Unit VI-Part 1 (Gen Journal Gen Ledger Trial Balance)

Unit VI – Part 1General Journal, General Ledger, Trial Balance

Overview

Background The work for each accounting period follows a cycle, which is called the accounting cycle. This refers to a series of sequential steps or procedures performed to accomplish the accounting process.

1. Journalizing

2. Posting to the General Ledger

3. Trial Balance Preparation

4. Adjusting the Books

5. Preparing Financial Statements

6. Closing the Books

7. Preparing Post Closing Trial Balance

8. Reversing Entries

Purpose The purpose of Unit IV “General Journal, General Ledger, Trial Balance ” is to introduce the student on the use of a general journal, general ledger and the preparation of the trial balance.

In this unit This unit contains the following topics:

Topics See PageJournalizing (Step 1) 2 of DJournal Rules 4 of DJournal Entries 6 of DThe General Ledger 9 of DThe Chart of Accounts 11 of DPosting to the General Ledger (Step 2) 13 of DBalancing Accounts 16 of DTrial Balance 17 of DLimitations of the Trial Balance 19 of D

Marivic D. Valenzuela-Manalo Page 1of D

Journalizing (Step 1)

Overview Bookkeeping is the systematic and chronological recording of transactions in

books of accounts following a series of steps and procedures commonly referred to as the accounting cycle. This bookkeeping procedure begins with journalizing which is the first part of this unit.

Journal Accounting is based on double-entry bookkeeping, which means that

accountants record the dual effects of a business transaction. The basic recording procedure in accounting involves a device called a journal. A journal is a daily record of business transactions that shows in one place the complete debit and credit effect of each transaction on the accounts of the business in chronological order. The general journal is also known as the book of original entries.

Journalizing The chronological recording of the business transactions in the book of

original entry.

Illustration Below is an example of a typical journal.

Continued on next page


Journalizing (Step 1), Continued

Legend The definitions below illustrate the legend:

Date, is used to show the day of the month on which each transaction takes place.

Particulars column or sometimes called the Account Titles and Explanation column, is used to show every account title affected by each transaction and to give some explanation or justification of the debits and credits being made to the accounts.

P/R (Posting Reference) column is important because it indicates the numbers of the accounts in the ledger to which the debits and credits recorded in the journal have been transferred. In manual systems, these account numbers are inserted at the proper time in the P/R column of the journal.

Debit and credit columns indicate the amounts to be debited or credited to the account titles written in the particulars column.


Journal Rules

Overview The following guidelines will be useful when recording transactions in a

general journal.

Journal Rules The recording process follows these five steps:

1. Transactions are first analyzed, identifying the transaction from business source documents, e.g., official receipts, cash vouchers, etc. All transactions recorded in journals must be based upon some objective verifiable evidence. Business documents are formal written records that provide information to everyone with an understanding of accounting to measure the amount of the transaction and to analyze it in the same way. The data used for the journal entry are verifiable if it is possible to trace the transaction to its point of origin.

2. The day on which the transaction took place is written in the Date column.

3. The account titles affected by the transactions are put into the particulars column. It is an accepted practice to list first in each transaction the account title/s being debited, followed by the account title/s being credited. The debited account titles are written against the left margin of the particulars column. The accounts being credited are indented from the left margin of the particulars column. If any single transaction requires several debits and credits, all account titles receiving the debits will be listed first, followed by the indented account titles receiving the credits. At the same time each account title is written in the journal, the peso amount is inserted in the appropriate Debit or Credit column. For each journal entry, the total debits must equal the total credits.



Journal Rules, Continued

Journal Rules, con’t.

Continuation of the steps:

4. A brief explanation is written immediately below the last account title credited. This gives the reason why the accounts are being debited or credited and verifies the amounts used. The explanations follow no rigid rules. The accountant uses his own wording in every explanation. He must keep in mind, however, that other readers must understand the transaction and the manner in which it was recorded.

5. It is advisable to leave a blank line following the explanation to help distinguish one journal entry from the next. Thus, each journal entry consists basically of four parts:

Transaction date

Debit entry

Credit entry

Explanation


Journal Entries

Journal Entries The following transactions of Joseph Labrador, CPA will show the ways in which the rules mentioned in the previous section are applied to a general journal. The transactions are described first and the proper method of recording the transactions follows in the illustrative journal form.

Transaction Date Description of Transaction

September 1 Mr. Joseph Labrador began his accounting firm by investing cash of P300,000 and furniture of P50,000.

2 Paid the business tax to the City Treasurer, P5,000.

3 Purchased a computer from CompuCenter for P40,000 on account

4 Purchased various office supplies from National Bookstore, P7,000.

5 Sent charge bills to ABC Co. for accounting services rendered, P10,000.

6 Made a partial payment of P10,000 to CompuCenter

7 Received P5,000 in cash for services rendered to XYZ Co.

8 Mr. Labrador withdrew P8,000 cash for personal use.

9 Paid repairman for repair service on the office furniture, P500.

10 Paid in cash the following: Secretary’s salary P3,500 PLDT & MWSS Bills 1,500



Journal Entries, Continued

Example of Journal entries

Below is a typical journal with journal entries:



Journal Entries, Continued

Compound Journal Entry

A compound entry (i.e., entry with more than one debit or more than one credit or more than one debit and credit) is optional to be used on the part of the recorder. Compounding an entry, however, is not to be used to serve laziness at the sacrifice of clarity. Compound entries should be used only for similar transactions.

The event in September 1 and 10 may be journalized by two simple journal entries as shown in the illustration. But it can also be recorded by one compound journal entry as follows:

Sept. 1 Cash 300,000 Office furniture & fixture 50,000 Joseph, Capital 350,000 To record initial investment

Sept. 10 Salaries & wages expense 3,500 Utilities expense 1,500 Cash 5,000 Paid salary of secretary & PLDT & MWSS bill


The General Ledger

Overview Since transactions are recorded in the journal according to their dates of occurrences, items of similar nature are not grouped together. Information in the general journal is spread among the various transactions recorded. If information regarding an item is desired, say, cash, for example, it is still necessary to gather the information from the scattered pages of the journal. Due to this inconvenience, there is a need for another record in which data appearing in the journal may be summarized to show the status of each item. Each item is represented by an account. A group of accounts constitutes a ledger. The general ledger is also known as the book of final entry (Punzalan, J., Santos, M., 1969).

Forms of General Ledger

There are two possible forms of general ledger account. These are:

Standard Form

The headings in each column of this form indicate the type of information that is recorded. There is a complete set of columns, Date, Items or Explanation, P/R, Amount, for each side (debit and credit of the account). The Date column shows the day each transaction affecting the account took place. The Item column, which is rarely used, gives information about unusual transactions recorded in the account. The P/R column is called a posting reference column and tells the source of the debit or the credit being entered in the account. The debit and credit columns show the peso amount for each transaction recorded in the account.



The General Ledger, Continued

Forms of a ledger

The other account form is

Running Balance Form

This type of account permits an analysis of transactions in terms of debits and credits, but the arrangement of the columns is different from the standard account form. The sample shows this running balance form of account; its use will be deferred until you have become more familiar with recording transactions in the standard account format.


The Chart of Accounts

Overview An accountant usually prepares a chart of accounts, which is the listing of all

the account titles being used by the business in its operations including their respective account numbers, at the time the business is organized. At that time, he considers the nature of the business, the kinds of transactions, which are likely, and the names of the accounts needed to record the information. He prepares the chart of accounts in a ledger order, which is also the financial statement order. Whenever necessary, the accountant or a newly trained employee may refer to the chart for specific account titles and for the position of such accounts in the ledger or in the statements.

Illustration The chart of accounts prepared for Joseph Labrador, CPA follows:

Account No. Account Title ASSETS

101 Cash102 Marketable Securities103 Notes Receivable104 Accounts Receivable

104-A Allowance For Doubtful Accounts105 Interest Receivable106 Advances To Employees107 Office Supplies108 Prepaid Rent109 Prepaid Insurance201 Land202 Building

202-A Accumulated Depreciation-Building203 Office Equipment

203-A Accumulated Depreciation-Office Equipment204 Office Furniture And Fixture

204-A Accumulated Depreciation-Office Furniture & Fixture



The Chart of Accounts, Continued

Illustration (continued)

LIABILITIES301 Accounts Payable302 Notes Payable303 Interest Payable304 Salaries & Wages Payable305 Withholding Taxes Payable306 SSS & Medicare Premium Payable307 Pag-Ibig Contributions Payable321 Mortgage Payable

PROPRIETORSHIP401 Labrador, Capital

401-A Labrador, Drawing402 Income & Expense Summary

REVENUES501 Service Income502 Interest Income503 Dividend Income

EXPENSES601 Advertising Expense602 Depreciation Expense603 Doubtful Accounts Expense604 Gas & Oil Expense605 Insurance Expense606 Interest Expense607 Miscellaneous Expense608 Office Supplies Expense609 Postage & Telegraph Expense610 Rent Expense611 Repair & Maintenance Expense612 Salaries & Wages Expense613 SSS & Medicare Premium Expense614 Taxes & Licenses Expense615 Transportation Expenses616 Utilities Expense


Posting to the General Ledger (Step 2)

Overview Journals are called books of original entry because the information from the underlying business papers, i.e., receipts, invoices, etc., is recorded here first. In most businesses, accounting transactions seldom go to the ledger accounts without first having been recorded in a journal. The journalized transactions must, however, be transferred to the ledger accounts so that the changes in individual asset, liability, proprietorship, revenue and expense items may be accumulated. The process of transferring the data from journal entries to the individual account in the ledger is called posting. Posting simply involves transferring the journalized debit and credit data to each account name in the journal entry. The amounts are written on the side of the accounts as specified in the journal entry.

Journal Entry The journal entry and the procedure for posting the debit portion of this

transaction to the proper account are illustrated below:

Debit Posting procedure

On the debit side of the account, in the ledger:

1. Enter the year (where needed), the month (where needed), and the day in the Date column of the account affected.

2. Enter the amount in the debit column of the amount affected.3. Enter the journal posting reference (journal symbol, e.g., GJ for general

journal and page number) in the P/R column to show the source of the data posted.

4. In the journal, enter the ledger posting reference (account number) in the P/R column for the debit part of the transaction, indicating the completion of the posting.



Posting to the General Ledger (Step 2), Continued

Illustration Below is the illustration of the debit posting procedure.

Debit Posting Illustrated

Journal Entry The journal entry and the procedure for posting the credit portion of the given

transaction follow:

Credit Posting Procedure

On the credit side of the account in the ledger:

1. Enter the year (where needed), the month (where needed), and the day in the Date column of the account affected.

2. Enter the amount in the credit column of the account affected.3. Enter the journal posting reference (journal symbol and page number) in

the P/R column to show the source of the data posted.4. In the journal, enter the ledger posting reference (account number) in the

P/R column for the credit part of the transaction, indicating the completion of the posting.



Posting to the General Ledger (Step 2), Continued

Illustration Below is the illustration of the credit posting procedure.

Credit Posting Illustrated


Balancing Accounts

Overview The general ledger accounts provide a means for determining the amount for

each of these items that exist at the end of each accounting period or at any other time. This information is obtained by balancing the accounts.

Balancing accounts in the general ledger is a simple procedure. First, the debit and credit sides of each account are footed (totaled) whenever more than one figure appears in a column, and the totals are inserted in small penciled figures immediately below the last entry on each side of the account. Second, the total of the debits in each account is compared with the total of the credits. Third, when the total of the debits is greater than the total of the credits, the difference between the two totals is inserted in pencil on the debit side of the account following the line with the penciled footing. If the total of the credits is more than the total of the debits, the difference is inserted in pencil on the credit side next to the penciled footing. Asset and expense accounts will normally have debit balances. Liability capital and revenue accounts will normally have credit balances.

Illustration Below is an illustration of Posting the Cash Account transactions of J.

Labrador from September 1 to 10:


Trial Balance

Overview The trial balance is a list of schedule of open accounts in the general ledger with their corresponding account balances, i.e., the difference between the total debits and total credits of an account in the ledger. It is prepared to verify the equality of debits and credits in the ledger at the end of each accounting period or at any time the postings are updated.

The previous section has shown the procedure for entering transactions directly in the ledger accounts and the way to determine the balances of accounts after the transactions for an accounting period has been recorded. At this point in the sequence, it is advisable to check the work for arithmetic accuracy. Preparing the trial balance does this. The trial balance summarizes all the accounts in the general ledger and thus, provides a check on the equality of the debits and credit entries in the ledger. This schedule has the following characteristics:

It is a list of accounts.

The list of accounts is unclassified; it does not attempt to state whether accounts listed are assets or liabilities, current or long term.

The accounts listed are normally those with open balances, that is, they have peso amount balances.

The accounts are listed in ledger orders.

If the accounts have been debited and credited with equal amounts for each transaction during the accounting period, and if the balances of all accounts have been accurately calculated, the sum of the debit balance accounts (the assets and the expenses) will equal the sum of the credit balance accounts (the liabilities, proprietor’s capital and revenues).

It is important to note that the trial balance is a list prepared for all accounts with open (debit or credit) balances. Accounts with zero balances are excluded.



Trial Balance, Continued

Reminder The trial balance is not a complete proof of the correctness of the accounting

entries recorded. It is possible to debit on asset account instead of an expense account, credit a revenue account instead of a liability account, make compensating arithmetic errors (errors that offset each other), or debit and credit the appropriate accounts but for the incorrect amount, and still produce a trial balance in which the debit balances equal the credit balances. All that the trial balance really proves is that the transactions were recorded so that debits and credits are equal in amount. In spite of the limitations of the trial balance, it is nevertheless an important tool in checking the equality of the debit and credit balances in the general ledger. In addition to providing a kind of proof of work done the trial balance may also be used as a source of information for the preparation of balance sheet and income statement.

Illustration Below is the trial balance of Joseph Labrador, CPA:

Joseph Labrador, CPATrial Balance

September 10, 20X1

ACCOUNT TITLES DEBIT CREDIT

Cash 269,500Accounts Receivable 10,000Office Supplies 7,000Office Equipment 40,000Office Furniture & Fixture 50,000Accounts Payable 30,000Labrador, Capital 350,000Labrador, Drawing 8,000Service Income 15,000Taxes & Licenses Expense 5,000Repair & Maintenance Expense 500Salaries & Wages Expense 3,500Utilities Expense 1,500 __________

395,000=========

395,000 =======


Limitations of the Trial Balance

Overview The Trial Balance provides proof that the ledger is in balance. The

agreement of the debit and credit totals of the trial balance gives assurance that

Equal debits and credits have been recorded for all transactions. The debit or credit balance of each account has been correctly computed.

The addition of the account balances in the trial balance has been correctly performed.

Limitations Experience proves that not all the trial balances that we prepare are balanced. There are many instances that the debit total is not similar to that of the credit total. The following are the steps in locating errors in the trial balance:

Prove the addition of the trial balance by adding columns in the opposite direction from that previously followed.

If the error does not lie in the addition, determine the exact amount by which the trial balance is out of balance. The amount of the discrepancy is often a clue to the source of the error.

If the difference is divisible by 9, this suggests either a:

Transposition Error. An interchange in the order of the digits of a number, e.g., 87 for 78; 453 for 354; 1234 for 4231; etc. The first is called a one-column transposition, the second, a two-column transposition and the third, a three-column transposition. An error caused by a one-column transposition is divisible by 9, by a two column transposition by 99, by a three-column transposition by 999, and so on.



Limitations of the Trial Balance, Continued

Limitations, cont.

Below is the continuation of steps in locating errors in the trial balance:

Transplacement Error. Also known as sliding error, occurs when some or all the digits of a number are moved one or more places to the left or right, e.g., 450.00 written as 45.00 or as 4.50 or as 4005.00. The first is called a one-column slide, and the next two as two column slides. The error caused by a one-column slide is divisible by 9, by a two column slide by 99, and soon. After the division is performed, the quotient always indicates the figure transplaced.

If the difference is an even number, divide it by 2. The quotient could be the balance of an account that is erroneously copied to the trial balance on the wrong side or the amount of a journal entry that is posted on the wrong side of the ledger.

Compare the amounts in the trial balance with the balances in the ledger. Be sure that no account is omitted.

Recompute the balance of each ledger account.

Trace all postings from the journal to the ledger accounts. As this is done, place a check mark in the journal and in the ledger after each figure is verified. When the operation is completed, look through the journal and the ledger for unchecked amounts. In tracing postings, be alert not only for errors in amount but also for debits entered as credits, or vice versa.


Documents

Unit VI-Part 1 (Gen Journal Gen Ledger Trial Balance)