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Posting from a General Journal to a General Ledger

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Posting from a General Journal to a General Ledger 55Posting from a General Journal to a General Ledger AFTER STUDYING CHAPTER 5, YOU WILL BE ABLE TO: 1. Define accounting terms related to posting from a general jour- nal to a general ledger. 2. Identify accounting concepts and practices related to posting from a general journal to a general ledger. 3. Prepare a chart of accounts for a service business organized as a proprietorship. 4. Post amounts from a general journal to a general ledger. 5. Prove cash and journalize correcting entries. ACCOUNT FORM TERMS PREVIEW Encore Music records transactions in a general journal as described in Chapter 4. A journal is a permanent record of the debit and credit parts ledger of each transaction with transactions recorded in general ledger chronological order. A journal does not show, in one place, all the changes in a single account number account. file maintenance If only a journal is used, a business must opening an search through all journal account pages to find items affect- posting ing a single account balance. For this reason, a proving cash form is used to summarize correcting entry in one place all the changes to a single account. A separate form is used for each account. 94 ACCOUNTING IN YOUR CAREER TIME FOR POSTING Shayla Graham is the bookkeeper at Hammonds Marketing Services. Tony Hammonds, who started the busi- ness, hired her to take full charge of accounting, but has never shown a great deal of interest in her daily work. Tony is now talking with Shayla to dis- cuss ways to free up some time for her to take on additional responsibilities in the rapidly growing business. Tony begins, “Shayla, you’ve done a great job with the accounting system here at Hammonds Marketing. I have come to rely on you totally for everything related to accounts. But now I need to see if we can find some ways for you to do your work in less time so you can help me with some other projects.” “Thank you for the vote of confidence, Tony,” Shayla says, “I’d be happy to work with you on other projects if we can find a way for me to do so.” “Well, it looks like there’s a lot of duplication in your work. You look at all the documents and then prepare some additional ones. Then you record them in the journal, and then you record them all again when you post them. You’re doing the same thing three times.” “Tony,” Shayla replies, “I promise you I am not creating unnecessary work. Each one of these steps is an important part of what we call the accounting cycle. And the accounting firm that audits our books has assured both you and me that I am following the correct procedures. Let me explain why each of these steps is important.” Critical Thinking: 1. How should Shayla explain the care she takes examining and preparing source documents? 2. What would be a good way to explain why both journalizing and posting are important? CHAPTER 5 Posting from a General Journal to a General Ledger 95 5-1 Preparing a Chart of Accounts RELATIONSHIP OF A T ACCOUNT TO AN ACCOUNT FORM Information needed to trace T Account entry back to journal page Debit side Credit side ACCOUNT POST. DATE ITEM REF. DEBIT CREDIT An account form is based on and includes The major disadvantage of the account form the debit and credit sides of a T account. In addi- shown is that no current, up-to-date account bal- tion to debit and credit columns, space is ance is shown. If this form is used, an up-to-date provided in the account form for recording the balance must be calculated each time the transaction date and journal page number. This account is examined. When an account has a information can be used to trace a specific entry large number of entries, the balance is difficult back to where a transaction is recorded in a and time consuming to calculate. Therefore, a journal. more commonly used account form has Debit and Credit Balance columns as shown below. ACCOUNT ACCOUNT NO. BALANCE DATE ITEM POST. DEBIT CREDIT REF. DEBIT CREDIT Balance columns Because the form has columns for the debit balances than is the T account. and credit balance, it is often referred to as the Encore Music uses the balance-ruled account form. balance-ruled account The account balance is calculated and form. recorded as each entry is recorded in the account. Recording information in an account is described later in this chapter. The T account is a useful device for analyzing transactions into debit and credit parts. However, the balance- ruled account form is more useful as a permanent record of changes to account 96 CHAPTER 5 Posting from a General Journal to a General Ledger CHART OF ACCOUNTS Encore Music CHART OF ACCOUNTS Balance Sheet Accounts Income Statement Accounts (100) ASSETS (400) REVENUE 110 Cash 410 Sales 120 Petty Cash (500) EXPENSES 130 Accounts Receivable—Kids Time 510 Advertising Expense 140 Accounts Receivable—Learn N Play 520 Insurance Expense 150 Supplies 530 Miscellaneous Expense 160 Prepaid Insurance 540 Rent Expense (200) LIABILITIES 550 Supplies Expense 210 Accounts Payable—Ling Music Supplies 560 Utilities Expense 220 Accounts Payable—Sullivan Office Supplies (300) OWNER’S EQUITY 310 Barbara Treviño, Capital 320 Barbara Treviño, Drawing 330 Income Summary A group of accounts is called a ledger. A as a chart of accounts. Encore Music’s chart of ledger that contains all accounts needed to accounts is shown above. prepare financial statements is called a For ease of use while studying Cycle 1, general ledger. The name given to an account is Encore Music’s chart of accounts is also shown known as an account title. The number assigned on page 3. to an account is called an account number. Accounts in a general ledger are arranged in the same order as they appear on financial state- ments. Encore Music’s chart of accounts shows Preparing a Chart of Accounts five general ledger divisions: (1) Assets, (2) A list of account titles and numbers showing Liabilities, (3) Owner’s Equity, (4) Revenue, and the location of each account in a ledger is known (5) Expenses. ACCOUNT NUMBERS 150 Supplies General ledger division Location within general ledger division Encore Music assigns a three-digit account Therefore, the number for the asset account, number to each account. For example, Supplies is Supplies, begins with a 1. assigned the number 150, as shown . The second two digits indicate the location The first digit of each account number of each account within a general ledger division. shows the general ledger division in which the The 50 in the account number for Supplies indi- account is located. For example, the asset cates that the account is located between account division accounts are numbered in the 100s. number 140 and account number 160. CHAPTER 5 Posting from a General Journal to a General Ledger 97 Encore Music initially assigns account num- When a new account is added at the end of a bers by 10s so that new accounts can be added ledger division, the next number in a sequence easily. Nine numbers are unused between each of 10s is used. For example, suppose Encore account on Encore Music’s chart of accounts. For Music needs to add another expense account, example, numbers 111 to 119 are unused Water Expense, to show more detail about one of between accounts numbered 110 and 120. New the utility expenses. The expense accounts are numbers can be assigned between existing arranged in alphabetic order. Therefore, the new account numbers without renumbering all exist- account would be added at the end of the ing accounts. The procedure for arranging expense section of the chart of accounts. The last accounts in a general ledger, assigning account used expense account number is 560, as shown numbers, and keeping records current is called on the chart of accounts. The next number in the file maintenance. sequence of 10s is 570, which is assigned as the Unused account numbers are assigned to number of the new account. new accounts. Encore Music records payments 550 Supplies Expense (Existing account) for gasoline in Miscellaneous Expense. If Ms. 560 Utilities Expense (Existing account) Treviño found that the amount paid each month 570 Water Expense (New Account) for gasoline had become a major expense, she might decide to use a separate account. The account might be titled Gasoline Expense. Encore Encore Music has relatively Music arranges expense accounts in alphabetic few accounts in its order in its general ledger. Therefore, the new general ledger account would be inserted between Advertising and does not Expense and Insurance Expense. anticipate adding many new 510 Advertising Expense (Existing account) accounts in the ExpenseGasolineand Insurance Expense Expense. (New Account) future. Therefore, a 520 Insurance Expense (Existing account) three-digit account number adequately The number selected for the new account provides for the few should leave some unused numbers on either account numbers side of it for other accounts that might need to that might be added. be added. The middle, unused account number However, as the num- between existing numbers 510 and 520 is 515. ber of general ledger Therefore, 515 is assigned as the account accounts increases, a business may number for the new account. change to four or more digits. Charts of accounts with more 510 Advertising Expense (Existing account) number for the new account. than three digits are described in 515 Gasoline Expense (New Account) later chapters.
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