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Year 12 Accounting
Chapter 7
The General Journal
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Tuesday
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The General Journal
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Read Where Are We Headed? P. 143.
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The Need for the General Journal.
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There will be some transactions that cannot be recorded in the
special journals because they do not involve cash, and do not involve
the purchase or sale of stock. For instance, what happens if the owner
contributes her own vehicle for business purposes? This transaction
is neither receipt nor payment, nor sale nor purchase.
Transactions like this must still be recorded in a journal before they
can be posted to the ledger, but they cannot be recorded in the
special journals used so far. At the same time, because they are
infrequent they do not justify their own special journal would be only
one entry to summarise! Rather, they are recorded in a more general
journal called, surprisingly enough, the General Journal.
Thus, the General Journal is used to record infrequent, non-cash
transactions, which cannot be recorded in either one of the special
journals.
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Uses of the General Journal
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The main types of transactions that will be recorded in the
General Journal are:
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commencing entries
non-cash transactions with the owner
bad debts
correcting entries
closing entries (covered in Chapter 9)
balance day adjustments (covered in Chapters 10 and 11).
Study Tip
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If a transaction involves cash, it is recorded in either the Cash
Receipts Journal or the Cash Payments Journal, whether it is
infrequent or not.
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You!
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Review Questions 7.1.
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All q’s.
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Format
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Because the General Journal is used to record such a variety of
transactions, it must be fairly simple in terms of format.
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Basically, transactions are recorded in date order (as they occur),
with the Details column used to record the name of each ledger
account affected by the transaction. Then the amount is simply
recorded in the debit or credit column as is necessary. The key
thing to remember about the debit and credit columns in the
General Journal is that, like all transactions, the debits must
equal the credits. If the transaction does not balance in the
General Journal, it has no chance of balancing when it is posted
to the ledger accounts.
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Narrations
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Because the General Journal records a wide variety of
transactions, it is necessary to give a brief description of the
transaction immediately after recording the debit and credit
entries. This description is known as a narration. The
narration should ‘tell the story’ of what has happened, and
also note the source document involved.
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You!
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Review Questions 7.2.
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Q’s 1, 2, & 4.
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Commencing Entries
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The purpose of a commencing entry is to open or establish
ledger accounts for any existing asset, liability and owner’s
equity items.
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Commencing Entries
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By convention, the debit entries are recorded first, followed by
the credit entries, with the accounts to be credited indented
slightly.
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The three asset accounts – Bank, Stock Control and Vehicle –
require a debit balance, while the liability accounts – Loan –
GQC Finance and GST Clearing – require a credit balance. But
on their own, these five entries do not comprise a complete
entry, because the debit entries ($60 400) do not match the
credit entries ($15 900); a further credit (of $44 500) is required.
This balancing amount becomes the owner’s Capital As was
noted previously, the narration provides a brief description of
the transaction which in this case is the Commencement of
double-entry records. It also identifies the source document that
verifies the transaction – Memo 1.
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See the General Ledger accounts on p. 148, 149.
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Commencing entries and
subsidiary ledger accounts
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The balances of all existing asset, liability and owner’s equity
accounts must still be entered in the General Ledger, but all
individual debtor and creditor balances must also be entered in
the subsidiary ledger accounts, and this must be recorded in the
commencing entry in the General Journal.
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Refer Figure 7.3 p. 148.
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Note how the double-entry process is preserved in the General
Ledger columns (and thus in the General Ledger accounts) with
the total debits matching the total credits. The total amount owed
by debtors ($5800) is recorded as the opening balance in the
Debtors Control account, and the total amount owed to creditors
($8300) is recorded as the opening balance in the Creditors
Control account. In addition, the Accounting equation has been
used to determine the amount of Capital ($47 500).
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Monday
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Thursday
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Exams!
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Putting debit entries first should be encouraged in the
General Journal although theoretically students won't lose
marks for this.
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‘As for abbreviations I like enforcing the habit of students to
never abbreviate so that there is no confusion but as for
acceptable abbreviations I believe there is only two: P/L
Summary Account; and Accumm. Dep'n of "Asset”. Still,
encouraging students to not abbreviate will allow them one
less thing to stress about on their exam.’
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GST would be another…
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Commencing entries and
subsidiary ledger accounts
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In the subsidiary ledgers, the double-entry process is
suspended – only the entry that affects the individual debtor
or creditor is recorded. Thus, the entries in the Subsidiary
Ledger columns of the General Journal do not have to be a
matching double entry.
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Refer General Ledger p. 148, 149.
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Non-cash Transactions with the
Owner
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Because the owner and business are assumed to be separate
entities, transactions between the two must be recorded in
the firm’s accounting records. Obviously, cash drawings will
be recorded in the Cash Payments Journal and capital
contributions of cash will be recorded in the Cash Receipts
Journal. But drawings or capital contributions of other noncash items – such as stock or equipment – will need to be
recorded in the General Journal.
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Drawings of Stock
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See Figure 7.4 p. 150.
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Non-cash Transactions with the
Owner
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Non-cash capital contributions
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Whereas assets withdrawn by the owner are debited to a separate
Drawings account, assets that are contributed by the owner are
credited straight to the Capital account.
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See Figure 7.5.
You!
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Review Questions 7.4 q’s 1, 2 & 4.
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Bad Debts
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Unfortunately for small business owners, not all debtors can
be counted on to repay the amounts they owe, and
occasionally, a debt may need to be written off as ‘bad’.
According to the Conservatism principle, a bad debt should
be recognised as an expense when the loss is probable, so
that assets (in this case, Debtors Control) are not overstated.
This will usually be when the debtor is in liquidation or has
been declared bankrupt and the debt is deemed to be
irrecoverable. Recognising a bad debt will ensure the
reports contain all the information that is useful for decisionmaking, thus ensuring Relevance.
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Bad Debts
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A bad debt is a good example of how an expense does not
have to involve a cash payment. If a bad debt is incurred, the
business will need to recognise an expense for the loss of an
economic benefit (the cash which will not be received) in the
form of a decrease in assets (debtors), which decreases
owner’s equity. At the same time, the business must record
the decrease in Debtors Control (in the General Ledger) and
the account of the individual debtor (in the Debtors Ledger).
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See example and Figure 7.6 p. 153.
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You!
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Review Questions 7.5 q. 3.
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Correcting Entries
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It is difficult to set rules for the correction of errors, simply because
there is such a wide variety of errors that may need to be corrected.
However, if the error involves recording a transaction in the wrong
ledger account, the basic approach would be to:
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1 Undo the incorrect entry by reversing it – (i.e. record a debit entry to undo an
incorrect credit, and vice versa) and then
2 Enter the correct entry.
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See Figure 7.7.
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If the error was the omission of a transaction, this could be corrected by
simply making an additional entry in the General Journal. If the error
involved the use of an incorrect amount, it could be corrected either by
an additional entry (using the additional amount), or a reducing entry
(to credit the account originally debited and vice-versa) using the
excess amount.
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You!
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Read Summary.
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Do five exercises.