Week 5, Chap 4 Part 2

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1 Slide 1 Week 5, Chap 4 Part 2 The General Journal and the General Ledger Instructor: Michael Booth

2 Slide 2 The General Journal Objective Prepare compound journal entries. McGraw-Hill 2007 The McGraw-Hill Companies, Inc. All rights reserved. The second objective of this chapter shows how to enter a compound journal entry into the general journal.

3 Slide 3 Preparing Compound Entries

4 Slide 4 Business Transaction Let s go back to the November 7 transaction. Suppose that Well s Consulting Services purchased equipment for $5,000, issued a check for $2,500, and agreed to pay the balance in 30 days. Let s journalize a transaction that affected more than two accounts.

5 Slide 5 1. Analyze the financial event. 2. Apply the rules of debit and credit. November 7, 2016, Purchase Equipment $5,000 Partial Payment $2,500, Check 1001 Balance Due $5,000 in 30 days. Which account is debited? For what amount? Which account(s) is/are credited? For what amount? To record the $5,000 purchase of equipment when only half is paid up front and the other half is on account, Well s Consulting Services would debit the Equipment account for the cost--$5,000. Then it would credit Cash for $2,500 and credit Accounts Payable for the remaining $2,500 owed on the equipment.

6 Slide 6 3. Make the entry in T-account form. November 7, 2016, Purchase Equipment $5,000 Partial Payment $2,500, Check 1001 Balance Due $2,500 in 30 days. Equipment Cash Accounts Payable 5,000 2,500 2,500 Notice that this entry has one debit and two credits. This is a compound entry. Notice that there are three accounts effected. Debits must equal credits ($5,000 = $5,000)

7 Slide 7 QUESTION: What is a compound entry? ANSWER: A compound entry is a journal entry that contains more than one debit or credit. Since more than two accounts were affected in the purchase of the equipment, we need to make a compound journal entry.

8 Slide 8 4. Record the complete entry in general journal form. November 7, 2016, Purchase Equipment $5,000 Partial Payment $2,500, Check 1001 Balance Due $2,500 in GENERAL 30 days. JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. Nov. 7 Equipment 5, Cash 2, Accounts Payable 2, Bought equip. from The Information Technology Store, Inv. 11, issued Ck for $2,500, bal. due in 30 days 5, = 5, No matter how many accounts are affected by a transaction, total debits must equal total credits. The debited accounts are listed first and then the credited accounts are next. Equipment is debited and Cash and Account Payable are credited.

9 Slide 9 The General Ledger Objectives Post journal entries to general ledger accounts. Correct errors made in the journal or ledger. The third objective of this chapter shows us how to post journal entries into accounts in the general ledger.

10 Slide 10 Ledgers We will now be taking our general journal entries and transferring them to our ledger.

11 Slide 11 QUESTION: What is a ledger? ANSWER: A ledger is the record of final entry. It is the last place that accounting transactions are recorded. A ledger is the record of final entry. It is the last place that accounting transactions are recorded.

12 Slide 12 Ledgers The ledger contains a separate form for each account. The third step of the accounting cycle is posting to the ledger. We learned how to journalize in our previous section that was the second step in the accounting cycle, now let s learn the third step in our accounting cycle: posting to ledgers.

13 Slide 13 QUESTION: What is posting? ANSWER: Posting is the process of transferring data from a journal to a ledger. When we transfer data from the general journal to the ledger, this is called posting.

14 Slide 14 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 Posting, the verb for recording in the General Ledger, is the third step in the accounting cycle.

15 Slide 15 The General Ledger We will now be taking our general journal entries and transferring them to our ledger.

16 Slide 16 QUESTION: What is a general ledger? ANSWER: A general ledger is a permanent, classified record of all accounts used in a firm s operation. T accounts represent the accounts in our ledger. All of our journal entries will update accounts in the ledger.

17 Slide 17 The General Ledger Every business has a general ledger. The general ledger is the master reference file for the accounting system. The general ledger is the master reference file for the business.

18 Slide 18 Ledger Account Forms We will now be taking our general journal entries and transferring them to our ledger.

19 Slide 19 Ledger Account Forms On the ledger account form shown below, notice the: Account name and number Columns for date, description, and posting reference Columns for debit, credit, debit balance, and credit balance ACCOUNT CASH ACCOUNT NO. 101 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Nov. 6 J1 100, , The general ledger looks a lot like the general journal but it has two additional BALANCE columns.

20 Slide 20 Posting to the General Ledger We will now be taking our general journal entries and transferring them to our ledger.

21 Slide 21 Post journal entries to general ledger accounts. Posting is the 3 rd objective of this chapter.

22 Slide 22 Post to the general ledger in five steps. 1. On the ledger form, enter the date of the transaction. Enter a description of the entry, if necessary. Usually, routine entries do not require descriptions. 2. On the ledger form, enter the general journal page in the Posting Reference column. 3. On the ledger form, enter the debit amount in the Debit column or the credit amount in the Credit column. Let s review the five steps of posting from the general journal to the general ledger.

23 Slide 23 Post to the general ledger in five steps. (cont.) 4. On the ledger form, compute the balance and enter it in the Debit Balance column or the Credit Balance column. 5. On the general journal, enter the ledger account number in the Posting Reference column.

24 Slide 24 Step 1: On the ledger form, enter the date of the transaction. Enter a description of the entry, if necessary. Usually, routine entries do not require descriptions. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Nov. 7 Equipment 5, Cash 5, Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO. 141 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Nov. 7 J1 5, , Step one: transfer the date and description (if necessary).

25 Slide 25 Step 2: On the ledger form, enter the general journal page in the Posting Reference column. The letter J refers to the general journal. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Nov. 7 Equipment 5, Cash 5, Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO. 141 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Nov. 7 J1 5, , Next, write the Journal page that the journal entry is on in the Posting Reference column in the General Ledger. J refers to journal.

26 Slide 26 Step 3: On the ledger form, enter the debit amount in the Debit column or the credit amount in the Credit column. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Nov. 7 Equipment 5, Cash 5, Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO. 141 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Nov. 7 J1 5, , Next, transfer the dollar amount to either the debit or the credit column of the general ledger action columns.

27 Slide 27 Step 4: On the ledger form, compute the balance and enter it in the Debit Balance column or the Credit Balance column. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Nov. 7 Equipment 5, Cash 5, Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO. 141 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Nov. 7 J1 5, , Make sure that you enter the balance of the account after posting from the general journal. (This is the most up-to-date balance in the account.)

28 Slide 28 Step 5: On the general journal, enter the ledger account number in the Posting Reference column. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Nov. 7 Equipment 141 5, Cash 5, Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO. 141 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Nov. 7 J1 5, , The last thing you need to do is write the account number of the account in the POST REF column of the general journal. This indicates that the journal entry has been posted to the general ledger.

29 Slide 29 Review the Posting Process GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Nov. 7 Equipment 141 5, Cash 101 5, Purchased equipment Check 1001 ACCOUNT Cash ACCOUNT NO. 101 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Nov. 6 J1 100, , Nov. 7 J1 5, , Let s review the posting process.

30 Slide 30 In the general ledger accounts, the balance sheet accounts appear first and are followed by the income statement accounts. The order is: Assets Liabilities Owner s equity Revenue Expenses General Ledger Accounts This order of accounts speeds the preparation of the trial balance and the financial statements. The general ledger contains all of the accounts that exist in a business and all of their activity. Balance sheet accounts are listed first, then the income statement accounts are listed next.

31 Slide 31 The General Ledger Objective Correct errors made in the journal or ledger. McGraw-Hill 2007 The McGraw-Hill Companies, Inc. All rights reserved. The last objective of chapter 4 shows us how to correct errors made in the journal or ledger.

32 Slide 32 Correcting Journal and Ledger Errors

33 Slide 33 Journal and Ledger Errors Sometimes errors are made when recording transactions in the journal. The method used to correct an error depends on whether or not the journal entry has been posted to the ledger. If the accountant wants to correct an error, the correction method will depend on whether or not the journal entry has been posted yet to the general ledger.

34 Slide 34 Correcting Journal and Ledger Errors If an error is discovered before the entry is posted, neatly cross out the incorrect item and write the correct data above it. To ensure honesty and provide a clear audit trail, erasures are not made in the journal. Here is one correction method.

35 Slide 35 Before Posting On September 1 an automobile repair shop purchased some shop equipment for $9,000 in cash. By mistake the journal entry debited the Office Equipment account rather than the Shop Equipment account. Let s practice correcting an error that was discovered before it was posted to the general ledger.

36 Slide 36 Before Posting GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. Shop Equipment 2016 Sept. 1 Office Equipment 9, Cash 9, Purchased equipment Check 2141 The accountant would neatly cross out Office Equipment and write Shop Equipment above it. The correct account Shop Equipment would be posted to the ledger in the usual manner. Cross out the incorrect account and write the correct account above the crossed out one. Post like normal after the correction is made.

37 Slide 37 Correcting Journal and Ledger Errors If the error is discovered after posting, a correcting entry a journal entry made to correct the erroneous entry is journalized and posted. Do not erase or change the journal entry or the postings in the ledger accounts. Note that erasures are never permitted in the journal or ledger. What if the error is discovered after posting? It is important never to erase in the journal or the ledger.

38 Slide 38 After Posting On September 1 an automobile repair shop debited Office Equipment rather than Shop Equipment for $9,000 by mistake. The debit was posted to the Office Equipment account in the general ledger. A correcting journal entry must be journalized and posted. If the error is discovered after being posted to the general ledger, then a correcting journal entry must be journalized and posted.

39 Slide 39 QUESTION: What is a correcting entry? ANSWER: A correcting entry is a journal entry made to correct an erroneous entry. A correcting entry is simply another journal entry which corrects a previous journal entry.

40 Slide 40 After Posting GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Sept. 1 Office Equipment 141 9, Cash 101 9, Purchased equipment Check 2141 This erroneous journal entry was posted to the general ledger. In this journal entry Office Equipment was debited instead of Shop Equipment. To correct this error, a correcting journal entry must be made..

41 Slide 41 After Posting GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Oct. 1 Shop Equipment 151 9, Office Equipment 141 9, To correct error made on Sept. 1 when a purchase of shop equipment was recorded as office equipment The correcting journal entry debits Shop Equipment and credits Office Equipment for $9,000. The entry transfers $9,000 out of the Office Equipment and into the Shop Equipment account. Here is the correcting journal entry.

42 Slide 42 SECTION R E Complete the following sentences: The ledger is called the record of final entry because it is the last place where accounting transactions are recorded. V I E W Posting is the process of transferring data from a journal to a ledger. The general ledger is the master reference file for the accounting system. Can you answer these questions?

43 Slide 43 SECTION R E Complete the following sentences: The first three steps of the accounting cycle are to, analyze, journalize and post transactions. V I E W Posting references are an important part of the audit trail. A correcting entry is a journal entry made to correct an erroneous entry.

44 Slide 44 SECTION R E Complete the following sentences: A journal is a diary of business activities. V I E W The journal is sometimes called the record of original entry because it is where transactions are first entered in the accounting records. The general journal is a financial record for entering all types of business transactions. The journal is a diary of business activities. The Journal is sometimes called the record of original entry because it is where transactions are first entered in the accounting records. The general journal is a financial record for entering all types of business transactions.

45 Slide 45 SECTION R E V I E W Complete the following sentences: Journalizing is the process of recording transactions in the general journal. The audit trail is a chain of references that makes it possible to trace information, locate errors, and prevent fraud. A journal entry that contains more than one debit or credit is called compound a. entry Journalizing is the process of recording transactions in the general journal. The audit trail is a chain of references that makes it possible to trace information, locate errors, and prevent fraud. A journal entry that contains more than one debit or credit is called a compound entry.

46 Slide 46 Assignments: See web: http//cabrillo.edu/~mbooth This will be updated weekly as required