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96 CHAPTER 3 The Recording Process

SU M M A R Y OF STUDY OBJECTIVES
1. Explain what an account is and how it helps in the record- place all the information about changes in specific account
ing process. An account is a record of increases and decreases balances.
in specific asset, liability, and stockholders’ equity items. 6. Explain what posting is and how it helps in the recording
2. Define debits and credits, and explain how they are used process. Posting is the procedure of transferring journal en-
to record business transactions. The terms debit and credit are tries to the ledger accounts.This phase of the recording process
synonymous with left and right. Assets, dividends, and ex- accumulates the effects of journalized transactions in the in-
penses are increased by debits and decreased by credits. Lia- dividual accounts.
bilities, common stock, retained earnings, and revenues are in- 7. Prepare a trial balance and explain its purposes. A trial
creased by credits and decreased by debits. balance is a list of accounts and their balances at a given time.
3. Identify the basic steps in the recording process. The basic Its primary purpose is to prove the equality of debits and cred-
steps in the recording process are (a) analyze each transac- its after posting. A trial balance also uncovers errors in jour-
tion in terms of its effects on the accounts, (b) enter the trans- nalizing and posting and is useful in preparing financial state-
action information in a journal, (c) transfer the journal infor- ments.
mation to the appropriate accounts in the ledger. 8. Identify the advantages of both manual and computerized
4. Explain what a journal is and how it helps in the record- accounting systems. A manual accounting system is
ing process. The initial accounting record of a transaction is advantageous when one is learning accounting. Learning the
entered in a journal before the data are entered in the accounts. system manually provides users with a better comprehension
A journal (a) discloses in one place the complete effects of a of accounting and its logic. A computerized system does have
transaction, (b) provides a chronological record of transactions, the advantages of speed, efficiency, accuracy, and timeliness of
and (c) prevents or locates errors because the debit and credit information. However, the data compiled
amounts for each entry can be readily compared. are only as good and as accurate as the data
5. Explain what a ledger is and how it helps in the record- being entered. Thus manual and computer- ✓THE
ing process. The entire group of accounts maintained by a ized accounting systems do complement NAVIGATOR
company is referred to as the ledger. The ledger keeps in one each other.

GL O S S A R Y
Account A record of increases and decreases in specific as- General ledger A ledger that contains all asset, liability, and
set, liability, or stockholders’ equity items (p. 68). stockholders’ equity accounts (p. 77).
Application Solutions Providers (ASPs) Companies that Journal An accounting record in which transactions are ini-
provide application solutions directly to the end-users in the tially recorded in chronological order (p. 75).
industry. The end-users purchase application solutions via Journalizing The entering of transaction data in the journal
the Internet rather than the software (p. 93). (p. 75).
Chart of accounts A list of accounts and the account num- Ledger The entire group of accounts maintained by a com-
bers that identify their location in the ledger (p. 80). pany (p. 77).
Common stock Issued in exchange for the owners’ invest- Posting The procedure of transferring journal entries to the
ment paid into the corporation (p. 71). ledger accounts (p. 79).
Compound entry A journal entry that involves three or Retained earnings Net income that is retained in the busi-
more accounts (p. 76). ness (p. 71).
Credit The right side of an account (p. 69). Simple entry A journal entry that involves only two accounts
Debit The left side of an account (p. 69). (p. 76).
Dividend A distribution by a corporation to its stockhold- T account The basic form of an account (p. 68).
ers on a pro rata (equal) basis (p. 71). Three-column form of account A form with columns for
Double-entry system A system that records in appropriate debit, credit, and balance amounts in an account (p. 79).
accounts the dual effect of each transaction (p. 69). Trial balance A list of accounts and their balances at a given
General journal The most basic form of journal (p. 75). time (p. 88).

EX E R C I S E S Indicate debit and credit effects

3-1 For each of the following accounts indicate (a) the effect of a debit or a credit on the ac-
count and (b) the normal balance. and normal balance.
(SO 2)
1. Rooms Revenue
2. Rent Expense
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Exercises 97

3. Salary Payable
4. Capital
5. Food Revenue
6. Cash
3-2 Transactions for Milton’s Wings and Pizza for the month of June are presented below. Identify accounts to be debited
Identify the accounts to be debited and credited for each transaction, and journalize the trans- and credited.
actions. (SO 2)
June 1 Milton Wolfe invests $20,000 cash in exchange for shares of common stock in a
small printing corporation.
2 Buys equipment on account for $8,600.
3 Pays $1,200 to landlord for June rent.
12 Bills B. J. Chang $890 for a pizza party.
3-3 Ouro Johnson has the following transactions during August of the current year. Indicate Indicate basic and debit–credit
(a) the basic analysis and (b) the debit–credit analysis illustrated on pages 82–86 of the text. analysis.
Journalize the transactions. (SO 4)

Aug. 1 Opens an office as a travel agent, investing $25,000 in cash in exchange for com-
mon stock.
4 Pays insurance in advance for 6 months, $1,200.
16 Receives $5,000 from clients for arranging travel services.
27 Pays secretary $1,500 salary.
3-4 Selected transactions for Y. K. Catering are presented in journal form below. Post the trans- Post journal entries to
actions to T accounts. T accounts.
(SO 6)
J1
Date Account Titles and Explanation Ref. Debit Credit

May 10 Accounts Receivable 7,200

Service Revenue 7,200
15 Cash 5,500
Accounts Receivable 5,500
20 Cash 2,500
Service Revenue 2,500

3-5 An inexperienced bookkeeper prepared the following trial balance that does not balance. Prepare a correct trial balance.
Prepare a correct trial balance, assuming all account balances are normal. (SO 7)

ELIZABETH BAKERY
Trial Balance
December 31, 2008
Debit Credit
Cash $33,600
Prepaid Insurance $4,900
Accounts Payable 7,500
Unearned Fees 5,800
Common Stock 20,000
Dividends 4,000
Service Revenue 29,200
Salaries Expense 17,000
Rent Expense 3,000

$76,400 $48,600
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98 CHAPTER 3 The Recording Process

Post journal entries and pre- 3-6 Selected transactions from the journal of Palm Tree Travel, Inc., are presented below.
pare a trial balance.
(SO 6, 7) Date Account Titles and Explanation Ref. Debit Credit

Aug. 1 Cash 10,000

Common Stock 10,000
(Investment of cash for stock)
10 Cash 3,900
Service Revenue 3,900
(Received cash for services provided)
12 Computer 4,100
Cash 1,500
Notes Payable 2,600
(Purchased computer for
cash and notes payable)
25 Accounts Receivable 2,200
Service Revenue 2,200
(Billed for services provided)
31 Cash 1,800
Accounts Receivable 1,800
(Receipt of cash on account)
Instructions
(a) Post the transactions to T accounts.
(b) Prepare a trial balance at August 31, 2008.
Journalize transactions from 3-7 The T accounts below summarize the ledger of Mardi Gras Catering Corporation at the
account data, and prepare a end of the first month of operations:
trial balance.
(SO 4, 7) Cash No. 101
4/1 15,000 4/15 900
4/12 600 4/25 1,500
4/29 1,000
Common Stock No. 311
4/30 600
4/1 15,000
Accounts Receivable No. 112
Service Revenue No. 400
4/7 4,100 4/29 1,000
4/7 4,100
Supplies No. 126
4/12 600
4/4 2,500 4/30 600
Accounts Payable No. 201 Salaries Expense No. 726
4/25 1,500 4/4 2,500 4/15 900

Instructions
(a) Prepare the complete general journal entries (including explanations) from which the
postings to Cash were made.
(b) Prepare a trial balance at April 30, 2008.
Journalize a series of transac- 3-8 Evergreen Campground was started on June 1 by Jolene and David Collier. The follow-
tions. ing selected events and transactions occurred during June.
(SO 2, 4)
June 1 Invested $150,000 cash in the business in exchange for common stock.
4 Purchased land costing $40,000 for cash.
8 Incurred advertising expense of $3,500 on account.
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Exercises 99

11 Paid salaries to employees $1,500.

12 Hired Campground manager at a salary of $5,000 per month, effective July 15.
13 Paid $2,000 for a one-year insurance policy.
20 Received $9,000 in cash for admission fees.
30 Received $5,000 in cash for admission fees.
30 Paid $1,000 on account for advertising incurred on June 8.

Evergreen uses the following accounts: Cash; Prepaid Insurance; Land; Accounts Payable; Un-
earned Admissions; Common Stock; Admission Revenue; Advertising Expense; and Salaries Ex-
pense.
Instructions
Journalize the April transactions.
3-9 Alyson Clark is a licensed incorporated CPA. During the first month of operations of the Journalize transactions, post,
business, the following events and transactions occurred: and prepare a trial balance.
(SO 2, 4, 6, 7)
Sept. 1 Invested $40,000 cash in exchange for common stock.
2 Hired a secretary-receptionist at a salary of $2,480 per month.
3 Purchased $1,500 of supplies on account from Ross Supply Company.
7 Paid office rent of $1,500 for the month.
11 Completed a tax assignment and billed client $1,900 for services rendered.
12 Received $7,000 advance on a management consulting engagement.
17 Received cash of $2,350 for services completed for Mutter Company.
31 Paid secretary-receptionist $2,480 salary for the month.
31 Paid 40% of balance due Ross Supply Company.

The company uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable,
No. 126 Supplies, No. 201 Accounts Payable, No. 205 Unearned Revenue, No. 311 Common
Stock, No. 400 Service Revenue, No. 726 Salaries Expense, and No. 729 Rent Expense.

Instructions
(a) Journalize the transactions.
(b) Post to the ledger accounts.
(c) Prepare a trial balance on September 30, 2008.
3-10 Surepar Miniature Golf and Driving Range was opened on March 1 by Bill Affleck. The Journalize a series of transac-
following selected events and transactions occurred during March: tions.
(SO 2, 4)
Mar. 1 Invested $60,000 cash in the business in exchange for common stock.
3 Purchased Lee’s Golf Land for $38,000 cash. The price consists of land $23,000,
building $9,000, and equipment $6,000. (Make one compound entry.)
5 Advertised the opening of the driving range and miniature golf course, paying
advertising expenses of $1,600.
6 Paid cash $1,480 for a one-year insurance policy.
10 Purchased golf clubs and other equipment for $2,600 from Parton Company
payable in 30 days.
18 Received $800 in cash for golf fees earned.
19 Sold 100 coupon books for $15 each. Each book contains 10 coupons that enable
the holder to play one round of miniature golf or to hit one bucket of golf balls.
25 Declared and paid $1,000 cash dividend.
30 Paid salaries of $600.
30 Paid Parton Company in full.
31 Received $500 cash for fees earned.
Bill Affleck uses the following accounts: Cash; Prepaid Insurance; Land; Buildings; Equipment;
Accounts Payable; Unearned Revenue; Common Stock; Dividends; Golf Revenue; Advertising
Expense; and Salaries Expense.
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100 CHAPTER 3 The Recording Process

Instructions
Journalize the March transactions.

FINANCIAL REPORTING PROBLEM: PepsiCo

3-11 The financial statements of PepsiCo are presented in Appendix A. The statements con-
tain the following selected accounts for the year ended, 2006 stated in millions of dollars.
Accounts Payable $6,496 Income Taxes Payable $ 90
Accounts Receivable 3,725 Interest Expense 239
Property, Plant, and Equipment 9,687 Inventory 1,926
Instructions
(a) Answer the following questions.
(1) What is the increase and decrease side for each account?
(2) What is the normal balance for each account?
(b) Identify the probable other account in the transaction and the effect on that account when:
(1) Accounts Receivable is decreased.
(2) Accounts Payable is decreased.
(3) Inventory is increased.
(c) Identify the other acconts(s) that ordinarily would be involved when:
(1) Interest Expense is increased.
(2) Property, Plant, and Equipment is increased.

✓
■
■ Remember to go back to the Navigator box on the chapter-opening page and
check off your completed work.