Chapter 7 The General Journal Year 12 Accounting Chapter 7 The General Journal

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The General Journal Read Where Are We Headed? P. 143. The Need for the General Journal. There will be some transactions that cannot be recorded in the special journals because they do not involve cash, and do not involve the purchase or sale of stock. For instance, what happens if the owner contributes her own vehicle for business purposes? This transaction is neither receipt nor payment, nor sale nor purchase. Transactions like this must still be recorded in a journal before they can be posted to the ledger, but they cannot be recorded in the special journals used so far. At the same time, because they are infrequent they do not justify their own special journal would be only one entry to summarise! Rather, they are recorded in a more general journal called, surprisingly enough, the General Journal. Thus, the General Journal is used to record infrequent, non-cash transactions, which cannot be recorded in either one of the special journals.

Uses of the General Journal The main types of transactions that will be recorded in the General Journal are: commencing entries non-cash transactions with the owner bad debts correcting entries closing entries (covered in Chapter 9) balance day adjustments (covered in Chapters 10 and 11). Study Tip If a transaction involves cash, it is recorded in either the Cash Receipts Journal or the Cash Payments Journal, whether it is infrequent or not.

You! Review Questions 7.1. All q’s.

Format Because the General Journal is used to record such a variety of transactions, it must be fairly simple in terms of format. Basically, transactions are recorded in date order (as they occur), with the Details column used to record the name of each ledger account affected by the transaction. Then the amount is simply recorded in the debit or credit column as is necessary. The key thing to remember about the debit and credit columns in the General Journal is that, like all transactions, the debits must equal the credits. If the transaction does not balance in the General Journal, it has no chance of balancing when it is posted to the ledger accounts.

Narrations Because the General Journal records a wide variety of transactions, it is necessary to give a brief description of the transaction immediately after recording the debit and credit entries. This description is known as a narration. The narration should ‘tell the story’ of what has happened, and also note the source document involved. You! Review Questions 7.2. Q’s 1, 2, & 4.

Commencing Entries The purpose of a commencing entry is to open or establish ledger accounts for any existing asset, liability and owner’s equity items.

Commencing Entries By convention, the debit entries are recorded first, followed by the credit entries, with the accounts to be credited indented slightly. The three asset accounts – Bank, Stock Control and Vehicle – require a debit balance, while the liability accounts – Loan – GQC Finance and GST Clearing – require a credit balance. But on their own, these five entries do not comprise a complete entry, because the debit entries ($60 400) do not match the credit entries ($15 900); a further credit (of $44 500) is required. This balancing amount becomes the owner’s Capital As was noted previously, the narration provides a brief description of the transaction which in this case is the Commencement of double-entry records. It also identifies the source document that verifies the transaction – Memo 1. See the General Ledger accounts on p. 148, 149.

Commencing entries and subsidiary ledger accounts The balances of all existing asset, liability and owner’s equity accounts must still be entered in the General Ledger, but all individual debtor and creditor balances must also be entered in the subsidiary ledger accounts, and this must be recorded in the commencing entry in the General Journal. Refer Figure 7.3 p. 148. Note how the double-entry process is preserved in the General Ledger columns (and thus in the General Ledger accounts) with the total debits matching the total credits. The total amount owed by debtors ($5800) is recorded as the opening balance in the Debtors Control account, and the total amount owed to creditors ($8300) is recorded as the opening balance in the Creditors Control account. In addition, the Accounting equation has been used to determine the amount of Capital ($47 500).

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Exams! Putting debit entries first should be encouraged in the General Journal although theoretically students won't lose marks for this.  ‘As for abbreviations I like enforcing the habit of students to never abbreviate so that there is no confusion but as for acceptable abbreviations I believe there is only two: P/L Summary Account; and Accumm. Dep'n of "Asset”. Still, encouraging students to not abbreviate will allow them one less thing to stress about on their exam.’ GST would be another…

Commencing entries and subsidiary ledger accounts In the subsidiary ledgers, the double-entry process is suspended – only the entry that affects the individual debtor or creditor is recorded. Thus, the entries in the Subsidiary Ledger columns of the General Journal do not have to be a matching double entry. Refer General Ledger p. 148, 149.

Non-cash Transactions with the Owner Because the owner and business are assumed to be separate entities, transactions between the two must be recorded in the firm’s accounting records. Obviously, cash drawings will be recorded in the Cash Payments Journal and capital contributions of cash will be recorded in the Cash Receipts Journal. But drawings or capital contributions of other non- cash items – such as stock or equipment – will need to be recorded in the General Journal. Drawings of Stock See Figure 7.4 p. 150.

Non-cash Transactions with the Owner Non-cash capital contributions Whereas assets withdrawn by the owner are debited to a separate Drawings account, assets that are contributed by the owner are credited straight to the Capital account. See Figure 7.5. You! Review Questions 7.4 q’s 1, 2 & 4.

Bad Debts Unfortunately for small business owners, not all debtors can be counted on to repay the amounts they owe, and occasionally, a debt may need to be written off as ‘bad’. According to the Conservatism principle, a bad debt should be recognised as an expense when the loss is probable, so that assets (in this case, Debtors Control) are not overstated. This will usually be when the debtor is in liquidation or has been declared bankrupt and the debt is deemed to be irrecoverable. Recognising a bad debt will ensure the reports contain all the information that is useful for decision- making, thus ensuring Relevance.

Bad Debts A bad debt is a good example of how an expense does not have to involve a cash payment. If a bad debt is incurred, the business will need to recognise an expense for the loss of an economic benefit (the cash which will not be received) in the form of a decrease in assets (debtors), which decreases owner’s equity. At the same time, the business must record the decrease in Debtors Control (in the General Ledger) and the account of the individual debtor (in the Debtors Ledger). See example and Figure 7.6 p. 153. You! Review Questions 7.5 q. 3.

Correcting Entries It is difficult to set rules for the correction of errors, simply because there is such a wide variety of errors that may need to be corrected. However, if the error involves recording a transaction in the wrong ledger account, the basic approach would be to: 1 Undo the incorrect entry by reversing it – (i.e. record a debit entry to undo an incorrect credit, and vice versa) and then 2 Enter the correct entry. See Figure 7.7. If the error was the omission of a transaction, this could be corrected by simply making an additional entry in the General Journal. If the error involved the use of an incorrect amount, it could be corrected either by an additional entry (using the additional amount), or a reducing entry (to credit the account originally debited and vice-versa) using the excess amount.

You! Read Summary. Do five exercises.