Week 2Recording transactions in

Journals

LEARNING OBJECTIVES

1. Identify the nature of, purpose of and evidence for transactions2. Describe the accounting cycle used to record, classify and

summarise transactions, including the of ledger accounts and the general ledger

3. Explain the purpose and format of the general journal, 4. Record transactions in the general journal

TYPES OF TRANSACTIONS

• External Transactions– Involve an outside party– Exchange of economic resources and/or obligations

• Sale of inventory• Purchase of supplies

• Internal Transactions– Transformation of economic resources

• Use of office supplies

• Non-Transactional Events– Not usually recorded, but may be in the future

• Receiving an order from a customer

SOURCE DOCUMENTS

• Prepared for every external transaction• Support entries in accounting records• Important element in control system• Common source documents include:– Tax invoice (specific requirements as per ATO)– Purchase order– Cash register tape– Credit card slip

THE ACCOUNTING CYCLE

Source documents

2. Prepare financialstatements

Steps in the Cycle Accounting Records

1. Recognise & recordtransactions

Financial statements

Start of new period

DOUBLE-ENTRY ACCOUNTING

• Each transaction must be analysed to determine:– What type of accounts are affected• Assets; Liabilities; Equity; Income; Expense

– By how much each item must be increased or decreased

• The accounting equation must always remain in balance

NORMAL ACCOUNT BALANCES

Increases NormalAccount Recorded On BalanceAssets Debit side DebitLiabilities Credit side CreditEquity

Investment in entity Credit side CreditDrawings from entity Debit side DebitIncome: Revenues Credit side CreditExpenses Debit side Debit

Recap on the Debit and Credit rules

8

All assets accounts = All liability accounts + All equity accounts Dr Cr Dr Cr Dr Cr

Debit todecrease

Credit toincrease

Normalbalance

Debit toincrease

Credit todecrease

Normalbalance

Debit todecrease

Credit toincrease

Normalbalance

Debit toincrease

Credit todecrease

Normalbalance

Debit todecrease

Credit toincreaseNormalbalance

Expense accounts Dr Cr

Income accounts Dr Cr

EXPANDED ACCOUNTING CYCLE

2. Journalise transaction

3. Post to ledger accounts

4. Prepare trial balance of GL

5. Prepare financial statements

1. Recognise & record transactions Source documents

General journal

General ledger

Trial balance

Financial statements

GENERAL JOURNAL

• Once analysed a transaction is recorded first in the general journal

What is a Journal? It is called the book of Original Entry It is a complete record of all transactions It is presented in Chronological order It can be useful for reducing and locating errors

GENERAL JOURNAL

• A journal has the following advantages:– Complete record of all transactions– Presented in chronological order– Useful for locating and reducing errors as debits and

credits shown together

General Journal

What do we need to know?Has a transaction occurred ? (Check source documents)

Is the transaction a business transaction ?

What accounts are affected by the transaction ?

What types of accounts are these ?

What was the effect of this transaction in terms of the accounting equation ?Does my journal balance

The Journalising Process

Five steps of journalising process

• Step 1: Identify the transactions from source documents• Step 2: Specify each account affected by the transaction and classify

by type (asset, liability, or owner’s equity)• Step 3: Determine whether each account is increased or decreased by

the transaction• Step 4: Apply the debit and credit rules to determine whether to debit

or credit the account to record increase or decrease• Step 5: Enter the transaction in the journal

Source:Accounting : Horngren/Harrison/Robinson, 3rd edition

General Journal Entries

Each general journal entry contains the following information

The date that the business transaction occurred

The debit entry always appears first

Details of the account(s) to be debited

ie. Name, account number and dollar amount Details of the account(s) to be credited

ie. Name, account number and dollar amount A narration or description of the transaction

1st May 2012 Darren Jones deposits $35 000 in a business bank account. He has a

lawn mowing business.• Source documents

– Bank deposit slip• Is it a business transaction?

– Yes as economic resources have been exchanged between two parties (Darren and the business)

• What accounts are affected?– Asset cash at bank increases (Dr)– Equity account capital increases (Cr)

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General Journal

Date Particulars Post Ref

Debit Credit

1/5/12 Cash at Bank 110 35000

Capital 310 35000

Darren sets up business

2nd May 2012 Darren purchases a vehicle and gardening equipment for cash

• Source documents– Bank withdrawal slip or Cheque butts or Paid tax invoice

• Is it a business transaction?– Yes as economic resources have been exchanged between two parties

(the business and the suppliers)• What accounts are affected?

– Asset cash at bank decreases (Cr)– Asset accounts motor vehicle and equipment increases (Dr)

16

General Journal

Date Particulars Post Ref

Debit Credit

2/5 Motor Vehicle 130 21,000

Equipment 140 9,000

Cash at Bank 110 30,000

Purchase of van and equipment for cash

Debits entered before Credits

Recording Transactions in General Journal

We will not use GST for this example.1. 1/1/12 Stuart Lang starts a cleaning business

by placing $200,000 in a business bank account2. 2/1/12 Stuart Lang Buys a Van for $50,000

paying cash3. 4/1/12 Stuart Lang withdraws $3,000 from the

business.

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General Journal entries

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Date Account Post Debit Credit

1 Jan Cash at Bank 110 200,000

S.Lang Capital 310 200,000

Commenced business

2 Jan Van 150 50,000

Cash at Bank 110 50,000

Purchased a van for cash

4 Jan S. Lang Drawings 315 3,000

Cash at Bank 110 3,000

Owner withdrew cash

Use the five step journalising process to record journal entries in Problem 3.4, p 119 from your

text

Step 1: IDENTIFY the transaction

Step 2: Specify accounts and classify by types

Step 3: Determine increase or decrease in each account

Step 4: Determine whether to Dr. or Cr. the account to record increase or decrease

Step 5: Enter transaction in the JOURNAL with brief explanation

July 13

6

101819

The owner invested $2 500 000 cash into the business.Acquired the business of Jeffrey’s Golf World for $1 800 000 cash. The price consisted of land $1 000 000, building $650 000, and equipment $150 000.Advertised the opening of the golf course, paying advertising expenses of $36 000 for a major television campaign.Paid cash $36 000 for a 1-year insurance policy.Purchased new golfing equipment for $60 000 from Rory Golfing, payable in 30 days.Received golf membership fees of $22 000 in cash.

The Arid Sands Golf Club was opened for business on 1 July by Todd Simpson. The following selected events and transactions occurred during the first month of operations:

Five step journalising process to record journal entries