The General Journal and the General Ledger Chapter Three The General Journal and the General Ledger

Performance Objectives Record a group of transactions pertaining to a service enterprise in a two-column general journal Post entries from a two-column general journal to general ledger accounts Copyright © Houghton Mifflin Company. All rights reserved.

Performance Objectives Prepare a trial balance from the ledger accounts Correct entries using the ruling method Correct entries using the correcting entry method Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Last Chapter Record Business Transaction in Account After Footing Accounts, Send Account Balances to Trial Balance After DR = CR in Trial Balance, Create Financial Statements Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. This Chapter Record Business Transaction in General Journal: “Journal Entries” Post Journal Entries to Accounts in the Ledger After Footing Accounts, Send Account Balances to Trial Balance Copyright © Houghton Mifflin Company. All rights reserved.

Performance Objective 1 Record a group of transactions pertaining to a service enterprise in a two-column general journal Copyright © Houghton Mifflin Company. All rights reserved.

What Is a General Journal? The book in which a person enters the original record of a business transaction Commonly referred to as a book of original entry Chronological listing of all the business transactions for the company Each listing records the debits and credits associated with that business transaction A book or a location on a hard drive where all business transactions are listed Like a diary Copyright © Houghton Mifflin Company. All rights reserved.

Two-Column General Journal A general journal in which there are two amount columns One used for debit amounts One used for credit amounts Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Other Journals What are they? General journal (this chapter) Sales journal (Chapter 10) Purchases journal (Chapter 10) Cash receipts journal (Chapter 11) Cash payments journal (Chapter 11) Why different journals? Separation of duties Efficiency and accuracy in recording accounting information Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Journalizing The process of recording a business transaction in a journal Copyright © Houghton Mifflin Company. All rights reserved.

Example of Business Transaction Recorded in the General Journal Create a journal entry for each transaction. Copyright © Houghton Mifflin Company. All rights reserved.

What’s in a Journal Entry? Date At least one debit entry Debit account, use exact account title, do not indent titles At least one credit entry Credit account, use exact account title, indent titles An explanation of the transaction: Check number Invoice number Accounts receivable customer name Many other elements… Remember: the accountant must leave a good audit trail so that users of accounting information can understand what occurred with each transaction DR=CR Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Source Documents Business papers, such as checks, invoices, receipts, letters, and memos, that furnish proof that a transaction has taken place The objective evidence that the transaction occurred Example Copyright © Houghton Mifflin Company. All rights reserved.

Which Company Is Selling the Boomerangs? The company name at the top of the invoice indicates who is selling Knowing how to make this distinction will help you with: your practice sets at the end of this class! recording the correct journal entry Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Cost Principle The principle that a purchased asset should be recorded at its actual, or historical, cost Historical cost: Actual cost What you paid for it The amount that was on the receipt Remember: this is different from “market value” Look ahead: In Chapter 4 we will see that the historical cost principle is the reason we will create a new account for depreciation expense Copyright © Houghton Mifflin Company. All rights reserved.

Building the Journal Entry Date Copyright © Houghton Mifflin Company. All rights reserved.

Building the Journal Entry Debit Copyright © Houghton Mifflin Company. All rights reserved.

Building the Journal Entry Credit Copyright © Houghton Mifflin Company. All rights reserved.

Building the Journal Entry Explanation Copyright © Houghton Mifflin Company. All rights reserved.

Recording Transactions in a Two-Column General Journal We will be recording business transactions for a company with the following details: Owner name: L. P. Arch Business name: Arch Copy Co. Business type: Sole proprietorship (one-person business) Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Transaction (a): Arch deposited $70,000 in bank account in name of business Copyright © Houghton Mifflin Company. All rights reserved.

Transaction (b): Bought equipment costing $33,000, paying cash Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Transaction (c): Bought equipment on account from Melton Office Supply, $7,000 Copyright © Houghton Mifflin Company. All rights reserved.

Transaction (d): Paid Melton Office Supply, a creditor, $2,000 Copyright © Houghton Mifflin Company. All rights reserved.

The Debits and Credits Within a Journal Entry: Formulating the appropriate transaction debits and credits is the most important element in the accounting process It represents the very basic foundation of accounting, and all the structure represented by financial statements and other reports is entirely dependent upon it DR=CR Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Now Take a Look in the Book for the Rest of Arch Copy Co. Journal Entries Transaction (e): Arch invested her own personal data processing equipment in Arch Copy Co. having a fair market value of $6,200 Transaction (f): Arch Copy Co. sold services for cash, $2,520 Transaction (g): Paid rent for the month, $700 And the rest of the transactions from (g) to (s) Copyright © Houghton Mifflin Company. All rights reserved.

Performance Objective 2 Post entries from a two-column general journal to general ledger accounts Copyright © Houghton Mifflin Company. All rights reserved.

From General Journal to Ledger Accounts Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. General Ledger A loose-leaf book or computer file containing the activity (by accounts) of a business Each account from the chart of accounts has its own ledger account in the general ledger Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Chart of Accounts The official list of account titles used to record the transactions of a business The account number for each account Assets (100s) Owner's Equity (300s) 111 Cash 311 L.P. Arch, Capital 113 Accounts Receivable 312 L.P. Arch, Drawing 117 Prepaid Insurance 124 Equipment Revenues (400s) 411 Income from Services Liabilities (200s) 221 Accounts Payable Expenses (500s) 511 Wages Expense 512 Rent Expense 513 Supplies Expense 514 Advertising Expense 515 Utilities Expense Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Ledger Account Complete listing of business transactions for an individual account Where you look if you want to find the balance of any given account Copyright © Houghton Mifflin Company. All rights reserved.

T Account Compared with Ledger Account Bal. 34,120 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Posting The process of transferring figures from the journal to the ledger accounts Copyright © Houghton Mifflin Company. All rights reserved.

Four-Step Posting Process Transfer transaction date to account’s date column Transfer the debit/credit amount and calculate the new balance Write journal page number in posting reference column of ledger as a cross-reference Go back to journal and write account number in posting reference column of journal as a cross-reference Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Cross-reference The ledger account number in the Post. Ref. column of the journal and the journal page number in the Post. Ref. column of the ledger account Copyright © Houghton Mifflin Company. All rights reserved.

Posting—an Illustration Page # Account # Amount Date Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Post. Ref. in Journal Why don’t we write in the posting reference when we first create the journal entry? So we don’t forget to post it later! We want to do it only after we post it When we look in the journal, we know that we have already posted the entry We know what account to look at if there is a problem Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Posting Transaction (a): Arch deposited $70,000 in bank account in name of business Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Posting Transaction (a): Arch deposited $70,000 in bank account in name of business Copyright © Houghton Mifflin Company. All rights reserved.

Posting Arch Copy Co. Transactions (a) to (s) Your textbook presents each transaction and shows how to post it. Copyright © Houghton Mifflin Company. All rights reserved.

Performance Objective 3 Prepare a trial balance from the ledger accounts Copyright © Houghton Mifflin Company. All rights reserved.

Preparing a Trial Balance List the ledger account balances in two columns on the trial balance Left column = Debits Right column = Credits Trial balance proves DR = CR Copyright © Houghton Mifflin Company. All rights reserved.

Steps in the Accounting Process Journalize business transaction: Use source document to record journal entry in general journal Decide on accounts that are affected Enter Date Don’t indent debit Indent credit Write description DR = CR Post all journal entries to ledger accounts in general ledger Transfer date Transfer amount Record both cross references Transfer all totals to trial balance Copyright © Houghton Mifflin Company. All rights reserved.

If DR = CR on the Trial Balance, Can There Be Errors? Yes! Therefore, we must look at how to correct errors Copyright © Houghton Mifflin Company. All rights reserved.

Correct Entries Using the Ruling Method—Manual Correcting errors before posting has taken place Insert I -- corrected Mar. 1 entry, page 90 Copyright © Houghton Mifflin Company. All rights reserved.

Correct Entries Using the Ruling Method—Manual Correcting errors before posting has taken place Copyright © Houghton Mifflin Company. All rights reserved.

Correct Entries Using the Ruling Method—Manual Correcting errors after posting has taken place Copyright © Houghton Mifflin Company. All rights reserved.

Correcting Entry Method—Manual or Computerized One-step method Create journal entry to undo error and provide correction Always include explanation! Two-step method Reverse the error with a journal entry Make the correct journal entry Always include explanation! Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. One-Step Method Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Two-Step Method Copyright © Houghton Mifflin Company. All rights reserved.

Demonstration Problem We will be recording business transactions for the company with the following details: Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (a), 6/1/05: Nelson deposited $43,000 in a bank account in the name of business Journalize Copyright © Houghton Mifflin Company. All rights reserved.

Trans. (b), 6/5/05: Bought truck, paying cash, $23,000 Journalize Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (c), 6/6/05: Bought camper shell for truck on account from Louie's Trucks & Campers, $2,500 Journalize Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (d), 6/9/05: Paid Louie's Trucks & Campers, a creditor, $1,500, Ck. No. 4300 Journalize Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (e), 6/9/05: Nelson invested his own personal computer equipment, having a fair market value of $3,400, in WindSport Boomerang & Kite Demos Journalize Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (f), 6/14/05: Nelson and employee performed boomerang & kite demo for Girl Scouts and received $2,500, Ck. No. 12655 General Journal Page 1 Line # Post. Date Description Ref. . Debit Credit 1 2005 2 June 1 Cash 43,000.00 3 R. P. Nelson, Capital 43,000.00 4 Original investment by Nelson in WindSport Boomerang and Kite Demos. 5 6 5 Equipment 23,000.00 7 Cash 23,000.00 8 Bought equipment for cash. 9 10 6 Equipment 2,500.00 11 Accounts Payable 2,500.00 12 Bought equipment on account from Louie's Trucks & Campers. 13 14 9 Accounts Payable 1,500.00 15 Cash 1,500.00 16 Paid Louie's Trucks & Campers on account, Ck. No. 4300. 17 18 9 Equipment 3,400.00 19 R. P. Nelson, Capital 3,400.00 20 Investment by Nelson in WindSport Boomerang & Kite Demos. 21 22 14 Cash 2,500.00 23 Income from Demos 2,500.00 24 Cash revenue received from Girl Scouts, Ck. No. 12655. Journalize Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (a), 6/1/05: Nelson deposited $43,000 in a bank account in the name of business Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (a), 6/1/05: Nelson deposited $43,000 in a bank account in the name of business Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (a), 6/1/05: Nelson deposited $43,000 in a bank account in the name of business Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (a), 6/1/05: Nelson deposited $43,000 in a bank account in the name of business Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (a), 6/1/05: Nelson deposited $43,000 in a bank account in the name of business Posting Copyright © Houghton Mifflin Company. All rights reserved.

Trans. (b), 6/5/05: Bought truck, paying cash, $23,000 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Trans. (b), 6/5/05: Bought truck, paying cash, $23,000 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Trans. (b), 6/5/05: Bought truck, paying cash, $23,000 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Trans. (b), 6/5/05: Bought truck, paying cash, $23,000 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Trans. (b), 6/5/05: Bought truck, paying cash, $23,000 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (c), 6/6/05: Bought camper shell for truck on account from Louie's Trucks & Campers, $2,500 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (c), 6/6/05: Bought camper shell for truck on account from Louie's Trucks & Campers, $2,500 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (c), 6/6/05: Bought camper shell for truck on account from Louie's Trucks & Campers, $2,500 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (c), 6/6/05: Bought camper shell for truck on account from Louie's Trucks & Campers, $2,500 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (c), 6/6/05: Bought camper shell for truck on account from Louie's Trucks & Campers, $2,500 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (d), 6/9/05: Paid Louie's Trucks & Campers, a creditor, $1,500, Ck. No. 4300 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (d), 6/9/05: Paid Louie's Trucks & Campers, a creditor, $1,500, Ck. No. 4300 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (d), 6/9/05: Paid Louie's Trucks & Campers, a creditor, $1,500, Ck. No. 4300 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (d), 6/9/05: Paid Louie's Trucks & Campers, a creditor, $1,500, Ck. No. 4300 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Trans. (d), 6/9/05: Paid Louie's Trucks & Campers, a creditor, $1,500, Ck. No. 4300 Posting Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. After Posting All Transactions and Footing All Accounts, Create the Trial Balance Copyright © Houghton Mifflin Company. All rights reserved.