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Posting to Journals is step 2 of the Accounting Cycle. After sorting out your Source Documents into cash and credit transactions, it is time to record the amounts in the 7 Journals, also called Day Books and Books of Original Entry.
Students of accounting and business owners who record daily transactions will be familiar with the different types of receipts, invoices, credit notes, bills, vouchers and emails that prove business activities have taken place. These documents fall under 4 types of transactions.
4 Types of transactions
1. Cash transactions
These are divided into cash and bank. Then, they are further divided into large and small amounts.
2. Goods for resale on credit
These are divided into sales, purchases, returns inwards and returns outwards. These are treated differently from goods for resale using cash.
3. Goods not for resale on credit
These are divided into assets, liabilities, income, capital and expenses. These are treated differently from goods not for resale using cash.
4. Transactions that do not involve money
These are opening accounts, transferring information from one account to another, correcting errors, and recording of depreciation, bad debts and investing or withdrawals of fixed assets and expenses. As long as it enters, moves around or leaves the business, and does not involve money, it falls into this category.
How to use the 7 Journals
The transactions in these 4 categories are posted to 7 Journals. It may sound complicated but once you practise allocating transactions to their respective Journals, it becomes easy. Here is a breakdown of how to use the 7 Journals in accounting.
Cash Book
Cash, cheques and bank transactions with a limit are recorded in the Cash Book. These transactions are current assets in a business. The Cash Book uses the double entry system. This means that every transaction has two entries that show one item coming in while another is going out.
Draw up a table with 12 columns to do a 3-column Cash Book. Write at the top centre Cash Book.
The left side of the Cash Book is called debit and records cash, cheques and bank transfers received. The columns are labelled Date, Details, Folio, Discount Allowed, Cash and Bank.
The right side is called credit and records payments of cash, cheques and bank transfers. The columns are labelled Date, Details, Folio, Discount Received, Cash and Bank.
Petty Cash Book
The Petty Cash Book records cash spent below a limit, say $200. It is used to avoid flooding the Cash Book with numerous transactions with small amounts. It is drawn up as a table with 8 or more columns depending on the number of transactions.
Write at the top centre Petty Cash Book. The first 5 columns are headed Receipts, Date, Details, Folio/voucher and Payments. The other columns have the names of the expenses like Cleaning, Postage, Office, Van, Sundry, etc. Totals of these columns are posted to the relevant expense accounts in the General Ledger.
Purchases Journal
Goods for resale bought on credit go to the Purchases Journal. These transactions are usually called credit purchases, goods bought on credit, or stock purchased from supplier and payment to be made at a later date.
Students often mistake it with the purchase of machinery on credit and stationery bought on credit. Machinery is an asset and stationery items are expenses not related to goods for resale. So, they are not recorded in the Purchases Journal.
Draw up a table with 4 columns. Write at the top centre Purchases Book. At far right, put the Page number. Transactions may run over to several pages. Head up the columns with Date, Suppliers, Invoice number, Folio, and Amount due with a dollar sign under it.
Record the entries for credit purchases made for the period. Leave the Folio column blank until you complete the Ledger accounts so you can match the entry in the two books. Total purchases go to the Purchases account in the General Ledger and is added to the total cash purchases from the Cash Book.
Sales Journal
Goods for resale sold on credit go to the Sales Journal. These transactions are usually called credit sales, goods sold on credit, or stock sold to customer and payment to be received at a later date.
Students often mistake it with the sale of a motor vehicle on credit and accrued revenue from renting space to a tenant. Motor vehicle is an asset and rent revenue is income not related to goods for resale. So, they are not recorded in the Sales Journal.
Draw up a table with 4 columns. Write at the top centre Sales Book. At far right, put the Page number. Transactions may run over to several pages. Head up the columns with Date, Customers, Invoice number, Folio, and Amount due with a dollar sign under it.
Record the entries for credit sales made for the period. Leave the Folio column blank until you complete the Ledger accounts so you can match the entry in the two books. Total sales go to the Sales account in the General Ledger and is added to the total cash sales from the Cash Book.
Returns Inwards Journal
Goods brought back to the business from credit customers go to the Returns Inwards Journal. These transactions usually occur at a later date of the credit sales so the bookkeeper has to match the transactions with the ones that happened earlier in the period.
Draw up a table with 4 columns. Write at the top centre Returns Inwards Book. At far right, put the Page number. Transactions may run over to several pages. Head up the columns with Date, Customers, Invoice number, Folio, and Amount due with a dollar sign under it.
Record the entries for returns inwards made for the period. Leave the Folio column blank until you complete the Ledger accounts so you can match the entries. Total returns go to the Returns Inwards account in the General Ledger.
It is also recorded in the Sales Ledger on the credit side of the respective Accounts receivable customer’s account. This entry will deduct the amount due from the customer.
If students or bookkeepers are faced with the return of goods that involve cash, the transaction does not go in the Returns Inwards Journal. Since there is cash to be refunded to the customer, you must debit the Returns Inwards account in the Ledger and credit the Accounts Payable account to reverse the transaction. When the business pays the customer the refund, you must debit Accounts Payable to close it off and credit the Cash Book.
Returns Outwards Journal
Goods sent back to the supplier that were bought on credit by the business go to the Returns Outwards Journal. These transactions usually occur at a later date of the credit purchases so the bookkeeper has to match the transactions with the ones that happened earlier in the period.
Draw up a table with 4 columns. Write at the top centre Returns Outwards Book. At far right, put the Page number. Transactions may run over to several pages. Head up the columns with Date, Suppliers, Invoice number, Folio, and Amount due with a dollar sign under it.
Record the entries for returns outwards made for the period. Leave the Folio column blank until you complete the Ledger accounts so you can match the entries. Total returns outwards go to the Returns Outwards account in the General Ledger.
It is also recorded in the Purchases Ledger on the debit side of the respective Accounts payable customer’s account. This entry will deduct the amount owed to the supplier.
If students or bookkeepers are faced with the return of goods that involve cash, the transaction does not go in the Returns Outwards Journal. Since there is cash to be refunded to the business, you must debit the Accounts Receivable account and credit the Returns Outwards account in the Ledger to reverse the transaction. When the business receives the refund from the supplier, you must debit the Cash Book and credit the Accounts Receivable account to close it off.
General Journal
All transactions that do not relate to cash and goods for resale go to the General Journal. As long as it enters or leaves the business, and does not involve money, it is recorded in this book. These are:
- opening accounts
- transferring information from one account to another
- correcting errors
- recording of depreciation
- writing off bad debts
- posting the investing or withdrawals of fixed assets and expenses
Draw up a table with 5 columns. Write at the top centre General Journal. At far right, put the Page number. Transactions may run over to several pages. Head up the columns with Date, Details, Folio, Dr with a dollar sign under it and Cr with a dollar sign under it.
When opening accounts, list the assets brought forward from last period and record the amounts in the debit column. Indent the liabilities under the assets and record the amounts in the credit column. Assets minus liabilities gives you the capital figure to record in the credit column.
All other transactions are recorded using 3 lines in the General Journal. The details for the debit entry starts at the margin and the details for the credit entry is indented. The third line is a note on the transaction made. These entries are then recorded in the respective accounts in the General Ledger.
Conclusion
The 7 Journals are easy to complete once you understand the 4 types of transactions. It is very frustrating to do an entire question and then find out that you have posted numerous items in the wrong Journals. Students should spend some time learning how to allocate transactions to the respective Journals before diving into questions that are long and tedious. This article should be very helpful for you to learn about Journals quickly.
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