chapter three the general journal and the general ledger

Chapter Three

The General Journal and the General

Ledger

Copyright © Houghton Mifflin Company. All rights reserved. 3 - 2

Performance Objectives

1. Record a group of transactions pertaining to a service enterprise in a two-column general journal

2. Post entries from a two-column general journal to general ledger accounts


Performance Objectives

3. Prepare a trial balance from the ledger accounts

4. Correct entries using the ruling method

5. Correct entries using the correcting entry method


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


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


Performance Objective 1

Record a group of transactions pertaining to a service enterprise in a two-column general journal


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


Two-Column General Journal

• A general journal in which there are two amount columns– One used for debit amounts– One used for credit amounts


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


Journalizing

The process of recording a business transaction in a journal


Example of Business Transaction Recorded in the General Journal

Create a journal entry for each transaction.


What’s in a Journal Entry?1. Date2. At least one debit entry

– Debit account, use exact account title, do not indent titles3. At least one credit entry

– Credit account, use exact account title, indent titles4. 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=CRDR=CR


Invoice # 4369

INVOICE

Customer Misc

Name Date 2/23/05Address Order No.City KDH State NC ZIP 27943 RepPhone FOB Shipping Point

Qty Unit Price TOTAL25 10.00$ 250.00$ 15 12.50$ 187.50$

SubTotal 437.50$ Shipping

Payment Credit Tax Rate(s)

Comments TOTAL 437.50$ NameCC #

Expires

Kitty Hawk Kite Store403 Lake Dr. Unit Highline

DescriptionBellen Boomerang Model

Terms: 2/15,N/45

Gel Boomerangs2124 Kittredge St. PMB 61

Berkeley, CA 94704

Office Use Only

Our Customers Have Many Happy Returns!

Duece Boomerang Model

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


Invoice # 4369

INVOICE

Customer Misc

Name Date 2/23/05Address Order No.City KDH State NC ZIP 27943 RepPhone FOB Shipping Point

Qty Unit Price TOTAL25 10.00$ 250.00$ 15 12.50$ 187.50$

SubTotal 437.50$ Shipping

Payment Credit Tax Rate(s)

Comments TOTAL 437.50$ NameCC #

Expires

Kitty Hawk Kite Store403 Lake Dr. Unit Highline

DescriptionBellen Boomerang Model

Terms: 2/15,N/45

Gel Boomerangs2124 Kittredge St. PMB 61

Berkeley, CA 94704

Office Use Only

Our Customers Have Many Happy Returns!

Duece Boomerang Model

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


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


Building the Journal Entry

• Date



• Debit



• Credit



• Explanation


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. ArchBusiness name: Arch Copy Co.Business type: Sole proprietorship

(one-person business)


Transaction (a): Arch deposited $70,000 in bank account in name of business


Transaction (b): Bought equipment costing $33,000, paying cash


Transaction (c): Bought equipment on account from Melton Office Supply, $7,000


Transaction (d): Paid Melton Office Supply, a creditor, $2,000


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=CRDR=CR


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)



Post entries from a two-column general journal to general ledger accounts


From General Journal to Ledger Accounts


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


Chart of Accounts• The official list of account titles used to

record the transactions of a business

• The account number for each account

111 Cash 311 L.P. Arch, Capital113 Accounts Receivable 312L.P. Arch, Drawing117 Prepaid Insurance

124 Equipment411 Income from Services

Liabilities (200s)221 Accounts Payable

511Wages Expense512 Rent Expense513 Supplies Expense514 Advertising Expense515 Utilities Expense

Assets (100s)

Revenues (400s)

Expenses (500s)

Owner's Equity (300s)


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


T Account Compared withLedger Account

Debit + Credit - Account: Cash Account No: 111a) 70,000 b) 33,000f) 2,520 d) 2,000p) 850 g) 700 Debit Credit

q) 4,220 i) 360 1 200577,590 l) 1,800 2 June 1 1 70,000.00 70,000.00

m) 160 3 2 1 33,000.00 37,000.00n) 200 4 4 1 2,000.00 35,000.00o) 2,130 5 7 1 2,520.00 37,520.00p) 620 6 8 1 700.00 36,820.00s) 2,500 7 10 1 360.00 36,460.00

43,470 8 15 1 1,800.00 34,660.00bal 34120 9 18 1 160.00 34,500.00

10 20 2 200.00 34,300.0011 24 2 2,130.00 32,170.0012 26 3 620.00 31,550.0013 30 3 850.00 32,400.0014 30 3 4,220.00 36,620.0015 30 3 2,500.00 34,120.00

Cash General Ledger

BalanceDebit CreditItem Post. Ref.Date

Bal. 34,120


Posting

The process of transferring figures from the journal to the ledger accounts


Four-Step Posting Process

1. Transfer transaction date to account’s date column

2. Transfer the debit/credit amount and calculate the new balance

3. Write journal page number in posting reference column of ledger as a cross-reference

4. Go back to journal and write account number in posting reference column of journal as a cross-reference


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


Posting—an Illustration

DescriptionPost.Ref. Debit Credit

1 20052 June 1 Cash 111 70,000.003 L.P. Arch, Capital 70,000.004 Original investment by Arch in Arch Copy Co.56 2 Equipment 33,000.007 Cash 33,000.008 Bought Equipment for cash9

Line #

General Journal Page 1

Date

Line #

Account: Cash Account No: 111

Date Item Post.Ref. Debit CreditDebit Credit

1 20052 June 1 1 70,000.00 70,000.003 2 1 33,000.00 37,000.004 4 1 2,000.00 35,000.005 7 1 2,520.00 37,520.006 8 1 700.00 36,820.007 10 1 360.00 36,460.008 15 1 1,800.00 34,660.009 18 1 160.00 34,500.00

10 20 2 200.00 34,300.0011 24 2 2,130.00 32,170.0012 26 3 620.00 31,550.0013 30 3 850.00 32,400.0014 30 3 4,220.00 36,620.0015 30 3 2,500.00 34,120.00

General Ledger

Balance

1.1. DateDate

2.2. AmountAmount

3.3. Page #Page #

4.4. Account #Account #


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


Posting Transaction (a): Arch deposited $70,000 in bank account in name of business


Posting Arch Copy Co. Transactions (a) to (s)

Your textbook presents each transaction and shows how to post it.



Prepare a trial balance from the ledger accounts


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


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


If DR = CR on the Trial Balance, Can There Be Errors?

• Yes!

• Therefore, we must look at how to correct errors


Correct Entries Using the Ruling Method—Manual

Correcting errors before posting has taken place

• Insert I -- corrected Mar. 1 entry, page 90



Correcting errors before posting has taken place



Correcting errors after posting has taken place


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!


One-Step Method


Two-Step Method


Demonstration Problem

We will be recording business transactions for the company with the following details:

Owner name: R. P. NelsonBusiness name: WindSport Boomerang & Kite DemosBusiness type: Sole proprietorship

(one-person business)


Trans. (a), 6/1/05: Nelson deposited $43,000 in a bank account in the name of business


1 20052 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.56789

101112131415161718192021222324

Line #


Date

JournalizeJournalize


Trans. (b), 6/5/05: Bought truck, paying cash, $23,000


1 20052 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.56 5 Equipment 23,000.00 7 Cash 23,000.00 8 Bought equipment for cash.9

101112131415161718192021222324

Line #


Date



Trans. (c), 6/6/05: Bought camper shell for truck on account from Louie's Trucks & Campers, $2,500



10 6 Equipment 2,500.00 11 Accounts Payable 2,500.00 12 Bought equipment on account from Louie's Trucks & Campers.131415161718192021222324

Line #


Date



Trans. (d), 6/9/05: Paid Louie's Trucks & Campers, a creditor, $1,500, Ck. No. 4300



10 6 Equipment 2,500.00 11 Accounts Payable 2,500.00 12 Bought equipment on account from Louie's Trucks & Campers.1314 9 Accounts Payable 1,500.00 15 Cash 1,500.00 16 Paid Louie's Trucks & Campers on account, Ck. No. 4300.1718192021222324

Line #


Date



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



10 6 Equipment 2,500.00 11 Accounts Payable 2,500.00 12 Bought equipment on account from Louie's Trucks & Campers.1314 9 Accounts Payable 1,500.00 15 Cash 1,500.00 16 Paid Louie's Trucks & Campers on account, Ck. No. 4300.1718 9 Equipment 3,400.00 19 R. P. Nelson, Capital 3,400.00 20 Investment by Nelson in WindSport Boomerang & Kite Demos.21222324

Line #


Date



Trans. (f), 6/14/05: Nelson and employee performed boomerang & kite demo for Girl Scouts and received

$2,500, Ck. No. 12655


DescriptionPost.Ref. .Debit Credit


10 6 Equipment 2,500.00 11 Accounts Payable 2,500.00 12 Bought equipment on account from Louie's Trucks & Campers.1314 9 Accounts Payable 1,500.00 15 Cash 1,500.00 16 Paid Louie's Trucks & Campers on account, Ck. No. 4300.1718 9 Equipment 3,400.00 19 R. P. Nelson, Capital 3,400.00 20 Investment by Nelson in WindSport Boomerang & Kite Demos.2122 14 Cash 2,500.00 23 Income from Demos 2,500.00 24 Cash revenue received from Girl Scouts, Ck. No. 12655.

Line #

Date






10 6 Equipment 2,500.00 11 Accounts Payable 2,500.00 12 Bought equipment on account from Louie's Trucks & Campers.1314 9 Accounts Payable 1,500.00 15 Cash 1,500.00 16 Paid Louie's Trucks & Campers on account, Ck. No. 4300.1718 9 Equipment 3,400.00 19 R. P. Nelson, Capital 3,400.00 20 Investment by Nelson in WindSport Boomerang & Kite Demos.2122 14 Accounts Receivable 2,500.00 23 Income from Demos 2,500.00 24 Cash revenue received from Girl Scouts, Ck. No. 12655.

Line #


Date

PostingPosting




Debit Credit

1 20052 June 1 1 43,000.00 43,000.00 34567

Line #

General Ledger

Date ItemPost.Ref. Debit Credit

Balance

PostingPosting




1 20052 June 1 Cash 111 43,000.00 3 R. P. Nelson, Capital 43,000.00 4 Original investment by Nelson in WindSport Boomerang and Kite Demos.56 5 Equipment 23,000.00 7 Cash 23,000.00 8 Bought equipment for cash.9


Line #


Date

PostingPosting



Account: R. P. Nelson, Capital Account No: 311

Debit Credit

1 20052 June 1 1 43,000.00 43,000.00 34567

Line #

General Ledger


Balance

PostingPosting




1 20052 June 1 Cash 111 43,000.00 3 R. P. Nelson, Capital 311 43,000.00 4 Original investment by Nelson in WindSport Boomerang and Kite Demos.56 5 Equipment 23,000.00 7 Cash 23,000.00 8 Bought equipment for cash.9


Line #


Date

PostingPosting



Account: Equipment Account No: 124

Debit Credit

1 20052 June 5 1 23,000.00 23,000.0034567

Line #

General Ledger


Balance

PostingPosting




1 20052 June 1 Cash 111 43,000.00 3 R. P. Nelson, Capital 311 43,000.00 4 Original investment by Nelson in WindSport Boomerang and Kite Demos.56 5 Equipment 124 23,000.00 7 Cash 23,000.00 8 Bought equipment for cash.9


Line #


Date

PostingPosting




Debit Credit

1 20052 June 1 1 43,000.00 43,000.003 5 1 23,000.00 20,000.004567

Line #

General Ledger


Balance

PostingPosting




1 20052 June 1 Cash 111 43,000.00 3 R. P. Nelson, Capital 311 43,000.00 4 Original investment by Nelson in WindSport Boomerang and Kite Demos.56 5 Equipment 124 23,000.00 7 Cash 111 23,000.00 8 Bought equipment for cash.9


Line #


Date

PostingPosting






Line #


Date

PostingPosting



Account: Equipment Account No: 124

Debit Credit

1 20052 June 5 1 23,000.00 23,000.00 3 6 1 2,500.00 25,500.00 4567

Line #

General Ledger


Balance

PostingPosting





10 6 Equipment 124 2,500.00 11 Accounts Payable 2,500.00 12 Bought equipment on account from Louie's Trucks & Campers.1314 9 Accounts Payable 1,500.00 15 Cash 1,500.00 16 Paid Louie's Trucks & Campers on account, Ck. No. 4300.1718 9 Equipment 3,400.00 19 R. P. Nelson, Capital 3,400.00 20 Investment by Nelson in WindSport Boomerang & Kite Demos.2122 14 Accounts Receivable 2,500.00 23 Income from Demos 2,500.00 24 Cash revenue received from Girl Scouts, Ck. No. 12655.

Line #


Date

PostingPosting



Account: Accounts Payable Account No: 221

Debit Credit

1 20052 June 6 1 2,500.00 2,500.00 34567

Line #

General Ledger

Date Item Post.Ref. Debit Credit

Balance

PostingPosting





10 6 Equipment 124 2,500.00 11 Accounts Payable 221 2,500.00 12 Bought equipment on account from Louie's Trucks & Campers.1314 9 Accounts Payable 1,500.00 15 Cash 1,500.00 16 Paid Louie's Trucks & Campers on account, Ck. No. 4300.1718 9 Equipment 3,400.00 19 R. P. Nelson, Capital 3,400.00 20 Investment by Nelson in WindSport Boomerang & Kite Demos.2122 14 Accounts Receivable 2,500.00 23 Income from Demos 2,500.00 24 Cash revenue received from Girl Scouts, Ck. No. 12655.

Line #


Date

PostingPosting



Account: Accounts Payable Account No: 221

Debit Credit

1 20052 June 6 1 2,500.00 2,500.00 3 9 1 1,500.00 1,000.00 4567

Line #

General Ledger


Balance

PostingPosting





10 6 Equipment 124 2,500.00 11 Accounts Payable 221 2,500.00 12 Bought equipment on account from Louie's Trucks & Campers.1314 9 Accounts Payable 221 1,500.00 15 Cash 1,500.00 16 Paid Louie's Trucks & Campers on account, Ck. No. 4300.1718 9 Equipment 3,400.00 19 R. P. Nelson, Capital 3,400.00 20 Investment by Nelson in WindSport Boomerang & Kite Demos.2122 14 Accounts Receivable 2,500.00 23 Income from Demos 2,500.00 24 Cash revenue received from Girl Scouts, Ck. No. 12655.

Line #


Date

PostingPosting




Debit Credit

1 20052 June 1 1 43,000.00 43,000.00 3 5 1 23,000.00 20,000.00 4 9 1 1,500.00 18,500.00 567

Line #

General Ledger


Balance

PostingPosting





10 6 Equipment 124 2,500.00 11 Accounts Payable 221 2,500.00 12 Bought equipment on account from Louie's Trucks & Campers.1314 9 Accounts Payable 221 1,500.00 15 Cash 111 1,500.00 16 Paid Louie's Trucks & Campers on account, Ck. No. 4300.1718 9 Equipment 3,400.00 19 R. P. Nelson, Capital 3,400.00 20 Investment by Nelson in WindSport Boomerang & Kite Demos.2122 14 Accounts Receivable 2,500.00 23 Income from Demos 2,500.00 24 Cash revenue received from Girl Scouts, Ck. No. 12655.

Line #


Date

PostingPosting


After Posting All Transactions and Footing All Accounts, Create the Trial Balance

17,860 1,650 2,000

31,020 2,100

46,400 2,500

9,220 1,030

700 600 200 160

57,720 57,720

WindSport Boomerang & Kite DemosTrial BalanceJune 30, 2005

CashAccounts ReceivablePrepaid InsuranceEquipmentAccounts PayableR. P. Nelson, CapitalR. P. Nelson, DrawingIncome from DemosWages ExpenseRent ExpenseSupplies ExpenseAdvertising ExpenseTraveling Expense