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Chapter Three The General Journal and the General Ledger.

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1 Chapter Three The General Journal and the General Ledger

2 Copyright © Houghton Mifflin Company. All rights reserved 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

3 Copyright © Houghton Mifflin Company. All rights reserved 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

4 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

5 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

6 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

7 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

8 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

9 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

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

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

12 Copyright © Houghton Mifflin Company. All rights reserved What’s in a Journal Entry? 1.Date 2.At least one debit entry –Debit account, use exact account title, do not indent titles 3.At least one credit entry –Credit account, use exact account title, indent titles 4.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

13 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

14 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

15 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

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

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

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

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

20 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)

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

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

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

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

25 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

26 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)

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

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

29 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

30 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 111Cash311L.P. Arch, Capital 113Accounts Receivable312L.P. Arch, Drawing 117Prepaid Insurance 124Equipment 411Income from Services Liabilities (200s) 221Accounts Payable 511Wages Expense 512Rent Expense 513Supplies Expense 514Advertising Expense 515Utilities Expense Assets (100s) Revenues (400s) Expenses (500s) Owner's Equity (300s)

31 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

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

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

34 Copyright © Houghton Mifflin Company. All rights reserved 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

35 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

36 Copyright © Houghton Mifflin Company. All rights reserved Posting—an Illustration 1.Date 2.Amount 3.Page # 4.Account #

37 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

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

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

40 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.

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

42 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

43 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

44 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

45 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

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

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

48 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!

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

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

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

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

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

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

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

56 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

57 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 Journalize Description Post. Ref..DebitCredit June1Cash43, R. P. Nelson, Capital43, Original investment by Nelson in WindSport Boomerang and Kite Demos. 5 65Equipment23, Cash23, Bought equipment for cash Equipment2, Accounts Payable2, Bought equipment on account from Louie's Trucks & Campers Accounts Payable1, Cash1, Paid Louie's Trucks & Campers on account, Ck. No Equipment3, R. P. Nelson, Capital3, Investment by Nelson in WindSport Boomerang & Kite Demos Cash2, Income from Demos2, Cash revenue received from Girl Scouts, Ck. No Line # Date General Journal Page 1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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