decrease Increase Credit Owner's Drawing Increase Decrease Debit Revenues Decrease Increase Credit Expenses Increase Decrease Debit 8. The expanded basic equation is: Assets = Liabilities + Owner's Capi- tal - Owner's Drawing + Revenues - Expenses Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 2 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations The Recording Process 9. (S.O. 3) The basic steps in the recording process are: a. Analyze each transaction for its effect on the accounts. b. Enter the transaction information in a journal. c. Transfer the journal information to the appropriate accounts in the ledger. The Journal 10. (S.O. 4) Transactions are initially recorded in a journal. a. A journal is referred to as a book of original entry. b. A general journal is the most basic form of journal. 11. The journal makes several significant contributions to the recording process: a. It discloses in one place the complete effect of a transaction. b. It provides a chronological record of transactions. c. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared. 12. Entering transaction data in the journal is known as journalizing. When three or more accounts are required in one journal entry, the entry is known as a compound entry. The Ledger 13. (S.O. 5) The ledger is the entire group of accounts maintained by a company. It keeps in one place all the information about changes in account balances and it is a source of useful data for management. 14. The standard form of a ledger account has three money columns and the balance in the account is determined after each transaction. 15. (S.O. 6) Posting is the procedure of transferring journal entries to the ledger accounts. The following steps are used in posting: a. In the ledger, enter in the appropriate columns of the account(s) debited the date, jour- nal page, and debit amount. b. In the reference column of the journal, write the account number to which the debit amount was posted. c. Perform the same steps in a. and b. for the credit amount. The Chart of Accounts 16. A chart of accounts is a listing of the accounts and the account numbers which identify their location in the ledger. The numbering system usually starts with the balance sheet accounts and follows with the income statement accounts. 11 Cash 41 Fees Earned 12 Accounts Receivable 50 Wages Expense 14 Supplies 51 Office Rent 15 Prepaid Insurance 52 Equipment Rent Expense 17 Office Equipment 53 Utilities Expense 21 Accounts Payable 54 Music Expense 23 Unearned Revenue 55 Advertising Expense 31 Lee Chang, Capital 56 Supplies Expense 32 Lee Chang, Drawing 59 Miscellaneous Expense Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 3 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations The Basic Steps 17. The basic steps in the recording process are illustrated as follows: Transaction On September 4, Fesmire Inc. pays $3,000 cash to a creditor in full pay- ment of the balance due. Basic analysis The liability Accounts Payable is decreased $3,000, and the asset Cash is decreased $3,000. Debit-credit Debits decrease liabilities: debit Accounts Payable $3,000. analysis Credits decrease assets: credit Cash $3,000. Journal Sept. 4 Accounts Payable 26 3,000 entry Cash 1 3,000 (Paid creditor in full) Posting Cash 1 Accounts Payable 26 Sept. 4 3,000 Sept. 4 3,000 The following transactions were completed during July, the second month of the busi- ness operations: 1 Lee Chang made an additional investment in Music Depot by depositing P2,500 in Music Depot’s checking account. 1 Instead of continuing to share office space with a local real estate agency, Lee decided to rent office a local music store. Paid rent for July, P2,000. 1 Paid a premium of P2,700 for a comprehensive insurance policy covering liability, theft, and fire. The policy covers a one year period. 2 Received P1,350 on account. 3 On behalf of Music Depot, Lee signed a contract with a local radio station WHBD, to provide a guest disc jockey for 80 hours per month for a monthly fee of P3,600. Any additional hours beyond 80 will be billed to WHBD at P40 per hour. In accordance with the contract, lee received P7,200 from WHBD as an advance payment for the first two months. 3 Paid P250 on account. 4 Paid an attorney P500 for reviewing the July 3rd contract with WHBD. (Recorded as Miscellaneous Expense.) 5 Purchase office equipment on account from One-Stop Office Mart, P5,000. 8 Paid for a newspaper advertisement, P200. 11 Received P800 for serving as a disc jockey for a party. 13 Paid P600 to a total audio electronics store for rental of digital recording equipment. 14 Paid wages of P1,000 to receptionist and part-time assistant. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 4 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 16 Received P1,750 for serving as a disc jockey for a wedding reception. 18 Purchased supplies on account, P680. 21 Paid P420 to Upload Music for use of its current music demos in making various music sets. 22 Paid P800 to a local radio station to advertise the services of Music Depot twice daily for the remainder of July. 23 Served as disc jockey for a party for P2,500. Received P750, with the remainder due August 2, 2010. 27 Paid electric bill, P560. 28 Paid wages of P1,000 to receptionist and part-time assistant. 29 Paid miscellaneous expenses, P150. 30 Served as a disc jockey for a charity ball for P1,800. Received P400, with the remainder due on August 9, 2010. 31 Received P2,800 for serving as a disc jockey for a party. 31 Paid P1,100 royalties (music expense) to National Music Clearing for use of various artists’ music during July. 31 Withdrew P1,500 cash from Music Depot for personal use. Music Depot’s chart of accounts and the balance of accounts as of June 1, 2010 (normal balances), are as follows: 11 Cash 8,010 41 Fees Earned 5,650 12 Accounts Receivable 1,350 50 Wages Expense 400 14 Supplies 170 51 Office Rent 750 15 Prepaid Insurance - 52 Equipment Rent 500 Expense 17 Office Equipment - 53 Utilities Expense 300 21 Accounts Payable 250 54 Music Expense 1,290 23 Unearned Revenue - 55 Advertising Expense 600 31 Lee Chang, Capital 8,000 56 Supplies Expense 180 32 Lee Chang, Drawing 200 59 Miscellaneous Expense 150 INSTRUCTIONS 1. Enter the July 1, 2010 accounts balances in the appropriate balance column of a four-column account. Write Balance in the Item column, and place a check mark (/) in the Posting Reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) You may use T-accounts in lieu of formal accounts. 2. Analyze and journalize each transaction in a two-column journal, omitting journal entry explanations. 3. Post the journal to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare an unadjusted trial balance trial balances as of July 31, 2010. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 5 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations The Trial Balance 18. (S.O. 7) A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of the debits and credits after posting. 19. A trial balance does not prove that all transactions have been recorded or that the ledger is correct because the trial balance may still balance when a. a transaction is not journalized. b. a correct journal entry is not posted. c. an entry is posted twice. d. incorrect accounts are used in journalizing or posting. e. offsetting errors are made in recording the amount of a transaction. MUSIC DEPOT Unadjusted Trial Balance July 31, 2010 Debit Credit Balances Balances Cash.............................................................................................. 12,780 Accounts Receivable..................................................................... 3,150 Supplies......................................................................................... 850 Prepaid Insurance......................................................................... 2,700 Office Equipment........................................................................... 5,000 Accounts Payable.......................................................................... 5,680 Unearned Revenue....................................................................... 7,200 Lee Chang, Capital........................................................................ 10,500 Lee Chang, Drawing...................................................................... 1,700 Fees Earned.................................................................................. 15,300 Wages Expense............................................................................ 2,400 Office Rent Expense...................................................................... 2,750 Equipment Rent Expense.............................................................. 1,100 Utilities Expense............................................................................ 860 Music Expense.............................................................................. 2,810 Advertising Expense...................................................................... 1,600 Supplies Expense.......................................................................... 180 Miscellaneous Expense................................................................. 800 38,680 38,680 Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 6 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 20 MINUTE QUIZ Circle the correct answer. True/False 1. Assets are increased by debits and liabilities are decreased by credits. True False 2. The owner’s capital account is increased by credits. True False 3. An account will have a credit balance if the total debit amounts exceed the total credit amounts. True False 4. The ledger is the entire group of accounts and is referred to as the book of original entry. True False 5. The basic steps in the recording process are (1) to analyze each transaction, (2) to enter the transaction in a journal, and (3) to transfer the journal entry to the appropriate ledger accounts. True False 6. The procedure of transferring journal entries to the ledger accounts is called posting and should be performed in chronological order. True False 7. Assets = liabilities + owner’s capital – drawing + revenues – expenses is a correct form of the expanded basic accounting equation. True False 8. In posting, one should enter “J2” in the Post. Ref. Column on page two of the journal. True False 9. When the columns of the trial balance equal each other, it proves no errors occurred in recording and posting. True False 10. The double-entry system is possible because all business transactions may be expressed in equal debit and credit entries. True False Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 7 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Multiple Choice 1. Transactions are initially recorded in the a. general ledger. b. general journal. c. trial balance. d. balance sheet. 2. The right side of an account is referred to as the a. footing. b. chart side. c. debit side. d. credit side. 3. A purchase of office equipment for cash requires a credit to a. Office Equipment. b. Cash. c. Accounts Payable. d. Owner’s Equity. 4. The equality of the accounting equation can be proven by preparing a a. trial balance. b. journal. c. general ledger. d. T-account. 5. Which of the following accounts would be increased with a debit? a. Rent Payable b. Owner’s Capital c. Service Revenue d. Owner’s Drawing Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 8