Question

As the full-time bookkeeper, your job is to make sure all transactions are recorded properly. If there is an error, each correction needs the reason for the change and the effect on each account, whether it is an increase or decrease.

1.   What are some examples of transactions that would need to be recorded or journalized?

2.   Can you provide an example of a transaction and the journal entry from either Chapter 4 of our textbook or from your current employer?

3.   Why is it important to accurately record the transaction you selected?

Answer 1

Part I   Journalizing in accounting is the system by which all business transactions are recorded for your financial records. A business transaction is first recorded in a journal, also called a Book of Original Entry. Your journal keeps a record of all your business transactions, tracking them in chronological order, as they happen. Adding new journal entries is called journalizing. The process of journalizing starts whenever a business transaction occurs.

Let’s say your client pays an invoice. You’d want to record that payment as a journal entry to log the transaction. Each journal entry typically records the date, the account you’re debiting or crediting and a brief description of the transaction that occurred.

Examples of Transactions that needs to be Journalised?

There are different types of journals, but the most important are outlined here:

Sales Journal: Records credit sales related to your business. When a client pays an invoice by credit, you’ll record it in your Sales Journal.

Purchase Journal: Records credit purchases you make for your business, such as office supplies to stock your desk, or software for your work.

Cash Receipts Journal: Records all the cash flowing into your business, including cash payments you receive from your clients.

Cash Payments Journal: Records all cash flowing out of your business. If you paid for parking on your way to a business meeting using cash, you’d record it here.

The transactions entered into your journals are later transferred to your general ledger. So what’s the difference between a journal and a general ledger? Think of journals as records that show all the financial details of your business. A general ledger, on the other hand, is a master document that offers less detail. Instead, it gives a big-picture view of your financials.

Journalizing Transactions: A Step-By-Step Guide

Journalizing involves recording business transactions to keep an accounting record, using the double-entry accounting method. Here are the three steps to journalizing transactions in accounting:

1. CLASSIFY BUSINESS TRANSACTIONS BY ACCOUNT

Take a look at each business transaction and classify it by the type of transaction. There will be two types of accounts involved in each transaction: one account will be debited and one account will be credited.

2. DETERMINE THE ACCOUNT TYPE THAT’S INVOLVED

There are different types of accounts that can be included in a journal entry, and it’s important to identify the correct account type when using double-entry bookkeeping. The types of accounts normally used by self-employed workers include: asset, liability, expense and revenue. Here’s a full list of account types for your reference.

3. APPLY THE FUNDAMENTAL ACCOUNTING EQUATION TO THE TRANSACTION

Remember the essential fact of the basic accounting equation: your financial transactions must always be balanced, with the sum of your debits always equal to the sum of your credits. So you’ll want to ensure that every time you debit one account, you credit the corresponding account.

4. JOURNALIZE THE TRANSACTION

To complete the process, you’ll want to record the business transaction as a journal entry in the correct journal. Don’t forget to include the date of the transaction and a brief description of the financial event you’re recording.

Part II Example of Transactions and the Journal Entry:-

1. A machinery of Rs. 4000 was sold for Rs. 5200. Depreciation provision to date was Rs. 400; and commission paid to selling agent was Rs. 320 and wages paid to the worker for removing the machine was Rs. 50.
   
   (a) What comes in business will be debited
   
   
   → Cash from sale of machinery comes, so, cash account will be debited.
   → Depreciation Provision is the loss of business, but we will debited for calculating net machinery cost.
   
   Depreciation Account Dr. 400
   
   Machinery Account Cr. 400
   
   With this cost of machinery will be 4000 -400 = 3600
   
   → Commission paid to sale agent is also selling expenses but relating to this capital item sale. So, it will also debit.
   
   → Wages is also expenses of business and it will be debit.
   
   Commission Account Dr. 320
   Wages Account Dr. 50
   
   To Cash Account Cr. 370
   
   Now, its effect on net cash proceeds from sale of machinery = 5200 - 320 -50 = 4830

What goes from business, machinery goes from business, so machinery account will credit.
→ Net profit from this transaction will also credit.

Journal Entry

Cash Account Debit 4830

Machinery Account Credit 3600
Profit and Loss Account 1230

* Calculation of net profit from this deal

net cost of machinery = 4000 - 400 = 3600
Net Sale proceed = 5200 - 320 - 50 = 4830
-------------------------------------------------
Net profit from sale of machinery = Rs. 1230

Part III Importance of accurately recording transactions:-

1. Bookkeeping Helps You Budget - Bookkeeping is important because it helps you budget. When income and expenses are properly organized, it makes it easier to review financial resources and expenses. A budget creates a financial road map for your business. With a budget, you can plan for future expenses and the anticipated resources that would cover those expenses.  
2. Tax Preparation :- In most cases, your business has to file a tax return every year. And every year, millions of business owners are scrambling through their desk to find missing paperwork. Sound familiar? The tax filing process can be made more efficient by simply having a bookkeeping function within your company. Bookkeeping is important for filing your personal tax return too. As a business owner, a large part of your income comes from your business. In order to know how much you earned, you have to know what your business earned first. With a bookkeeping process in place, you can have financial information ready for tax time. Instead of scrambling for receipts or invoices, all your financial information is organized on one central system.
3. Analysis :-Bookkeeping is important because it helps with business analysis. It is a tool used by management to analyze business performance.The product of bookkeeping is financial statements. Financial statements should be regularly generated and used for analysis.While analyzing financial statements, you can track your cash inflows and outflows.Bookkeeping gives you information on which business lines are working or not working. This type of analysis allows to focus on your company’s strengths and improve on its weaknesses.
4. Planning Purpose:- Bookkeeping presents the past financial performance of your company. In order to plan for the future, you have to have a good understanding of the past. Bookkeeping will give you the clear picture of what exactly works or doesn’t work.Bookkeeping not only helps with planning for strategic purposes but also plays a major role in tax planning. It gives your CPA the necessary information to properly categorize revenues and expenses.With bookkeeping, you and your CPA can structure certain expenses to be more favorable. For example, if you have regular meetings with your clients, you might decide to provide lunch during your meetings. This has favorable tax benefits for your business.
5. Easy Reporting to Investors:-Investors want to know the financial performance of your business to be able to want to quantify the value of their investment. Financial statements do just that. The balance sheet, income statement, and cash flow statement all present the value of your business.As stated previously, the product of bookkeeping is financial statements. Bookkeeping allows investors to have up-to-date and accessible information. Investors will be able to make better, well informed, decisions which is the ultimate purpose of bookkeeping. Bookkeeping is not only for current investors but for future investors too. Prospective investors are more likely to invest in your business when you have organized financial information. Think about it, if you were an investor, would you invest in a company that didn’t have accessible and organized financial records.
6. Financial Management :- Bookkeeping is important because it allows you to take control of your business’ finances. Bookkeeping paints a clear picture of how you spend money. You can see outstanding invoices owed by you or your customers. You will benefit from paying your bills on time and receiving payment for your products or services on time too. Its this delicate balance of cash inflow and outflow that will keep your business going.
7. Track Profit and Growth:-Bookkeeping is important because it shows your business’ profitability. For example, the income statement is one of the financial statements that is prepared from your bookkeeping. On the income statement, you can see if your business is profitable or not. Without this information, it is impossible to know how well (or not so well) you’re doing.Bookkeeping also helps with tracking growth. Over time, you will accumulate months and years of data. With this data, you can observe trends and gain a greater understanding of your business cycles and compare results across periods.
8. Requirement Under Law :- Last, but certainly not least, the law requires you to keep financial records for your company. Depending on your legal structure, the law requires you to keep financial records separate from your personal expenses. Failing to do so, can lead to termination of your business.