Chapter 4Topic 2: Journalizing Transactions

Steps in the Accounting Cycle

• Step 1 – ORIGINATING DATA

• Step 2 – JOURNALIZING DATA

• Step 3 – POSTING

• Step 4 – TRIAL BALANCE

• Handout!

Review Topic 1

• Objectivity Principle – all accounting data should be verified

• Source Documents – business papers that give evidence/proof of business transactions

• First/Opening Balance Sheet, Invoices (purchase/sales), cheque stub, remittance slip

Topic 2• Summary Table and T-Accounts

• Are they the most effective way of recording business transactions?

• Several disadvantages:• Debit and credit entries are entered in two different accounts

far from each other. You need to search the entire ledger.

• Accounts do not display in any particular order, or show all the transactions that occurred on a particular day.

• When an error is made it its difficult to locate quickly.

How to overcome these disadvantages?

• Journal

• A daily record of business transactions in debit and credit form; a book of original entry.

• Many different types of journals (sales, purchases, cash receipts, cash payments)

• It is like a diary, it shows each days DR and CR’s that are analyzed from source documents.

• Also known as a book of original entry.

Journal

• General Journal• A two column journal

• Journalizing• The process of analyzing

transactions into debits and credits, and recording the results in a journal

Journalizing: An IllustrationSteps to Follow

• Step 1: Analyze the effects of the transaction in the usual way (t-accounts), and debit before credit.

• Step 2: All journal sheets are numbered consecutively.

• Step 3: Write the title of the account to be debited in the Account Title and Explanation column. Dollar signs are not necessary. The journal is not a formal financial statement.

Steps

• Step 4: On the line below the debit entry, indent about 1.5 cm from the date column and write the title of the account to be credited. Indenting makes it easier to distinguish the credit from the debit entry.

• Step 5: Explanation – identification of source documents

• Post-Reference Column - Not used in journalizing but posting, the next step.

Illustrating Journal Entries

• Tips:• Journal pages numbered

• Date column

• Skip line between transactions

• First entry is the opening entry

• Only complete transactions are shown on a journal (if you don’t have enough room go to the next page)

• Page 119 – 121

Terminology

• Opening Entry• The first entry to establish an account. It identifies the accounts that

have a beginning balance at the beginning of the business. First/opening balance sheet.

• Compound Entry• An entry that involves more than two accounts.

• Error Correction• Rule out the mistake with a single line, neatly insert the correct amount

and initial (never erased).

Examining Advantages of the Journal

• Journal lists all the financial events by date.

• Journal provides a record of all transactions in date order, you can compare the volume of transactions from day to day.

• Equality of debits and credits can be checked at a glance. Errors can be discovered before the transactions are transferred to the ledger.

• The journal not only shows all numerical info about a transaction in one place, but also explains the transaction.

• The journal is a factual proof of financial events in case such proof should be required in a court of law, or if any source documents should be lost or destroyed.