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The Journal and Source Documents
Chapter 6 The Journal and Source Documents 1
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The Journal 2
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The Journal Recording transactions directly in the T- accounts (i.e. the ledger accounts) is only possible when there are a limited number of transactions and a limited number of accounts. As the complexity of the business increases transactions would get spread over pages and pages of ledger accounts. To centralize the recording of transactions, accountants use another book, called a journal. 3
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The Journal A journal is a book in which accounting entries for all transactions are first recorded, before they are recorded in the ledger accounts. Each transaction is recorded separately in chronological order. The journal provides a continuous record of all transactions. It is sometimes referred to as the “book of original entry”. 4
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The Journal The simplest type of journal is the two-column general journal. It has two money columns, one for the debit amounts and one for the credit amounts. It is easy to visually verify that each transaction balances … the debit entries equal the credit entries. The accounting entries for the transactions are referred to as journal entries. Journalizing is the process of recording accounting entries in the journal. 5
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The Two-Column General Journal
1 2007 Jan 1 Bank Supplies Equipment 1 3 5 — 6 0 0— — Bank Shirley Cassar, Capital — — Opening Entry 12 Equipment A/P – World Wide Fiber Optics Bank Network software installation; issued cheque #41 with the balance due in 30 days Steps in Recording a Journal Entry … Write a brief explanation for the entry. Beginning at the left side of the “Particulars”. Finally … Leave a blank line before the next entry. Steps in Recording a Journal Entry … Enter the name of the account(s) to be debited at the left side of the “Particulars” column. Enter the amount in the “Debits” column. Steps in Recording a Journal Entry … Enter the name of the account(s) to be credited. They are to be indented in the “Particulars” column. Enter the amount in the “Credits” column. Next … Record the “Year” in small figures on the first line of each page. Enter a new year at the point on the page where it occurs. Before you begin … Record the General Journal page number. The pages are numbered consecutively. Steps in Recording a Journal Entry … Enter the day in the date column Include the “month” on the first line of each page. Do not repeat it for each entry. Enter a new “month” at the point when it occurs. 6
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Source Documents 6.2
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Business transactions start outside of the accounting department.
The accounting department learns about transactions from business papers called “source documents.” SOURCE DOCUMENT: a business paper that shows the details of the transaction and shows all the information needed to account for it properly.
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Almost every accounting entry is based on a source document.
For some transactions, there are no actual source documents (for example: the owner withdrawing money for personal use). If this happens, the entry must be supported by another business paper or record (for example: memo).
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The company must keep source documents for future reference and in case there are errors.
Source documents provide facts to verify business transactions.
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Some Typical Source Documents:
Cash Sales Slip Sales Invoice Point of Sale Summary Purchase Invoice Cheque Copies Cash Receipts Daily Summary Bank Advices (Debit Advice informs the business of a decrease to their account / Credit Advice informs of an increase)
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Cash Sales Slip When you sell a good or service and the buyer gives you cash. For example: receipt DR CR . Mar 4 Bank Sales Cash sales slip #1234
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Sales Invoice When you sell a good or service and the buyer will pay you later (sale on account). For example: a bill. DR CR . Mar 5 A/R – S&S Boatworks Sales Sales invoice #7198, n30
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Point of Sale Summaries
The sale of goods or services through a cash register. This is a summary printed at the end of the day of all the transactions on the cash register. DR CR . Oct 30 Bank Sales Daily POS summary
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Purchase Invoice The purchase of goods or services on account.
When you buy something and agree to pay later. DR CR . Mar 6 Equipment Repair A/P-General Engineering Purchase invoice #4123, n60
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Cheque Copy A copy of a cheque used to show the details of the transaction. DR CR . Mar 6 A/P-Sterling Spars ,802.90 Bank ,802.90 Cheque copy #01011
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Cash Receipts Daily Summary
A list of payment s received from our customer s. DR CR . Mar 6 Bank ,142.24 A/R – A. Baldwin A/R – R. Perri A/R – Pier 10 Marina Daily cash receipts
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Bank Debit or Credit Advice
Debit advice: shows the amount that will be withdrawn from our bank account. Credit advice: shows the amount that will be deposited into our bank account.
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Bank Debit or Credit Advice
DR CR . Mar 9 Bank Charges and Interest Bank Bank debit advice
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Source Documents Some other additional supporting documents:
1. Receipts, such as those for donations or postage. 2. Bills, such as water or telephone. 3. Memos from the owner. 4. Bank statements. 5. invoices 6. Online banking transactions w/ confirmation numbers 7. Insurance endorsement certificates 8. Cash register tapes
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Summary of 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 A purchase of goods or services on account. 1. An expense account 2. An asset account Accounts Payable 21
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Summary of Source Documents
Transaction Description Journal Entries Debit Credit Cheque Copy 1. Paying 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 Cheques received from customers on account Accounts Receivable Bank Debit Advice Bank account decrease Interest exp., bank charges Bank Credit Advice Bank account increase Interest earned, etc. 22
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Sales Taxes 6.3
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Provincial Sales Tax Sales tax is one way that provincial government raise funds (get money). Tax dollars generated from business transactions are referred to as sales taxes. A retail sales tax is charged by most provincial governments. A retail sales tax is a percentage tax based on the price of goods sold to a customer - commonly known as PST (Provincial Sales Tax)
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Basic Taxation Principles
1. Tax dollars are charged to the buyer of the goods. 2. Tax dollars are collected by the seller and recorded in a separate liability account. 3. Tax dollars rightfully belong to the government. 4. The seller sends the tax dollars to the government at appointed times.
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Value-Added Sales Taxes
A Value-added sales tax is a tax charged to both goods and services as they pass through different stages of production and delivery. For example: GST (Goods & Services Tax) and HST (Harmonized Sales Tax)
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-The GST/HST are known as a value-added tax. It is designed so that:
1. The government receives its money at each stage in the production / distribution chain, as a value is added to the product. 2. Ultimately, only the final user pays the GST/HST. 3. Refer to page 199 of your textbook
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Any business with sales of taxable goods and services of $30,000 or more is required to complete a GST/HST registration form and send it to the CRA. They are given a business number and are told if they should report/remit the GST/HST monthly, quarterly, annually.
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HST Businesses that pay HST should keep track of the HST charged on its purchases in a separate account. Businesses have to send the tax dollars they have collected from buyers to the government LESS the HST they have paid on their purchases in the same time period.
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FOR EXAMPLE… Tim’s Tea Time spent $ on HST for the year of 2015. For the year of the 2015, Tim’s Tea Time collected $10, in HST from their customers. How much HST does Tim’s Tea Time need to remit to the government?
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$ WHY???? Because they get to deduct this amount from its HST tax liability. They are REFUNDED the HST they have paid.
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Accounting for HST There are two HST accounts in the ledger:
1. HST Payable 2. HST Recoverable These are both LIABILITY accounts.
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HST Payable HST Payable is the total amount of HST collected from customers during a reporting period (could be one month, one year, 1/4 of a year). NORMAL BALANCE: CREDIT
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HST Recoverable HST Recoverable is the total amount of HST the business has paid to other companies in one reporting period. NORMAL BALANCE: DEBIT
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1. Sales and HST The seller will calculate the HST, collect the HST from the customer, then keep it until it needs to be paid (remitted) to the government. Brookswood Driving School sold lessons for cash for $20,000 in August with an HST rate of 13%.
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Aug 31 Lesson Revenues 20 000 — HST Payable 2 600— 22 600 — 16 Bank
2007 Aug 31 Bank — Lesson Revenues HST Payable — 2 600— Revenue earned from cash sales 6
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2. Purchases and HST - Businesses are allowed to recover (get back) the HST they paid to other companies. Everyone must pay HST when they buy something, but businesses can get the money back from the government Brookswood Driving School purchased $5000 of supplies in August and paid $650 in HST (13%)
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Aug 31 Lesson Revenues HST Payable 20 000 — 2 600— 31 Supplies
16 2007 Aug 31 Bank — Lesson Revenues HST Payable — 2 600— Revenue earned from cash sales 31 Supplies HST Recoverable — 6 5 0 —- Bank or A/P — Purchased supplies 6
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REMITTING HST When it is time to pay the government the HST you have collected, you must deduct the HST you have paid first. For example…Brookswood Driving School must now remit the HST to the government. Recall the balance in HST Payable: $2600 HST Recoverable: $640
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Aug 31 HST Recoverable 6 5 0 — Bank 1 9 5 0 — 2 6 0 0 — 16 HST Payable
2007 Aug 31 HST Payable — HST Recoverable Bank 6 5 0 — — Remitted monthly HST 6
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GST on the Balance Sheet
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Classwork Exercise 3 ALL and 4B ONLY 48
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Building Spreadsheet Models
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Building Spreadsheet Models
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Review Exercises 52
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Using Your Knowledge 53
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Using Your Knowledge 54
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Using Your Knowledge 55
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Using Your Knowledge 56
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