The journal

The journal

Learning objectives

After you have studied this chapter, you should be able to: l explain the purpose of having a Journal l enter up the Journal l post from the Journal to the ledgers l complete opening entries for a new set of accounting books in the Journal and

make the appropriate entries in the ledgers l describe and explain the accounting cycle

Introduction

In this chapter, you will learn about the book of original entry that sweeps up all the transactions that have not been entered fully in the other five books of original entry – the Journal. You’ll learn about the sort of transactions that are entered in the Journal and how to make those entries. You’ll also learn how to transfer those entries to the accounts in the ledgers. Finally, you will learn what the accounting cycle consists of and see how it links all the material you have learnt so far in this book.

17.1 Main books of original entry

We have seen in earlier chapters that most transactions are entered in one of the following books of original entry:

l Cash Book l Sales Day Book l Purchases Day Book l Returns Inwards Day Book l Returns Outwards Day Book.

These books are each devoted to a particular form of transaction. For example, all credit sales are in the Sales Day Book. To trace any of the transactions entered in these five books would be relatively easy, as we know exactly which book of original entry would contain the information we are looking for.

Chapter 17 l The journal

17.2 The journal: the other book of original entry

The other items which do not pass through these five books are much less common, and some- times much more complicated. It would be easy for a bookkeeper to forget the details of these transactions if they were made directly into the ledger accounts from the source documents and, if the bookkeeper left the business, it could be impossible to understand such bookkeeping entries.

Activity

17.1 If these five books are used to record all cash and bank transactions, and all credit purchase and sales items, what are these other items that need to be

recorded in a sixth book of original entry? What is needed is a form of diary to record such transactions, before the entries are made in

the double entry accounts. This book is called the Journal . For each transaction it will contain: l the date

l the name of account(s) to be debited and the amount(s) l the name of the account(s) to be credited and the amount(s) l

a description and explanation of the transaction (this is called a narrative ) l

a folio reference to the source documents giving proof of the transaction. The use of a journal makes fraud by bookkeepers more difficult. It also reduces the risk of enter-

ing the item once only instead of having double entry. Despite these advantages there are many businesses which do not have such a book.

17.3 Typical uses of the journal

Some of the main uses of the Journal are listed below. It must not be thought that this is a com- plete list.

1 The purchase and sale of fixed assets on credit.

2 Writing off bad debts.

3 The correction of errors in the ledger accounts.

4 Opening entries. These are the entries needed to open a new set of books.

5 Adjustments to any of the entries in the ledgers.

The layout of the Journal is:

The Journal

Date Details Folio Dr Cr The name of the account to be debited.

The name of the account to be credited. The narrative.

On the first line in the entry is the account to be debited. The second line gives the account to be credited. It is indented so as to make it obvious that it is the credit part of the double entry. The final line is a description of what is being done and provides a permanent record of the reason(s) for the entry.

You should remember that the Journal is not a double entry account. It is a form of diary, just as are the Day Books you learnt about in Chapters 14 to 16. Entering an item in the Journal is not the same as recording an item in an account. Once the journal entry is made, the entry in the double entry accounts can then be made.

Part 3 l Books of original entry

Note for students: The vertical lines have been included above in order to illustrate how the paper within the Journal may be printed. You may find it useful to rule your paper according to this lay- out when attempting examples and questions on this topic.

17.4 Journal entries in examination questions

If you were to ask examiners what type of bookkeeping and accounting questions are always answered badly by a lot of students they would certainly include ‘questions involving journal entries’. This is not because they are difficult, but a lot of students seem to suffer some sort of mental block when doing such questions. The authors, who have been examiners for a large number of accounting bodies around the world, believe that this occurs because students fail to view the journal as a document containing instructions, three per transaction:

1 The account(s) to be debited.

2 The account(s) to be credited.

3 A description of the transaction. To help you avoid this sort of problem with journal entries, you’ll first of all see what the

entries are in the accounts, and then be shown how to write up the Journal for each of these entries. Let’s now look at a few examples.

In practice, the folio reference entered in the T-accounts is often that of the other account involved in the transaction; rather than that of a journal entry. However, this is done when no journal entry has been prepared. When a journal entry has been prepared, it is always the journal entry folio reference that appears in the T-accounts.

1 Purchase and sale on credit of fixed assets

1 A milling machine is bought on credit from Toolmakers Ltd for £10,550 on 1 July 20X8. The transaction involves the acquisition of an asset matched by a new liability. From what you

have learnt in earlier chapters, you will know that the acquisition of an asset is represented by a debit entry in the asset account. You will also know that a new liability is recorded by crediting a liability account. The double entries would be:

Folio GL1 20X8

Machinery

July 1 Toolmakers Ltd

J1

Toolmakers Ltd

Folio PL55

20X8

July 1 Machinery

J1 10,550

Activity

17.2 All the folio numbers have been entered in these ledger accounts. You do need to enter them at some time so that you can trace the other side of the entries,

but why have they already been entered?

Now what we have to do is to record those entries in the journal. Remember, the journal is simply a kind of diary, not in account form but in ordinary written form. It says which account has to been debited, which account has been credited, and then gives the narrative which simply describes the nature of the transaction. For the transaction above, the journal entry will appear as follows:

Chapter 17 l The journal

(page 1) Date

The Journal

Details Folio Dr Cr 20X8

£ £ July 1

Machinery GL 1 10,550 Toolmakers Ltd

PL55 10,550 Purchase of milling machine on credit, Capital purchases invoice No 7/159

2 Sale of stationery no longer required for £300 on credit to K Lamb on 2 July 20X8. Here again it is not difficult to work out what entries are needed in the double entry accounts.

They are as follows:

Folio SL79 20X8

K Lamb

July 2 Stationery

Folio GL51

20X8

J2 300 The journal entry will appear as follows:

July 2 K Lamb

(page 2) Date

The Journal

Details Folio Dr Cr 20X8

£ £ July 2

K Lamb SL79 300 Stationery

GL51 300 Sales of stationery no longer required See letter ref. KL3X8g

2 Bad debts

A debt of £78 owing to us from H Mander is written off as a bad debt on 31 August 20X8. As the debt is now of no value we have to stop showing it as an asset. This means that we will credit H Mander to cancel it out of his account. A bad debt is an expense, and so we will debit it to a Bad Debts Account. The double entry for this is shown as:

Bad Debts

Folio GL16 20X8

Aug 31 H Mander

J3

H Mander

Folio SL99

20X8

J3 78 The journal entry is:

Aug 31 Bad debts

(page 3) Date

The Journal

Details Folio Dr Cr 20X8

£ £ Aug 31

Bad debts GL16 78 H Mander

SL99 78

Part 3 l Books of original entry

3 Correction of errors

This is explained in detail in Chapters 32 and 33.

However, the same procedures are followed as in the case of these other types of journal entries.

4 Opening entries

J Brew, after being in business for some years without keeping proper records, now decides to keep a double entry set of books. On 1 July 20X8 he establishes that his assets and liabilities are as follows:

Assets: Van £3,700, Fixtures £1,800, Stock £4,200, Debtors – B Young £95, D Blake £45, Bank £860, Cash £65.

Liabilities: Creditors – M Quinn £129, C Walters £410. The Assets therefore total £3,700 + £1,800 + £4,200 + £95 + £45 + £860 + £65 = £10,765; and

the Liabilities total £129 + £410 = £539 The Capital consists of Assets – Liabilities, i.e. £10,765 − £539 = £10,226.

1 July 20X8 will be the first day of the accounting period, as that is the date on which all the asset and liability values were established.

We start the writing up of the books on 1 July 20X8. To do this we:

1 Open asset accounts, one for each asset. Each opening asset is shown as a debit balance.

2 Open liability accounts, one for each liability. Each opening liability is shown as a credit balance.

3 Open an account for the capital. Show it as a credit balance. The Journal records what you are doing, and why. Exhibit 17.1 shows: l The Journal

l The opening entries in the double entry accounts.

Exhibit 17.1

( page 5 ) Date

The Journal

Folio Dr Cr

Details

20X8 £ £ July 1

Debtors – B Young

SL1 95

D Blake

Creditors – M Quinn

PL1 129

C Walters

Assets and liabilities at this date

entered to open the books.

Chapter 17 l The journal

General Ledger

(page 1) 20X8

Van

Folio

July 1 Balance

J5

(page 2) 20X8

Fixtures

Folio

July 1 Balance

J5

(page 3) 20X8

Stock

Folio

July 1 Balance

July 1 Balance

J5 10,226

Sales Ledger

(page 1) 20X8

B Young

Folio

July 1 Balance

J5

(page 2) 20X8

D Blake

Folio

July 1 Balance

J5

Purchases Ledger

M Quinn

July 1 Balance

J5 129

(page 2)

C Walters

20X8

Folio £

July 1 Balance

J5 410

Cash Book

(page 1) 20X8

July 1 Balances

J5

Once these opening balances have been recorded in the books, the day-to-day transactions can

be entered in the normal manner.

At the elementary level of examinations in bookkeeping, questions are often asked which entail opening a set of books and recording the day-by-day entries for the ensuing period.

Part 3 l Books of original entry

Activity

17.3 Do you think you will ever need to do this again for this business? (Hint: think about the entries to be made at the start of the next accounting period.)

5 Adjustments to any of the entries in the ledgers

These can be of many types and it is impossible to write out a complete list. Several examples are now shown:

1 K Young, a debtor, owed £2,000 on 1 July 20X9. He was unable to pay his account in cash, but offers a five-year old car in full settlement of the debt. The offer is accepted on 5 July 20X9.

The personal account has now been settled and needs to be credited with the £2,000. On the other hand, the business now has an extra asset, a car, resulting in the car account needing to be debited with the £2,000 value that has been placed upon the new car.

The double entry recorded in the ledgers is:

SL333 20X9

K Young

£ July 1 Balance b/d

20X9

July 5 Motor car

J6 2,000

GL171 20X9

Car

July 5 K Young

J6

The journal entry is:

(page 6) Date

The Journal

Folio Dr Cr 20X9

K Young

SL333 2,000

Accepted car in full settlement of debt per letter dated 5/7/20X9

2 T Jones is a creditor. On 10 July 20X9 his business is taken over by A Lee to whom the debt

of £150 is now to be paid. Here one creditor is just being exchanged for another one. The action needed is to cancel the amount owing to T Jones by debiting his account, and to show it owing to Lee by opening an account for Lee and crediting it.

The entries in the ledger accounts are:

SL92 20X9

T Jones

20X9

July 10 A Lee

J7

July 1 Balance b/d

July 10 T Jones

J7 150

Chapter 17 l The journal The journal entry is:

(page 7) Date

The Journal

Details Folio Dr Cr 20X9

£ £ July 10

T Jones SL 92 150 A Lee

SL244 150 Transfer of indebtedness as per letter ref G/1335

3 We had not yet paid for an office printer we bought on credit for £310 because it was not working properly when installed. On 12 July 20X9 we returned it to the supplier, RS Ltd. An allowance of £310 was offered by the supplier and accepted. As a result, we no longer owe the supplier anything for the printer.

The double entry in the ledger accounts is:

PL124 20X9

RS Ltd

£ July 12 Office machinery

1 Balance b/d 310

GL288 20X9

Office Machinery

£ July

20X9

J8 310 The journal entry is:

1 Balance b/d

July 12 RS Ltd

(page 8) Date

The Journal

Details Folio Dr Cr 20X9

£ £ July 12

RS Ltd PL124 310 Office machinery

GL288 310 Faulty printer returned to supplier. Full allowance given. See letter 10/7/20X9.

17.5 Examination guidance

Later on in your studies, especially in Business Accounting 2, you may find that some of the jour- nal entries become rather more complicated than those you have seen so far. The best plan for nearly all students is to follow this advice:

1 On your examination answer paper write a heading ‘Workings’. Then show the double entry accounts under that heading. 2 Now put a heading ‘Answer’, and show the answer in the form of the Journal, as shown in this chapter.

If you are so good at the subject that you can manage without showing the workings, leave them out.

If the question asks for journal entries you must not fall into the trap of just showing the double entry accounts, as you could get no marks at all even though your double entry records are cor- rect. The examiner wants to see the journal entries, and you must show that as your answer.

Part 3 l Books of original entry

17.6 The basic accounting cycle

Now that we have covered all aspects of bookkeeping entries, we can show the whole account- ing cycle in the form of the diagram in Exhibit 17.2.

Note that the ‘accounting cycle’ refers to the sequence in which data is recorded and processed until it becomes part of the financial statements at the end of the period.