A journal is a record of transactions that shows the accounts and amounts of both the debit side and credit side of the entry. A General Journal is the primary journal or place to record transactions that do not fit into any other journal.
The General Journal (GJ) serves a major purpose. In many small business situations, the Cash Disbursements (CD) Journal is the only journal used in conjunction with the GJ. The CD journal you may recall is essentially your checkbook register. That being the case, one side of the transactions always results in a credit (decrease) to Cash. Your computer system automatically decreases cash and you decide which GL accounts to debit the checks. This is pretty straightforward. If you can’t remember how debits and credits work, type the following link to review the “accounting Model”:
http://www.reallifeaccounting.com/accounting_model.asp
But, how do you enter information into your computer that is not related to the checks you wrote? Consider for instance, items such as: bank charges; correction of mistakes; deposits to the bank; sales; sales tax; non-sufficient funds (NSF) from customer checks that bounce; depreciation expense; gain or losses from the sale or trade of fixed assets; notes payable; inventory adjustments; accounts receivable and accounts payable entries; payroll; and, any other unusual transactions that might occur.
Use of the General Journal sets apart the person who knows how accounting works from those who don’t. Why? Because one must understand how debits and credits work in order to write the adjusting journal entries. This simple knowledge is what gives power to the user. This ability allows a person to solve problems, straighten out messes, bring order to disorder, and not be fooled or intimidated by anyone. I remember one day I was in a client’s office and was getting ready to leave for another client appointment. I mentioned I was working on organizing a corporation’s books that were in chaos, and the principals had no idea what they were doing. I was a little surprised when the client I was with said, “Wow, I would love to have that kind of power”. I had never thought about it that way before, but she was right. There is power with knowledge and it feels good.
The people who “know they know” how accounting works can explain or communicate information confidently to those that need to know, such as the boss, board of directors, partners, CPA or staff. The General Journal is one of the most versatile tools found in the accountant’s toolbox.
4 Comments
I was looking for a good intermediate accounting book. Saw a few options at http://www.intermediateaccounting.net . Any suggestions?
Joe: I’ve always used the Mosich & Larsen Intermediate Accounting book. Not sure what the latest addition is. Mine is the 5th edition from 1982.
John
In an S corp with single owner should I move money out of retained earnings of business into an owners separate account at end of year? Or doesn’t it matter being only single owner.
Sandi: I’m trying to understand the nature of your question. Retained earnings in an S-Corp is really called a “triple -A” account. But for simplicity sake let’s clarify that the retained earnings account is essentially an accumulation of all the previous profit, losses, contributions, and distributions of the corporation. When you say, “move money out of retained earnings” what do you mean? Do you mean writing a general journal entry that decreases retained earnings and move the amount into another account? What would be this “owners separate account” called, and what would be its purpose? Perhaps you are thinking that in the case that there is more than one stockholder you would need to keep track of each stockholder’s equity separately on the balance sheet? Your tax preparer should be keeping track of each stockholder’s basis when the tax return is completed each year. This is done for a single stockholder also. Tracking basis is done off balance sheet.
Let me know if I didn’t quite get what you were asking.
John
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