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Chapter 4
Topic 2: Journalizing Transactions
Steps in the Accounting Cycle
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Step 1 – ORIGINATING DATA
Step 2 – JOURNALIZING DATA
Step 3 – POSTING
Step 4 – TRIAL BALANCE
• Handout!
Review Topic 1
• Objectivity Principle – all accounting data should be verified
• Source Documents – business papers that give evidence/proof
of business transactions
• First/Opening Balance Sheet, Invoices (purchase/sales), cheque
stub, remittance slip
Topic 2
• Summary Table and T-Accounts
• Are they the most effective way of recording business transactions?
• Several disadvantages:
• Debit and credit entries are entered in two different accounts far from each
other. You need to search the entire ledger.
• Accounts do not display in any particular order, or show all the transactions that
occurred on a particular day.
• When an error is made it its difficult to locate quickly.
How to overcome these disadvantages?
• Journal
• A daily record of business transactions in debit and credit form; a book of original
entry.
• Many different types of journals (sales, purchases, cash receipts, cash
payments)
• It is like a diary, it shows each days DR and CR’s that are analyzed from
source documents.
• Also known as a book of original entry.
Journal
• General Journal
• A two column journal
• Journalizing
• The process of analyzing
transactions into debits and
credits, and recording the results
in a journal
Journalizing: An Illustration
Steps to Follow
• Step 1: Analyze the effects of the transaction in the usual way (taccounts), and debit before credit.
• Step 2: All journal sheets are numbered consecutively.
• Step 3: Write the title of the account to be debited in the
Account Title and Explanation column. Dollar signs are not
necessary. The journal is not a formal financial statement.
Steps
• Step 4: On the line below the debit entry, indent about 1.5 cm
from the date column and write the title of the account to be
credited. Indenting makes it easier to distinguish the credit from
the debit entry.
• Step 5: Explanation – identification of source documents
• Post-Reference Column - Not used in journalizing but posting,
the next step.
Illustrating Journal Entries
• Tips:
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Journal pages numbered
Date column
Skip line between transactions
First entry is the opening entry
Only complete transactions are shown on a journal (if you don’t have enough room go
to the next page)
• Page 119 – 121
Terminology
• Opening Entry
• The first entry to establish an account. It identifies the accounts that have a beginning
balance at the beginning of the business. First/opening balance sheet.
• Compound Entry
• An entry that involves more than two accounts.
• Error Correction
• Rule out the mistake with a single line, neatly insert the correct amount and initial
(never erased).
Examining Advantages of the Journal
• Journal lists all the financial events by date.
• Journal provides a record of all transactions in date order, you can compare the
volume of transactions from day to day.
• Equality of debits and credits can be checked at a glance. Errors can be discovered
before the transactions are transferred to the ledger.
• The journal not only shows all numerical info about a transaction in one place, but
also explains the transaction.
• The journal is a factual proof of financial events in case such proof should be
required in a court of law, or if any source documents should be lost or destroyed.