Matter Left for Record in the Journal.—By the use of a cash receipts, a cash disbursements, a purchase, and a sales journal, four principal classes of transactions are taken out of the old-time journal and entered in separate books of record. If transactions of any other class are numerous enough to justify the use of a separate book of record, such a record should be set up. Although the number of subsidiary journals, each recording one kind of transaction, may become very large, nevertheless in practically all cases it is necessary to retain the general journal (often referred to simply as “the Journal”), in order to take care of such miscellaneous items as are not recorded in any of the special journals.

The standard form of journal was illustrated in Chapter XVI, where it was stated that a journal must provide space for date of entry, account classification, ledger folio index, debit and credit money columns, and explanation. As an explanation of the form, method of use, proper observance of margins, etc., was made there, it need not be repeated here.

Kinds of Transactions Recorded in the Journal.—When the number of subsidiary journals used is limited to the cash receipts, cash disbursements, purchase, and sales journals, as is frequently the case, all items not affecting these four books should be entered in “the Journal”; i.e., transactions involving notes receivable and notes payable; adjustments with customers and creditors resulting from return of goods or claims and allowances thereon; and all formal opening, adjusting, and closing entries. Furthermore, there is usually a number of other transactions, which because of their special and unusual nature cannot be grouped with the items of the special journals and must therefore be entered in the general journal.

Journal Explanations.—When these various classes of transactions are entered in the Journal, a very complete explanation should be given the entry. In fact, all entries covering settlements and adjustments with outsiders and within the business itself are of primary importance and the explanation should be so carefully worded as to make the intent of the entry plain and intelligible.

Closing and Posting the Journal.—No particular formality attaches to the closing and posting of the ordinary standard form of journal. There is no summary entry, no totaling, and there are no rulings to be made. Ordinary care must be exercised to see that the debits and credits are correctly posted. Since the entry in the Journal is given in its complete form and no debits or credits are suppressed, as is the case in the special journals, posting is not difficult.

The Analytic Journal with Divided Columns.—One form of the journal has its debit and credit columns separated, the debit money column appearing at the extreme left of the page, followed in order across the page by columns for date, account classification, ledger folio, and credit money amount. This kind of journal is called a divided or split-column journal and is ordinarily used to collect the totals to be posted to controlling accounts and thus to secure control over subsidiary ledgers. This matter will be fully discussed in later chapters. When the journal is so used it is provided with additional debit and credit analysis columns on each side according to the subsidiary ledgers employed. A divided-column journal with three debit and three credit columns is shown in Form 14. There is always a general money column on each side, the other columns depending on the kind of analysis required by the business.

In the illustration referred to, an Accounts Receivable and an Accounts Payable column are provided. It is obvious that the Accounts Receivable column should usually appear on the credit side and the Accounts Payable column on the debit side; although in some cases provision is also made for an Accounts Receivable column on the debit and an Accounts Payable column on the credit side. The account of S. J. White, a customer, which is paid by his note, should be credited for the amount of $510.20 and consequently the item is extended to the Accounts Receivable column.

Illustrations—Opening Entries.—Illustration will be given of a few typical transactions requiring journal entry. The standard two-column journal will be used.

For the purpose of illustrating opening entries, assume the following data:

On September 30, 19—, Jack Gibson started in business, with the following assets and liabilities: Cash $3,500; Notes Receivable $800; Merchandise $4,000; Furniture and Fixtures $450; Accounts Receivable $2,100; Accounts Payable $1,500; and Notes Payable $1,200.

An analysis of this transaction shows that no part of it belongs to either the purchase or sales journals. The part relating to cash is entered in the cash receipts journal. However, in order to show the complete investment in one place, the entire transaction including the cash part, is entered in the Journal and posted from there, with the exception of the cash item. The reason for this exception is that the cash investment is also entered in the cash book and will find its way to the ledger Cash account through the total cash debits at the end of the period. Because of this the cash item in the Journal should be checked and not posted to the Cash account in the ledger.

Likewise, the investment item in the cash book, showing a credit of $3,500 to Jack Gibson, Capital account, should be checked and not posted to the credit of his account in the ledger because this item forms a part of the total investment of $8,150 posted to his credit from the Journal entry.

If the student has difficulty in determining the debits and credits of entries of this kind, it may be helpful to set up the data informally first, in the form of a balance sheet. Using this as a guide, he should then make his journal entry, debiting the asset items and crediting the liability and net worth items.

The above entries bring the transaction completely on the books of original entry and show the ledger folios to which the various items are posted. Notice the check in the L. F. column in the Journal opposite “Cash” and in the cash book opposite “Jack Gibson, Capital,” which is inserted to prevent posting the same item twice.

For opening entries full explanation and details, where necessary, should be given in the Journal, covering lease agreements and contracts entered into when commencing business, and other similar data. It should be noted that with opening entries it is customary for the explanation to precede the formal showing of debits and credits, rather than to follow it as in the case of all other journal entries.

Adjusting and Closing Entries.—Other typical entries to be illustrated are those made at the close of a fiscal period: (1) to adjust the books in accordance with certain data that were not obtainable before; (2) to transfer all temporary proprietorship accounts to the summary account, Profit and Loss; and (3) to transfer the net profit, i.e., the balance of the Profit and Loss account, to the proprietor’s personal account, and the balance of this latter account to the proprietor’s capital account.

The debits and credits of the entries necessary to effect the record of the data and transfers mentioned, can be determined as in the operations with ledger accounts previously shown.

The following data relate to Jack Gibson’s business and are given to illustrate the three classes of entries mentioned above:

During the year, sales amounted to $33,000; purchases to $25,000; selling expenses to $3,500; and general administrative expenses to $2,025. It is estimated that of outstanding accounts $350 are uncollectible; that furniture and fixtures have depreciated in value $45. Merchandise inventory shows $5,000 on hand. Gibson drew $1,000 during the year.

The first thing necessary is to make the adjustments on account of depreciation, bad debts estimate, and present inventory. These adjustment entries are made in the Journal as follows:

The first two entries, when posted, will bring on the book valuation accounts for furniture and fixtures and accounts receivable, and will set up the expense accounts, Depreciation and Bad Debts. The third Journal entry, when posted, will transfer the goods on hand at the beginning of the year so that they can be added to the Purchases made during the year. In this connection it will be remembered that the sum of these two items, old inventory plus purchases during the year, constitutes the primary factor of “cost of goods to be accounted for.” The fourth entry shows the asset Merchandise now on hand and, by its credit to Purchases, effects a subtraction from Purchases, so that the balance of Purchases, $24,000, shows the “cost of goods sold.”

The books are now adjusted and ready for summarization by means of the Profit and Loss account. The following Journal entries, transferring all temporary proprietorship items to the Profit and Loss account, will effect the closing operation:

The first entry transfers the sales income to the credit of Profit and Loss. The second entry charges the Profit and Loss account with the cost of goods sold and all other expenses for the fiscal year. When the posting has been completed up to this point, the balance of the Profit and Loss account shows a net gain of $3,080, which, belonging to the proprietor, is transferred to the credit of his personal account, as shown by the third entry. He has drawn against prospective profits to the extent of $1,000, leaving $2,080 of profit remaining in the business as an addition to his permanent investment. Hence, this balance is transferred to Gibson’s capital account by the fourth entry.

Objection to the Direct Ledger Method of Adjusting and Closing the Books.—These adjustment and closing transactions are sometimes recorded directly in the ledger without first entering them in the Journal. Usually this is not satisfactory because it does not show in one place a complete record of all the adjustment and closing summaries necessary at the close of a fiscal period. These summaries are matters of sufficient concern to the business to warrant their entry in the Journal where full and complete explanations can be given. The more complex entries often needed to adjust and close the books of a business where numerous income and expense accounts are kept, follow the same general principles as those discussed above. Adjusting and closing entries are given fuller treatment in Chapters XXVII and XXVIII.

The two illustrations given above cover certain types of Journal entries which are of a more difficult character than the customary purchases, sales, and cash entries. A keen analysis is often required to formulate the debits and credits of these entries, and the explanatory matter should be worded with sufficient care to render them intelligible even after the immediate interest in them has been lost and their recording ink has become “cold.”

Entries Affecting Several Journals.—Transactions sometimes require entry in two or more journals. A basic principle of bookkeeping is that there should be no duplication of entry in the various journals. A transaction that can be completely entered in one journal should not be entered in any other journal. The one exception to this principle is made in the case of an investment transaction, as explained on page 171. Sometimes, however, there may be a conflict of places of entry, as in the case of cash purchases and sales, already explained, where entry is made in both journals in order to allow each journal to perform its proper function. Two examples will illustrate the proper method of handling such transactions.

Problem 1. Assume that a customer, James Robbins, buys $1,000 worth of goods, paying $300 cash, giving a note for $500 and leaving the balance on open account.

The following entries should be made:

It will be noted that three journals are involved. Entry (a) is recorded in the sales journal; entry (b) in the cash receipts journal; and entry (c) in the general journal. The net effect of the three entries is:

Because special journals are used, however, the transaction must be split up as indicated above.

Problem 2. Assume that the business purchases from the Investment Trust Co. a building site valued at $5,000, paying for it $2,000 cash and a note for the balance supported by a mortgage.

Two methods are used to record this transaction, neither having any special advantage over the other.

First Method:

Entry (a) is made in the cash disbursements journal, and entry (b) in the general journal. This method of entry requires the splitting of the land value into two parts and breaks up what is really a unit transaction by recording it in two places. Because of this, the general journal portion of the entry should be followed by a very full explanation of the entire transaction, in which reference to the partial cash payment should be made. In the cash disbursements journal the only explanation needed will be a reference to the general journal entry.

Second Method.—To bring about a complete record of the land item in one place, the following method is often used:

Entry (a) in the general journal sets up an account with the vendor, the Investment Trust Co. Entry (b) in the cash disbursements journal and entry (c) in the general journal show the cancellation of the liability to the vendor through the payment of cash in the one case and the giving of a mortgage in the other. The net effect of the entries is:

It will be noted that this method sets up a formal account with the vendor—a desirable thing—but that it requires one more entry than the first method.

The other entries recorded in the Journal ought not to give the student any particular difficulty.