transactions for a new
business; how to use a general journal to record equity transactions
Use journalizing to organize transaction information; journalize changes in ownership interest
Record reduction in amounts you owe and amounts others owe you 4.2 How to record sales and
purchases
Record transactions involving assets, liabilities, revenue, and expenses 4.3 The role of accounts payable
FOR EXAMPLE
See Figure 4-1, which illustrates how a general journal organizes transac- tion information. Small Business Accounting in Action Use journalizing to organize transaction information.
All debit accounts are written at the left of the column. All credit accounts are indented.
The description is further indented. This chapter explores the transactions of a
new business for one month. From the initial investment by the owner through sales to cli- ents, many transactions enter the accounting
system. Along the way you will learn how owners withdraw funds for personal use and how they account for sales and purchases on credit.
INTRODUCTION
As discussed in Chapter 3, the accounting cycle starts with transactions, followed by journal entries. Journalizing is the process of recording transactions in a journal. The general journal can be used to journalize any transaction, but a typical business uses special journals. An example of a special journal is the cash disbursements journal, which records all the checks you write. The general jour- nal is usually reserved for entries that don’t fi t into any of the special journals.
This chapter uses the general journal exclusively, not because that is how it’s done in the real world, but because it allows a focus on the nature of each transaction. Even if you use a computerized accounting program, you need to understand what happens behind the scenes.
4.1.1 Using the General Journal
Whether you use special journals or the general journal, each journal entry will contain the same information about a transaction:
• Date: The date of the transaction.
• Debit: The account debited in the transaction and the amount of the debit. • Credit: The account credited in the transaction and the amount of the credit.
• Description: Brief information and a reference to the source document.
Figure 4-1 shows how the general journal organizes this information into columns.
The column titled “Post Ref.” is left blank for now. You won’t need the “Post Ref.” column until the next step, which is posting (covered in Chapter 5).
In a general journal, transactions are entered on multiple lines because each transaction impacts at least two accounts (and sometimes more than two). Notice how the information is formatted in the Description column: Journalizing:
The process of recording transactions in a journal.
Journalizing:
The process of recording transactions in a journal.
63 Figure 4-1 Year Month Amount Amount Amount Amount Day Day
General Journal Page 1
Account Debited Account Credited Description Account Debited Account Credited Description
Date Description Post Ref. Debit Credit
The general journal.
PATHWAY TO . . .
MAKING A GENERAL JOURNAL ENTRY 1. Date
• If you are starting a new page, write the year at the top of the page in the date column.
• Write the month below the year.
• Do not write the month again on the page unless the month changes while you are still using that page.
• Write the day. 2. Debit
• Write the name of the account debited in the Description column. • Write the amount of the debit in the Debit column.
3. Credit
• Indent slightly so that your credit entry begins to the right of (and below) your debit entry.
• Write the name of the account credited in the Description column.
• Write the amount of the credit in the Credit column. 4. Description
• Indent again so that your description begins to the right of (and below) your credit entry.
• Write a brief description of the transaction. • Include source document numbers.
If you use a manual accounting system, be sure to number the pages of your general journal. You will need page numbers to post transactions and to research the details of any particular transaction.
4.1.2 Equity Transactions
Every business is owned by somebody. Equity accounts track owners’ con- tributions to the business as well as their share of ownership. Small, unin- corporated companies track equity using the Capital and Withdrawals accounts.
• Capital: This account refl ects the amount of initial money the business
owner contributed to the company as well as owner contributions made after initial start-up. The value of this account is based on cash contribu- tions and other assets contributed by the business owner, such as equip- ment, vehicles, or buildings. If a small company has several different partners (or members in the case of an LLC), then each individual gets his or her own Capital account.
• Withdrawals: This account tracks any money that a business owner takes out of the business. If a business has more than one owner, each owner gets his or her own Withdrawals account.
The Withdrawals account has a normal balance that seems to break the rules of debit and credit. It is an equity account, but a withdrawal decreases equity. Therefore its normal balance is a debit, the opposite of the Capital account. Table 4-1 shows the normal balances for all the main account types.
Like revenue and expenses, the Withdrawals balance is transferred to the Capital account at the end of the accounting period. If this seems confusing, don’t worry. It makes perfect sense when you do the closing (Chapter 7). Just remember that Withdrawals has a normal debit balance.
Capital:
The equity account that tracks owners’ contributions to the business.
Capital:
The equity account that tracks owners’ contributions to the business.
Withdrawals:
The equity account that tracks money that owners take out of the business.
Withdrawals:
The equity account that tracks money that owners take out of the business.
Table 4-1: Normal Balances Including Withdrawals
Account Type
Normal
Balance Increase Decrease
Assets Debit Debit Credit
Liabilities Credit Credit Debit
Equity Capital account Credit Credit Debit
Withdrawals account Debit Debit Credit
Revenue Credit Credit Debit
65