Accounting Books - Journal and

Ledger
The General Journal and Special Journal
Many businesses maintain several types of journals. The nature of the business operations and the volume of transactions determine
the type and number of journals needed. The simplest type of journal is called the general journal. The process of recording a
transaction is called journalizing the transactions. This type of journal is unique among journals because it may be used to record any
type of business transactions. Recording all transactions in the general journal is not cost effective and time consuming. To speed up
and simplify the recording process, most businesses make use of special journals. Each special journal is designed to record a
particular type of transaction efficiently and quickly. Examples of special journals and their use are the following:
a. Cash Receipts Journal – is used to record all cash that had been received.
b. Cash Disbursements Journal – is used to record all transactions involving cash payments.
c. Sales Journal (Sales on Account Journal) – is used to record all sales on credit (on account)
Purchase Journal (Purchase on Account Journal) – is used to record all purchases of inventory on credit (or on account)
2. The importance of using a journal
• The journal shows all information concerning a particular transaction.
• The journal provides a chronological record of all the financial events in the business over time. If we want to know about a certain
transactions of years or months back, we can trace the said transactions as long as we have the date of the said transaction. The
entries in the journal a rearranged by date that makes it necessary to locate a particular event.
3. The Use of General Ledger
A ledger is a means of accumulating in one place all the information about changes in an asset, liability, equity, income, and expense
accounts.
A general ledger is often called a T-Account because of its resemblance to the letter T. A T-Account is a simplified form of general
ledger. A sample of a T-account is shown below:

A T-Account for each of the account titles listed on the said chart is prepared to determine the balance at the end of the period of
each account.

In order to determine the ending balance of each account using the “T-account”, the beginning balance is plot in the appropriate debit
or credit side, then total debits and credits are then determined. If the account has a beginning balance on the debit side, all the
debits during the period is added to the beginning then all the credits are deducted. There is a debit balance of the account if the sum
of the beginning balance and the total debits exceeds the total credits.
The normal balances of these accounts are listed below:
a. Asset Accounts – Debit Balance; however the normal balance of a contra asset account is credit.
In the above chart, the contra asset accounts are:
Allowance for Bad Debts,
Accumulated Depreciation (Accum. Deprn.) – Store Equipment
Accum. Deprn. – Off Eqpt
Accum. Deprn – Trans Eqpt
Accum. Deprn – Building
b. Liability Accounts – Credit Balance
c. Equity Accounts – Owner’s, Capital account has a normal balance on the credit side while the Owner’s,
Withdrawal account has a normal balance on the debit side.
d. Income – Credit Balance
e. Expense – Debit Balance

A summary of the normal balance of the account is shown:

Compound Journal Entry
An entry the involved two accounts only, one debit and one credit is called a simple journal entry. Some transactions, however, require more
than two accounts in journalizing. An entry that requires three or more accounts is a compound entry.
To illustrate:
Ariel Garden Supply Store acquire a land for P800,000. Ariel paid P300,000 cash and issued a promissory note for the balance.
To record the above transaction using simple entry:
(1) Land 300,000
Cash 300,000
To record purchased of land by paying cash
(2) Land 500,000
Note Payable 500,000
To record purchased of land by issuing promissory note
To record the above transactions using a compound entry:
Land 800,000
Cash 300,000
Notes Payable 500,000
To record purchased of land by paying cash and issuance of a promissory note

Basic Documents and Transactions

Related to Bank Deposits
Business usually maintain two types of account: (1) savings account , and (2) checking or current account

A. Savings Accounts
• These are intended to provide an incentive for the depositor to save money.
• The depositor can make deposits and withdrawals using the form provided by the bank.
• Banks usually pay an interest rate that is higher than a checking account or a current account.
• Some savings accounts have a passbook, in which transactions are logged in a small booklet that the depositor keep
• Some savings accounts charge a fee if the balance falls below a specified minimum
B. Checking or Current Accounts
• Money held under a checking account can be withdrawn through issuance of a check
• Banks usually allows numerous withdrawals and unlimited deposit under this type of account.
• The interest rate for checking account is usually lower as compared to a savings account.
• The account holder or depositor of a checking account is normally provided at the end of the month a bank statement showing all the deposits
made, checks paid by the bank, and the balance of the account.
• The depositor is given easy access to the funds as compared to a savings account.

Preparation of bank deposit and withdrawal slips

A withdrawal slip and deposit slip are written orders to the bank. These slips are used to take out money or to put in money to the depositors
account.
Withdrawal Slip
Without a withdrawal slip, the bank will not allow you to get money from your account. The required information in the withdrawal slip are:
• Account Name - the name of the depositor
• Account Number – the unique identifier given by the bank for every account maintained
• Date of the withdrawal
• Type of account - savings or current
• Currency
• Amount to be withdrawn - the amount that the depositor wishes to withdraw from his account.
The amounts in words and in figures are indicated.
• Signature of the Depositor – this is the most important part in the withdrawal slip. The signature is a proof that the depositor is authorizing the
bank to get money from his account. Usually, the bank compares the signature in the withdrawal slip against the signature in the bank records
submitted during the opening of the account.

*There are instances that the depositor cannot attend personally to withdraw the funds, he may authorize a representative by indicating the name of
the representative in the space provided and the representative must sign. There is a need for the representative to bring a valid identification card
upon withdrawal otherwise the bank will not approval the withdrawal.

Deposit Slip
The bank provides deposit slip that the depositor will fill up every time the depositor will put in money to his account. The usually required
information in a deposit slip are:
• Account Name – this is the complete name of the depositor that is reflected in the records of the bank. If it has a pass book, the account name is
indicated on first page inside the passbook.
• Account Number – this is a unique identifier of the account maintained by the depositor.
• Date of Deposit
• Type of Account
• Currency
• Amount in words and in figures – the amount that the depositor wishes to put into his account. The amount to be deposited maybe in form of
cash or check. If it is a cash deposit, the breakdown of the cash is usually listed in the deposit slip if it is a check deposit, the details of the checks
are indicated in the deposit slip, for example: Issuing Bank, Address of the Issuing Bank, date of the check and the amount.
Identify and prepare check (cheque)
A check is a document that orders a bank to pay a specific amount of money from a person's account to the person in whose name the cheque has
been issued. The person writing the cheque, the drawer, has a transaction banking account where his money is held. The drawer writes the various
details including the monetary amount, date, and a payee on the cheque, and signs it, ordering his bank, known as the drawee, to pay that person or
company the amount of money stated. Checks are a type of bill of exchange and were developed as a way to make payments without the need to
carry large amounts of money. The check number is usually indicated in the upper right portion of the check.

The following are the parties involved in a transaction that uses check as medium of exchange:
• Drawer, the person or entity who makes the check
• Payee, the recipient of the money
• Drawee, the bank or other financial institution where the cheque can be presented for payment

Identify and understand the contents of a bank statement

At the end of every month, the bank furnishes a statement to the depositor showing the movement of the account. It contain all the withdrawals,
deposits and balance of your account after every transaction. It may also indicate bank charges that were deducted by the bank automatically. Also,
interest earned by the account is likewise reflected.
The date column indicate the date the transaction was made. The check number indicates the details of the check paid by the bank. The transaction
code is normally a bank code for the transactions. The Debit column represents all charges or deduction made by the bank to your account. The
Credit column represents the deposits or additions to your account that was made by the bank. The Balance column is therunning balance after
considering the effect of the transaction to your account.

Samples of Debit transaction

• Bank service charge - monthly fee charged by the bank for its services (Ex. cost of printing checks writing funds to other locations and other
fees)
• NSF - (Not Sufficient Fund) – Banks also use a debit memorandum when a deposited check from a customer “bounces” because of insufficient
funds. Nowadays bank refer to this as DAIF (Drawn Against Insufficient Fund) or DAUD (Drawn Against Uncleared Deposits)

Samples of Credit transactions

• Collection of cash proceeds from notes receivables.
• Interest income earned by the deposit.

As part of control, the bank statement received from the bank is compared with the accounting records of the business. This process is called bank
reconciliation.
Bank reconciliation will be discussed in the succeeding chapters.
Together with the bank statements, the banks will include the copies of checks cleared or paid by the bank for that particular month.

Basic Reconciliation Statement

Nature of Bank Reconciliation Statement
It is normal for a company's bank balance as per accounting records to differ from the balance as per bank statement. The difference between these
figures is the reasons why companies prepare a bank reconciliation statement. Bank reconciliation statement is a report which compares the bank
balance as per company's accounting records with the balance stated in the bank statement.
The two common causes of the discrepancy in figures are:
• Time lags that prevent one of the parties (company or the bank) from recording the transaction in the same period as the other party.
Example: A bank statement that ends January 30, 2015 and then the company were able to collect cash of P20,000 at 5:00 PM. Bank usually
closes at 3:00 PM because of this, the cash collected will not be reflected in the bank as deposit but it is however recorded in accounting records of
the company.
• Errors by either party in recording transactions
Example: A check was issued to Meralco by the company amounting to P1000. The company recorded this as P100. When the check was
presented, the bank paid Meralco P1,000. In the records of the company it was P100 while in the records of the bank it’s P1,000.
There is in this case an error that will cause the difference between the company’s records and the bank records.
The importance of Bank Reconciliations are as follows:
• Preparation of bank reconciliation helps in the identification of errors in the accounting records of the company or the bank.
• Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary control mechanism to help protect the valuable
resource through uncovering irregularities such as unauthorized bank withdrawals. However, in order for the control process to work effectively, it
is necessary to segregate the duties of persons responsible for accounting and authorizing of bank transactions and those responsible for preparing
and monitoring bank reconciliation statements.
• If the bank balance appearing in the accounting records can be confirmed to be correct by comparing it with the bank statement balance,
it provides added comfort that the bank transactions have been recorded correctly in the company records.
• Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of a business.

There three methods of preparing bank reconciliation statement, namely:

a. Adjusted Method wherein the balances per bank and per book are separately determined.
b. Book to Bank Method wherein the book balance is adjusted to agree with the bank balance.
c. Bank to Book Method wherein the bank balance is adjusted to agree with book balance.
For the learners, the adjusted method will be used. The two remaining methods will be discussed in higher accounting subjects in case they wish to
pursue an accounting degree. In practice anyway, the adjusted method is the commonly used method.

The key terms to be aware of when dealing with a bank reconciliation are:
• Deposits in transit are amounts already received and recorded by the company, but are not yet recorded by the bank.
For example, a retail store deposits its cash receipts of August 31 into the bank's night depository at 10:00 p.m. on August 31. The bank will
process this deposit on the morning of September 1.
As of August 31 (the bank statement date) this is a deposit in transit.
Because deposits in transit are already included in the company's Cash account, there is no need to adjust the company's records. However,
deposits in transit are not yet on the bank statement.
Therefore, they need to be listed on the bank reconciliation as an increase to the balance per bank in order to report the true amount of cash.
A deposit in transit is on the company's books, but it isn't on the bank statement.

• Outstanding checks are checks that have been written and recorded in the company's Cash account but have not yet cleared the bank account or
presented to the bank by the payee.
Checks written during the last few days of the month plus a few older checks are likely to be among the outstanding checks.
Because all checks that have been written are immediately recorded in the company's Cash account, there is no need to adjust the company's
records for the outstanding checks. However, the outstanding checks have not yet reached the bank and the bank statement. Therefore, outstanding
checks are listed on the bank reconciliation as a decrease in the balance per bank.
Illustration of an Outstanding Check: On January 29, 2015, Juan issued a check to Maria amounting to P2,000. The checks was then recorded by
Juan in his books as a deduction to his,cash. It so happen that the bank was closed on that day and Maria was able to visit the bank and have it
encashed on February 1, 2015 only. In the bank statement received by Juan from his bank ending January30,2015, the P2,000 check was not
deducted however it was already deducted in the books of Juan on January 29, 2015. The P2,000 check is called an outstanding check.

• Bank errors are mistakes made by the bank. Bank errors could include the bank recording an incorrect amount, entering an amount that does not
belong on a company's bank statement, or omitting an amount from a company's bank statement.
The company should notify the bank of its errors. Depending on the error, the correction could increase or decrease the balance shown on the
bank statement.
Since the company did not make the error, the company's records are not changed.

• Bank service charges are fees deducted from the bank statement for the bank's processing of the checking account activity
Examples:
- accepting deposits,
- posting checks,
- mailing the bank statement,
Other types of bank service charges include the fee charged when a company overdraws its checking account and the bank fee for processing a
stop payment order on a company's check.
The bank might deduct these charges or fees on the bank statement without notifying the company. When that occurs, the company usually learns
of the amounts only after receiving its bank statement.
Because the bank service charges have already been deducted on the bank statement, there is no adjustment to the balance per bank.
However, the service charges will have to be entered as an adjustment to the company's books. The company's Cash account will need to be
decreased by the amount of the service charges.

• NSF check is a check that was not honored by the bank of the person or company writing the check because that account did not have a sufficient
balance. As a result, the check is returned without being honored or paid.
NSF is the acronym for not sufficient funds. When the NSF check comes back to the bank in which it was deposited, the bank will decrease the
checking account of the company that had deposited the check. The amount charged will be the amount of the check plus a bank fee.
Because the NSF check and the related bank fee have already been deducted on the bank statement, there is no need to adjust the balance per the
bank. However, if the company has not yet decreased its Cash account balance for the returned check and the bank fee, the company must decrease
the balance per books in order to reconcile.

• Check printing charges occur when a company arranges for its bank to handle the reordering of its checks. The cost of the printed checks will
automatically be deducted from the company's checking account.
Because the check printing charges have already been deducted on the bank statement, there is no adjustment to the balance per bank.
However, the check printing charges need to be an adjustment on the company's books. They will be a deduction to the company's Cash account.
• Interest earned will appear on the bank statement when a bank gives a company interest on its account balances. The amount is added to the
checking account balance and is automatically on the bank statement. Hence there is no need to adjust the balance per the bank statement.
However, the amount of interest earned will increase the balance in the company's Cash account on its books.

• Notes Receivable are assets of a company. When notes come due, the company might ask its bank to collect the notes receivable. For this service
the bank will charge a fee. The bank will increase the company's checking account for the amount it collected (principal and interest) and will
decrease the account by the collection fee it charges. Since these amounts are already on the bank statement, the company must be certain that the
amounts appear on the company's books in its Cash account.

• Errors in the company's Cash account result from the company entering an incorrect amount, entering a transaction that does not belong in the
account, or omitting a transaction that should be in the account. Since the company made these errors, the correction of the error will be either an
increase or a decrease to the balance in the Cash account on the company's books.
The Bank Reconciliation Process
Step 1. Adjusting the Balance per Bank
The first step is to adjust the balance on the bank statement to the true, adjusted, or corrected balance. The items necessary for this step are listed in
the following schedule:
Step 2. Adjusting the Balance per Books
The second step of the bank reconciliation is to adjust the balance in the company's Cash account so that it is the true, adjusted, or corrected
balance. Examples of the items involved are shown in the following schedule:

Step 3. Comparing the Adjusted Balances

After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2), the two adjusted amounts should be equal.
If they are not equal, you must repeat the process until the balances are identical. The balances should be the true, correct amount of cash as of the
date of the bank reconciliation. The adjusted cash balance will appear as the Cash in Bank in the Statement of Financial Position (Balance
Sheet).

Practice Set

Identify whether the following independent transaction is a book or a bank reconciling. In addition, determine the amount of the error and state
whether the amount will be added or deducted in the preparation of the bank reconciliation (use adjusted method):
1. Eagle Repairs received P1,500 from Jane. The bookkeeper recorded the amount as P500.
Answer: Book. P1,000 will be added to the books.
2. Nation Bank collected from the customer of Eagle the sum of P5,000 representing payment of the said customer to Eagle. No entry was made in
the books of Eagle.
Answer: Book. P5,000 will be added to the books.
3. The bank teller deducted CK 123 for P3,500 from the account of Eagle. The said check was issued by Egles Company a different depositor of
the bank.
Answer: Bank. P3,500 will be added to bank records. Hint: The teller had deducted the amount to the account of eagle which should not be, thus
the amount is returned or added.
4. The bookkeeper of Eagle recorded Check No. 345 in the Cash Disbursement Journal as P5,205.
The correct amount of the check was P5,250.
Answer: Book. P45 will be deducted in the book records. The bookkeeper should have deducted
P5,250 deductions to cash however he deducted P5,205 only, thus the difference should be deducted.
5. The deposits of Eagle earned interest of P100 for the month. Eagle does not have knowledge of interest earned until it receives the bank
statement.
Answer: Book. P100 is added to the book records. Interest income will increase the cash in bank of Eagle.
Bank reconciliation problem:

The bank statement for Juan Company shows a balance per bank of P15,907.45 on April 30,2015.
On this date the balance of cash per books is P11,589.45.
Additional information are provided below:
Deposits in transit: April 30 deposit (received by the bank on May 1) P2,201.40
Outstanding checks: No. 453-P3,000.00
No. 457-P1,401.30
No. 460-P1,502.70
Errors: Juan wrote check no. 443 for P1,226.00 and the bank correctly paid that amount.
However, he recorded the check as P1,262.00.
Bank memoranda:
Debit– NSF check from Pedro P425.60 .
Debit– Charge for printing company checks P30.00
Credit – Collection of note receivable for P1,000 plus interest earned of P50, less bank collection fee of P15.00.
Required: Prepare a bank reconciliation statement using the adjusted method.
Hint: Bank Debit Memo are deductions made by the bank to the account of the depositor
Bank Credit Memo are additions made by the bank to the account of the depositor

JUAN COMPANY
BANK RECONCILIATION STATEMENT
APRIL 30

Unadjusted Book Balance 11,589.45 Unadusted Bank Balance 15,907.45

Error in recording check no. 36.00 Deposit in Transit 2,201.40

443 (P1226-P1262)

Bank Debit Memo Outstanding Checks

NSF Check (425.60) No. 453 (3,000.00)

Printing Charge (30.00) No. 457 (1,401.30)

Bank Credit Memo No. 460 (1,502.70)

Collection (1,000+50-15) 1,035.00

Adjusted Book Balance 12,204.85 Adjusted Bank Balance 12,204.85