College Accounting, by Heintz and Parry Chapter 4: Journalizing and Posting Transactions

As December rolled around, Eddie knew that he wanted to do financial statements at the end of the year, so he decided that he should use the formal method of accounting for transactions: general journals and general ledgers. These are part of the standard flow of accounting information: source general general financial documents journal ledger statements

Eddie transferred all of the October and November transactions into the general journal and general ledger. Because Daniel and Lori went home for the holidays (and his creditors both extended his payment terms into January), they only had one transaction in December: on the 10th, Eddie got paid the $300 that he was owed from the November gig. Question: What accounts would get debited and credited in this transaction?

Answer: Cash (an asset) would get debited (it’s increasing) and Accounts Receivable (asset) would get credited (it’s decreasing because the customer no longer owes the money). A General Journal allows you to list the debit and credit for a transaction together, so that a 3rd party could easily see what happened. Journalizing a transaction is a 4-step process. Before starting the process, each account should be assigned an account number. There is a standard system for assigning account numbers. The first digit should be a: 1 for an asset 2 for a liability 3 for capital or drawing 4 for a revenue 5 for an expense. nDetails about this topicnSupporting information and examplesnHow it relates to your audiencenDetails about this topicnSupporting information and examplesnHow it relates to your audience

Step One: Enter the date Date Description P. R. Debit Credit 1999 Dec. 10

Step Two: Enter the Debit Date Description P. R. Debit Credit 1999 Dec. 10 Cash

Step Three: Enter the Credit (Indent the account title) Date Description P. R. Debit Credit 1999 Dec. 10 Cash Accounts Receivable

Step Four: Enter the Explanation (Indent even farther) Date Description P. R. Debit Credit 1999 Dec. 10 Cash Accounts Receivable Received payment for Nov. 17 gig.

The General Ledger is similar to a T- account but with more detail. The thick lines show where the “T” is in a general ledger account. Posting a debit or credit from the general journal into the general ledger takes 5 steps. account Cash account no. 111 Balance Date Item P.R. Debit Credit Debit Credit

Step One: Enter the Date account Accounts Receivable account no. 121 Balance Date Item P.R. Debit Credit Debit Credit 1999 Nov.17 J Dec.10

Step Two: Enter the Debit or Credit in the debit or credit column. account Accounts Receivable account no. 121 Balance Date Item P.R. Debit Credit Debit Credit 1999 Nov.17 J Dec

Step Three: Enter the New Balance (in this case, the new balance is zero, so a line is drawn in the debit and credit balance columns) account Accounts Receivable account no. 121 Balance Date Item P.R. Debit Credit Debit Credit 1999 Nov.17 J Dec

Step Four: Enter the Journal Page in the Posting Reference (P.R.) Column account Accounts Receivable account no. 121 Balance Date Item P.R. Debit Credit Debit Credit 1999 Nov.17 J Dec.10 J

Step Five: Enter the Ledger Account Number in the P.R. Column of the Journal Date Description P. R. Debit Credit 1999 Dec. 10 Cash Accounts Receivable Received payment for Nov. 17 gig.

At this point, Eddie did a trial balance (a listing of all general ledger balances) to see if his general ledger was posted properly. His trial balance showed the following: Eddie and the Losers Trial Balance For Year Ended Dec. 31, 1999 Debits Credits Cash 833 Musical Instruments 2200 Supplies 60 Prepaid Insurance 120 Accts. Payable 360 Eddie O’Hare, Capital 2000 Eddie O’Hare, Drawing 12 Gig Revenue 525 Wage Expense 80 Equip. Rental Expense It didn’t balance!

Eddie went through the following steps to find his error: 1) rechecked his addition (finding no error); 2) calculated how much he was off ( = $450); 3) looked for a transaction or balance for that amount ($450), because he might have skipped a debit or credit (he didn’t find the amount anywhere); and 4) looked for a transaction for half that amount (450/2=$225), because he might have put a debit on the credit side or vice versa (he made a $225 entry to cash and gig revenue on Oct. 17, but he found that he had posted it correctly).

The next steps to find his error were: 5) dividing the difference by 9 (450/9 = $50), and looking for a transaction (or balance) for that number or 10 times that number (he might have written 500 as 50 or 50 as 500). This is called a sliding error. Neither amount appeared on his books, however. 6) Since the difference was divisible by 9 (450/9 = 50), he looked for a transposition error (where two numbers next to each other get flipped). The difference of 50 indicates we should look for a number where the digit in the hundreds place and the digit in the tens place differed by 5.

Eddie found one number that fit his description, the cash balance of $833. Sure enough, the general ledger showed that the balance should have been $383, a difference of $450! Eddie and the Losers Trial Balance For Year Ended Dec. 31, 1999 Debits Credits Cash 833 Musical Instruments 2200 Supplies 60 Prepaid Insurance 120 Accts. Payable 360 Eddie O’Hare, Capital 2000 Eddie O’Hare, Drawing 12 Gig Revenue 525 Wage Expense 80 Equip. Rental Expense

Eddie’s method will find most errors, unless there is more than one. In that case, he would probably need to retrace his transactions step by step. Eddie and the Losers Trial Balance For Year Ended Dec. 31, 1999 Debits Credits Cash 383 Musical Instruments 2200 Supplies 60 Prepaid Insurance 120 Accts. Payable 360 Eddie O’Hare, Capital 2000 Eddie O’Hare, Drawing 12 Gig Revenue 525 Wage Expense 80 Equip. Rental Expense Now it balances!