Journalizing Transactions Chapter 4

Objectives Define accounting terms related to journalizing transactions. Identify accounting concepts and practices related to journalizing transactions. Record in a five-column journal transactions to set up a business. Record in a five-column journal transactions to buy insurance for cash and supplies on account. Record in a five-column journal transactions that affect owner’s equity and receiving cash on account. Prove and rule a five-column journal and prove cash.

Journals and Journalizing Transactions are analyzed into debit and credit parts before information is recorded. Journal- a form for recording transactions in chronological order. Journalizing- recording transactions in a journal. Journals create a more permanent record of transactions.

Journals and Journalizing Businesses use different journals to fit the needs of the business. The nature of the business and the # of transactions to be recorded determine the kind of journal to be used.

Five-Column Journal Special Amount Column- a journal amount column headed with an account title Special amount columns are used when certain transactions occur often. Encores three special amount columns: Sales Credit, Cash Debit, Cash Credit These columns save time

Five-Column Journal IMPORTANT CONCEPTS WHEN USING A JOURNAL: Accuracy- Debits and Credits MUST be in the right place. Verify info in a journal with the transaction data. Chronological Order- Transactions are recorded in order by date. All info is recorded in one place, making info for a specific transaction easy to locate. Double-Entry Accounting-

Five-Column Journal Double Entry Accounting Entry- info for each transaction recorded in a journal. Double-Entry Accounting- recording of debits and credits of a transaction Each transaction affects at least two accounts Debits and Credits MUST equal

Source Documents Source Document- a business paper from which info is obtained for a journal entry Information needed to record entries in the journal is obtained from source documents. An entry generally cannot be recorded unless there is a source document to support it. A source document proves the transaction occurred and provides documentation if an entry is questioned later.

Source Documents OBJECTIVE EVIDENCE CONCEPT: A source document is prepared for each transaction. A transaction should be journalized only if it actually occurs. The amounts recorded must be true and accurate

Source Documents Check- a business form ordering a bank to pay cash from a bank account. Checks are source documents for cash payments. Stubs are sometimes used to record information to account for checks. What kinds of information is important on a check? (Pay to the order of, Date, Check No., Amount)

Source Documents Sales Invoice Invoice- a form describing the goods or services sold, the quantity, and the price. Sales Invoice- An invoice used as a source document for recording a sale on account Used when products/services are sold on account. A sales invoice is prepared in duplicate, original copy going to the customer. This is the OBJECTIVE EVIDENCE CONCEPT b/c the copy is used as a source document. Sales invoices are numbered in sequence.

Source Documents Receipt- a business form giving written acknowledgement for cash received. Receipts are prenumbered and act as a source document for cash received from transactions other than sales (OBJECTIVE EVIDENCE CONCEPT)

Source Documents Memorandum- a form on which a brief message is written describing a transaction. When no other source document is prepared for a transaction, or additional explanation is needed about a transaction. Premumbered with a brief note written to describe the transaction.

Source Documents Calculator Tape When cash is collected for products or services at the time they are sold, the info goes to a calculator tape. The calculator totals the amount of cash received from sales at the end of the day. Totaling all individual sales allows for one source document for a days sales. The date is put on each tape. T12 means the tape is for the 12th day of the month.

Journal Entries An entry consists of FOUR parts: Date Debit Credit Source Document Before a transaction is recorded, it must be broken into debit and credit parts.

Journal Entries Journals are considered permanent accounting records and are usually required to be in ink. We will use pencil for learning purposes. Journalizing cash received from owner as an investment Using the General columns--write the account title in the Account Title column Journalizing paid cash for supplies Work Together & On Your Own pg 71

Audit Your Understanding In what order are transactions recorded in a journal? Why are source documents important? List the four parts of a journal entry.

Journal Entries Paid cash for insurance Bought supplies on account Some sales on account are recorded immediately. A memorandum is prepared that shows supplies received on account Two line entries Paid cash on account Work Together & On Your Own pg 75

Audit Your Understanding Which journal columns are used to record paying cash for insurance? Which journal columns are used to record buying supplies on account? Which journal columns are used to record paying cash on account?

Journal Entries Received cash from sales Sold services on account When both amounts are recorded in special columns, place a check mark in the account title and Post Ref columns. Sold services on account Paid cash for an expense Whenever cash is paid for an expense, the journal entry is similar to the entry discussed above. The expense account will be the only difference.

Journal Entries Received cash on account Paid cash to owner for personal use Work Together & On Your Own pg 81

Audit Your Understanding Which journal is used to record receiving cash from sales? Which journal is used to record sales on account? Which journal is used to record paying cash for an expense? Which journal is used to record receiving cash on account? Which journal is used to record paying cash to owner for personal use?

Proving and Ruling a Journal Proving a Journal Each page of journal MUST be proved before it is forwarded to continue recording transactions, to ensure that totals forwarded are accurate. DEBITS MUST EQUAL CREDITS. STEPS: Proving a journal page Add each of the amount columns. Use a calculator is one is available. Add the debit column totals, and then add the credit column totals. 3. Verify that the total debits and total credits are equal. When they are equal, the page is proved

Proving and Ruling a Journal After a journal page is proved, it is ruled. STEPS: Ruling a journal page Rule a SINGLE line across all amount columns directly below the last entry Write the date on the next line in the Date column Write the words Carried Forward in the Account Title column. Place a check mark in the Post. Ref. column Write each column total below the single line. 5. Rule DOUBLE lines below the column totals across all amount columns. DOUBLE lines means totals are verified as correct.

Starting a New Journal Page The column totals from the previous page are carried forward to a new page. STEPS: Starting a new journal page Write the page number at the top of the journal page Write the date in the Date column Write Brought Forward in the Account Title column. Place a check mark in the Post. Ref. column 4. Record the column totals brought forward from the previous page

Proving and Ruling at the End of the Month Proving cash- determining that the amount of cash agrees with the accounting records Cash can be proved at any time STEPS: Proving cash Calculate the cash balance --Cash on hand at the beginning of the month --PLUS total cash received during the month (Cash Dr) --LESS total cash paid during the month (Cash Cr) --EQUALS cash balance at the end of the month --Checkbook balance on the next unused stub 2. Verify that the cash balance EQUALS the checkbook balance on the next unused stub in the checkbook

Proving and Ruling at the End of the Month Ruling a journal at the end of the month is similar to those for ruling a journal page to carry the totals forward. Write Totals in the Account Title column.

Standard Accounting Practices Correct errors by neatly drawing a line through the incorrect item. Write the correct item immediately above the canceled item. Entire entry incorrect – Draw neat lines through all parts of the incorrect entry. Journalize the entry correctly on the next blank line.

Standard Accounting Practices 3. Correct entries below incorrect entry – Draw neat lines through all incorrect parts of the entry. Record the correct items on the same lines as the incorrect items, directly above the canceled parts. 4. Only abbreviate when space is limited.

Standard Accounting Practices 5. No dollars and cents signs, use lines on the paper. 6. Two zeros are written in the cents columns when an amount is in even dollars. Do not leave the cents column blank. 7. A single line is ruled across amount columns to indicate addition or subtraction. 8. A double line is ruled across amount columns to indicate that the totals have been verified as correct.

Standard Accounting Practices 9. Neatness is very important in accounting records so there is no doubt about the information. Work Together & On Your Own pg 87

Audit Your Understanding List the three steps for proving a journal. State the formula for proving cash. List the five steps to rule a journal at the end of a month.