This post has been produced by B J Harford FCCA, FIAB, Principal at Woodgrove Tutorials. Woodgrove Tutorials is an IAB Accredited Training Provider. Their Principal, Brian J Harford FCCA is an Award Winning qualified Accountant with 36 years teaching experience in Bookkeeping & Accounts including 17 years as a Part Time Lecturer at the London Metropolitan University (formerly Guildhall University.) For website see: www.woodgrove-tutorials.co.uk.
The Journal is not part of the General Ledger. It is used as a record of transfers between accounts. The most common use of the Journal is for the correction of errors. An example of this now follows: Suppose that a firm pays wages of £1,000. We know that the double entry to record this transaction should be :-
DEBIT Wages Account £1,000
CREDIT Cash Account £1,000
Suppose that the Cash Account was credited, but due to an error, the Wages Account was not debited. Instead another account (say the Rent Account) was debited. The situation would appear as follows:
Rent a/c Cash a/c
Cash 1,000 Wages 1,000
Clearly the Rent Account should not have been debited and the debit which appears in that account needs to be transferred from the Rent Account to the Wages Account. The correcting entry needed to put things right would firstly be recorded in the Journal as follows:
Wages Account 1,000
Rent Account 1,000
Correction of error in misposting the payment of wages to the Rent A/C.
Each Journal entry may be given a separate number (for subsequent tracing) and each entry should have a narrative which briefly explains the nature and purpose of the Journal. The Journal entry would then be posted to the ledger accounts specified in the Journal. (Please note that the account that is to be debited is always written first in the Journal).
The posting to the ledger for Journal No.1 would be as follows:-
Rent a/c Wages a/c
£ £ £
Cash 1,000 Journal 1 1,000 Journal 1 1,000
As can be seen, the Journal posting has restored the situation. The Rent Account has a nil balance and the Wages Account has a debit balance of £1,000, which is correct.
The Journal is not only used for the correction of errors. It can be used for any posting which is subsequently required to be reflected in the General Ledger. These could include postings from Sales and Purchases Day Books and from the Cash Account. However, it is not essential to enter the totals from these books in the Journal prior to posting to the General Ledger. Postings can be made directly from these books without the use of the Journal. As stated above, the main use of the Journal is for transfers between accounts (usually the correction of errors) following postings from the Sales and Purchases Day Books and the Cash Account.
Suspense Accounts and the Journal
We already know that errors of omission, commission and principle will not be detected by the Trial Balance. However, when other types of errors occur and the Trial Balance does not balance then we can use a Suspense Account to make the Trial Balance numerically correct. An example of the use of the Suspense Account now follows:-
The following Trial Balance was extracted from the books of a business:-
FURNITURE & EQUIPMENT 1,000
CASH AT BANK 4,000
PLANT & MACHINERY 6,000
TOTALS 30,000 27,000
As can be seen the Trial Balance does not balance because the debits exceed the credits by £3,000. In order to make the Trial Balance correct we need £3,000 credit. Therefore we open a Suspense Account and credit it with £3,000. Please note that the entry in the Suspense Account constitutes single entry book-keeping and there is no corresponding entry for the £3,000. The Suspense Account appears as follows:-
Suspense a/c – credit
If we rewrote the Trial Balance including the Suspense Account then we would have a Trial Balance which balances. However how would the balance of £3,000 on the Suspense Account be allocated in the final accounts? It will be remembered that a credit balance represented a liability or income. We would not know whether the Suspense Account should be allocated to the Profit and Loss Account or to the Balance Sheet. The errors comprising the £3,000 must be located. Suppose that they were found to be:
(i) Rent of £1,000 paid, entered in the Cash Account correctly but not posted to the Rent Account.
(ii) Purchase of Plant and Equipment incorrectly debited to Purchases Account £2,000.
(iii) Payment of a £100 telephone bill correctly entered in the Cash Account but debited to the Telephone Account as £1,000.
(iv) £2,000 capital paid into the business correctly debited to the Cash Account but also debited to the Capital Account.
(v) A receipt of £900 from a debtor was entered correctly in the debtors account but not debited to the Cash Account.
The journal entries (without narratives) necessary to correct the errors are as follows:
Note Dr Cr
Rent Account (1) 1,000
Suspense Account 1,000
JOURNAL 2 Note
Plant & Equipment Account (2) 2,000
Purchases Account 2,000
Suspense Account (1) 900
Telephone Account 900
Suspense Account (1) &(3) 4,000
Capital Account 4,000
Cash Account (1) 900
Suspense Account 900
(1) The ‘other side” of each entry is to the Suspense Account in each case.
(2) This is merely a transfer between two accounts to correct an error of commission. The original error did not cause the Trial Balance to become unbalanced so the Suspense Account is not relevant.
(3) The entry to both the Suspense and Capital Accounts needs to be for £2,000 X 2 = £4,000 because the Capital Account was debited with £2,000 instead of being credited with £2,000. In effect it is now necessary to credit the Capital Account with £2,000 twice. Once to cancel the incorrect debit entry and once to record the correct entry.
The entries in the Journal would then be posted to the relevant accounts which would then appear as follows:
Suspense a/c Rent a/c
Journal 3 900 Bal b/d 3,000 Bal b/d 2,000 Bal c/d 3,000
Journal 4 4,000 Journal 1 1,000 Journal 1 1,000
Journal 5 900
4,900 4,900 3,000 3,000
Purchases a/c Telephone a/c
Bal b/d 8,000 Journal 2 2,000 Bal b/d 1,000 Journal 3 900
Bal c/d 6,000 Bal c/d 100
8,000 8,000 1,000 1,000
Plant & Machinery a/c
Bal b/d 6,000 Bal c/d 8,000
Journal 2 2,000
Bal c/d 14,000 Bal b/d 10,000
Journal 4 4,000
Bal b/d 4,000 Bal c/d 4,900
Journal 5 900
A new Trial Balance would then be written taking the new balances on those accounts included in the journals. The new Trial Balance would appear as follows:-
FURNITURE & EQUIPMENT 1,000
CASH AT BANK 4,900
PLANT & MACHINERY 8,000
TOTALS 31,000 31,000
The Suspense Account is now cleared, i.e. has a nil balance, and as such does not appear in the Trial Balance.
If the IAB can help you with any of the above please do not hesitate to get in touch.
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