2.5: Using Formal Accounting Records

Learning Objective

Record transactions in a general journal and post in a general ledger.

The preceding analysis of financial transactions used T-accounts to record debits and credits. T-accounts will continue to be used for illustrative purposes throughout this book. In actual practice, financial transactions are recorded in a general journal.

A general journal, or just journal, is a document that is used to chronologically record a business's debit and credit transactions (see Figure 2.2). It is often referred to as the book of original entry. Journalizing is the process of recording a financial transaction in the journal. The resulting debit and credit entry recorded in the journal is called a journal entry.

A general ledger, or just ledger, is a record that contains all of a business's accounts. Posting is the process of transferring amounts from the journal to the matching ledger accounts. Because amounts recorded in the journal eventually end up in a ledger account, the ledger is sometimes referred to as a book of final entry.

Recording Transactions in the General Journal

Each transaction is first recorded in the journal. The January transactions of Big Dog Carworks Corp. are recorded in its journal as shown in Figure 2.2. The journalizing procedure follows these steps (refer to Figure 2.2 for corresponding numbers):

1. The year is recorded at the top and the month is entered on the first line of page 1. This information is repeated only on each new journal page used to record transactions.
2. The date of the first transaction is entered in the second column, on the first line. The day of each transaction is always recorded in this second column.
3. The name of the account to be debited is entered in the description column on the first line. By convention, accounts to be debited are usually recorded before accounts to be credited. The column titled 'F' (for Folio) indicates the number given to the account in the General Ledger. For example, the account number for Cash is 101. The amount of the debit is recorded in the debit column. A dash is often used by accountants in place of .00.
4. The name of the account to be credited is on the second line of the description column and is indented about one centimetre into the column. Accounts to be credited are always indented in this way in the journal. The amount of the credit is recorded in the credit column. Again, a dash may be used in place of .00.
5. An explanation of the transaction is entered in the description column on the next line. It is not indented.
6. A line is usually skipped after each journal entry to separate individual journal entries and the date of the next entry recorded. It is unnecessary to repeat the month if it is unchanged from that recorded at the top of the page.

Figure \(\PageIndex{1}\): General Journal Transactions for BDCC in January

Most of Big Dog's entries have one debit and credit. An entry can also have more than one debit or credit, in which case it is referred to as a compound entry. The entry dated January 3 is an example of a compound entry.

Posting Transactions to the General Ledger

The ledger account is a formal variation of the T-account. The ledger accounts shown in Figure 2.3 are similar to what is used in electronic/digital accounting programs. Ledger accounts are kept in the general ledger. Debits and credits recorded in the journal are posted to appropriate ledger accounts so that the details and balance for each account can be found easily. Figure 2.3 uses the first transaction of Big Dog Carworks Corp. to illustrate how to post amounts and record other information.

Figure \(\PageIndex{2}\): Illustration of a Transaction Posted to Two Accounts in the General Ledger

1. The date and amount are posted to the appropriate ledger account. Here the entry debiting Cash is posted from the journal to the Cash ledger account. The entry crediting Share Capital is then posted from the journal to the Share Capital ledger account.
2. The journal page number is recorded in the folio (F) column of each ledger account as a cross reference. In this case, the posting has been made from general journal page 1; the reference is recorded as GJ1.
3. The appropriate ledger account number is recorded in the folio (F) column of the journal to indicate the posting has been made to that particular account. Here the entry debiting Cash has been posted to Account No. 101. The entry crediting Share Capital has been posted to Account No. 320.
4. After posting the entry, a balance is calculated in the Balance column. A notation is recorded in the column to the left of the Balance column indicating whether the balance is a debit or credit. A brief description can be entered in the Description column but this is generally not necessary since the journal includes a detailed description for each journal entry.

This manual process of recording, posting, summarizing, and preparing financial statements is cumbersome and time-consuming. In virtually all businesses, the use of accounting software automates much of the process. In this and subsequent chapters, either the T-account or the ledger account can be used in working through exercises and problems. Both formats are used to explain and illustrate concepts in subsequent chapters.

Special Journals and Subledgers

The general journal and the general ledger each act as a single all-purpose document where all the company's transactions are recorded and posted over the life of the company.

As was shown in Figure 2.6.1, various transactions are recorded to a general journal chronologically by date as they occurred. When companies engage in certain same-type, high-frequency transactions such as credit purchases and sales on account, special journals are often created in order to separately track information about these types of transactions. Typical special journals that companies often use are a sales journal, cash receipts journal, purchases journal and a cash disbursements journal. There can be others, depending on the business a company is involved in. The general journal continues to be used to record any transactions not posted to any of the special journals, such as:

• correcting entries
• adjusting entries
• closing entries

An example of a special journal for credit sales is shown below.

Figure \(\PageIndex{3}\): Sales Journal – records credit sales

For simplicity, the cost of goods sold is excluded from this sales journal and will be covered in chapter five of this course. The sales journal provides a quick overview of the total credit sales for the month as well as various sub-groupings of credit sales such as by product sold, GST, and customers.

The sales journal can also be expanded to include credit sales returns, and the purchases journal to include purchases returns and allowances for each accounting month. Note that purchase discounts would be recorded in the cash disbursements journal because the discount is usually claimed at the time of the cash payment to the supplier/creditor. This is also the case with sales discounts from customers which would be recorded in the cash receipts journal at the time the cash, net of the sales discount, is received. Any cash sales returns would be recorded in the cash disbursements journal.

Recall from Figure 2.3 that with accounting records that comprise only a general journal and general ledger, each transaction recorded in the general journal was posted to the general ledger. With special journals, such as the sales journal, their monthly totals are posted to the general ledger instead. For larger companies, these journals can be summarized and posted more frequently, such as weekly or daily, if needed.

Below are examples of other typical special journals such as a purchases journal, cash receipts journal, cash disbursements journal and the general journal. Note the different sub-groupings in each one and consider how these would be useful for managing the company's business.

Credit Purchases Journal
Date	Invoice #	Creditor	Ref	Accounts Payable	Hardware Purchases	Lighting Purchases	Plumbing Purchases	P1 GST Recv
				Credit	Debit	Debit	Debit	Debit
2017
Sept 1	B253	Better and Sons	AP6	$60,000			$57,000	$3,000
Sept 5	2008	Northward Suppliers	AP2	160,000	$152,000			8,000
Sept 6	15043	Lighting Always	AP4	18,000		$17,100		900
Sept 7	RC18	VeriSure Mfg	AP1	24,000			22,800	1,200
Sept 8	1102	Pearl Lighting	AP3	5,000	2,000	2,750		250
Sept 11	EF-1603	Arnold Consolidated	AP5	1,600			1,520	80
Totals				$268,600	$154,000	$19,850	$81,320	$13,430
GL account				210	510	514	518	180

Table \(\PageIndex{1}\): Purchases Journal – records credit purchases

Cash Receipts Journal								CR1
Date	Billing #	Customer	Ref	Cash	Sales Discount	Accounts Receivable	Cash Sales	GST Payable
				Debit	Debit	Credit	Credit	Credit
2017
Sept 1	17001	Hardy	AR5	$12,000	$120	$12,120
Sept 6	CS1	Cash sale	CS1	1,500			$1,425	$75
Sept 8	17003	Bergeron	AR4	2,000		2,000
Sept 11	17004	Douglas	AR3	20,000		20,000
Sept 12	17005	Cash sale	CS2	3,250			3,088	163
Sept 13	17006	White	AR2	5,000		5,000
Totals				$43,750	$120	$39,120	$4,513	$238
GL account				102	402	110	410	280

Table \(\PageIndex{2}\): Cash Receipts Journal – records all cash receipts

Cash Disbursements Journal								CD1
					Purchase
Date	Chq #	Payee	Ref	Cash	Purchase Discount (Inventory)	Accounts Payable	Other Disb...	Desc
				Credit	Credit	Debit	Debit
2017
Sept 1	101	General Lighting Ltd.	AP22	$14,775	$225	$15,000
Sept 2	102	John Bremner	SAL1	1,600			$1,600	Salary exp.
Sept 11	103	Lighting Always	AP4	4,200		4,200
Sept 12	104	VeriSure Mfg	AP1	22,500	225	22,725
Sept 13	105	Receiver General	AP 14	14,000			14,000	GST Aug
Sept 14	106	City of Edmonton	AP18	5,500			5,500	Property Tax
Totals				$62,575	$450	$41,925	$21,100
GL account				102	104	210	various

Table \(\PageIndex{3}\): Cash Disbursements Journal – records all cash disbursements

General Journal				GJ1
Date	Account/Explanation	F	Debit	Credit
Sept 30, 2017	Bank service charges expense	520	25
	Cash	102		25
	Bank reconciliation for August
Sept 30, 2017	Depreciation expense	530	3,500
	Accumulated depreciation	118		3,500
	Depreciation for September
Totals			3,525	3,525

Table \(\PageIndex{4}\): General Journal – records all other entries including adjustments, corrections, and closing entries

Each account that exists in the general journal must be represented by a corresponding account in the general ledger. As previously stated, each entry from the general journal is posted directly to the general ledger, if no other special journals or subledgers exist. If there are several hundreds or thousands of accounts receivable transactions for many different customers during a month, this detail cannot be easily summarized in meaningful ways. This may be fine for very small companies, but most companies need certain types of transactions sub-groupings, such as for accounts receivable, accounts payable and inventory. For this reason, subsidiary ledgers or subledgers are used to accomplish this. Subledgers typically include accounts receivable sub-grouped by customer, accounts payable by supplier, and inventory by inventory item. Monthly totals from the special journals continue to be posted to the general ledger, which now acts as a control account to its related subledger. It is critical that the subledgers always balance to their respective general ledger control account, hence the name control account.

Below is an example of how a special journal, such as a sales journal is posted to the subledgers and general ledger.

Figure \(\PageIndex{4}\)

Note how the general ledger can now be posted using the monthly totals from the sales journal instead of by individual transaction. Each line item within the sales journal is now posted on a daily basis directly to the subledger by customer instead, and balanced to the accounts receivable control balance in the general ledger. The subledger enables the company to quickly determine which customers owe money and details about those amounts.

At one time, recording transactions to the various journals and ledgers was all done manually as illustrated above. Today, accounting software makes this process easy and efficient. Data for each transaction is entered into the various data fields within the software transaction record. Once the transaction entry has been input and saved, the software automatically posts the data to any special journals, subledgers and general ledger. At any time, the accountant can easily obtain summary or detailed reports including a trial balance, accounts receivable by customer, accounts payable by creditor, inventory by inventory item, and so on.

Below is a flowchart that illustrates the flow of the information for a manual system from the source documents to the special journals, the subledgers and to the general ledger. This illustration also helps to give a sense of how the data would flow using accounting software.

Figure \(\PageIndex{5}\)