BUS103: Introduction to Financial Accounting

Items are entered into the general journal or the special journals via journal entries, also called journalizing.

Learning Objectives

• Explain the correct procedure for making a journal entry
• State the purpose of the General Journal and Special Journals

Key Points

• Special journals are designed to facilitate the process of journalizing and posting transactions. They are used for the most frequent transactions in a business.
• Journal entries are prepared after examining the source document to see if a business transaction has taken place.
• The total amount debited and the total amount credited should always be equal, thereby ensuring the accounting equation is maintained.

Terms

• journalizing
  the act of recording bookkeeping entries
• credit
  an entry in the right hand column of an account; credits increase liability, income, and equity accounts and decrease asset and expense accounts
• debit
  an entry in the left hand column of an account to record a debt; debits increase asset and expense accounts and decrease liability, income, and equity accounts
• Facilitate
  To make easy or easier.
  

Examples

Consider our example for the yoga studio.

How would we record journal entries for each transaction?

The General Journal

The general journal is where double entry bookkeeping entries are recorded by debiting one or more accounts and crediting another one or more accounts with the same total amount. The total amount debited and the total amount credited should always be equal, thereby ensuring the accounting equation is maintained.

Depending on the business's accounting information system, specialized journals may be used in conjunction with the general journal for record-keeping. In such case, use of the general journal may be limited to non-routine and adjusting entries

Special Journals

Special journals are designed to facilitate the process of journalizing and posting transactions. They are used for the most frequent transactions in a business. For example, in merchandising businesses, companies acquire merchandise from vendors and then in turn sell the merchandise to individuals or other businesses. Sales and purchases are the most common transactions for merchandising businesses. A business like a retail store will record the following transactions many times a day for sales on account and cash sales.

Journalizing

Items are entered the general journal or the special journals via journal entries, or journalizing. Journal entries are prepared after examining the source document to see if a business transaction has taken place. If a business transaction has taken place, that is a transaction that causes a measurable change in the accounting equation then a journal entry is necessary . Each journal entry must have a debit and a credit. Journal entries also include the date of the transaction, titles of the accounts debited and credited (credited account is indented several spaces), the amount of each debit and credit; and an explanation of the transaction also known as a Narration.

The company's income statement

Closing the accounts prepares the ledger for the next accounting period.

Consider our example for the yoga studio. How would we record journal entries for each transaction?

Pre-opening

Prior to opening the business, you make the following transactions:

1. You contribute $4,000 in cash to start the business.

Cash 4,000

Contributed capital 4,000

2. You purchase $500 worth of mats and other equipment for use during classes.

PPE 500

Cash 500

3. You purchase an additional $400 worth of mats, equipment, and clothing for sale at the studio.

Inventory 400

Cash 400

4. You purchase liability insurance at a total cost of $1,200. The policy covers July 1 through December31.

Prepaid insurance 1,200

Cash 1,200

July

The following transactions take place during July.

1. You receive cash totaling $800 for classes.

Cash 800

Revenue 800

2. Your instructor teaches classes for the month. You agree to pay $600 for the classes; $300 is paid on July 15, and $300 will be paid on August 3.

Wage expense 600

Cash 300

Wage payable 300

3. You pay rent for July of $1,000 on July 1.

Rent expense 1,000

Cash 1,000

4. You use utilities (electricity and water) totaling $200. This amount is payable on August 15.

Utility expense 200

Utility payable 200

August

The following transactions take place during August.

1. You receive $1,500 in cash for classes. Of this amount, $1,000 was for classes in August. The remainder is for 2-month passes allowing unlimited classes in August and September.

Cash 1,500

Revenue 1,250

Unearned revenue 250

2. Your instructor again earns $600 teaching classes; $300 due on August 16 and $300 on September 1.

Wage expense 600

Cash 300

Wage payable 300

3. Utilities total $150, payable September 15.

Utility expense 150

Utility payable 150

4. You pay rent of $1,000 on August 1.

Rent expense 1,000

Cash 1,000

5. You sell inventory costing $150 for a $225.

Cash 225

Revenue 225

Cost of goods sold 150

Inventory 150

(these can be combined into a single entry if you choose. )

6. You are worried about money, so your Uncle Rafael makes you an offer. He agrees to loan you $2,000 in cash. You will need to repay him sometime later, but he doesn't say when.

Cash 2,000

Loan Payable 2,000

7. A client is extremely dissatisfied with their class, and demands their money back. Reluctantly, you agree. The class cost $15.

Revenue 15

Cash 15

or

Refund expense 15

Cash 15

8. After borrowing money, you decide to withdraw some of your investment in the studio to pursue other opportunities. You decide to withdraw $1,000.

Contributed capital 1,000

Cash 1,000

(this cannot be a dividend, because your balance of retained earnings is negative).

Journal Entry

Journal entries record business transactions so they may later be used to create financial statements.