Chapter 6

1. Chapter 6 The Journal and Source Documents

2. General Journal • Book where accounting entries for all transactions are first recorded • Fills the need to record all parts of a transaction in one place • Includes date, debit, credit and brief explanation • Advantages: • Fewer errors • Easy to check all debit and credit entries made • Chronological order • Gives idea of volume of business • Convenient picture of day’s business Click here for online journal demo

3. General Journal Facts • Pages numbered consecutively • Each journal entry balances • Blank line usually, between transactions • A “compound entry” affects more than two accounts • Account titles are capitalized • Simple, brief explanations

4. Journal Entries • Written in a specific format • Debit account and amount are recorded first • Credited account and amount are recorded second and are indented • Each transaction there is at least one debit and one credit; total of debits is equal to total of credits

5. Journalizing • Process of recording accounting entries in the journal • Known as a book of original entry • First three steps of the accounting cycle: Accounting entries are transferred to the ledger accounts Transactions are recorded in journal Transactions Occur

6. Journalizing • Record the date • Year –written only once on each page above the first entry in small figures • Month –enter the month on the first line of each page, do not repeat for each entry. Enter a new month at the point where it occurs. • Date – enter the day on the first line of each journal entry. The day is always repeated regardless of how many transactions are on that day.

7. Steps in Recording a Journal Entry Step 1 – enter the dates Step 2 –Enter names of the accounts to be debited and enter the debit amounts in the Debit column. Step 3 - Enter the names of the accounts to be credited. They are indented from the left side of the Particulars column. Enter the credit amounts in the Credit column. Step 4 – Write a brief explanation for the transaction beginning at the left side of the Particulars column.

8. Opening Entry • The journal entry that starts the books off, or “opens” them • Every accounting entry is recorded first in the journal; even the one that sets up the financial position from a balance sheet • See page 160 in text.

9. Source Documents • Necessary proof of transactions • Shows the nature of a transaction and provides all information needed to account for it properly • Accounting department uses the source documents as the basis for recording the entries; almost every accounting entry is based on a source document • Cheques written: payment by us, DR A/P or other payable account CR Bank • Cheques received: DR Bank CR Sales/Revenue….

10. Source Documents: Cash Sales Slips • Record of all cash received • DR Bank • CR Sales or A/R • Often called Cash Receipts

11. Source Documents: Sales Invoice • Sale on credit (account) • DR A/R • CR • Sales/Revenue

12. Source Documents: Purchase Invoice • Purchase item on credit (account) • DR ??? • CR A/P

13. Source Documents: Other • Bank Credit Memo: bank gives you cash, e.g., interest; DR Bank CR Interest Revenue • Bank Debit Memo: bank withdraws cash from your account, e.g., service charge; DR Bank Charges CR Bank

14. GAAP – The Cost Principle • Accounting for purchases must be at the cost price to the purchaser • i.e. it is recorded at the price paid at the time, if the market value changes the cost recorded does not change

15. Taxes The seller is charged with the responsibility of administering the sales tax. The seller is obliged to: • Calculate the tax and add it on to the normal price of the goods • Collect the tax from the customer • Accumulate the sales tax charged to the customers in a special liability account called HST payable • Remit the accumulated sales tax to the government periodically. In some cases it will be paid to the government before it is collected from the customer.

16. HST • Harmonized Sales Tax (July 1, 2010 in Ontario) • 13% of purchase total • Replaces GST and PST • Most businesses are required to file monthly or quarterly and must remit the net tax owed within one month following the end of their reporting period. • What is taxed? • How do you account for taxes???

17. HST Payable • A liability account used to accumulate the HST amounts charged to customers during the reporting period. HST Payable No. 220 Recorded as a credit when received from a customer. When payment is made to the government it is recorded as a debit.

18. HST Recoverable • A minus (or contra) liability account used to accumulate the HST paid by the business for the reporting period. It is deducted from the amount of the liability – HST payable. If the recoverable is greater than the payable, the business will claim a refund. HST Recoverable No. 225 Recorded as a debit when paid out for businesses purchases. When payment is made to the government it is recorded as a credit.

19. In some cases, the tax will be paid to the government before it is collected from the customer (sales sold on account)

20. PST • Provincial Sales Tax • One way that provincial governments raise funds • 8%

21. Taxes On the Balance Sheet Custodial Services Balance Sheet March 31,2010 Liabilities Accounts Payable $5634.90 HST Payable $2309.65 Less: HST recoverable 1567.90 741.75 Bank Loan 2500.00 Total Liabilities $8876.65 Owner’s Equity J. Delorme, Capital Capital Mar 1 10000 Add Net Income