Week 4/5, Chap 4. The General Journal and the General Ledger. Instructor: Michael Booth

Week 4/5, Chap 4 The General Journal and the General Ledger Instructor: Michael Booth

Complete the trial balance 1. Enter the trial balance heading showing the company name, report title, and closing date for the accounting period. 2. List the account names in the same order as they appear on the financial statements. Assets Liabilities Owner s Equity Revenue Expenses in six steps.

Complete the trial balance in six steps. 3. Enter the ending balance of each account in the appropriate Debit or Credit column. 4. Total the Debit column. 5. Total the Credit column. 6. Compare the total debits with the total credits.

Assets = Liabilities + Owner s Equity

Financial Statements

Prepare an income statement, a statement of owner s equity, and a balance sheet.

After the trial balance is prepared, the financial statements are prepared. Net income from the income statement is used on the statement of owner s equity. The ending balance of the Owner s, Capital account, computed on the statement of owner s equity, is used on the balance sheet.

Wells CONSULTING SERVICES Income Statement Month Ended December 31, 2010 Revenue Fees Income 47,000.00 Expenses Salaries Expense 8,000.00 Utilities Expense 650.00 Total Expenses 8,650.00 Net Income 38,350.00 Wells CONSULTING SERVICES Statement Of Owner s Equity Month Ended December 31, 2010 Carolyn Wells, Capital, Dec. 1, 2010 100,000.00 Net Income for December 38,350.00 Less Withdrawals for December 5,000.00 Increase in Capital 33,350.00 Carolyn Wells, Capital, Dec. 31, 2010 133,350.00 Wells CONSULTING SERVICES Balance Sheet December 31, 2010 ASSETS LIABILITIES Cash 111,350.00 Accounts Payable 3,500.00 Accounts Receivable 5,000.00 Supplies 1,500.00 Prepaid Rent 8,000.00 OWNER S EQUITY Equipment 11,000.00 Carolyn Wells, Capital 133,350.00 Total Assets 136,850.00 Total Liabilities and Owner s Equity 136,850.00

McGraw-Hill 2007 The McGraw-Hill Companies, Inc. All rights reserved. The General Journal and the General Ledger The General Journal Section Objectives 1. Record transactions in the general journal. 2. Prepare compound journal entries.

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.

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

Journals

QUESTION: What is a journal? ANSWER: A journal is a record of original entry.

Journal A journal is a diary of business activities. There are different types of journals. Transactions are entered in the journal in chronological order.

QUESTION: What is chronological order? ANSWER: Chronological order is the order in which events occur.

The General Journal

Record transactions in the general journal.

QUESTION: What is a general journal? ANSWER: A general journal is a financial record for entering all types of business transactions.

QUESTION: What is journalizing? ANSWER: Journalizing is the process of recording transactions in a journal.

GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2010 Nov. 6 Cash Carolyn Wells, Capital 100,000.00 100,000.00 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.

GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2010 Nov. 6 Cash 100,000.00 Carolyn Wells, Capital 100,000.00 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.

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.

Recording Month s (November) Transactions in the General Journal

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.

1. 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.

2. Apply the rules of debit and credit. Cash Investment by Owner Which account is debited? Which account is credited? For what amount? For what amount?

3. Make the entry in T-account form. Cash Investment by Owner 100,000 Cash Carolyn Wells, Capital 100,000

4. Record the complete entry in general journal form. Cash Investment by Owner GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2010 Nov. 6 Cash 100,000.00 Carolyn Wells, Capital 100,000.00 Investment by owner Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account affected.

1. 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.

3. Make the entry in T-account form. Cash Purchase of Equipment Equipment Cash 5,000 5,000

4. 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 5,000.00 Cash 5,000.00 Purchased equip., Check 1001

1. Analyze the financial event. Business Transaction On November 10, Wells Consulting Services purchased office equipment on account for $6,000.

3. Make the entry in T-account form. Credit Purchase of Equipment 6,000 Equipment Accounts Payable 6,000

4. 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 6,000.00 Accounts Payable 6,000.00 Purchased equipment on account from Office Plus, Inv. 2223, due in 60 days All required information should be included in the explanation.

1. 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 1002. Which account is debited? For what amount? Which account is credited? For what amount?

3. Make the entry in T-account form. Cash Purchase of Supplies Supplies Cash 1,500 1,500

4. 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 1,500.00 Cash 1,500.00 Purchased supplies, Ck. 1002

1. 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 1003. Which account is debited? For what amount? Which account is credited? For what amount?

3. Make the entry in T-account form. Payment to a Creditor Accounts Payable Cash 2,500 2,500

4. 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 2,500.00 Cash 2,500.00 Paid on account, Office Plus, Invoice 2223, Check 1003

1. 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?

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

4. 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 8,000.00 Cash 8,000.00 Paid Dec. and Jan. rent in advance; Check 1004

Recording Month s (December) Transactions in the General Journal

1. Analyze the financial event. 2. Apply the rules of debit and credit. Performed services for $36,000 in cash. December 31, 2010. Customer Invoice 3369. Which account is debited? For what amount? Which account is credited? For what amount?

3. Make the entry in T-account form. Performed services for $36,000 in cash. December 31, 2010. Customer Invoice 3369. 36,000 Cash Fees Income 36,000

4. Record the complete entry in general journal form. Performed services for $36,000 in cash. December 31, 2010. Customer Invoice 3369. GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT 2010 REF. 2009 31 Dec. 10 Cash 36,000.00 Fees Income 36,000.00 Performed services for cash. Invoice 3369. Note: Change in page number

1. Analyze the financial event. 2. Apply the rules of debit and credit. Performed services for $11,000 on credit. December 31, 2010. Customer Invoice 3370. For what amount? Which account is debited? Which account is credited? For what amount?

3. Make the entry in T-account form. Performed services for $11,000 on credit. December 31, 2010. Customer Invoice 3370. Accounts Receivable 11,000 Fees Income 11,000 Record the revenue as earned even if you haven t received the cash.

4. Record the complete entry in general journal form. Performed services for $11,000 on credit. December 31, 2010. Customer Invoice 3370. GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Accounts Receivable 11,000.00 Fees Income 11,000.00 Performed services on credit. Invoice 3370

1. 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, 2010. Which account is debited? For what amount? Which account is credited? For what amount?

4. Record the complete entry in general journal form. Received $6,000 in cash from credit clients on their accounts, December 31, 2010. GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Cash 6,000.00 Accounts Receivable 6,000.00 Received cash from credit clients on account

1. Analyze the financial event. 2. Apply the rules of debit and credit. Paid $8,000 for salaries, December 31, 2010. Checks 1005-1006 Which account is debited? Which account is credited? For what amount? For what amount?

3. Make the entry in T-account form. Paid $8,000 for salaries, December 31, 2010. Check 1005-1006 Salaries Expense 8,000 Cash 8,000

4. Record the complete entry in general journal form. Paid $8,000 for salaries, December 31, 2010. Checks 1005-1006 GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Salaries Expense 8,000.00 Cash 8,000.00 Paid monthly salaries to employees, Check 1005-1006

1. 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?

3. Make the entry in T-account form. Paid $650 for a utility bill, December 31, 2010. Check 1007 Utilities Expense 650 Cash 650

4. Record the complete entry in general journal form. Paid $650 for a utility bill, December 31, 2010. Check 1007 GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Utilities Expense 650.00 Cash 650.00 Paid monthly bill for utilities, Check 1007

1. Analyze the financial event. 2. Apply the rules of debit and credit. The owner withdrew $5,000 for personal expenses, December 31, 2010, Check 1008. Which account is debited? Which account is credited? For what amount? For what amount?

3. Make the entry in T-account form. The owner withdrew $5,000 for personal expenses, December 31, 2010, Check 1008. Carolyn Wells, Drawing 5,000 Cash 5,000

4. Record the complete entry in general journal form. The owner withdrew $5,000 for personal expenses, December 31, 2010, Check 1008. GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Carolyn Wells, Drawing 5,000.00 Cash 5,000.00 Owner withdrew cash for personal expenses, Check 1008

3. Record the complete entry in general journal form. Received $6,000 in cash from credit clients on their accounts, December 31, 2010. GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Cash 6,000.00 Accounts Receivable 6,000.00 Received cash from credit clients on account

In Class Exercise 4.1B

Preparing Compound Entries

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.

1. Analyze the financial event. 2. Apply the rules of debit and credit. November 7, 2010, 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?

3. Make the entry in T-account form. November 7, 2010, 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.

QUESTION: What is a compound entry? ANSWER: A compound entry is a journal entry that contains more than one debit or credit.

4. Record the complete entry in general journal form. November 7, 2010, Purchase Equipment $5,000 Partial Payment $2,500, Check 1001 Balance Due $2,500 in 30 days. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. Nov. 7 Equipment 5,000.00 Cash 2,500.00 Accounts Payable 2,500.00 Bought equip. from The Information Technology Store, Inv. 11, issued Ck. 1001 for $2,500, bal. due in 30 days 5,000.00 = 5,000.00 No matter how many accounts are affected by a transaction, total debits must equal total credits.

Ledgers

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

Ledgers The ledger contains a separate form for each account. The third step of the accounting cycle is posting to the ledger.

QUESTION: What is posting? ANSWER: Posting is the process of transferring data from a journal to a ledger.

The General Ledger

QUESTION: What is a general ledger? ANSWER: A general ledger is a permanent, classified record of all accounts used in a firm s operation.

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

Ledger Account Forms

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 2010 Nov. 6 J1 100,000.00 100,000.00

Posting to the General Ledger

Post journal entries to general ledger accounts.

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.

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.

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. 2010 Nov. 7 Equipment 5,000.00 Cash 5,000.00 Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO. 141 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2010 Nov. 7 J1 5,000.00 5,000.00

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. 2010 Nov. 7 Equipment 5,000.00 Cash 5,000.00 Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO. 141 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2010 Nov. 7 J1 5,000.00 5,000.00

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. 2010 Nov. 7 Equipment 5,000.00 Cash 5,000.00 Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO. 141 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2010 Nov. 7 J1 5,000.00 5,000.00

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. 2010 Nov. 7 Equipment 5,000.00 Cash 5,000.00 Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO. 141 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2010 Nov. 7 J1 5,000.00 5,000.00

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. 2010 Nov. 7 Equipment 141 5,000.00 Cash 5,000.00 Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO. 141 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2010 Nov. 7 J1 5,000.00 5,000.00

Review the Posting Process GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2010 Nov. 7 Equipment 141 5,000.00 Cash 101 5,000.00 Purchased equipment Check 1001 ACCOUNT Cash ACCOUNT NO. 101 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2010 Nov. 6 J1 100,000.00 100,000.00 Nov. 7 J1 5,000.00 95,000.00

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.

Correcting Journal and Ledger Errors

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.

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.

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.

Before Posting GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2010 Shop Equipment Sept. 1 Office Equipment 9,000.00 Cash 9,000.00 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.

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.

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.

QUESTION: What is a correcting entry? ANSWER: A correcting entry is a journal entry made to correct an erroneous entry.

After Posting GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2010 Sept. 1 Office Equipment 141 9,000.00 Cash 101 9,000.00 Purchased equipment Check 2141 This erroneous journal entry was posted to the general ledger.

After Posting GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2010 Oct. 1 Shop Equipment 151 9,000.00 Office Equipment 141 9,000.00 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.

SECTION Complete the following sentences: R E 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.

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

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.

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

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