1. Chapter 6 – The Journal and Source Documents
BAF3M Accounting
Chapter 6 – The Journal and Source Documents

2. 6.1 The Journal
Just as people write diaries to record their experiences, thoughts, & feelings accountants also use diary called the “General Journal” to record facts and details of a business transactions.
Up to the end of Chapter 5, we used T accounts to recorded transactions.

3. 6.1 The Journal
Each transaction is recorded separately and in chronological order.
There is a blank line between each separate transactions.
GJ is also referred to as the book of original entry
It provides a continuous record of all transactions

4. The First 6 Steps in the Accounting Cycle
1 Transactions occur.
2 Transactions are recorded in the journal in order by date.
3 The accounting entries are transferred to the ledger accounts. (or T accounts)
4 Trial Balance
5 Adjusting Entry
6 Balance Sheet and Income Statement

5. The Accounting Cycle Source documents Transaction Analysis
Record in Journal
Post to
Ledger
Financial Statements
Adjusted Trial Balance
Record & Post Adjusting Entries
Unadjusted Trial Balance
The Accounting Cycle
Close Temporary Accounts
Post-Closing Trial Balance

6. The Two-Column Journal
Year recorded at the top of column.
Month recorded once with days noting business transactions.
Account titles are always capitalized.
Explanations are brief but tell ‘the story’.
Debits are always recorded first.
Credit particulars are always indented.
The completed journal entry must balance.
Leave a blank line before next entry.
P.R.: Posting Reference – this will be covered in more detail later; just leave it blank for now
Year entered once in small figures on the first line of each page. (for this demonstration, I gave it a full line just to make it visible)
Month is entered on the first line of each page, but do not repeat for each entry. Enter a new month at the point it occurs.
Day is entered on the first line of each journal entry and is repeated no matter how many transactions occur on a given day.
Note the compound entry in the second example

7. THE FIVE GOLDEN RULES TO JOURNALIZING
1 – Date
2 – Debits
3 – Credits
4 – Explanation
5 – Skip a line

8. EXAMPLE… This account remains blank for now The page number
The account that is debited 9
Nov.20--
The account that is credited. Notice that it is indented
The explanation of the transaction

9. “WHY DO WE HAVE TO DO THIS…. I LIKED THE T-ACCOUNTS BETTER. ”
“WHY DO WE HAVE TO DO THIS…. I LIKED THE T-ACCOUNTS BETTER!!!” common accounting student statement
Chief purpose of the general journal is to provide a continuous record of the accounting entries in the order they occur
T-accounts are not official accounting documents
T-accounts are ‘good’; just not ‘good enough’ to handle all financial information properly

10. Example of a Journal Entry
Let’s say that on Feb 1, you sold your accounting service to your existing client for $180. Customer did not pay on the same date, but she paid on Feb 15 instead.
What are the journal entries?
Date Particulars PR Debit Credit
Feb 1 A/R Service Revenue
Sold tax return service to Mr. Smith Invoice #123
15 Bank
A/R
Received pymt from Mr. Smith

11. Journal Entries – Style notes
Year recorded at the top of column.
Month recorded only once, only written at top of new page or if month changes
Account titles are always capitalized.
Explanations are brief but tell ‘the story’. (What happened?)
Debit accounts are always recorded first.
Credit accounts are always indented.
Total debit $$$ must equal total credit $$$
Leave a blank line before next entry.

12. 6.2 Source Documents
A Source Document is a business paper that shows the nature of a transaction and provides all of the information needed to account for it properly
When a bookkeeper first records the journal entry, they have to read and interpret the information in source documents.
Idea: to a think-pair-share analyze different source docs and report back to class?

13. 6.2 Source Documents Several types are explained in the text
Cash Sales Slip
Sales Invoice
Point of Sale (POS) Summaries
Purchase Invoice
Cheque Copies
Cash Receipts Daily Summary
Bank Advices (Bank Memos)
Copy chart on p.192

14. Point of Sale Summaries
People use credit cards and debit cards to pay for items.
A point of sale terminal is a computerized sales register which allows a business and its customers to exchange funds electronically. (More details in chapter 9)
At the end of each day, an accounting clerk can use POS terminal to print POSS at least two source documents.

15. Point of Sale Summaries
An example is Fig 6.6 Page 187
You can see that PSS reveals the sales activities of three cards: VISA, Master card and debit cards.
Journal Entry for POS summaries is:
Dr Cr
Bank
Sales
POS summary Oct 30

16. Point of Sale Summaries
Note: Cheque copy itself is not sufficient proof that the payment is proper. A bill or receipt is also needed to support the accounting entry for a cash purchase. Otherwise we have no idea what this check is for.

17. Common Source Documents
Transaction Description
Journal Entries
Debit
Credit
Cash Sales Slip POS Summaries
A sale of goods (or services) for cash.
Bank
Sales or Revenue
Sales Invoice
A sale of goods (or services) on account.
Accounts Receivable
Purchase Invoice
Company purchased goods (or services) on account
1. An expense account (small amount)
Few times an asset account (big amount) can be debited. For example, machine
Accounts Payable

18. Transaction Description
Source Document
Transaction Description
Journal Entries
Debit
Credit
Cheque Copy
(Company wrote a cheque, meaning company paid cash)
1. Paying off of an account payable
2. Cash purchase of an asset
3. Cash payment for an expense
4. Owner draws out money for personal use
1. A liability account
2. An asset account
3. An expense account
4. Drawings account
Bank
Cash Receipts Daily Summary (or check copies)
Cheques received from customers (who purchased goods on account in the past)
Accounts Receivable

19. Transaction Description
Source Document
Transaction Description
Journal Entries
Debit
Credit
Bank Debit Advice (by Bank Statement)
Bank account decrease
Interest expense or service charge
Bank
Bank Credit Advice (by Bank Statement)
Bank account increase because company’s savings acct earned interest or customer paid back their debt by online payment
Interest earned (Revenue), or AR

20. Additional Supporting Documents
In addition to the source documents listed in previous slide, you may encounter the following source documents:
Receipts (such as donations)
Bills (=Invoice) means you owe money for something you’ve purchased but yet to pay for (could be electronic)
Online banking transactions

21. Additional Supporting Documents
In addition to the source documents listed in previous slide, you may encounter the following source documents:
Written memos from the owner
Bank Statements – can contain most (if not all) of these information in reality. You have to learn how to read bank statements.
Cash register tapes

22. Number of Copies of Source Documents
There is no fixed number of required copies of business documents. It depends on the business and the owner.
You would need to keep at least one copy of the source document in general.

23. 6.3 Sales Taxes
Gather Round Kids, time for a history lesson …
On July 1, 2010 Ontario implemented the Harmonized Sales Tax (HST)
HST is a blending of the 8% PST and the 5% GST  13%

24. WHAT IS SALES TAX?
It is a percentage tax based on the price of goods/services sold to a customer.
The tax is added to the price and paid by the customer

25. SALES TAX: ONTARIO
On July 1, 2010 Ontario switched to the HST – Harmonized Sales Tax, rate of 13%
This new tax is a blending of the previous taxes GST and PST.
GST was 5%; PST was 8%  5+8=13%

26. JUST TO REMIND EVERYONE
If you buy shoes for $72.50, what is the final price you would pay? (HST is 13%)
Two ways to get to the proper answer:
= * .13
= 9.425
= 81.93
So you pay $81.93
= * 1.13
= 81.93
So you pay $81.93 OR

27. WHO COLLECTS SALES TAXES?
WHO PAYS SALES TAXES?
Anyone who is buying something
WHO COLLECTS SALES TAXES?
The person who is selling the good/service.

28. Therefore, when a business collects sales taxes for the government, the business will end up owing money to the government – a liability. The business must remit (pay) the collected sales tax to the government.
This new liability is not a “negative” thing for the business, however. Think about it: every increase in the HST Payable liability account means you also have an increase in a Revenue account.

29. LEARNING THE TERMINOLOGY
HST PAYABLE –the result of the company’s sales… (the company sold goods/services, and collects HST on behalf of the government)
HST RECOVERABLE – the result of the company’s purchases… (the company purchased goods and thus had to pay HST…they can apply to recover this money from the government)

30. Companies both buy products to use in their business and sell goods/services.
When a company buys goods/ services, the company will pay HST.
When a company sells a good/ service, the company will collect HST on behalf of the federal government.
HST is recoverable. This means that the HST paid can be deducted from, (or offsets) the HST owed to the government.

31. You are MOW’N IT DOWN LAWN CARE and you issue an invoice to O
You are MOW’N IT DOWN LAWN CARE and you issue an invoice to O. Veergroan for $200 worth of lawn care (include 13% HST)
Notice: The service only cost $200, but the client (O. Veergroan) had to pay $226! The $26 is the HST sales tax – (something we have all done personally!)
MOW’N IT DOWN does not count the extra $26 as Revenue (b/c it isn’t Revenue!) This amount must be sent to the Gov’t.

32. Example: MOW’N IT DOWN LAWN CARE buys $100 worth of fertilizer for O
Example: MOW’N IT DOWN LAWN CARE buys $100 worth of fertilizer for O. Veergroan’s lawn (include HST 13%), paid in cash.

33. Refund (HST Recoverable) offsets or reduces the HST Payable liability i.e. if you have a balance of $500 in your HST Payable account and $150 in your HST Recoverable account, you would only remit $350 ($500-$150) to the gov’t
Businesses remit HST quarterly to the gov’t; journalized like paying any other liability.
(i.e. DR: HST Payable, CR: Cash)
(reduce a liability, reduce an asset)
On a balance sheet, both HST Payable and HST Recoverable are listed under the liabilities section.

34. What is a Contra Account?
HST Recoverable is a special account known as a “contra” account.
A contra account offsets some other account
HST Recoverable offsets HST Payable
Since HST Payable is a liability, HST Recoverable is a contra-liability
Contras have opposite normal balances; therefore HST Recoverable has a normal Debit balance

35. Sales Taxes
Whenever someone buys something from another person, it is a business transaction.
Most business transactions in Canada are taxed by the Canadian government.
Governments use the tax dollars to fund important services such as health care, education and social assistance programs.
Tax dollars generated from business transactions are referred to as sales taxes.

36. Sales Tax
Taxation regulations are complex, so businesses rely on accountants to solve tax problems.
There are 4 basic taxation principles
Only buyers pay for the tax.
Seller collects the tax dollars and record it in separate liability account called “HST payable”
The tax dollars belong to the government. (not to the business which collects the tax)
The seller sends the tax dollars to the government at appointed times such as once a month.

37. HST
HST is a value added sales tax; which means that HST is charged to both goods and services as they pass through the different stages of production and delivery.
HST is 13% of the price. For example, if the price is $100 * 0.13 = $13 so final price is $113.
In Ontario, sellers charge HST on most goods or services. Sellers then submit the HST amounts to the government.

38. HST

39. HST For example, a basketball is made of rubber and leather.
Rubber and Leather manufacturer charges $10 + HST = $11.30
Nike must pay $11.30 to the rubber and leather manufacturer. After making the basketball, Nike charges 20 + HST = to sell the ball to Sportchek Sportchek bought it at They charge 30 + HST = 33.90

40. HST The retail customer (or final consumer) pays $33.90.
Journal Entry for HST from Sportchek perspective.
On Feb 15, Sportchek sold a basketball to a customer who paid cash, so journal entry would be
Dr Cr
Bank
Sales revenue
HST payable

41. HST Journal Entry for HST
On Feb 2, Sportchek bought a basketball from Nike. Sprots Check would record:
Dr. Cr.
Purchase (expense)
HST recoverable
Bank

42. Journal Entry for HST
We use HST recoverable account whenever business pays HST amount. Instead of debiting HST payable account, business would debit HST recoverable account.
HST recoverable account is a contra account of the HST payable account.

43. Journal Entry for HST
How much HST money does Sportchek have to remit to the government?
Ending balance of HST payable – Ending balance of HST recoverable
Answer: $ $2.60 = $1.30 so at the end of February, Sportchek would send $1.30 to the government.

44. Summary
When a business sells service or goods, they would collect the HST (13%) and credits “HST payable” account.
When a business buys service or goods, they would pay HST (13%) and debits “HST recoverable” account.
The business must send HST amount to the CRA (Canada Revenue Agency) after subtracting HST recoverable amount from HST payable amount.