Week 5, Chap 4 Part 1

Transcription

1 Slide 1 Week 5, Chap 4 Part 1 The General Journal and the General Ledger Instructor: Michael Booth

2 Slide 2 The General Journal and the General Ledger The General Journal Section Objectives 1. Record transactions in the general journal. 2. Prepare compound journal entries. McGraw-Hill 2007 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 explained T accounts and the trial balance, and their usefulness in the preparation of financial statements. Chapter 4 introduces accounting journals, the general ledger, and shows how to use both. In the real world, transactions are not recorded using the accounting equation, nor are they recorded using T-accounts. Instead, businesses use a Journal to record business transactions. The first objective of this chapter introduces the general journal.

3 Slide 3 QUESTION: What is the accounting cycle? ANSWER: The accounting cycle is a series of steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information. This chapter introduces the steps in the accounting cycle, a series of steps performed each accounting period.

4 Slide 4 The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 9 Interpret the financial information Step 8 Prepare a postclosing trial balance Step 7 Record closing entries Step 6 Record adjusting entries Here step 1 is to analyze transactions and step 2 is to journalize the data about transactions.

5 Slide 5 Journals

6 Slide 6 QUESTION: What is a journal? ANSWER: A journal is a record of original entry. Let s begin with the business s journal...a record of the original entry

7 Slide 7 Journal A journal is a diary of business activities. There are different types of journals. Transactions are entered in the journal in chronological order. Just like in school when you kept a diary or journal of your activities, a business journal does the same thing.

8 Slide 8 QUESTION: What is chronological order? ANSWER: Chronological order is the order in which events occur. The journal keeps a record of the business s financial events in the order that they occurred.

9 Slide 9 The General Journal

10 Slide 10 Record transactions in the general journal. Our first objective is to learn how to record financial transactions in the general journal.

11 Slide 11 QUESTION: What is a general journal? ANSWER: A general journal is a financial record for entering all types of business transactions. The journal is the book of original entry where we first record business transactions.

12 Slide 12 QUESTION: What is journalizing? ANSWER: Journalizing is the process of recording transactions in a journal. Journalizing, the verb, means to record transactions in the journal.

13 Slide 13 GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Nov. 6 Cash Carolyn Wells, Capital 100, , Enter the account to be debited. Enter the amount on the same line in the Debit column. Enter the account to be credited. Enter the amount on the same line in the Credit column. Take a look at a journal entry. Carolyn Wells, Owner, invested $100,000 cash into the business on November 6. Let s look at each part of the journal entry. First you should enter the year and the date of the transaction, then enter the name of the account debited flush against the line, then place the dollar amount in the debit column. Next drop down a line and indent ¼ to ½ inch and write the name of the account credited. Place the dollar amount of the credit in the credit column.

14 Slide 14 GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Nov. 6 Cash 100, Carolyn Wells, Capital 100, Investment by owner, Memo 01 Then enter a complete but concise description of the transaction. Whenever possible, the journal entry should refer to the source of the information. Document numbers are part of the audit trail. Once the transaction has been journalized, we need to indent a little and add an explanation of the event.

15 Slide 15 QUESTION: What is an audit trail? ANSWER: An audit trail is a chain of references that makes it possible to trace information, locate errors, and prevent fraud. It is important to leave an audit trail so that you can follow what happened in a transaction check numbers, invoice numbers, customer names, etc are all pieces of information which can be placed in the explanation.

16 Slide 16 Recording Month s (November) Transactions in the General Journal

17 Slide 17 Recording a Business Transaction 1. Analyze the financial event. Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account affected. 2. Apply the rules of debit and credit. a. Which account is debited? For what amount? b. Which account is credited? For what amount? 3. Make the entry in T-account form. 4. Record the complete entry in general journal form. Here are the steps to begin a journal entry. It is critical at this point that you have memorized and can apply the analysis process.

18 Slide Analyze the financial event. Business Transaction On November 6 Carolyn Wells withdrew $100,000 from personal savings and deposited it in a new business checking account for Wells Consulting Services. Let s journalize this initial investment by the owner in the general journal.

19 Slide Apply the rules of debit and credit. Cash Investment by Owner Which account is debited? For what amount? Which account is credited? For what amount? Do you remember using T accounts? We need to Debit Cash for $90,000 and Credit Carolyn Wells, Capital for the same amount.

20 Slide Make the entry in T-account form. Cash Investment by Owner 100,000 Cash Carolyn Wells, Capital 100,000 This is what it looks like in T-account form.

21 Slide Record the complete entry in general journal form. Cash Investment by Owner GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Nov. 6 Cash 100, Carolyn Wells, Capital 100, Investment by owner Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account affected. Here is the general journal entry.

22 Slide Analyze the financial event. Business Transaction On November 7 Wells Consulting Services issued Check 1001 for $5,000 to purchase a computer and other equipment. Let s journalize the purchase of new equipment.

23 Slide Make the entry in T-account form. Cash Purchase of Equipment Equipment Cash 5,000 5,000 Here is what the transaction looks like in T-account form.

24 Slide Record the complete entry in general journal form. Cash Purchase of Equipment GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. Nov. 7 Equipment 5, Cash 5, Purchased equip., Check 1001 Here is the general journal. Note; the third indent is a small description of the event

25 Slide Analyze the financial event. Business Transaction On November 10, Wells Consulting Services purchased office equipment on account for $6,000. Our next transaction is the purchase of equipment on account.

26 Slide Make the entry in T-account form. Credit Purchase of Equipment 6,000 Equipment Accounts Payable 6,000 Here is the transaction in T-account form.

27 Slide Record the complete entry in general journal form. Credit Purchase of Equipment GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. Nov. 10 Equipment 6, Accounts Payable 6, Purchased equipment on account from Office Plus, Inv. 2223, due in 60 days All required information should be included in the explanation. Here is the journal entry. Remember to include all important information in the explanation, the third indent after the credit entry. This improves the audit trail.

28 Slide Analyze the financial event. 2. Apply the rules of debit and credit. Business Transaction On November 28, Wells Consulting Services purchased supplies for $1,500, Check Which account is debited? For what amount? Which account is credited? For what amount? Next, we purchased supplies for $1,500 cash, so we need to debit Supplies for $1,500 and credit Cash for the same amount.

29 Slide Make the entry in T-account form. Cash Purchase of Supplies Supplies Cash 1,500 1,500 Here is the transaction in T-account form.

30 Slide Record the complete entry in general journal form. Cash Purchase of Supplies GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. Nov. 28 Supplies 1, Cash 1, Purchased supplies, Ck Here is the general journal entry for the transaction, once again see the third indent, the note with the check #.

31 Slide Analyze the financial event. 2. Apply the rules of debit and credit. Business Transaction On November 30 Wells Consulting Services paid Office Plus $2,500 in partial payment of Invoice 2223, Check Which account is debited? For what amount? Which account is credited? For what amount? When the business paid part of its bill for the equipment purchased earlier, it would debit Accounts Payable and credit Cash for $2,500.

32 Slide Make the entry in T-account form. Payment to a Creditor Accounts Payable Cash 2,500 2,500 Here is the transaction in T-account form.

33 Slide Record the complete entry in general journal form. Payment to a Creditor GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. Nov. 30 Accounts Payable 2, Cash 2, Paid on account, Office Plus, Invoice 2223, Check 1003 Remember, in the general journal, always enter debits before credits, followed by the note with the summary information for the business transaction.

34 Slide Analyze the financial event. 2. Apply the rules of debit and credit. Business Transaction On November 30, Wells Consulting Services wrote Check 1004 for $8,000 to prepay rent for December and January. Which account is debited? For what amount? Which account is credited? For what amount? When the business pays for two months rent in advance, it debited Prepaid Rent for $8,000 and credited Cash for $8,000.

35 Slide Make the entry in T-account form. Recording Prepaid Rent Prepaid Rent Cash 8,000 8,000 *Note: Both accounts affected are assets Here is the transaction in T-account form.

36 Slide Record the complete entry in general journal form. Recording Prepaid Rent GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. Nov. 30 Prepaid Rent 8, Cash 8, Paid Dec. and Jan. rent in advance; Check 1004 Here is the general journal entry, with the note.

37 Slide 37 Recording Month s (December) Transactions in the General Journal

38 Slide Analyze the financial event. 2. Apply the rules of debit and credit. Performed services for $36,000 in cash. December 31, Customer Invoice Which account is debited? For what amount? Which account is credited? For what amount? When the business performs consulting services and gets paid immediately, Well s Consulting will debit Cash for $36,000 and credit Fees Income for the same amount.

39 Slide Make the entry in T-account form. Performed services for $36,000 in cash. December 31, Customer Invoice ,000 Cash Fees Income 36,000 Here is the transaction in T account form.

40 Slide Record the complete entry in general journal form. Performed services for $36,000 in cash. December 31, Customer Invoice GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF Dec. 10 Cash 36, Fees Income 36, Performed services for cash. Invoice Note: Change in page number Here is the general journal entry. As the accounting period changes from November to December, the journal will start on a new page. The other rule for a new page number is if a page fills the next page is numbered in serial sequence. Notice the errors and how for audit purpose, small lines are used to cross-out the wrong information. The correct information is written next to the error.

41 Slide Analyze the financial event. 2. Apply the rules of debit and credit. Performed services for $11,000 on credit. December 31, Customer Invoice For what amount? Which account is debited? Which account is credited? For what amount? When the firm performs services for credit clients, it will debit Accounts Receivable and credit Fees Income for $11,000.

42 Slide Make the entry in T-account form. Performed services for $11,000 on credit. December 31, Customer Invoice Accounts Receivable 11,000 Fees Income 11,000 Record the revenue as earned even if you haven t received the cash. Remember to record the revenue even if you haven t gotten paid because you have EARNED the money. The three elements required for revenue recognition: 1. Known Price 2. Transfer of title of good or Acceptance by customer of service 3. High probability of payment; Cash or Accounts Receivable

43 Slide Record the complete entry in general journal form. Performed services for $11,000 on credit. December 31, Customer Invoice GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Accounts Receivable 11, Fees Income 11, Performed services on credit. Invoice 3370 Here is the general journal entry on the 31 st. Notice the invoice number in the note

44 Slide Analyze the financial event. 2. Apply the rules of debit and credit. Received $6,000 in cash from credit clients on their accounts, December 31, Which account is debited? For what amount? Which account is credited? For what amount? When the firm collects $6,000 from credit customers, it needs to debit Cash and credit Accounts Receivable.

45 Slide Record the complete entry in general journal form. Received $6,000 in cash from credit clients on their accounts, December 31, GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Cash 6, Accounts Receivable 6, Received cash from credit clients on account Here is the general journal entry. What is missing? The Note should have the invoice number for the original sale

46 Slide Analyze the financial event. 2. Apply the rules of debit and credit. Paid $8,000 for salaries, December 31, Checks Which account is debited? Which account is credited? For what amount? For what amount? When the business pays $8,000 salaries expense to its employees, they would debit Salaries Expense for $8,000 and credit Cash for the same amount.

47 Slide Make the entry in T-account form. Paid $8,000 for salaries, December 31, Check Salaries Expense 8,000 Cash 8,000 Here is the transaction in T-account form.

48 Slide Record the complete entry in general journal form. Paid $8,000 for salaries, December 31, Checks GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Salaries Expense 8, Cash 8, Paid monthly salaries to employees, Check And, here is the general journal entry. Notice the sequence of checks used to pay the employees

49 Slide Analyze the financial event. 2. Apply the rules of debit and credit. Paid $650 for a utility bill. Which account is debited? Which account is credited? For what amount? For what amount? When the business pays a utility bill of $650, it will debit Utilities Expense and credit Cash for the $650.

50 Slide Make the entry in T-account form. Paid $650 for a utility bill, December 31, Check 1007 Utilities Expense 650 Cash 650 Here is the transaction in T account form.

51 Slide Record the complete entry in general journal form. Paid $650 for a utility bill, December 31, Check 1007 GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Utilities Expense Cash Paid monthly bill for utilities, Check 1007 Here is the general journal entry, notice the check number in the note

52 Slide Analyze the financial event. 2. Apply the rules of debit and credit. The owner withdrew $5,000 for personal expenses, December 31, 2016, Check Which account is debited? Which account is credited? For what amount? For what amount? When the owner withdraws $5,000 for personal use, the accountant will debit the Carolyn Wells, Drawing account and credit the Cash account for the $5,000 withdrawal.

53 Slide Make the entry in T-account form. The owner withdrew $5,000 for personal expenses, December 31, 2016, Check Carolyn Wells, Drawing 5,000 Cash 5,000 In T account form, this is what the transaction looks like.

54 Slide Record the complete entry in general journal form. The owner withdrew $5,000 for personal expenses, December 31, 2016, Check GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Carolyn Wells, Drawing 5, Cash 5, Owner withdrew cash for personal expenses, Check 1008 Here is the general journal entry on the 31 st, including the check # for the cash event

55 Slide Analyze the financial event. 2. Apply the rules of debit and credit. Received $6,000 in cash from credit clients on their accounts, December 31, Which account is debited? For what amount? Which account is credited? For what amount? When the firm collects $6,000 from credit customers, it needs to debit Cash and credit Accounts Receivable.

56 Slide Record the complete entry in general journal form. Received $6,000 in cash from credit clients on their accounts, December 31, GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Cash 6, Accounts Receivable 6, Received cash from credit clients on account Here is the general journal entry, once again should have the invoice number of the original sale included in the note.