Chapter 3 Lecture Notes

Recording transactions in a general journal:

A journal or general journal is called a book of original entry. It is the place or book where every business transaction is first recorded.

A journal entry is the business transaction (debits and credits) that is recorded into a journal once it is analyzed.

The journal entry is basically the written form before you post it to the T account. Put it into words before it goes into the T accounts!

The process of recording a journal entry or business transaction is called journalizing. Before any transaction can be journalized, it must be analyzed to determine the account(s) to

be debited and the account(s) to be credited. The information about the business transactions comes from the business’s source

documents. Examples of source documents include checks, invoices, receipts, loan papers, quotes, etc. Source documents furnish objective evidence that the transaction occurred.

Parts of a general journal entry: (Look at pages 113-114)

1. Date: Record the year and month in the left part of the Date column and the day of the month in the right part.

2. Account(s) to be debited: Write the full account title(s), starting next to the Date column. List the dollar amount in the Debit column.

3. Account(s) to be credited: List these accounts below the account titles to be debited and indent them approximately one-half inch from the Date column. List the dollar amount in the Credit column.

4. Explanation: Write a brief explanation of the transaction below the account titles to be credited and indent them one-half inch further. The explanation cites any specifics, such as check or invoice numbers. The explanation is optional.

5. Always skip a line between each journal entry. Look at page 114.6. There are no dollar signs or decimal points in journal entries.

Cost Principle – This principle states that all assets should be recorded at their actual cost when they are purchased. The fair market value or what you can sell it for does not matter, it only matters what it cost when you initially record the transaction.

You will deal with the fair market value or sells price when you actually sale the asset, this is known as capital gains or loss.

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The posting process transfers information from the journal to the ledger.

Ledger or General Ledger: A book containing all of the accounts of a business; a grouping of all of the accounts.

Ledger Account: a complete record of all of the business transactions for that individual account.

The Ledger Account Form: It summarizes all of the transactions from the general journal that affect a specific amount. It is the same thing as the T-Account. The T-Account is informal and the Ledger Account Form is formal. Look at the comparison of the Cash account on page 119.

The “Item” in the account can be left blank unless it something that you need to remember.

Steps in the posting process: (pages 120-121)

Posting: the process of transferring the journal transactions in the General Journal to the accounts in the General Ledger.

Post each transaction and account separately. The cross-reference method is used so you can tell where the amount came from. Post References are used to indicate that the entries have been posted.

o In the General Ledger account enter the page number of the General Journal that the transaction came from.

o In the General Journal enter the account number of the General Ledger account that the transaction came from in the Post. Ref. column.

Preparation of the trial balance:

The Trial Balance is an informal list of the general ledger accounts and their respective ending balances.

The purpose of the trial balance is to aid in proving the equality of the debits and credits in the accounts prior to preparing the financial statements.

Even if the Trial Balance is equal it does not mean that there are not other errors that have occurred.

We discussed the Trial Balance in more depth in Chapter 2.

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Correction of errors:

Never erase or delete an error. Doing this will cause the deletion of the audit trail. Corrections of errors depend on whether the error has been posted to the accounts or not. Be sure to provide a brief but complete explanation in the journal entry for audit trail

purposes whenever you do a correction.

Making a Correction Before Posting (manual only) Draw a line through the incorrect item and write the correct item (Examples page 131)

Making a Correction After Posting (manual or computerized) One-step method: Make one entry that undoes the error and provides the correction.

(Example bottom of page 132) Two-step method: Journalize the reversal of the entry that is incorrect and journalize the

correct entry. (Example page 132-133)

Answers to Quiz Yourself on page 144

1. A2. C3. E4. B5. D6. C

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