SOURCES OF DATA FOR THE LEDGER
=Insufficiency of the Ledger Record.=—In an earlier chapter a business
transaction was defined as an exchange of values, and the ledger as
the book in which transactions are grouped under predetermined titles
or names. Thus, all transactions relating to machinery are grouped
under the title “Machinery”; those relating to cash under the title of
“Cash”; those to purchases under the name “Purchases”; etc. Even in
a small business the ledger may contain a large number of accounts,
all necessary to give a clear-cut presentation of the volume and
significance of business transactions.
The ledger record presents an analysis of transactions into their
component elements, each transaction being classified and recorded,
usually, in at least two ledger accounts, and frequently in more.
Consequently, in order to learn the nature of a given transaction, to
see it in its entirety, it may be necessary to refer to a number of
separate ledger accounts. This process, even if the ledger is small,
is not always easy; and when the ledger contains a large number of
accounts, it becomes practically impossible. Accordingly, another kind
of record is needed.
=The Book of First Record.=—This other record shows in one place the
transaction in its entirety; it gives a complete statement of the
conditions and all other data relating to the transaction. It also
shows the fundamental analysis of the transaction into its debit and
credit elements under appropriate titles. It is called the original
or first record. Usually it is not the very first record made of the
transaction but it is the first record made in the books of account.
The book in which this record is kept is called the “Journal.” The
record as kept in the ledger is a secondary record based on the
original or first record in the journal. Because of its secondary
nature, courts will not accept the ledger as evidence without
verification.
=Posting to the Ledger.=—The act of transferring the original entry
from the journal into the ledger is called posting to the ledger. In
order not to lose sight of the original record in the journal it is
important that the ledger entry show by letter and number the book and
page where the original entry can be found. This index is entered in
what is called the reference column of the ledger account, which is
just to the left of the money column. In this manner every entry in a
ledger account has a reference to the original entry pertaining thereto.
=The Journal.=—A journal may be defined as a diary or log in which the
happenings or transactions of a business are recorded in chronological
order; that is, consecutively day by day as they arise. Formerly it
was sometimes called a day-book or blotter. As usually operated,
however, the day-book or blotter contained a rough record giving all
the essential data relating to each transaction without regard to
accounting terminology, i.e., without regard to the formulation of
the debit and credit of each transaction. The day-book entry was a
sort of memorandum from which a formal record was made in the journal.
This day-book or blotter, though still in use in some places, has very
largely been discarded and only the formal journal is used. This latter
was originally a single book but in modern accounting practice it has
become separated into many special journals.
=Characteristics of the Journal.=—1. Being of the nature of a diary,
the journal shows each day’s transactions in consecutive order with
little regard to grouping. The first characteristic, therefore, of the
journal is that it is a book of chronological entry, a record of each
transaction just as it took place, with the entries made according to
the dates of the transactions.
2. Another characteristic of the journal entry is that it is an
analytical and classifying record. Before the entry is made, the
transaction is analyzed into its two elements of debit and credit,
determined according to the effect the transaction has in increasing
and decreasing assets, liabilities, or proprietorship. The account
titles used in the journal are the same as those used in the ledger and
are selected on the basis of a detailed subclassification of the three
fundamental groups of accounts. The degree of detail in classification
depends on the desired minuteness of the information required. The
guiding principle in giving these titles is to use such names as will
tell truthfully and accurately what kind of information is recorded
under each head. A journal entry is therefore an analytical record as
to debit and credit, which classifies the different elements of the
transaction under such titles as will later be used in the ledger.
3. A final and a very essential characteristic of the journal is that
every entry should carry in addition to account titles, with their
debit and credit amounts, a brief but complete summary of all the
conditions and data relating to the transaction, so that, if referred
to in the future, the journal record will call to mind the essentials
of the entire transaction.
Because of these three characteristics, and particularly the last two,
the journal record is of prime importance.
=Equilibrium of the Journal Entry; Compound Entries.=—As explained in
a preceding chapter, the debit and credit elements of all transactions
must be equal in amount. Since the journal entry is an analysis of the
transaction, it must obviously show equal amounts in the debit and
credit columns. In case the analysis and classification require an
entry consisting of more than one debit and one credit item, the total
of the several debit items must equal the total of the several credit
items. Such an entry is called a compound journal entry.
=Standard Form of Journal.=—The standard form of journal provides
spaces for the following information: date, classification as to
debit and credit, ledger index column, money columns to show both the
debit and credit amounts, and full record of the essentials of the
transaction. The following form illustrates a complete journal entry:
==================================================================
19— | | | | |
Jan.| 10 | Notes Receivable | 10 | 1,000.00 |
| | James Jackson | 14 | | 1,000.00
| | 60-day note, payable at | | |
| | First National Bank, | | |
| | Perryville, Maryland, | | |
| | with interest at 6% per | | |
| | annum. Due March 10, 19— | | |
Form 6. Standard Form of Journal
The date is sometimes shown in the middle of the first blank line; but
it is better to place it at the extreme left. The account titles are
placed on separate lines unencumbered with other data, because they are
of first importance in posting. The name of the debit account is shown
on the extreme left of the explanation column, with a uniform margin
to the right for the credit account. The debit and credit amounts are
placed in the left and right money columns respectively. Data giving
full explanation of the entry are shown directly below the classified
debit and credit entry, slightly to the right of the margin of the
credit account title, and a uniform margin is maintained down the page.
The column to the left of the money columns shows the ledger pages to
which the entry is posted. The entry is read thus: Notes Receivable,
debit; James Jackson, credit, $1,000.00.