So, you want to learn
Bookkeeping!
Special Journals
by Bean Counter's Dave Marshall

Lesson 6
Review of Major Concepts


Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
Bean Counter

What Did We Cover ?

The Introduction

  • Described the different types of Special Journals and their Purpose
  • Reviewed Transactions and Analysis
  • Presented a Detailed Transaction Analysis Example/Exercise

Lesson 1 General Ledger, Control Accounts, Subsidiary Ledgers & Special Journals reviewed the General Ledger and explained and discussed Control Accounts, Special Journals, and Subsidiary Ledgers.

Lesson 2 General Journal discussed the purpose of the General Journal, what information is recorded, and provided examples and illustrations of the types of entries that are normally recorded in this journal. Closing Entries were also discussed and how and why closing entries are prepared and posted.

Lesson 3 Cash Disbursements (Payments) & Purchases Journals discussed the purpose of these journals, what information is recorded, and provided examples and illustrations of the types of entries that are normally recorded in these journals.

Lesson 4 Cash Receipts & Sales Journals discussed the purpose of these journals, what information is recorded, and provided examples and illustrations of the types of entries that are normally recorded in these journals.

Lesson 5 Sales & Purchase Return Journals discussed the purpose of these journals, what information is recorded, and provided examples and illustrations of the types of entries that are normally recorded in these journals.

What should we now know ?
  • The General Journal is actually only used to record unusual or infrequent types of transactions. If a transaction doesn't "fit" in any of the other special journals then record it in this journal.
  • The purpose of Special Journals, what they are, and how they're used.
  • How to determine what Special Journal to use to record the different types of business transactions.
  • What Control Accounts and Subsidiary Ledgers are and how they're used.
    The general ledger account Accounts Receivable Control includes only total or summary amounts. Since additional detail information about this account is needed, a subsidiary ledger is created that provides this detailed information. Detailed information maintained in this Subsidiary Journal includes:
    • Customer Name and Address
    • Current Balance Owed
    • Amounts Billed-Invoice Numbers and Amounts
    • Amounts Paid-Check Numbers/Credit Card/etc.

    Also note that every transaction that affects the General Ledger Accounts Receivable Control Account, must be posted both to the Accounts Receivable account in the general ledger and to the individual customer's account in the Accounts Receivable Subsidiary Ledger.

    Likewise, since the General Ledger Accounts Payable Control Account only contains summary information an Accounts Payable Subsidiary Ledger is used to record and maintain detail information about suppliers. Detailed information maintained in this Subsidiary Journal includes:

    • Supplier Name and Address
    • Current Balance Owed
    • Amounts Billed-Invoice Numbers and Amounts
    • Amounts Paid-Check Numbers/Credit Card/etc.

    Every transaction that affects the General Ledger Accounts Payable Control Account, must be posted both to the Accounts Payable account in the general ledger and to the individual supplier's account in the Accounts Payable Subsidiary Ledger.

  • The flow of information through a bookkeeping system from source documents such as checks and invoices, to the Special Journals, Subsidiary Ledgers, and finally ending up summarized in our General Ledger.
  • Closing the books prepares the books for the start of a new period and resets all the income and expense accounts to zero.
  • Some new terms and definitions.
    Periodic and Perpetual Inventory Systems
    Depreciation
    Prepayments
    Compound Journal Entries
  • Formal Closing Entries are normally only prepared at the end of a year.
  • Adjusting Entries are usually prepared at the end of each accounting period not just at year end.
  • The purpose of and how the Income Summary Account is used during our Closing Process.
  • Understand how to prepare and use Worksheets as an aid for Adjusting & Closing the books.
  • How to prepare our formal Income Statement, Capital Statement, and Balance Sheet with the aid of our Worksheets.
  • Steps in Adjusting & Closing Our Books.
  • Types of Adjusting Entries.

If you've completed my Introductory and this tutorial and I did my job, you should be well on your way to becoming an adequate bookkeeper. Sorry I didn't say great, but along with knowledge you also need some experience in order to become great. The more practice or the more you do something the easier it gets. Pretty soon you get to the point where you don't even have to think about it.

Until you get to that point, below I've provided you with a quick overview of the bookkeeping process and some "cheat" sheets, tables, definitions, and tips to help get you on your way.

Overview Of Bookkeeping

Account Definition: An individual record for each type of asset, liability, equity, revenue, and expense and costs used to show the beginning balance and to record the increases and decreases for a period and the resulting ending balance at the end of a period.

The General Ledger has a page(s) for each account. It consists of a title, account number, a debit column and credit column and a balance column(s). The left side of an account is the debit side and the right side of an account is the credit side. The current balance of an account is calculated by subtracting the smaller sum (debit or credit) from the larger sum.

Types Of Accounts

  1. Assets
  2. Liabilities
  3. Owner's Equity
  4. Revenue
  5. Expenses & Costs

Normal Account Balances
Assets, drawing, and expense accounts normally have debit balances. Liabilities, owner's equity, and revenue accounts normally have credit balances.

Classifying Accounts

  • Balance Sheet Accounts
  • Assets
  • Liabilities
  • Equity / Capital
  • Income Statement Accounts
  • Revenues
  • Expenses & Costs

Balance Sheet Accounts
Balance sheet accounts are classified as assets, liabilities, or owner's equity. Owner's equity is the portion that remains after liabilities are subtracted from assets. Drawings represent assets taken out by owners of proprietorships.

Income Statement Accounts
Income statement accounts have a direct effect on the balance of owner's equity. Expense accounts decrease owner's equity, while revenue accounts increase owner's equity. The net gain or loss is determined by subtracting expenses from revenues. At the end of a financial period, all expense and revenue accounts are closed to a summarizing account usually called Income Summary. For this reason, all income statement accounts are considered to be temporary or nominal.

Rules For Increasing & Decreasing Accounts

All You Need To Know About Debits and Credits
Summarized In One Sentence
:

Enter an amount in the Normal Balance Side of an Account to Increase the Balance of an Account and in the Opposite Side of an Account to Decrease the Balance of an Account.

Additional Clarification:
Since Assets, Draw, and Expense Accounts normally have a Debit Balance, in order to Increase the Balance of an Asset, Draw, or Expense Account enter the amount in the Debit or Left Side Column and in order to Decrease the Balance enter the amount in the Credit or Right Side Column.

Likewise, since Liabilities, Owner's Equity (Capital), and Revenue Accounts normally have a Credit Balance in order to Increase the Balance of a Liability, Owner's Equity, or Revenue Account the amount would be entered in the Credit or Right Side Column and the amount would be entered in the Debit or Left Side column to Decrease the Account's Balance.

Common Types Of Business Transactions
In a typical business transaction we get something and we give up something.

Sale-Sell goods and/or services
Cash Sale-customer pays at the time of sale
The business gets cash or a check from their customer and gives up a product or service to their customer.

On Account Sale-business allows the customer time to pay
The business gets a promise to pay from their customer and gives up a product or service to their customer.

Purchase goods and/or services
Cash Purchase-business pays the supplier at the time of purchase
The business gets a product or service from their supplier and gives up cash or a check to their supplier.

On Account Purchase-supplier allows the business time to pay
The business gets a product or service from a supplier and gives up a promise to pay to their supplier.

Pay Supplier Charge Purchases -pay suppliers for products and/or services that we promised to pay for later (charge).
The business gets the amount of their promise to pay the supplier reduced and gives up cash or a check.

Receive Customer Charge Payments -receive payments from a customer that promised to pay us later (charge sale).
The business gets cash or a check from their customer and gives up (reduces the amount of) their customer's promise to pay.

Borrow Money (Loans) The business gets cash or equipment and gives up a promise to pay.

Repay a Loan
The business gets the amount of their promise to pay reduced and gives up cash or a check.

Draw
The business gets the owner's claim to the business assets reduced and gives up cash or a check.

Payroll
The business gets services from their employees and gives up a check.

These common types of business transactions are the underlying basis for the use of specialized journals.

Bean Counter's seven simple steps (RUDUUDD) to analyze and record our transactions:

  1. Recognize that a transaction (event) has occurred and what source documents such as sales invoices (tickets), invoices from suppliers, contracts, checks written or checks received , provide documentation (proof) that a transaction has occurred.
  2. Understand how the transaction (event) affects the business-the type of transaction and whether it needs to be recorded in the formal bookkeeping records.
  3. Determine what accounts are affected and whether the transaction increases or decreases the account balance.
  4. Use the business's Chart of Accounts when necessary to determine the account numbers that represent these accounts.
  5. Use the debit and credit rules to determine if the accounts are debited or credited.
  6. Determine what Journal should be used to record the transaction.
  7. Do It-Record the transaction.

Special Journals Used To Record Our Transaction

Definitions for the Special Journals.

The General Journal is used to record unusual or infrequent types of transactions. Type of entries normally made in the general journal are depreciation entries, correcting entries, and adjusting and closing entries.

The Cash Payments Journal is a special journal that is used to record all cash that is paid out by a business except for payroll. Columns are set up for types of transactions that occur frequently enough to warrant a separate column. Some examples are Accounts Payable (Payments on Purchases and Services Charged) and Cash Purchases.

The Cash Receipts Journalis a special journal that is used to record all receipts of cash. Columns are set up that indicate the sources of the cash. Two of the major sources of cash for a business are Cash Sales and Collections of Customer Charge Sales. These and other categories that have a lot of activity (transactions) have their own column.

The Sales Journal is a special journal where sales of services and merchandise made on account (business's customer is allowed to charge purchases) are recorded.

The Purchases Journal is a special journal that is used to record all purchases and various expenses and other charges from suppliers that a business has an open account with (supplier allows the business to charge purchases).

The Payroll Journal is a special journal that is used to record and summarize salaries and wages paid to employees and the deductions for taxes and other authorized employee withholding amounts.

The Sales Return & Allowances Journal is a special journal that is used to record the returns and allowances of merchandise sold on account.

The Purchase Returns & Allowances Journal is a special journal that is used to record the returns and allowances of merchandise purchased on account.

What Journal To Use Chart

  • Sales/Revenue Journal
    • Type of Transaction Recorded:
    • Product Sales/Fees billed to customers who we have granted credit (charge sales)
  • Cash Receipts Journal
    • Types of Transactions Recorded:
    • Cash product sales / fees
    • Cash collected on customer accounts
    • Any other receipt (source) of cash
  • Purchases Journal
    • Type of Transactions Recorded:
    • Purchase of any expense on account
    • Purchase of supplies on account
    • Purchase of equipment on account
    • Purchase of any other asset on account
  • Cash Payments Journal
    • Types of Transactions Recorded:
    • Cash paid for expenses
    • Cash payments to our suppliers on account or cash purchases
    • Cash purchase of supplies
    • Any other cash payment
  • Sales Return & Allowances Journal
    • Type of Transaction Recorded:
    • Return of merchandise sold on account by customers
  • Purchase Return & Allowances Journal
    • Type of Transaction Recorded:
    • Return of merchandise purchases on account from suppliers
  • Payroll Journal
    • Type of Transaction Recorded:
    • Cash payments to employees for salary & wages
      (Not discussed in this tutorial)

Let's Make It Even Easier

What Journal Do I Use ?

Want to make determining what journal to use even easier ? . The following table is set up to guide you to the proper journal by answering some simple questions.

1.Did You Receive Cash ?
YES Record transaction in Cash Receipts Journal
  NO Answer question 2
2.Did you write a check ?
YES-a check was written Answer Question 2.(a)
    2.(a) Did you pay an employee for salary or wages earned ?  
    YES Record transaction in Payroll Journal
      NO Record transaction in Cash Disbursements Journal
  NO-a check was not written Answer Question 3.
3.Did you bill a product or service to a customer and grant credit (on account) ?
YES Record transaction in Sales / Accounts Receivable Journal
  NO Answer question 4
4.Did you incur an expense or purchase supplies, inventory, or an asset and the supplier granted you credit (on account) ?
YES Record transaction in Purchases / Accounts Payable Journal
  NO Answer question 5
5.Did You Return Merchandise purchased on account from a supplier ?
YES Record transaction in Purchase Returns & Allowances Journal
  NO Answer question 6
6.Did a Customer Return Merchandise purchased on account ?
YES Record transaction in Sales Returns & Allowances Journal
  NO Looks like you need to record the transaction in the General Journal

Adjusting and Closing Entries

At the end of an accounting period (month/year), the account balances are brought up to date and amounts are adjusted to reflect their current correct balance with general journal entries that are called adjusting entries.

Types Of Adjusting Entries
   and Examples of Accounts Used To Record The Entry

Inventory / Cost & Expense Accounts
Accounts Affected:
Office Supplies Inventory / Office Supplies Expense
Inventory /Purchases / Cost Of Goods Sold

Prepayments
Accounts Affected:
Prepaid Insurance / Insurance Expense
Prepaid Rent / Rent Expense

Accruals
Unrecorded Revenue
Accounts Affected:
Other Receivables / Other Income

Unrecorded Expense
Accounts Affected:
Expense Account / Other Liability

Bank Charges & Credits
Accounts Affected:
Bank Fees & Charges / Cash In Bank

Fixed Assets
Accounts Affected:
Vehicles & Other Equipment / Depreciation Expense

Unusual Events
Accounts Affected:
Loss on Thefts / Inventory
Bad Debt Expense / Accounts Receivable

Correcting Entries
Used to fix mistakes
Accounts Affected:
Any account that has the wrong balance

Closing Entries
At the end of an accounting period (usually year), entries called Closing Entries are made to prepare the books for the new year.

Closing Entries are made at the end of a period (usually year) to reduce the "temporary" account balances (revenue, expenses, and drawing accounts) to zero and transfer the summarized balances to the capital account. Closing entries only affect the Income Statement Accounts and the Owner's Drawing and Capital Account. We reset our income statement account (revenues & expenses) balances to zero in order to start over and begin calculating the results for the next new period. If we didn't, the new period would have, not only the results from the new period, but also the results from the prior (older) period included.

Steps In Closing The Books

  • Prepare The Following Closing Entries
  • Close Drawing Account to Capital Account
  • Close All Revenue and Expense Accounts To Income Summary Account
  • Close Income Summary Account to Capital Account

Flow of Information Thru The Bookkeeping Records

Source Documents

provides the initial data about business transactions. Checks, Invoices to Customers, and Invoices from Suppliers are some common examples of source documents.

Special Journals
Cash Receipts, Cash Disbursements, Sales
Purchases, Payroll, General Journal, etc.

use the information from the source documents to create a chronological listing of all business transactions and detailed information about each transaction.

General Ledger

uses the summarized information transferred from the journal(s) to summarize the data into individual accounts.

Subsidiary Ledgers

uses the detailed information transferred from the journal(s) to provide detailed information about special accounts called Control Accounts.

Trial Balance & Worksheets

uses the information from the General Ledger to summarize the data to use for preparing the Financial Statements.

Financial Statements

uses the summarized data contained in the Trial Balance to prepare the business's financial reports .

Your Accounting Cycle
An accounting cycle is the sequence of repetitive bookkeeping tasks and procedures that are performed each period. Once you get in the groove as a bookkeeper, you basically perform the same tasks each month (period). Basically, all businesses purchase goods and services from suppliers, write checks to suppliers and employees, sell and bill products and/or services to customers, and receive payments from customers and others. Our job as bookkeepers is simply to properly record and summarize these common types of transactions in the proper Journals, Ledgers, Sub Ledgers, and Worksheets.

Steps in the Accounting Cycle

  • Identify and analyze transactions that need to be recorded
  • Journalize (record) the transactions in the proper journal
  • Post from the journals to the General Ledger and Subsidiary Ledgers
  • Prepare a Worksheet/Schedule of each Subsidiary Ledger and verify that the total balance of the Subsidiary ledger agrees with the balance of the General Ledger Control Account.
  • Prepare A Trial Balance/Adjusting Entry Worksheet
    Enter Trial Balance Information from General Ledger
    Review accounts and other information to determine if any Adjusting Entries are necessary
    Perform any necessary Counts of Inventories
    Enter any needed Adjusting Entries in our Worksheet and calculate our Adjusted Balances
  • Prepare Income Statement From Our Worksheet
  • Prepare Worksheet For Closing Entries
    Enter Closing Entries to transfer the balances of the Revenue and Expense Accounts to Income Summary Account
    Enter Closing Entry to transfer the balance of Income Summary Account to the Owner's Capital Account
    Enter Closing Entry to transfer the balance of the Owner's Drawing Account to the Owner's Capital Account
  • Prepare Balance Sheet and Capital Statement from our Worksheet
  • Record our Adjusting Entries in our formal General Journal
  • Record our Closing Entries in our formal General Journal
  • Post our formal entries from our General Journal to our General Ledger
  • Prepare a Post Closing Trial Balance Worksheet
By now you should realize that all bookkeeping actually involves is learning some terminology, a few rules and concepts, what records to maintain such as Special Journals and a General Ledger, and applying a little logic and some common sense.

I'm heading back to the office now. I hope you noticed that I even dressed up and wore a coat and tie to visit your office instead of my T-shirt and shorts that I wore starting out in this tutorial.

Oh shucks, I almost forgot. I promised to check your knowledge before I left you. This quiz has multiple choice and true and false questions. All the multiple choice questions deal with Special Journals. A transaction is presented and it's your job to pick the Special Journal that should be used to record the transaction.
See what you know

You also might want to test your knowledge using the Special Journals Skills Test.
Special Journals and Debits and Credits Skills Test

For the "kid" in all of us,
try my Games.
  • Fling The Teacher Game
    The object of my Fling The Teacher Bookkeeping and Accounting Games is to build a trebuchet by correctly answering 15 questions. If you can get it completely built, you can get rid of me (at least for a little while) by using the catapult to fling me away. A trebuchet, for those like me that didn't know, is a catapult or type of medieval artillery used during sieges.
  • Basketball
    The object of my Basketball Bookkeeping and Accounting Games is to test your 3-point shooting skills in addition to testing your basic bookkeeping and accounting knowledge.
  • Walk The Plank
    The object of my Walk The Plank Bookkeeping and Accounting Games is to feed me to the sharks by making me walk the plank. You accomplish this by answering bookkeeping and accounting questions correctly.

Congratulations

Having completed this tutorial, you shouldn't need me as much for assisting you in doing your routine bookkeeping. You know what that means don't you ? Go ahead and cheer while I cry, smaller billings to you for my services. Now you should only need me to help you with some of the more complicated tasks. As always, I enjoyed my visit to your office.

If you benefited from my tutorial, consider purchasing an E-book or CD version of my tutorials. Your support makes it possible for me to continue to develop and add additional new tutorials to my Bean Counter Series.
Purchase E-book or CD Versions

Once Again Your Humble Tutor
Dave Marshall
Bean Counter

Cartoons in this tutorial provided by Ron Leishman. If you enjoyed them, get some of your own Toon-A-Day.
http://www.toonaday.com

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