Chapter 2
Chapter 6: The Journal
and Source Documents
Chapter 2 quiz will be on Monday, September 22.
The First Three Steps in the
Accounting Process
Transactions
occur.
Transactions
are recorded
in the journal
in order by
date.
The accounting
entries are
transferred to
the ledger
accounts.
The General Journal
•debit entry and one credit entry.
•In reality, many transactions are
consist of many accounts, so we have to
record the transactions first in the
General Journal. (or Journal) (similar to
diary)
•General Journal is a notebook in
which accounting entries are first
recorded
The General Journal
•Each transaction is recorded separately in
chronological order.
•It is therefore referred to as the book of
original entry
 Each transaction is recorded
a) separately
b) in the order that they occur
• It provides a continuous record of all
transactions
The Two-Column Journal
1. Year recorded at the top of column.
2. Month recorded once with days noting business
transactions.
3. Account titles are always capitalized.
4. Explanations are brief but tell ‘the story’.
5. Debits are always recorded first.
6. Credit particulars are always indented.
7. The completed journal entry must balance.
8. Leave a blank line before next entry.
The Steps in Recording a Journal
Entry
•Step 1: Date: Enter the day in the date
column (second column)
•Step 2: Debit Accounts: Enter the
name of the accounts, which is to be
debited. Enter the amount in debit
column.
The Steps in Recording a Journal
Entry
•Step 3: Credit Accounts: Enter the
names of the accounts which is to be
credited. They are indented about
1.5 cm. Enter the amount in credit
column.
•Step 4: Explanation: Write a brief
explanation for the entry beginning at
the left side of the “Particular” column
on the line beneath the last credit
item.
Example of a Journal Entry
• Let’s say that on Feb 1, you sold your tax return service
to your existing client for $180.
• Customer did not pay on the same date.
• Customer paid on Feb 15.
• Make journal entries:
Date Particulars
PR
Debit Credit
Feb 1 AR
180
Service fee(Rev)
180
Sold tax return service to Mr. Smith
15 Bank
180
AR
180
Received money from Mr. Smith Invoice 123
Notes about recording
a Journal Entry
Year recorded at the top of column.
2.Month recorded once with days noting
business transactions.
3.Account titles are always capitalized.
4.Explanations are brief but tell ‘the story’.
5.Debits are always recorded first.
6.Credit particulars are always indented.
1.
Notes about recording
a Journal Entry
7. The completed journal entry must
balance. (total debit amount must be
equal to total credit amounts)
8. Leave a blank line before next entry.
General Journal
•Typically, accounting clerk (or
bookkeeper) is responsible for
making journal entries.
•They use the source documents and
record the entries in the journal.
•Accountant would review and
confirms that these journal entries are
accurate (free of error) and then
accountants would post the journal
“On Account”
If a company “purchases an item (such
as equipment) on credit (account),”
this means that it is not paid yet.
• Debit Asset account
• Credit Accounts Payable account
 If a company “sells on account”, this
means that customer did not pay cash yet.
• Debit Accounts Receivable account
• Credit a revenue account.

“On Account”


If a company “pays on account” to decrease
the amount they owe to a creditor, then we:
• Credit Cash (or Bank) account and
• Debit Accounts Payable account
If a company “receives on account” from
debtor, this means that the company received
cash from the debtor. Then we:
• Debit Cash account and
• Credit Accounts Receivable account
Source Documents
•Think / Pair : Explain to each other what source documents
are for and what opening entry is for and why we do journal
entries first instead of using T-accounts directly.
There are many types of source documents :
1. Cash Sales slip
2. Sales Invoice
3. Purchase Invoice
4. Check copies
5. Cash Receipts Daily Summary
6. Bank Advices
Cash Sales Slip
•It is a business form showing the
details of a transaction in which goods
(or service) are sold to a customer for
cash.
•Example is in Fig 6.4 (P185) :
Masthead Marine sells boats, marine
equipment, boat parts and supplies.
Cash Sales Slip
•The first copy goes to customer as
receipt, and the second copy goes to
accounting department. The third
copy stays in the store for easy
reference later on.
Cash Sales Slip
Sales Invoice
•When you deal with other businesses
(instead of a retail customer), you do not
receive cash right away. Instead you make
sales on account.
•For each sale on account, a sales invoice is
issued to the customer.
•A sales invoice is a business form showing
the details of a transaction in which goods
or services are sold on account.
Sales Invoice
•One copy goes to the customer,
(which becomes a Accounts Payable
source document) second copy goes
to the accounting department (source
document for Accounts Receivable)
and the third copy stays in the store.
Sales Invoice
The Accounting Cycle
(not all the steps
are mentioned here)
Transaction
s occur.
Entries
recorded in
journal.
Posting
from the
journal to
the ledger
accounts.
Ledger
balance by
means of
trial
balance.
Posting

There are two important books in
accounting: General Journal and Ledger.

The General Journal is an ongoing
record of all business transactions.
General Journal is like diary or journal.

For each account (e.g. Bank, Accounts
Receivable, Drawings) there is also an
ongoing record  a ledger.

The process of transferring the numbers
from the General Journal to the ledger is
Balance Column Account

So far, we considered only T account for Ledger.

However, there is a second kind of Ledger called
“Balance Column Account”, which has three
columns: (similar to T account)
1. Debit column
2. Credit column
3. Balance column

BCA shows the account balance after each entry.
The Balance Column Account
Bank
5 000
350
700 1 750
200
960
450
6 350 3 060
3 290
Balance Column Account

“P.R.” : Posting Reference number, and
this indicates the page number of your
journal

“Dr/Cr” : indicates whether the balance is
debit balance or credit balance.

“No 101” indicates the account number of
Bank account.

Six Steps in Posting
5 Steps in the Ledger (Balance Column
Account)
1. Turn to page, which contains the
particular account in ledger.
2. Record the date on the next line.
3. Record the journal page number in “PR”
column.
4. Record the amount in Debit or Credit
column.
Six Steps in Posting
Last step in the Journal
6. Record the ledger’s account number in
the journal.
 By doing step 6, you are checking off to
show that the journal entry has been
posted.
 This action is important when finding
errors after making trial balance.
Six Steps in Posting
5 Steps in the Ledger (Balance Column
Account)
1. Turn to page, which contains the
particular account in ledger.
2. Record the date on the next line.
3. Record the journal page number in “PR”
column.
4. Record the amount in Debit or Credit
column.
Six Steps in Posting
Last step in the Journal
6. Record the ledger’s account number in
the journal.
 By doing step 6, you are checking off to
show that the journal entry has been
posted.
 This action is important when finding
errors after making trial balance.
The Accounting Cycle
(not all the steps
are mentioned here)
Transaction
s occur.
Entries
recorded in
journal.
Posting
from the
journal to
the ledger
accounts.
Ledger
balance by
means of
trial
balance.
Classwork / Homework
P83 E2-7, E2-9 (a and b)
 P86 P2-3A (a and b)
 Optional question P86 P2-4A

Trial Balance
But in reality, accounting staffs sometimes
(or few times) make mistakes.
 Therefore, accountants have to
periodically check the accuracy of the
ledger and make sure the ledger is in
balance. This is done by setting up a
TRIAL BALANCE.

Trial Balance



Trial Balance is done usually at the end of the
month (after you are finished recording the
business transactions into the T-Account
Ledgers.)
A Trial balance is a listing of the account
balances (ending) in a ledger. It is used to
see if the dollar value of the debit accounts is
equal to the credit accounts
To do this, you simply add up all of the debit
balances, add up all of the credit balances,
and see if the two totals are the same.
Trial Balance



If the balances agree, ( => total debit amounts =
total credit amounts) then the ledger is said to be
in balance.
If the balances do not agree, then the ledger is
said to be out of balance. This process is
called “taking off trial balance”
In manual accounting system, they had to check
trial balances at the end of each week or month.
Trial Balance


If you use a computerized accounting system, the
ledger is never out of balance because
accounting software programs prevent users
from entering unbalanced accounting entries.
(For example, simply accounting software does
not allow you to “enter” (or “post”) the
transaction unless the debit amounts are equal
to credit amounts.)

If the Debits and Credits balance, the
ledger is said to be in balance. If they
don’t agree, the ledger is said to be out of
balance. This whole process is called
taking off a trial balance

If the ledger is out of balance, the work
is not accurate and there is at least one
mistake.

A trial balance is taken off the ledger
monthly and kept until the books are
audited at year end.
Steps of Making a Trial Balance






We will do P113 (Fig 4.10) on the board.
Step 1: Write the title, “who, what (trial
balance) and when”
Step 2: List all the accounts in first column
and their balances on second column or third
column.
Step 3: Place the debit balances in the second
column and credit balances in the third column.
Step 4: Add up the two total amount for debit
column and for credit balances.
Step 5: Check if the two totals are the same.
If they are, draw a line above the total amount and
draw double line below the total amounts.
Notes about Trial Balance
Another type of worksheet…has 3 main
columns
 Title: Who, what and when
 All accounts are listed in the first
column (same order as balance sheet!!!
This time, we just have one column for all
three types of accounts.)
 Second column lists debit amounts
 Third column lists credit amounts
 Single (indicate totalling) and

Trial Balance out of Balance?!!!


NOTE: Sometimes trial balances do not work out
on the first attempt. This is where the
accountant’s real skill shines in finding and
correcting errors.
Errors happen due to:
• faulty addition: example: someone added 1000
•
•
instead of 10000  error is $1, 100 or 1000
Transposing numbers: example: someone added
196 instead of 169  usually the error is multiple of 9
Entering items on the wrong side: example:
instead of debitting AR for $500, someone creditted
AR for $500  the error can be divided by 2
Trial Balance out of Balance?!!!

What to do if the Trial Balance is not balanced:
Here are the 4 steps:
1. Re-add the Trial Balance columns
2. Check the account balances from the ledger
3.
4.
5.
against those of the Trial Balance (none
missing, none on wrong side, correct amounts, etc)
Recalculate the account balances
Check that there is balanced accounting entries for
each transaction in each account
Check that posting process is done accurately.
Trial Balance out of Balance?!!!

Even if the ledger is in balance, but still it
might have errors!!! These are the most
difficult errors to find.
• Example: customer paid $500 they owed last month,
•
so someone made incorrect entry of debitting AR by
$500 and creditting $500 cash by $500. This kind of
mistake will not be found by Trial Balance worksheet.
Any other example?
** Drawings are treated the same as an Expense or
Asset, with the Debit increasing on the left and Credit
decreasing on the right. **Think / Pair for 4 minutes
Drawings
In a healthy business, the owner will be
able to withdraw money of the business on
a regular basis much like a salary
 This account keeps track of how much
money is being drawn by the owner.
 These withdrawals of funds by the owner
are known as drawings and represent a
decrease in equity

Drawings


Drawings are NOT expenses – they have
nothing to do with determining net income or
net loss
Ie: Mike Tran, owner, withdraws $300 for
personal use:
• All entries affecting Drawings follow the rules
of debit and credit. Drawings represent a
decrease in equity – decreases in equity =
debit entries
• Drawings account is a contra account of the
regular capital account. It appears in Balance
sheet.
• It normally has a debit balance.
Drawings Transaction


If the owner takes the computer from company and takes
it home. Is this a transaction?
Yes. Accountant has to credit computer or equipment
account and debit Drawings account.
Classwork / Homework
P81 E2-1, Ex 2-9 only ©,
 P86 P2-3A only © we did a and b
yesterday.
 P87 P2-5A and P2-10A
