In this lesson, we will learn how to journalize transactions for a business, and how to post those journal entries into the general ledger. Specifically, we will discuss:
1. Journalizing transactions for Jessica's Consulting Services
In the previous tutorial, we learned the steps to preparing journal entries. Now we will learn how to journalize the business transactions for Jessica’s Consulting Services. These journal entries use double-entry accounting to record the debits and credits related to each of the business transactions.
Business Transaction: Jessica Price withdrew $100,000 from personal savings, and deposited it in a new
checking account in the name of Jessica’s Consulting Services.
In the T-accounts, we recorded a debit for $100,000 in the cash account and a credit for $100,000 in Jessica Price’s capital account. We transfer that same information to the general journal along with a description of the transaction. We use the posting reference column to link the transactions. A posting reference is a column in the general journal that indicates the link between transactions and accounts. Since this transaction is labeled (a) in the transaction list and in the T-accounts, we can label it (a) in the journal entries to show the link at each stage.
For each of the business transactions, we transfer the debits and credits from the T-accounts into the general journal using the posting reference column to show the link between the transactions, the T-accounts, and the general journal entry.
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Click here to view the remaining general journal entries.
Jessica’s Consulting Services began operations on November 1. Below is a summary of the revenue, expense, and withdrawal transactions that occurred during the month of November.
Business Transactions
During the month of November, Jessica’s Consulting Services earned $36,000 in revenue from clients who paid cash for accounting and bookkeeping services.
Jessica’s Consulting Services has charge account clients that are allowed 30 days to pay for services. The amounts owed by these clients are called accounts receivable, which are a new form of asset for the consulting firm. During November, Jessica’s Consulting Services earned $11,000 of revenue from charge account clients.
During November, Jessica’s Consulting Services received $6,000 on account from clients who owed money for services previously billed.
In November, Jessica’s Consulting Services paid $8,000 in salaries for the bookkeeper and the office manager.
Jessica’s Consulting Services issued a check for $650 to pay the utilities bill.
Jessica Price wrote a check to withdraw $5,000 cash for personal use.
A ledger that stores the details for a general ledger control account.
Control account
A summary-level account in the general ledger.
Posting references (PR)
A column in the general journal that is used to indicate when entries have been posted to the ledger accounts, showing the link between the transactions and accounts.
Adjusting entry
A journal entry that is used at month-end to adjust the financial statements to bring them up to date and in compliance with accounting standards.
Compound journal entry
A journal entry that includes more than two lines of entries.
Reversing entry
An adjusting entry that is reversed as of the beginning of the following period, usually because an expense was expected to be accrued in the previous period, and is no longer needed.
2. Posting journal entries to the accounts in the ledger
The third step in the accounting cycle is to post journal entries to the accounts in the ledgers. In the ledger, we accumulate an ending balance for each account so that we can prepare financial statements. Posting is the process of entering transactions into the ledger, which is where all transactions are permanently recorded. The balances of the ledger accounts allow us to obtain financial information regarding the business.
Using the general journal as a guide, we enter transaction data in the accounts. Businesses keep account records on a special form that makes it possible to record all data efficiently. The ledger is the master set of accounts that summarize all transactions occurring within an entity, and it is used to populate information on the financial statements of a business. The steps for the manual posting process are listed below. In a computerized system, these steps are completed automatically when the transaction is recorded in the journal.
step by step
1. In the cash account in the ledger, record the date (for example, May 1, 202X).
2. Record the page number of the journal “GJ1” in the posting reference (PR) column of the cash account.
3. Transfer the dollar amount of the debit portion of the entry to the ledger. Calculate the new balance of the account. To keep a running balance in each account, as we would in our personal checkbook, take the present balance in the account on the previous line, and add or subtract the transaction as necessary to arrive at our new balance.
4. Record the account number of Cash (111) in the posting reference (PR)
column of the journal. This listing is known as cross-referencing.
The same sequence of steps occurs for each line in the journal. The debits and credits in the journal may be posted in the order they were recorded, or all the debits may be posted first and then all the credits.
Each ledger account provides a complete record of the increases and decreases to that account. The ledger also shows the current balance for each account, which allows us to complete a trial balance and financial statements. If we discover errors in the ledger, we should create correcting entries as soon as possible. A correcting entry is a journal entry that is made in order to fix an erroneous transaction that had previously been recorded in the general ledger. It is important to fully document a correcting entry in order to understand why the correction was made.
Below we will find the general ledger accounts for Jessica’s Consulting Services. The ledgers are recorded by account title and they show us the debits and credits that are related to each account along with the account balance.
The following ledger is the Cash ledger for Jessica’s Consulting Services. We will see all of the debits and credits from the journal entries that include cash. For example, transaction (a) consisted of Jessica’s investment into the company, therefore, we record the debit for $100,000. The next transaction is a result of the company purchasing equipment for $5,000, recording a credit to cash. The balance column shows the account’s balance after each transaction occurs. With the cash account, we begin with $100,000 from the investment and we subtract the $5,000 that we spent on supplies, resulting in a $95,000 balance. We follow the same steps for each of the transactions that include cash and ultimately end up with a cash balance of $111,350 at the end of the year.
A general ledger is created for each of the company’s accounts. We record the debits and credits for each transaction that impacts the account and the balance in the account after each transaction. Jessica Price Consulting Services will have general ledger accounts for Cash, Accounts Receivable, Supplies, Prepaid Rent, Equipment, Accounts Payable, Jessica Price, Capital, Revenue, Salaries Expense, and Utilities Expenses. Each ledger will allow us to see the transactions that occurred within that account as well as the balances of each account.
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Click here to view the remaining ledgers for Jessica Price Consulting Services.
terms to know
Posting
The process of entering transactions into the ledger, which is where all transactions are permanently recorded.
Correcting entry
A journal entry that is made in order to fix an erroneous transaction, which had previously been recorded in the general ledger.
summary
In this lesson, we journalized the business transactions for Jessica’s Consulting Services, and recorded the necessary debits and credits related to her business transactions, which range from starting the business to providing services that bring in revenue.
Using the journal entries from Jessica’s Consulting Services as a guide, we learned to transfer transaction data into the ledger, and learned about the steps for correcting any errors that are found.
Source: This content has been curated and revised from "Accounting Principles: A Business Perspective" by Hermanson, Edwards, and Maher. License: CC BY 3.0
REFERENCES
Hermanson, R., Edwards, J., and Maher, M. (2019 ). Accounting Principles: A business perspective. (First Global Text Edition). Volume 1
Terms to Know
Correcting entry
A journal entry that is made in order to fix an erroneous transaction, which had previously been recorded in the general ledger.
Posting
The process of entering transactions into the ledger, which is where all transactions are permanently recorded.
