MODULE 4
Recording Business Transactions
(part 2)
Objective 4: Post from the journal to the ledger
A. Posting – the process of transferring data from the journal to the accounts in the ledger.
1. Debits in the journal are posted as debits to the appropriate accounts; credits in the journal are posted as credits to the appropriate accounts.
2. All transactions must be keyed by date or number to link information. (Exhibits 2-5 and 2-6 illustrate the flow of accounting information, from journalizing the original entry to posting it to the accounts in the ledger.)
B. Each account consists of its original balance, plus increases, minus decreases, and its ending balance.
Objective 5: Prepare and use a trial balance
C. Unequal column totals indicate at least one error. Some common errors are:
1. Posting incorrectly.
2. Mathematical errors.
a. Transposition means digits are written in the wrong order. (For example, instead of $567, the number is written as $657.) A transposition error is always evenly divisible by 9 ($657 - $567 = $90, which is divisible by 9).
b. A slide means that one or more zeroes are added to, or left off, a number ($1,000 is written as $100). A slide is always evenly divisible by 9.
3. Omitting or entering account balances in the wrong column of the trial balance.
D. Equal trial balance totals prove only that debits posted to accounts equal credits posted to accounts. Errors in transactions that have equal debits and credits will not be revealed by unequal trial balance totals.
E. Posting details recorded in the journal and the ledger help provide a "trail" through the accounting data.
1. Exhibit 2-8 illustrates a journal and ledger, including several transactions, showing in full the details of the posting process, references, and account numbers.
a. Post the transaction date from the journal to the ledger.
b. Post the journal page number from the journal to the ledger.
c. Post the dollar amount of the debit from the journal as a debit to the same account in the ledger. Then post the credit amount to the appropriate account.
d. Post the account number from the ledger back to the journal.
2. "Journal reference" in the ledger tells which journal and page number the entry comes from.
3. "Posting reference" in the journal tells which account number the entry is posted to.
4. The reference columns indicate which transactions or parts of transactions have been posted.
F. A four-column account format (rather than a 2-column format) with a running balance is most often used in practice. (Refer to Exhibit 2-9.)
Objective 6: Set up a chart of accounts for a business
A. The chart of accounts lists all the accounts by account number. (See Exhibit 2-10.)
B. Refer to Appendix B for illustrations of more detailed charts of accounts.
C. Accounts are numbered beginning with assets, then liabilities, owner’s equity, revenues, and finally expenses; accounts in the ledger are always in this same order. For example, all assets generally begin with a "1" while liabilities generally begin with a "2".
D. The normal balance of an account is the side used to record increases; Exhibits 2-11 and 2-13 list the normal balances for all types of accounts.
E. An account that has a negative balance (the opposite of its normal balance) may indicate that an error has been made.
F. An expanded accounting equation, in Exhibit 2-12, illustrates how capital, withdrawals, revenues, and expenses are all part of owner’s equity. The illustration following this Exhibit shows how many revenue, expense, and withdrawals transactions are recorded:
2. A revenue is recorded with a credit to a specific revenue account.
3. Withdrawals are recorded with a debit to the Withdrawals account.
G. Decision guidelines for analyzing and recording transactions are presented.
Objective 7: Analyze transactions without a journal
A. Managers can quickly analyze the effect of a transaction by recording the transaction directly into T-accounts and skipping the journal. This short-cut approach is never used in the formal accounting system, but only when a fast analysis of transactions is required.
B. To take this short-cut, simply compress transaction analysis, journalizing, and posting into one step.