CHAPTER TWO

Information Processing and the Accounting Cycle

The Recording Process
Learning Objectives
Describe how accounts, debits, and credits are
used to record business transactions
Indicate how a journal is used in the recording
process
Explain how a ledger and posting help in the
recording process.
Prepare a trial balance
SOURCES, RECORDS AND BOOKS OF
PRIME ENTRY
1. The role of source documents
Business transactions are recorded on source documents. Examples
include sales and purchase orders, invoices and credit notes.
1.1 Types of source documents
Whenever a business transaction takes place, involving sales or
purchases, receiving or paying money, or owing or being owed money,
it is usual for the transaction to be recorded on a document. These
documents are the source of all the information recorded by a
business.
Types of source documents
Quotation. A document sent to a customer by a company stating the
fixed price that would be charged to produce or deliver goods or
services.
 Purchase order. A document of the company that details goods or
services which the company wishes to purchase from another
company. Two copies of a purchase order are often made, one is sent
to the company from which the goods or services will be purchased,
and the other is kept internally so the company can keep track of its
orders.
 Purchase orders are often sequentially numbered.
Types of source documents
Sales order. A document of the company that details an
order placed by a customer for goods or services.
 The customer may have sent a purchase order to the
company from which the company will then generate a
sales order.
 Sales orders are usually sequentially numbered so that the
company can keep track of orders placed by customers.
Goods received note. A document of the company that
lists the goods that a business has received from a supplier.
 A goods received note is usually prepared by the business’s
own warehouse or goods receiving area.
Goods dispatched note. A document of the company that lists the goods that the
company has sent out to a customer
 The company will keep a record of goods despatched notes in case of any queries by
customers about the goods sent.
 The customer will compare the goods despatched note to what they receive to make
sure all the items listed have been delivered and are the right specification.
Invoices An invoice relates to a sales order or a purchase order.
 When a business sells goods or services on credit to a customer, it sends out an
invoice. The details on the invoice should match the details on the sales order. The
invoice is a request for the customer to pay what he owes.
 When a business buys goods or services on credit it receives an invoice from the
supplier. The details on the invoice should match the details on the purchase order.
What does an invoice show?

Most invoices are numbered, so that the business can keep track of all the
invoices it sends out.
Information usually shown on an invoice includes the following.
(a) Name and address of the seller and the purchaser
(b) Date of the sale
(c) Description of what is being sold
(d) Quantity and unit price of what has been sold (eg 20 pairs of shoes at K25 a
pair)
(e) Details of trade discount, if any (eg 10% reduction in cost if buying over 100
pairs of shoes)
(f) Total amount of the invoice including (usually) details any of sales tax
(g) Sometimes, the date by which payment is due, and other terms of sale
Uses of multi-part invoices

As stated above invoices may be used for different purposes.

 Top copy to customer as a request for payment
 Second copy to accounts department to match to eventual payment
 Third copy to warehouse to generate a despatch of goods, as evidenced by a goods
despatched note
 Fourth copy stapled to sales order and kept in sales department as a record of
sales
Businesses will design their own invoices and there may be other copies for other
departments. Not all businesses will need four part invoices. A very small business
may use the customer copy of the invoice as a despatch note as well. In addition, the
sales invoice may be stapled to the sales order and both documents passed to the
accounts department.
Types of source documents
Statement. A document sent out by a supplier to a customer listing
the transactions on the customer’s account, including all invoices and
credit notes issued and all payments received from the customer
Credit note. A document sent by a supplier to a customer in respect
of goods returned or overpayments made by the customer. It is a
‘negative’ invoice
 Debit note. A document sent by a customer to a supplier in respect
of goods returned or an overpayment made. It is a formal request for
the supplier to issue a credit note
Types of source documents
Remittance advice. A document sent to a supplier with a payment,
detailing which invoices are being paid and which credit notes offset.
A remittance advice allows the supplier to update the customer’s
records to show which invoices have been paid and which are still
outstanding.
Receipt. A document confirming confirmation that a payment has
been received. This is usually in respect of cash sales, e.g a till receipt
from a cash register
Other documents

The following documents are sometimes used in connection with sales

and purchases.
(a) Debit notes
(b) Goods received notes
A debit note might be issued to adjust an invoice already issued. This is
also commonly achieved by issuing a revised invoice after raising a credit
or debit note purely for internal purposes (ie to keep the
records straight).
More commonly, a debit note is issued to a supplier as a means of
formally requesting a credit note.
Goods received notes (GRNs) record a receipt of goods, most
commonly in a warehouse. They may be used in addition to suppliers'
advice notes. Often the accounts department will want to see the
relevant
GRN and the matching purchase order before paying a supplier's
invoice. Even where GRNs are not routinely used, the details of a
consignment from a supplier which arrives without an advice note must
always be recorded.
The need for books of prime
entry
In the course of business, source documents are created.
The details on these source documents need to be summarized, as
otherwise the business might forget to ask for some money, or forget
to pay some, or even accidentally pay something twice.
It needs to keep records of source documents – of transactions – so
that it knows what is going on.
Such records are made in books of prime entry.
Books of prime entry are books in which we first record transactions.
The need for books of prime
entry
The main books of prime entry are as follows.
(a) Sales day book (Sales Journal) used for : All sales of merchandise on
account
(b) Purchase day book (Purchases Journal) used for: All purchases of
merchandise on account
(c) Sales returns day book(Sale return Journal) used for: all sales return
(d) Purchase returns day book
(e) Journal (General Journal) used for: Transactions that cannot be
entered in a special journal, including correcting, adjusting, and closing
entries
f) Cash book (Cash Receipts Journal) used for: All cash received
(including cash sales)
(g) Cash Payments Journal used for : All cash paid (including cash
purchases
(h) Petty cash book
If a transaction cannot be recorded in a special journal, the company
records it in the general journal.
Similarly, correcting, adjusting, and closing entries are recorded in the
general journal. In some situations, companies might use special
journals other than those listed above.
Special journals permit greater division of labour because several
people can record entries in different journals at the same time.
For example, one employee may journalize all cash receipts, and
another may journalize all credit sales. Also, the use of special
journals reduces the time needed to complete the posting process.
 With special journals, companies may post some accounts monthly
instead of daily.
Describe how accounts, debits, and
credits are used to record business
transactions.
The Recording Process
The Account
An account is an individual accounting record of increases and decreases in a specific
asset, liability, or owner’s equity item.
For example, a company would have separate accounts for Cash, Accounts Receivable,
Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on.
(Note that whenever we are referring to a specific account, we capitalize the name.)
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
The format of a ledger account
There are two sides to a ledger account, and an account heading on
top, and so they are often referred to as 'T' accounts.
(a) On top of the account is its name.
(b) There is a left hand side, or debit side.
(c) There is a right hand side, or credit side.
NAME OF ACCOUNT
Date Narrative Ref. K Date Narrative Ref. K
DEBIT SIDE CREDIT SIDE
1 The date of the transaction is entered in the Date column.
2 The debit account title (that is, the account to be debited) is entered
first at the extreme left margin of the column headed “Account Titles
and Explanation,” and the amount of the debit is recorded in the Debit
column.
3 The credit account title (that is, the account to be credited) is
indented and entered on the next line in the column headed “Account
Titles and Explanation,” and the amount of the credit is recorded in the
Credit column.
4 A brief explanation of the transaction appears on the line below the
credit account title. A space is left between journal entries. The blank
space separates individual journal entries and makes the entire journal
easier to read.
5 The column titled Ref. (which stands for Reference) is left blank when
the journal entry is made. This column is used later when the journal
entries are transferred to the ledger accounts
It is important to use correct and specific account titles in
journalizing.
Erroneous account titles lead to incorrect financial statements.
However, some flexibility exists initially in selecting account titles.
 The main criterion is that each title must appropriately describe the
content of the account.
 Once a company chooses the specific title to use, it should record
under that account title all later transactions involving the account.
Debits and Credits

The term debit indicates the left side of an account, and credit indicates
the right side.
They are commonly abbreviated as Dr. for debit and Cr. for credit.
We use the terms debit and credit repeatedly in the recording process
to describe where entries are made in accounts.
For example, the act of 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
Debits and Credits
When comparing the totals of the two sides, an account shows a debit
balance if the total of the debit amounts exceeds the credits.
An account shows a credit balance if the credit amounts exceed the
debits. Note the position of the debit side and credit side.
 Under the double-entry system, the dual (two-sided) effect of each
transaction is recorded in appropriate accounts.
This system provides a logical method for recording transactions and also
helps ensure the accuracy of the recorded amounts as well as the detection
of errors.
If every transaction is recorded with equal debits and credits, the sum of all
the debits to the accounts must equal the sum of all the credits.
Double Entry booking keeping
Double entry bookkeeping is based on the idea that each transaction has an
equal but opposite effect.
Every accounting event must be entered in ledger accounts both as a debit
and as an equal but opposite credit.
Dual effect (duality concept)
Double entry bookkeeping is the method used to transfer the weekly/monthly
totals from the books of prime entry into the general ledger.
Double entry bookkeeping is the method by which a business records
financial transactions. An account is maintained for every asset, liability,
income and expense. Every transaction is recorded twice so that every debit is
balanced by a credit.
Double Entry booking keeping
A Debit Entry will : Credit entry will:
 Increase an Asset Decrease an asset
 Increase expenses Increase a liability
 Increase Drawings Increase income

 Decrease liabilities Increase capital

DEAD CLIC
DEAD Debit – Expenses, Assets and Drawings
CLIC Credit – Liabilities , Income and Capital
Note that you only use the Dead Clic when the accounts are increasing
If the accounts are decreasing the opposite is true
Double Entry booking keeping
The basic rule, which must always be observed, is that every financial
transaction gives rise to two accounting entries, one a debit and the
other a credit.
The total value of debit entries in the general ledger is therefore
always equal at any time to the total value of credit entries.
Which account receives the credit entry and which receives the debit
depends on the nature of the transaction.
Double Entry booking keeping
Ledger accounts, with their debit and credit sides, are kept in a way
which allows the two-sided nature of every transaction to be recorded.
 This is known as the 'double entry' system of bookkeeping, because
every transaction is recorded twice in the accounts.
The rules of double entry bookkeeping
A debit entry will:
 increase an asset
 decrease a liability
 increase an expense
Double Entry booking keeping
 An increase in an expense (e.g. a purchase of stationery) or an
increase in an asset (e.g. a purchase of office furniture) is a debit.
 An increase in revenue (e.g. a sale) or an increase in a liability (eg
buying goods on credit) is a credit.
A decrease in an asset (e.g. making a cash payment) is a credit.
 A decrease in a liability (e.g. paying a creditor) is a debit.
Describe How Accounts, Debits, and Credits Are Used
to Record Business Transactions
Debits and Credits

• Record of increases and decreases in a specific asset,

liability, stockholders’ equity, revenue, or expense item.
• Debit = “Left”
• Credit = “Right”
An account can be illustrated in a
T-account form.

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Debits and Credits
Double-Entry 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 at least one other account.
• Debits must equal Credits.

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Debits and Credits
What Causes a Debit Balance?
If the sum of Debit entries are greater than the sum of
Credit entries, the account will have a debit balance.

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Debits and Credits
What Causes a Credit Balance?

If the sum of Credit entries are greater than the sum of

Debit entries, the account will have a credit balance.

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Debits and Credits
Asset and Liability Balances
• Assets - Debits should exceed
credits.
• Liabilities – Credits should
exceed debits.
• Normal balance is on the
increase side.

LO 1 Copyright ©2017 John Wiley & Sons, Inc. 34

Debits and Credits
Stockholders’ Equity Balances

• Owner’s investments and revenues

increase stockholders’ equity (credit).
• Dividends and expenses decrease
stockholders’ equity (debit).

LO 1 Copyright ©2017 John Wiley & Sons, Inc. 35

Debits and Credits
Revenue and Expense Balances

• The purpose of earning revenues

is to benefit the stockholders.
• The effect of debits and credits
on revenue accounts is the same
as their effect on stockholders’
equity.
• Expenses have the opposite
effect: expenses decrease
stockholders’ equity.

LO 1 Copyright ©2017 John Wiley & Sons, Inc. 36

Debits and Credits
Summary of Account Balances
Normal Balance Debit Normal Balance Credit

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Summary of Debit/Credit Rules

LO 1 Copyright ©2017 John Wiley & Sons, Inc. 38

Debit/Credit Rules and the Accounting
Equation
Relationship among the assets, liabilities and
stockholders’ equity of a business:

The equation must be in balance after every transaction.

Total Debits must equal total Credits.

LO 1 Copyright ©2017 John Wiley & Sons, Inc. 39

Example on T- ACCOUNTS
Presented below is information related to Hammond Real Estate Agency.
Oct. 1 Lia Berge begins business as a real estate agent with a cash investment of K30,000
2 Paid K700 cash for rent on office space.
3 Purchases office equipment for K2,800, on account.
6 Sells a house and lot for Hal Smith; bills Hal Smith K4,400 for realty services
performed.
27 Pays K1,100 on the balance related to the transaction of October 3.
30 Receives bill for October utilities, K130 (not paid at this time).
Instructions
Make T-Accounts
Solutions
Cash Capital
Oct 1. Capital 30, 000 Oct 2. Rent 700 Oct 1. Cash 30, 000
27 oct A/cs paya 1,100
Rent Equipment
Oct 2. Cash 700 Oct 3. Accounts Payable 2, 800

Accounts Payable
27 oct cash 1,100 Oct 3. equipment 2, 800
30 Oct Utility exp 130
 Accounts Receivable Service Revenue
Oct 6. Service revenue 4,400 Oct 6 A/cs receivable

Utility exp
30 Oct Accs Payable 130
Exercise on T-accounts and
closing the accounts
Selected transactions for Hellen Tembo, an interior decorator, in her first month of
business, are as follows.
Jan. 2 Invested K10,000 cash in business.
Jan. 3 Purchased used car for K3,000 cash for use in business.
Jan.9 Purchased supplies on account for K500.
Jan.11 Billed customers K2,400 for services performed.
Jan.16 Paid K350 cash for advertising.
Jan.20 Received K700 cash from customers billed on January 11.
Jan.23 Paid creditor K300 cash on balance owed.
Jan.28 Withdrew K1,000 cash for personal use by owner.
Instructions : make T-accounts and find the ending balance for each account
Exercise
Selected transactions for the Anthony Bwalya Company are presented in journal form below.
Post the transactions to T-accounts and determine each account’s ending balance.
Date Account Titles and Explanation Ref. Debit Credit
May 5 Accounts Receivable 4,400
Service Revenue 4,400
(Billed for services performed)
May 12 Cash 2,400
Accounts Receivable 2,400
(Received cash in payment of account)
May 15 Cash 3,000
Service Revenue 3,000
(Received cash for services performed)
Solutions
Accounts Receivable Service Revenue
5may Ser Revenue 4,400 12may Cash 2400 5may Accs Recei 4,400

Cash
12may Accs Rec 2400

Complete other transactions in a similar manner

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.
 Companies may use various kinds of journals, but every company has the
most basic form of journal, a general journal.
A general journal has spaces for dates, account titles and explanations,
references, and two amount columns.
See the format of the journal in whenever we use the term “journal” in
this context, we mean the general journal unless we specify otherwise.
The journal makes several significant contributions to the recording
process:
1. It discloses in one place the complete effects of a transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit
amounts for each entry can be easily compared.
LO 2: Indicate How a Journal Is Used in
the Recording Process
The Recording Process

LO 2 Copyright ©2017 John Wiley & Sons, Inc. 48

JOURNALIZING
Entering transaction data in the journal is known as journalizing.
Companies make separate journal entries for each transaction.
A complete entry consists of
(1) the date of the transaction,
(2) the accounts and amounts to be debited and credited, and
(3) a brief explanation of the transaction
The Recording Process
The Journal
• Book of original entry.
• Transactions recorded in chronological order.
• Contributions to the recording process:
1. Discloses the complete effects of a transaction.
2. Provides a chronological record of transactions.
3. Helps to prevent or locate errors because the
debit and credit amounts can be easily compared.

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The Recording Process
Journal Entry Illustration
Journalizing - Entering transaction data in the journal.
Illustration: On September 1, stockholders invested K15,000
cash in the corporation in exchange for shares of stock, and
Softbyte purchased computer equipment for K7,000 cash.

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SIMPLE AND COMPOUND ENTRIES
Some entries involve only two accounts, one debit and one credit. This
type of entry is called a simple entry.
Some transactions, however, require more than two accounts in
journalizing.
An entry that requires three or more accounts is a compound entry
Illustration: On July 1, Butler Company purchases a delivery truck costing
K14,000. It pays K8,000 cash now and agrees to pay the remaining K6,000 on
account
The Recording Process
Compound Entry

LO 2 Copyright ©2017 John Wiley & Sons, Inc. 53

Example
Kate Brown engaged in the following activities in establishing her salon,
Hair It Is:
1. Opened a bank account in the name of Hair It Is and deposited
K20,000 of her own money in this account as her initial investment.
2. Purchased equipment on account (to be paid in 30 days) for a total
cost of K4,800.
3. Interviewed three people for the position of hair stylist.
Prepare the entries to record the transactions.
Solutions
The three activities would be recorded as follows.
1. Cash 20,000
Owner’s Capital 20,000
(Owner’s investment of cash in business)
2. Equipment 4,800
Accounts Payable 4,800
(Purchase of equipment on account)
3. No entry because no transaction has occurred.
Example on journal entries
Presented below is information related to Hammond Real Estate Agency.
Oct. 1 Lia Berge begins business as a real estate agent with a cash investment of
K30,000
2 Paid rent, K700, on office space.
3 Purchases office equipment for K2,800, on account.
6 Sells a house and lot for Hal Smith; bills Hal Smith K4,400 for realty services
performed.
27 Pays K1,100 on the balance related to the transaction of October 3.
30 Receives bill for October utilities, K130 (not paid at this time).
Instructions
Journalize the transactions. ( explanations are needed)
Solutions
1. GENERAL JOURNAL
Date Account Titles and Explanation Ref. Debit Credit
Oct. 1 Cash 30,000
Owner’s Capital 30,000
Oct 2 Rent Expense 700
Cash 700
Oct 3 Equipment 2,800
Accounts Payable 2,800
Oct 6 Accounts Receivable 4,400
Service Revenue 4,400
Oct 27 Accounts Payable 1,100
Cash 1,100
Oct 30 Utilities Expense 130
Accounts Payable 130
LEDGER ACCOUNTING
The Ledger
Ledger accounts summarise all the individual transactions listed in the
books of prime entry.
The entire group of accounts maintained by a company is the ledger. The
ledger provides the balance in each of the accounts as well as keeps track
of changes in these balances.
A business is continually making transactions, eg buying and selling. It does
not prepare an income statement and a statement of financial position on
completion of every individual transaction.
To do so would be a time-consuming and cumbersome administrative task.
The Ledger
Standard Form of Account

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LEDGER ACCOUNTING AND DOUBLE
ENTRY
Companies may use various kinds of ledgers, but every company has
a general ledger. A general ledger contains all the asset, liability, and
owner’s equity accounts.
Individual Asset Accounts- Equipment, Land, Accounts Receivable,
Cash
Individual Liability Accounts-Interest Payable, Salaries and Wages
Payable, Accounts Payable, Notes Payable
Individual Owner's Equity Accounts- Salaries and Wages Expense,
Service Revenue, Owner's Drawings, Owner's Capital
LEDGER ACCOUNTING AND DOUBLE
ENTRY
The records of transactions, assets and liabilities should be kept in the
following ways.
(a) In chronological order, and dated so that transactions can be
related to a particular period of time.
(b) Built up in cumulative totals.
(i) Day by day (eg total sales on Monday, total sales on Tuesday)
(ii) Week by week
(iii) Month by month
(iv) Year by year
Types of Accounts
Personal Accounts – these are for debtors and creditors (i.e.
customers and suppliers).
 Impersonal Accounts – divided between ‘real’ accounts and
‘nominal’ accounts:
– Real Accounts – accounts in which possessions are recorded.
Examples are buildings, machinery, fixtures and stock.
– Nominal Accounts – accounts in which expenses, income and
capital are recorded.
Types of Accounts

Accounts

Impersonal Accounts
Personal accounts

Real Accounts For

possessions of all Nominal Accounts
Creditors’ Kinds For expenses, income &
Debtors’ accounts accounts capital
Explain how a ledger and
posting help in the recording
process.
The Ledger
 The entire group of accounts maintained by a company is the ledger.
The ledger provides the balance in each of the accounts as well as
keeps track of changes in these balances.
 Companies may use various kinds of ledgers, but every company has
a general ledger.
A general ledger contains all the asset, liability, and owner’s equity
accounts.
Whenever we use the term “ledger” we are referring to the general
ledger unless we specify otherwise.
Explain How a Ledger and Posting Help in
the Recording Process

The Ledger

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 65

Companies arrange the ledger in the sequence in which they present the
accounts in the financial statements, beginning with the balance sheet
accounts.
n order are the asset accounts, followed by liability accounts, owner’s
capital, owner’s drawings, revenues, and expenses. Each account is
numbered for easier identification.
 The ledger provides the balance in each of the accounts. For example,
the Cash account shows the amount of cash available to meet current
obligations.
 The Accounts Receivable account shows amounts due from customers.
Accounts Payable shows amounts owed to creditors.
STANDARD FORM OF ACCOUNT

The simple T-account form used in accounting textbooks is often very

useful for illustration purposes.
However, in practice, the account forms used in ledgers are much
more structured.
This format is called the three-column form of account. It has three
money columns—debit, credit, and balance. The balance in the
account is determined after each transaction.
 Companies use the explanation space and reference columns to
provide special information about the transaction.
 CASH NO. 101
Date Explanation Ref. Debit Credit Balance
2017
June 1 25,000 25,000
2 8,000 17,000
3 4,200 21,200
9 7,500 28,700
17 11,700 17,000
20 250 16,750
30 7,300 9,450
 M. Gonzales has the following transactions during August of the
current year.
Aug. 1 Opens an office as a financial advisor, investing K8,000 in cash.
Aug. 4 Pays insurance in advance for 6 months, K1,800 cash.
Aug. 16 Receives K3,600 cash from clients for services performed.
Aug. 27 Pays secretary K1,000 salary
Instruction
Post the transactions using the standard account form
Solutions
CASH
Date Account explanation ref Debit Credit Balance
Aug 1 Capital 8, 000 8, 000
Augu 4 Prepaid Insurance 1, 800 6,200
Aug 16 Service Revenue 3,600 9, 800
Aug 27 Salaries & wages 1, 000 8, 800
 CAPITAL
Date Account explanation ref Debit Credit Balance
Aug 1 Cash 8, 000 8, 000 Cr Balance
Prepaid Insurance
Date Account explanation ref Debit Credit Balance
4 Aug Cash 1800 3600 Dr Bal
Service Revenue
Date Account explanation ref Debit Credit Balance
Aug 16 Cash 3600 3600 Cr Bal
Salaries And Wages
Date Account explanation ref Debit Credit Balance
Aug 27 Cash 1,000 1000 Dr Bal
Selected transactions for Diana Bukama Company during its first month in business
are presented below.
Sept. 1 Invested K10,000 cash in the business.
Sept. 5 Purchased equipment for K12,000 paying K4,000 in cash and the balance on
account.
Sept. 25 Paid K3,000 cash on balance owed for equipment.
Sept. 30 Withdrew K700 cash for personal use.
Burke’s chart of accounts shows: No. 101 Cash, No. 157 Equipment, No. 201 Accounts
Payable, No. 301 Owner’s Capital, and No. 306 Owner’s Drawings.
Instructions
(a) Journalize the transactions on page J1 of the journal. (Omit explanations.)
(b) Post the transactions using the standard account form
Posting

Transferring journal entries to the ledger accounts is called posting. This phase
of the recording process accumulates the effects of journalized transactions into
the individual accounts. Posting involves the following steps.
1. In the ledger, in the appropriate columns of the account(s) debited, enter the
date, journal page, and debit amount shown in the journal.
2. In the reference column of the journal, write the account number to which
the debit amount was posted.
3. In the ledger, in the appropriate columns of the account(s) credited, enter the
date, journal page, and credit amount shown in the journal.
4. In the reference column of the journal, write the account number to which
the credit amount was posted.
Posting
Transferring
journal entries
to the ledger
accounts.

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Posting
Posting should be performed in chronological order. That is, the
company should post all the debits and credits of one journal entry
before proceeding to the next journal entry.
Postings should be made on a timely basis to ensure that the ledger is
up-to-date.
 The reference column of a ledger account indicates the journal page
from which the transaction was posted.
 The explanation space of the ledger account is used infrequently
because an explanation already appears in the journal.
CHART OF ACCOUNTS

The number and type of accounts differ for each company. The number of
accounts depends on the amount of detail management desires.
For example, the management of one company may want a single account
for all types of utility expense.
 Another may keep separate expense accounts for each type of utility, such
as gas, electricity, and water.
Similarly, a small company like Softbyte will have fewer accounts than a
corporate giant like Dell.
Softbyte may be able to manage and report its activities in 20 to 30
accounts, while Dell may require thousands of accounts to keep track of its
worldwide activities.
CHART OF ACCOUNTS
Most companies have a chart of accounts. This chart lists the
accounts and the account numbers that identify their location in the
ledger.
The numbering system that identifies the accounts usually starts with
the balance sheet account sand follows with the income statement
accounts
Chart of Accounts

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 78

The Recording Process Illustrated
Steps
Follow these steps:
1. Determine what type of
account is involved.
2. Determine what items
increased or decreased
and by how much.
3. Translate the increases
and decreases into
debits and credits.

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 79

The Recording Process Illustrated
Purchase equipment by issuing note

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 80

The Recording Process Illustrated
Receive cash in advance

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 81

The Recording Process Illustrated
Pay rent

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 82

The Recording Process Illustrated
Pay for insurance policy

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 83

The Recording Process Illustrated
Purchase advertising materials on account

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 84

The Recording Process Illustrated
Hire employees

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 85

The Recording Process Illustrated
Declare and pay a cash dividend

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The Recording Process Illustrated
Pay salaries to employees

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The Recording Process Illustrated
Received cash for services

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 88

Summary Journalizing and Posting
Oct. 1-3

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 89

Summary Journalizing and Posting
Oct. 4-31

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 90

The General ledger

The principal accounts are contained in a ledger called the general or nominal
ledger.
The nominal ledger is an accounting record which summarizes the financial
affairs of a business.
The nominal ledger is sometimes called the 'general ledger'. The information
contained in the books of prime entry (e.g the sales and purchases day books)
is summarized and posted to accounts in the nominal ledger.
It contains details of assets, liabilities, capital, income and expenditure, and so
profit and loss.
It consists of a large number of different accounts, each account having its
own purpose or 'name' and an identity or code.
General Ledger Illustrated

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 92

The General ledger
When it comes to drawing up the financial statements,
the revenue and expense accounts will help to form the
income statement,
while
The asset and liability accounts go into the statement of
financial position.
The General ledger
Examples of accounts in the nominal ledger include the following.
(a) Plant and machinery at cost (non-current asset)
(b) Motor vehicles at cost (non-current asset)
(c) Plant and machinery, provision for depreciation (liability)
(d) Motor vehicles, provision for depreciation (liability)
(e) Proprietor's capital (liability)
(f) Inventories – raw materials (current asset)
(g) Inventories – finished goods (current asset)
The General ledger
(h) Total trade accounts receivable (current asset)
(i) Total trade accounts payable (current liability)
(j) Wages and salaries (expense item)
(k) Rent and local taxes (expense item)
(l) Advertising expenses (expense item)
(m) Bank charges (expense item)
(n) Motor expenses (expense item)
(o) Telephone expenses (expense item)
(p) Sales (revenue item)
(q) Total cash or bank overdraft (current asset or liability)
 CHAPTER THRE
THE TRIAL BALANCE
THE TRIAL BALANCE
The Trial Balance
 A trial balance is a list of ledger balances shown in debit and credit
columns.
A trial balance is a list of accounts and their balances at a given time.
Customarily, companies prepare a trial balance at the end of an accounting
period.
They list accounts in the order in which they appear in the ledger. Debit
balances appear in the left column and credit balances in the right column.
IMPORTANCE OF A TRAIL BALANCE
The trial balance proves the mathematical equality of debits and credits
after posting.
Under the double-entry system, this equality occurs when the sum of the
debit account balances equals the sum of the credit account balances.
A trial balance may also uncover errors in journalizing and posting.
In addition, a trial balance is useful in the preparation of financial
statements,
THE TRIAL BALANCE
The steps for preparing a trial balance are:
1. List the account titles and their balances in the appropriate debit or credit
column.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.
A trial balance is a necessary checkpoint for uncovering certain types of
errors. For example, if only the debit portion of a journal entry has been
posted, the trial balance would bring this error to light.
Example
Below is the list of accounts for Pioneer Advertising agent of Kapiri for the
month ended October 31, 2019
Cash K 15,200
Supplies 2,500
Prepaid Insurance 600
Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Revenue 1,200
Owner’s Capital 10,000
Owner’s Drawings 500
Service Revenue 10,000
Salaries and Wages Expense 4,000
Rent Expense 900
Draw up the trial balance for the month ended 31, October 2019 for Pioneer
Advertising agent
Solutions
PIONEER ADVERTISING
Trial Balance
October 31, 2017
Debit Credit
Cash K 15,200
Supplies 2,500
Prepaid Insurance 600
Equipment 5,000
Notes Payable K 5,000
Accounts Payable 2,500
Unearned Service Revenue 1,200
Owner’s Capital 10,000
Owner’s Drawings 500
Service Revenue 10,000
Salaries and Wages Expense 4,000
Rent Expense 900
K28,700 K28,700
The Trial Balance
Limitations of a Trial Balance
A trial balance does not guarantee freedom from recording errors, however.
Numerous errors may exist even though the totals of the trial balance
columns agree.
For example, the trial balance may balance even when:
1. A transaction is not journalized.
2. A correct journal entry is not posted.
3. A journal entry is posted twice.
Limitations of a Trial Balance

4. Incorrect accounts are used in journalizing or posting.

5. Offsetting errors are made in recording the amount of a transaction.
As long as equal debits and credits are posted, even to the wrong account or
in the wrong amount, the total debits will equal the total credits. The trial
balance does not prove that the company has recorded all transactions or
that the ledger is correct.
Example
Amanda set up a business selling keep fit equipment, trading under the
name of Buy Your Biceps Shop. She put K7, 000 of her own money into a
business bank account (transaction A) and in Her first period of trading, the
following transactions occurred.
Transaction K
Paid rent of shop for the period 3,500
Purchased equipment (inventories) on credit 5,000
Raised loan from bank 1,000
Purchase of shop fittings (for cash) 2,000
Sales of equipment: cash 10,000
Sales of equipment: on credit 2,500
Payments for trade accounts payable 5,000
Payments from trade accounts receivable 2,500
Interest on loan (paid) 100
Other expenses (all paid in cash) 1,900
Drawings 1,500
Required
Present the above transactions in t-accounts and Balance the accounts and
draw up the Trial balance
 CASH AT BANK
K K
Capital – Amanda 7,000 Rent 3,500
Bank loan 1,000 Shop fittings 2,000
Sales 10,000 Trade accounts payable 5,000
Trade accounts receivable 2,500 Bank loan interest 100
Other expenses 1,900
Drawings 1,500
*balancing c/d 6500
20500 20500
balance b/d 6500
 CAPITAL (RON KNUCKLE)
K K
balance c/d7000 Cash at bank (A) 7,000
7000 7000
balance c/d 7000
BANK LOAN
K K
balance b/d 1000 Cash at bank (D) 1,000
1000 1000
balance c/d 1000
Amanda Trial Balance
Dr Cr
Cash 6 500
Capital 7000
Bank loan 1000
Purchases 5000
Rent 3500
Non currents assets 2000
Sales 12500
Bank loan interest 100
Other expenses 1900
Drawings 1500
20500 20500
What if the trial balance shows unequal debit and credit balances?

A trial balance can be used to test the accuracy of the double entry
accounting records.
It works by listing the balances on ledger accounts, some of which are
debits and some credits. Total debits should equal total credits.
If the two columns of the list are not equal, there must be an error in
recording the transactions in the accounts
The Trial Balance
A list of account balances, however, will not disclose the following types of
errors.
(a) The complete omission of a transaction, because neither a debit nor a
credit is made.
(b) The posting of a debit or credit to the correct side of the ledger, but to a
wrong account.
(c) Compensating errors (eg an error of K100 is exactly cancelled by another
K100 error elsewhere).
(d) Errors of principle, e.g cash from receivables being debited to trade
accounts receivable and credited to cash at bank instead of the other way
round.
Limitations of a Trial Balance
Trial balance may balance even when: Ethics note: An error is
the result of an
1. A transaction is not journalized. unintentional mistake; it
is neither ethical or
2. A correct journal entry is not posted. unethical. An irregularity
is an intentional
3. A journal entry is posted twice. misstatement, which is
viewed as unethical.
4. Incorrect accounts are used in
journalizing or posting.
5. Offsetting errors are made in
recording the amount of a
transaction.

LO 3 Copyright ©2017 John Wiley & Sons, Inc. 113

Example
Below are the list of account balances for Chelsea Mulenga a sole trader
specialized in fitness equipments. K
Cash 15,200
Supplies 2,500
Prepaid Insurance 600
Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Revenue 1,200
Example cont’
Owner’s Capital 10,000
Owner’s Drawings 500
Service Revenue 10,000
Salaries and Wages Expense 4,000
Rent Expense 900
Required
Draw up the trial balance for the above transactions
Solutions
Debit Credit
Cash (assets) 15,200
Supplies (asset) 2,500
Prepaid Insurance (asset) 600
Equipment (asset) 5,000
Notes Payable (liability) 5,000
Accounts Payable (liability) 2,500
Unearned Service Revenue (Income) 1,200
Solution cont’
Owner’s Capital(capital) 10,000
Owner’s Drawings (drawings) 500
Service Revenue (income) 10,000
Salaries and Wages Expense( expenses) 4,000
Rent Expense 900
28,700 28,700
Example
The following accounts come from the ledger of Meya Company at December 31, 2017.
157 Equipment K88, 000
306 Owner’s Drawings 8,000
201 Accounts Payable 22,000
726 Salaries and Wages Expense 42,000
130 Prepaid Insurance 6,000

112 Accounts Receivable 4,000

400 Service Revenue 95,000
301 Owner’s Capital K20, 000
212 Salaries and Wages payable 2, 000
200 Notes Payable (due in 3 months) 19,000
Required
Solution
Debit Credit
K K
Cash (asset) 7,000
Accounts Receivable (asset) 4,000
Prepaid Insurance (asset) 6,000
Equipment (asset) 88,000
Notes Payable (liability) K 19,000
Accounts Payable (liability) 22,000
Solution cont’
Salaries and Wages Payable (liability) 2,000
Owner’s Capital (capital) 20,000
Owner’s Drawings (drawings) 8,000
Service Revenue (income) 95,000
Utilities Expense (expense) 3,000
Salaries and Wages Expense(expense) 42,000
158,000 158,000
Example

An inexperienced accountant prepared the following trial balance. Prepare a correct trial balance,
assuming all account balances are normal.
CAPPSHAW COMPANY
Trial Balance
December 31, 2017
Debit Credit
Cash K10,800
Prepaid Insurance K 3,500
Accounts Payable 3,000
Unearned Service Revenue 2,200
Owner’s Capital 9,000
Owner’s Drawings 4,500
Service Revenue 25,600
Salaries and Wages Expense 18,600
Rent Expense 2,400
K31,600 K48,000
Example
The T-accounts below summarize the ledger of Depot Company at the
end of the first month of operations.
Cash No. 101 Unearned Service Revenue No. 209
1 April 16,000 15 April 700 30 April 1,600
12 April 1,200 25 April 1,600
29 April 900
30 April 1,600
Accounts Receivable No. 112 Owner’s Capital No. 301
7 April 2,900 29 April 900 1 April 16,000

Supplies No. 126 Service Revenue No. 400

4 April 1,900 7 April 2,900
12 April 1,200
Accounts Payable No. 201 Salaries and Wages Expense No. 726
25 April 1,600 4 April 1,900 15 April 700
Instructions
(a) Prepare the complete general journal (including explanations) from
which the postings to Cash were made.
(b) Prepare a trial balance at April 30, 2017
2. (a) GENERAL JOURNAL
Date Account Titles and Explanation Ref. Debit Credit
Apr. 1 Cash 16,000
Owner’s Capital 16,000
(Owner’s investment of cash in business)
April. 12 Cash 1,200
Service Revenue 1,200
(Received cash for services performed)
April. 15 Salaries and Wages Expense 700
Cash 700
(Paid salaries to date)
April 25 Accounts payable 1,600
Cash 1,600
(Paid creditors on account)
April. 29 Cash 900
Accounts Receivable 900
(Received cash in payment of account)
April. 30 Cash 1,600
Unearned Service Revenue 1,600
(Received cash for future services)
Solution
DEPOT COMPANY
Trial Balance
April 30, 2017
Debit Credit
Cash K17,400
Accounts Receivable 2,000
Supplies 1,900
Accounts Payable K 300
Unearned Service Revenue 1,600
Owner’s Capital 16,000
Service Revenue 4,100
Salaries and Wages Expense 700
K22,000 K22,000
Question
Bob Sample opened the Campus Laundromat on September 1, 2017. During the first
month of operations, the following transactions occurred.
Sept. 1 Bob invested K20,000 cash in the business.
Sept. 2 The company paid K1,000 cash for store rent for September.
Sept. 3 Purchased washers and dryers for K25,000, paying K10,000 in cash and signing a
K15,000, 6-month, 12% note payable.
Sept. 4 Paid K1,200 for a one-year accident insurance policy.
Sept. 10 Received a bill from the Daily News for online advertising of the opening of the
laundromat K200.
Sept. 20 Bob withdrew K700 cash for personal use.
Sept. 30 The company determined that cash receipts for laundry services for the month
were K6,200.
The chart of accounts for the company is the same as that for Pioneer
Advertising plus
No. 610 Advertising Expense.
Instructions
(a) Journalize the September transactions
(b) Open ledger accounts and post the September transactions.
(c) Prepare a trial balance at September 30, 2017
Solutions
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2017
Sept. 1 Cash 101 20,000
Owner’s Capital 301 20,000
(Owner’s investment of cash in business)
Sept 2 Rent Expense 729 1,000
Cash 101 1,000
(Paid September rent)
Sept. 3 Equipment 157 25,000
Cash 101 10,000
Notes Payable 200 15,000
(Purchased laundry equipment for cash and 6-month, 12% note payable)
Sept. 4 Prepaid Insurance 130 1,200
Cash 101 1,200
(Paid one-year insurance policy)
Sept. 10 Advertising Expense 610 200
Accounts Payable 201 200
(Received bill from Daily News for advertising)
Sept. 20 Owner’s Drawings 306 700
Cash 101 700
(Withdrew cash for personal use)
Sept. 30 Cash 101 6,200
Service Revenue 400 6,200
(Received cash for services performed)
Quiz
(b) Open ledger accounts and post the September transactions.
 CAMPUS LAUNDROMAT
Trial Balance
September 30, 2017
Debit Credit
Cash K13,300
Prepaid Insurance 1,200
Equipment 25,000
Notes Payable K15,000
Accounts Payable 200
Owner’s Capital 20,000
Owner’s Drawings 700
Service Revenue 6,200
Advertising Expense 200
Rent Expense 1,000
K41,400 K41,400
QUIZ 3
Emily Valley is a licensed dentist. During the first month of the operation of her
business, the following events and transactions occurred.
April1. Invested K20,000 cash in her business.
Apr 1. Hired a secretary-receptionist at a salary of K700 per week payable monthly.
Apr 2. Paid office rent for the month K1,100.
Apr 3. Purchased dental supplies on account from Dazzle Company K4,000.
Apr10. Performed dental services and billed insurance companies K5,100.
Apr 11. Received K1,000 cash advance from Leah Mataruka for an implant.
Apr20. Received K2,100 cash for services performed from Michael Santos.
Apr30. Paid secretary-receptionist for the month K2,800.
Apr30. Paid K2,400 to Dazzle for accounts payable due.
Quiz continues
Emily uses the following chart of accounts: No. 101 Cash, No. 112
Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No.
209 Unearned Service Revenue, No. 301 Owner’s Capital, No. 400
Service Revenue, No. 726 Salaries and Wages Expense, and No. 729
Rent Expense.
Instructions
(a) Journalize the transactions.
(b) Post to the ledger accounts.
(c) Prepare a trial balance on April 30, 2017.