ACCT1110 Chap.2 The Recording Process
The Recording Process
A debit is the left side of an account and a credit is the right side. Neither means good or bad, and neither means increase on its own: debits increase assets, expenses and dividends, while credits increase liabilities, equity and income. Half the table is enough, because the other half is its mirror. The placement is not arbitrary either.
Income and expenses are simply the two routes by which trading changes equity, so income sits with equity and an expense, being negative equity, sits opposite.
Recording itself is a relay across four stations. A source document proves that something happened. The general journal records it in date order with both halves together. The general ledger sorts those entries by account so each carries a running balance.
The trial balance lists every ledger balance to confirm the two columns are equal. No station downstream can invent information the first one did not carry, which is why a missing invoice is a reporting failure rather than a bookkeeping one.
What a balanced trial balance proves is narrower than students assume.
It is silent about an entry omitted entirely, an entry posted twice, a posting to the wrong account of the right type, and two errors that happen to offset. Knowing which errors it does catch, and the arithmetic signatures they leave, turns a vague checking exercise into a two minute diagnosis.
What this chapter covers
- 01
Which element increases on which side
- 02
Why expenses sit opposite income
- 03
Contra accounts and their normal balances
- 04
Source document to journal to ledger
- 05
What the trial balance tests
- 06
Four errors it cannot see
- 07
Transposition and reversal signatures
- 08
Narrations, and when they carry marks
A month of entries carried through to a proved trial balance
- +1Post the two cash-funded events: cash and share capital both at $90,000, then $26,000 moved out of cash and into the trailer account.
- +1Post the credit purchase and the invoice: supplies $6,400 against accounts payable, and accounts receivable $31,700 against service revenue. Revenue is recognised at the invoice, not the receipt.
- +1Post the two cash settlements: $18,000 moves from receivables into cash with no revenue effect, and $4,000 reduces both cash and payables. Add the $12,300 wages expense.
- +1List the balances. Debits: cash $65,700, receivables $13,700, supplies $6,400, trailer $26,000, wages $12,300. Credits: payables $2,400, share capital $90,000, service revenue $31,700.
Key terms
- Debit
- The left side of an account. It increases assets, expenses and dividends and decreases liabilities, equity and income, so its effect depends entirely on which element it lands in.
- Contra account
- An account that offsets another and therefore carries the opposite normal balance, such as accumulated depreciation sitting against an asset at cost.
- General journal
- The chronological record in which each transaction is written with both halves together, which is why it answers questions about a date.
- General ledger
- The record sorted by account rather than by date, which is why it answers questions about a balance.
- Trial balance
- A list of every ledger balance, used to confirm that total debits equal total credits. It tests one property and no others.
- Narration
- The short explanation written beneath a journal entry. Some questions require it and say so; others say it is not required, and the instruction is worth reading.
- Transposition error
- Writing digits in the wrong order, such as 450 for 540. The resulting difference is always divisible by nine, which makes it identifiable at a glance.
The Recording Process FAQ
Why do expenses increase on the debit side?
Because an expense is a reduction in equity. Equity increases with a credit, so anything that reduces equity increases with a debit. Once you read expenses as negative equity, and income as ordinary equity, you never have to memorise which side either belongs to. The same reasoning explains why dividends, which also reduce equity, are debited.
What errors will a balanced trial balance not reveal?
Four of them. An entry left out completely, an entry recorded twice in full, a posting to the wrong account of the correct type such as rent charged to insurance, and two independent errors that happen to cancel. Each of these leaves both columns equal, so they are found by reconciliation, by reading the ledger against supporting documents, or by an outsider such as the bank.
Is a credit balance in an asset account always an error?
Not always. A credit balance in cash at bank means the account is overdrawn, which is reported as a current liability rather than as a negative asset. A credit balance in accounts payable is entirely normal because it is a liability. A credit balance in accumulated depreciation is also normal, because that account is a contra asset.
How much detail should a journal entry carry?
Enough that a reader can reconstruct the transaction: the date, the accounts, the amounts, debits entered before credits with Dr and Cr shown, and a narration where the question asks for one. Past papers state the requirement question by question, so the instruction line tells you whether the narration is earning a mark or costing you time.
Exam move
Build the debit and credit table from memory every day for a week until it costs no thought, then stop practising it and start practising entries. The table is only useful at speed, and speed is exactly what the multiple choice paper measures.
Then spend an hour on errors specifically. Take a completed set of entries, introduce one error of each of the five types, and work out which ones a trial balance would catch.
That exercise is worth more than re-reading the chapter, because the exam asks the question in that direction: it describes a symptom and asks what caused it.
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