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Writing General Journal Entries – Some tips

01-Nov-04

What’s there to discuss about the general journal? I’ve explained why it is your most versatile accounting tool in the articles section of the blog. So what else is there to talk about? Well, here are some tips that may be helpful:

When writing general journal entries it is a good idea to work with a format and stick with it. For instance, write the debit first and place it to the far left under the description column. Use only the name of the general ledger account. On the next line, write the credit, but indent three spaces. In the next column write the general ledger account number. On the right side of that column create a column for the debit entries and one for the credit entries.

 Date or Ref #    Account Description  GL Number  Debits    Credits  
 11/01/XX         Bank Charges         8600        25.00            
                  Cash                 1010                  25.00   
 To record a NSF fee for check 3366

I’m limited as to drawing forms in this blog format, but you get the idea. A rule of thumb regarding the description is that each journal entry must stand on its own. In other words, if a total stranger read your description he/she would know the purpose of the journal entry. It is real easy to get lazy about writing the descriptions, but you will pay for it later when you are trying to figure out what transpired.

If you are consistent in keeping the same format, you will find that it is easier to mentally locate information you are looking for. It’s part being organized which is half the battle when doing accounting work.

Another tip is to place the general journal page right behind the financial statements you have prepared in a manila folder. That way when you are analyzing an account you will have the critical information you need at your fingertips. I always place the financial statements on top, followed by the general journal entries, and then the computer batch reports from entries made from the cash disbursements journal and the general journal. Underneath all of that, I place a detail of the general ledger report. I use a two-hole punch with fasteners to hold everything in place. This way it’s all there when I need it.

Imagine what it would be like if you never followed the same format, forgot to write descriptions of transactions, and had the various source documents scattered all over the office. You would spend half your time and energy being frustrated.

Any thoughts?

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The Bank Reconciliation: Your Most Important Navigational Tool

13-Oct-04

The bank reconciliation is defined as a process by which to compare a business entity’s book cash balance with the bank’s cash balance as of a given period so as to note any discrepancies.

What person would attempt to sail across the ocean without a compass, map, and a sextant? These are traditional navigational tools without which one could easily lose one’s way. In accounting, the bank reconciliation serves the same navigational purpose. Here’s why:

Cash is the lifeblood of a business organization. With it you succeed, without it you fail. Cash is so vital to an organization that one must continually keep track of its flow in and out of a business. This flow of cash is analogous to the pulse beat of a human heart. Some businesses check this pulse hourly, some daily. This is usually done via the running check register balance. Deposits are added, checks are subtracted to find the current cash balance.

Because we know that life is not perfect, mistakes are made. In order to find these mistakes, we need to have something from which to compare our calculations. Since we deposit and withdraw our money from a bank we can compare our records to theirs, hence a “bank reconciliation”. Once we have done this we can be reasonably assured that our current check register balance is correct. This is important, because we need accurate information for planning purposes. For instance, can I afford to buy those supplies? Will I have enough money to meet the payroll this week?

Admittedly, some people run their businesses by the “seat of their pants”. I know individuals who call the bank everyday to find out what their cash balance is. However, this method has a fatal flaw called “outstanding checks”. You may have written checks that the bank hasn’t yet received. What happens when those checks hit the bank? You had better have enough deposits to cover them. This is not a good way to run a business.

The bank reconciliation is the heart of your business bookkeeping. It brings light where before there was darkness. It brings order where chaos could potentially reign. Once completed, its power lies in the fact that you now know exactly how much money was deposited in the bank and where that money came from. In addition, there is no guessing as to exactly how much money was withdrawn and for what purpose. It provides a document that you can easily refer to for writing adjusting journal entries. This means you have a clear-cut audit trail that shows where your cash activity originated and how it arrived on the general ledger.

Once you have reached this point in the process of preparing your financial statements you are pointed towards home and the remaining items are usually routine. Those who have tried to prepare financial statements without the bank reconciliation as a guide understand and appreciate what I am talking about.

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Let’s talk about Bank Reconciliations

13-Oct-04

There are bank reconciliations and then there are bank reconciliations. Computer accounting software programs can do them automatically now, but what do you get? You get a confirmation that you are “in balance” with the bank. Is that all you need? Not for me! I still do them the old fashioned way, e.g., by hand. You might think I’m just an old-fashioned guy who can’t break an old habit. Perhaps. But, let me tell you some very good reasons why I still like the manual approach.

First, let me suggest that you read my article titled, “The Bank Reconciliation: Your Most Valuable Navigational Tool“ in the articles section of this blog. Next, download a blank bank reconciliation form from this link: http://www.reallifeaccounting.com/forms.asp

Now for the good reasons!

Good reason number one: A manually prepared bank reconciliation forces you to familiarize yourself with the deposits, checks, bank charges, outstanding checks, outstanding deposits, mistakes, bank errors, and other strange phenomenon that occur occasionally during a month’s bookkeeping transactions. This information that gets assimilated in your brain is invaluable when problem-solving later on.

Good reason number two: All the information regarding increases and decreases to your bank account are right there on one page. You will require this information when writing journal entries to make sure you have captured “all” the transactions that have occurred during the month, related to cash.

Good reason number three: The completed bank reconciliation form is a great reference for you when trying to figure out why your Cash account is out of balance. Theoretically, your Cash account should be in-balance. However, for some strange reason, this often is not the case.

Good reason number four: Keeping your eye out for outstanding checks that never clear the bank (stale-dated checks). Sometimes a check is voided but doesn’t get removed from the register. Sometimes a check gets written but doesn’t get put on the register but then clears the bank. These items require special adjusting journal entries. You can’t write them if you don’t even know about them.

Once you have a reconciled balance, you can run a preliminary financial statement and check to see if the general ledger Cash account balance is the same as that found on the bank reconciliation. If so, you have a green light to continue on. If not, the first step is to run a detail of the general ledger report for the Cash account. Use that information to compare what is on the bank reconciliation form. It should be the same, and, if not, the discrepancy will stand out like a sore thumb.

So I ask you, “How could I possibly do all this with a report that merely tells me that I am “in-balance”? I contend that it is well worth the extra time to prepare a manual bank reconciliation. I believe you are navigating in the dark without one.

What do you think? Feel free to ask any process questions about the mechanics of bank reconciliations.

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Let’s talk about Debits and Credits

04-Oct-04

Having worked in the field of accounting for over twenty-years, I have found that many people tend to shy away from memorizing the “Accounting Model”. See my article titled, “The Accounting Model – Accounting’s Rosetta Stone” in the articles section of this blog. The Accounting Model is the formula for how debits and credits work. You can click on this link to review the model and print it out if you like:

http://www.reallifeaccounting.com/accounting_model.asp

Learning how debits and credits work is the most critical part of accounting knowledge to grasp if you truly want to know the function of accounting. Why then, do so many people shy away from taking the fifteen minutes it takes to memorize the formula? Perhaps it “seems” complicated at first glance. Or, perhaps the value of being able to conceptualize the formula in the mind is not apparent.

Does your work require knowledge of accounting? If so, have you memorized the Accounting Model? If not, why? I would like to prove to you that it is a relatively simple thing to do, and that the benefit far outweighs the cost. Give it a try and use the comments section below this text to ask questions or provide any kind of feedback you would like.

John Day

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The Accounting Model – Accounting’s Rosetta Stone

21-Sep-04

As a small business owner/manager you must have an understanding of the financial end of your business. Certainly, you have a decent grasp of how the business operates, but are you able to visualize an accounting framework that your transactions fit into? To do this requires becoming familiar with how your financial statements are structured and knowing the rules for recording transactions.

Financial statements consist of a Balance Sheet and Profit & Loss Statement. These two reports act as a “container” for all your business transactions. Each transaction is recorded according to a set of rules called “The Accounting Model”.

The Accounting Model is made up of three very simple parts:

The first part is a ledger page with a line drawn down the middle (like a big T) automatically creating a left and right side of the dividing line. However, in accounting language the word “debit” is used instead of “left” and the word “credit” is used instead of “right”. The trick here is to not make this anymore complicated than it really is. Don’t try to use the words debit and credit to mean increase or decrease like you see on your bank statement. You can do this later when you fully understand how to work with these terms.

The second part is that there are five of these ledger T’s that relate to the five sections found in a set of financial statements. They are: 1) Assets; 2) Liabilities; 3) Equity; 4) Revenue; 5) Expense. The first three relate to the Balance Sheet and last two relate to the Profit & Loss Statement.

The third part is a rule that states: Any transaction that pertains to a section (Assets, Liabilities, etc.) that results in an increase or decrease has to be recorded on either the left or right side of the ledger page.

Go to the following URL to see an example of the Accounting Model, you can print out a copy if you like:

http://www.reallifeaccounting.com/accounting_model.asp

The next step is to memorize the model so you can visualize where transactions are to be recorded. Have you ever tried to learn how to use a ten-key calculator or computer keyboard? At some time you have to stop looking at the keys and allow your mind to memorize the keyboard. That’s when you get fast and efficient. Memorizing the accounting model is no different.

Let’s try a sample transaction so you can see how this works. A great technique is to think about what actually happened “physically” in a transaction. This is an important step because doing this will tell you what you need to know in order to convert the physical event into an accounting transaction.

For example, let’s say in your business you had a customer who walked in the door, bought some merchandise and handed you a check for $100. You deposited the $100 check in your bank account and recorded the sale in your sales journal. Keep in mind that each transaction has two parts, a debit (left side) and a credit (right side), and that double-entry accounting requires each side of the ledger to equal each other when the transaction is completed.

The first step is to identify the parts of the transaction and determine in which of the five sections each part belongs. For instance, you know that your $100 cash received is an Asset and your sale is Revenue.

The second step is to identify whether the transaction resulted in an increase or decrease to cash and the sale. In the sample transaction, it is obvious that cash was increased and sales were increased.

The third step is to look at the accounting model and let it tell you on which side of the ledger to record the transaction. Try it now. The model tells you that cash, being an Asset, goes on the left (debit) side when increased, and sales, being Revenue, goes on the right (credit) side when increased.

Since the debits equal the credits the books are said to be “in balance”. This gives you a brief idea about how the Accounting Model is used as a cipher to tell you where to record transactions in your general ledger (GL). All you have to do next is to practice using this system so that you become familiar with all of your GL accounts. Then the day will come when you become aware that you are no longer looking at the “keyboard” and realize that the accounting framework is fully integrated into your thinking process.

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