THE MODERN JOURNAL
=Matter Left for Record in the Journal.=—By the use of a cash receipts,
a cash disbursements, a purchase, and a sales journal, four principal
classes of transactions are taken out of the old-time journal and
entered in separate books of record. If transactions of any other class
are numerous enough to justify the use of a separate book of record,
such a record should be set up. Although the number of subsidiary
journals, each recording one kind of transaction, may become very
large, nevertheless in practically all cases it is necessary to retain
the general journal (often referred to simply as “the Journal”), in
order to take care of such miscellaneous items as are not recorded in
any of the special journals.
The standard form of journal was illustrated in Chapter XVI, where it
was stated that a journal must provide space for date of entry, account
classification, ledger folio index, debit and credit money columns,
and explanation. As an explanation of the form, method of use, proper
observance of margins, etc., was made there, it need not be repeated
here.
=Kinds of Transactions Recorded in the Journal.=—When the number
of subsidiary journals used is limited to the cash receipts, cash
disbursements, purchase, and sales journals, as is frequently the
case, all items not affecting these four books should be entered in
“the Journal”; i.e., transactions involving notes receivable and notes
payable; adjustments with customers and creditors resulting from return
of goods or claims and allowances thereon; and all formal opening,
adjusting, and closing entries. Furthermore, there is usually a number
of other transactions, which because of their special and unusual
nature cannot be grouped with the items of the special journals and
must therefore be entered in the general journal.
=Journal Explanations.=—When these various classes of transactions are
entered in the Journal, a very complete explanation should be given the
entry. In fact, all entries covering settlements and adjustments with
outsiders and within the business itself are of primary importance and
the explanation should be so carefully worded as to make the intent of
the entry plain and intelligible.
=Closing and Posting the Journal.=—No particular formality attaches to
the closing and posting of the ordinary standard form of journal. There
is no summary entry, no totaling, and there are no rulings to be made.
Ordinary care must be exercised to see that the debits and credits
are correctly posted. Since the entry in the Journal is given in its
complete form and no debits or credits are suppressed, as is the case
in the special journals, posting is not difficult.
=The Analytic Journal with Divided Columns.=—One form of the journal
has its debit and credit columns separated, the debit money column
appearing at the extreme left of the page, followed in order across
the page by columns for date, account classification, ledger folio,
and credit money amount. This kind of journal is called a divided or
split-column journal and is ordinarily used to collect the totals to
be posted to controlling accounts and thus to secure control over
subsidiary ledgers. This matter will be fully discussed in later
chapters. When the journal is so used it is provided with additional
debit and credit analysis columns on each side according to the
subsidiary ledgers employed. A divided-column journal with three debit
and three credit columns is shown in Form 14. There is always a general
money column on each side, the other columns depending on the kind of
analysis required by the business.
[Illustration: Form 14. Divided Column Journal]
In the illustration referred to, an Accounts Receivable and an Accounts
Payable column are provided. It is obvious that the Accounts Receivable
column should usually appear on the credit side and the Accounts
Payable column on the debit side; although in some cases provision
is also made for an Accounts Receivable column on the debit and an
Accounts Payable column on the credit side. The account of S. J. White,
a customer, which is paid by his note, should be credited for the
amount of $510.20 and consequently the item is extended to the Accounts
Receivable column.
=Illustrations—Opening Entries.=—Illustration will be given of a few
typical transactions requiring journal entry. The standard two-column
journal will be used.
For the purpose of illustrating opening entries, assume the following
data:
On September 30, 19—, Jack Gibson started in business,
with the following assets and liabilities: Cash $3,500;
Notes Receivable $800; Merchandise $4,000; Furniture
and Fixtures $450; Accounts Receivable $2,100; Accounts
Payable $1,500; and Notes Payable $1,200.
An analysis of this transaction shows that no part of it belongs to
either the purchase or sales journals. The part relating to cash is
entered in the cash receipts journal. However, in order to show the
complete investment in one place, the entire transaction including the
cash part, is entered in the Journal and posted from there, with the
exception of the cash item. The reason for this exception is that the
cash investment is also entered in the cash book and will find its way
to the ledger Cash account through the total cash debits at the end of
the period. Because of this the cash item in the _Journal_ should be
checked and not posted to the Cash account in the ledger.
Likewise, the investment item in the _cash book_, showing a credit
of $3,500 to Jack Gibson, Capital account, should be checked and not
posted to the credit of his account in the ledger because this item
forms a part of the total investment of $8,150 posted to his credit
from the Journal entry.
If the student has difficulty in determining the debits and credits of
entries of this kind, it may be helpful to set up the data informally
first, in the form of a balance sheet. Using this as a _guide_, he
should then make his journal entry, debiting the asset items and
crediting the liability and net worth items.
[Illustration]
[Illustration: Form 15. Opening Entries on Books]
The above entries bring the transaction completely on the books of
original entry and show the ledger folios to which the various items
are posted. Notice the check in the L. F. column in the Journal
opposite “Cash” and in the cash book opposite “Jack Gibson, Capital,”
which is inserted to prevent posting the same item twice.
For opening entries full explanation and details, where necessary,
should be given in the Journal, covering lease agreements and contracts
entered into when commencing business, and other similar data. It
should be noted that with _opening_ entries it is customary for the
explanation to precede the formal showing of debits and credits, rather
than to follow it as in the case of all other journal entries.
=Adjusting and Closing Entries.=—Other typical entries to be
illustrated are those made at the close of a fiscal period: (1)
to adjust the books in accordance with certain data that were not
obtainable before; (2) to transfer all temporary proprietorship
accounts to the summary account, Profit and Loss; and (3) to transfer
the net profit, i.e., the balance of the Profit and Loss account, to
the proprietor’s personal account, and the balance of this latter
account to the proprietor’s capital account.
The debits and credits of the entries necessary to effect the record
of the data and transfers mentioned, can be determined as in the
operations with ledger accounts previously shown.
The following data relate to Jack Gibson’s business and are given to
illustrate the three classes of entries mentioned above:
During the year, sales amounted to $33,000; purchases
to $25,000; selling expenses to $3,500; and general
administrative expenses to $2,025. It is estimated that
of outstanding accounts $350 are uncollectible; that
furniture and fixtures have depreciated in value $45.
Merchandise inventory shows $5,000 on hand. Gibson drew
$1,000 during the year.
The first thing necessary is to make the adjustments on account
of depreciation, bad debts estimate, and present inventory. These
adjustment entries are made in the Journal as follows:
19—
Sept. 30 Depreciation 20 45.00
Depreciation Reserve Furniture
and Fixtures 6 45.00
To bring on the books the expense
due to estimated depreciation and
to effect the proper valuation of
Furniture and Fixtures.
Bad Debts 21 350.00
Reserve for Doubtful Accounts 3 350.00
To bring on the books the expense
due to estimated loss from
uncollectible accounts.
Purchases 16 4,000.00
Merchandise Inventory 4 4,000.00
To transfer the goods on hand at
the beginning of the year to
Purchases.
Merchandise Inventory 4 5,000.00
Purchases 16 5,000.00
To transfer the inventory of
merchandise now on hand to
Merchandise Inventory account.
The first two entries, when posted, will bring on the book valuation
accounts for furniture and fixtures and accounts receivable, and will
set up the expense accounts, Depreciation and Bad Debts. The third
Journal entry, when posted, will transfer the goods on hand at the
beginning of the year so that they can be added to the Purchases made
during the year. In this connection it will be remembered that the
sum of these two items, old inventory plus purchases during the year,
constitutes the primary factor of “cost of goods to be accounted for.”
The fourth entry shows the asset Merchandise now on hand and, by its
credit to Purchases, effects a subtraction from Purchases, so that the
balance of Purchases, $24,000, shows the “cost of goods sold.”
The books are now adjusted and ready for summarization by means of the
Profit and Loss account. The following Journal entries, transferring
all temporary proprietorship items to the Profit and Loss account, will
effect the closing operation:
19—
Sept. 30
Sales 15 33,000.00
Profit and Loss 14 33,000.00
To close.
Profit and Loss 14 29,920.00
Purchases 16 24,000.00
Selling Expense 18 3,500.00
General Administrative Expense 19 2,025.00
Bad Debts 21 350.00
Depreciation 20 45.00
To close. 29,920.00
Profit and Loss 14 3,080.00
Jack Gibson, Personal 11 3,080.00
To transfer net profit for the year.
Jack Gibson, Personal 11 2,080.00
Jack Gibson, Capital 10 2,080.00
To transfer the portion of the
year’s net gain left in the
business.
The first entry transfers the sales income to the credit of Profit and
Loss. The second entry charges the Profit and Loss account with the
cost of goods sold and all other expenses for the fiscal year. When
the posting has been completed up to this point, the balance of the
Profit and Loss account shows a net gain of $3,080, which, belonging to
the proprietor, is transferred to the credit of his personal account,
as shown by the third entry. He has drawn against prospective profits
to the extent of $1,000, leaving $2,080 of profit remaining in the
business as an addition to his permanent investment. Hence, this
balance is transferred to Gibson’s capital account by the fourth entry.
=Objection to the Direct Ledger Method of Adjusting and Closing
the Books.=—These adjustment and closing transactions are sometimes
recorded directly in the ledger without first entering them in the
Journal. Usually this is not satisfactory because it does not show in
one place a complete record of all the adjustment and closing summaries
necessary at the close of a fiscal period. These summaries are matters
of sufficient concern to the business to warrant their entry in the
Journal where full and complete explanations can be given. The more
complex entries often needed to adjust and close the books of a
business where numerous income and expense accounts are kept, follow
the same general principles as those discussed above. Adjusting and
closing entries are given fuller treatment in Chapters XXVII and XXVIII.
The two illustrations given above cover certain types of Journal
entries which are of a more difficult character than the customary
purchases, sales, and cash entries. A keen analysis is often required
to formulate the debits and credits of these entries, and the
explanatory matter should be worded with sufficient care to render them
intelligible even after the immediate interest in them has been lost
and their recording ink has become “cold.”
=Entries Affecting Several Journals.=—Transactions sometimes require
entry in two or more journals. A basic principle of bookkeeping is
that there should be no duplication of entry in the various journals.
A transaction that can be completely entered in one journal should not
be entered in any other journal. The one exception to this principle
is made in the case of an investment transaction, as explained on page
171. Sometimes, however, there may be a conflict of places of entry, as
in the case of cash purchases and sales, already explained, where entry
is made in both journals in order to allow each journal to perform its
proper function. Two examples will illustrate the proper method of
handling such transactions.
PROBLEM 1. Assume that a customer, James
Robbins, buys $1,000 worth of goods, paying $300 cash,
giving a note for $500 and leaving the balance on open
account.
The following entries should be made:
(a) James Robbins 1,000.00
Sales 1,000.00
(b) Cash 300.00
James Robbins 300.00
(c) Notes Receivable 500.00
James Robbins 500.00
It will be noted that three journals are involved.
Entry (a) is recorded in the sales journal; entry (b)
in the cash receipts journal; and entry (c) in the
general journal. The net effect of the three entries is:
James Robbins 200.00
Cash 300.00
Notes Receivable 500.00
Sales 1,000.00
Because special journals are used, however, the
transaction must be split up as indicated above.
PROBLEM 2. Assume that the business purchases
from the Investment Trust Co. a building site valued at
$5,000, paying for it $2,000 cash and a note for the
balance supported by a mortgage.
Two methods are used to record this transaction,
neither having any special advantage over the other.
FIRST METHOD:
(a) Land 2,000.00
Cash 2,000.00
(b) Land 3,000.00
Mortgage Notes Payable 3,000.00
Entry (a) is made in the cash disbursements journal,
and entry (b) in the general journal. This method of
entry requires the splitting of the land value into two
parts and breaks up what is really a unit transaction
by recording it in two places. Because of this, the
general journal portion of the entry should be followed
by a very full explanation of the _entire_
transaction, in which reference to the partial cash
payment should be made. In the cash disbursements
journal the only explanation needed will be a reference
to the general journal entry.
SECOND METHOD.—To bring about a complete
record of the land item in one place, the following
method is often used:
(a) Land 5,000.00
Investment Trust Co. 5,000.00
(b) Investment Trust Co. 2,000.00
Cash 2,000.00
(c) Investment Trust Co. 3,000.00
Mortgage Notes Payable 3,000.00
Entry (a) in the general journal sets up an account
with the vendor, the Investment Trust Co. Entry (b) in
the cash disbursements journal and entry (c) in the
general journal show the cancellation of the liability
to the vendor through the payment of cash in the one
case and the giving of a mortgage in the other. The net
effect of the entries is:
Land 5,000.00
Cash 2,000.00
Mortgage Notes Payable 3,000.00
It will be noted that this method sets up a formal
account with the vendor—a desirable thing—but that it
requires one more entry than the first method.
The other entries recorded in the Journal ought not to
give the student any particular difficulty.