Bookkeeping All-In-One For Dummies. Dummies Consumer

transactions in just one month, imagine what a nightmare you’d face if your books didn’t balance and you had to find the error. It would be like looking for a needle in a haystack – a haystack of numbers!

      Because you enter every transaction in two places – that is, as a debit in one account and a credit in another account – in a double-entry bookkeeping system, you need to have a place where you can easily match those debits and credits. (For more on the double-entry system, flip back to Book I Chapter 1.)

      Long ago, bookkeepers developed a system of journals to give businesses a starting point for each transaction. This chapter introduces you to the process of journalizing your transactions; it tells you how to set up and use journals, how to post the transactions to accounts impacted, and how to simplify this entire process by using a computerized bookkeeping program.

      Establishing a Transaction’s Point of Entry

      In most companies that don’t use computerized bookkeeping programs, a transaction’s original point of entry into the bookkeeping system is through a system of journals.

      Each transaction goes in the appropriate journal in chronological order. The entry should include information about the date of the transaction, the accounts to which the transaction was posted, and the source material used for developing the transaction.

      

If, at some point in the future, you need to track how a credit or debit ended up in a particular account, you can find the necessary detail in the journal where you first posted the transaction. (Before it’s posted to various accounts in the bookkeeping system, each transaction gets a reference number to help you backtrack to the original entry point.) For example, suppose a customer calls you and wants to know why his account has a $500 charge. To find the answer, you go to the posting in the customer’s account, track the charge back to its original point of entry in the Sales journal, use that information to locate the source for the charge, make a copy of the source (most likely a sales invoice or receipt), and mail the evidence to the customer.

      If you’ve filed everything properly, you should have no trouble finding the original source material and settling any issue that arises regarding any transaction. For more on what papers you need to keep and how to file them, see Book I Chapter 5.

      It’s perfectly acceptable to keep one general journal for all your transactions, but one big journal can be very hard to manage because you’ll likely have thousands of entries in that journal by the end of the year. Instead, most businesses employ a system of journals that includes a Cash Receipts journal for incoming cash and a Cash Disbursements journal for outgoing cash. Not all transactions involve cash, however, so the two most common noncash journals are the Sales journal and the Purchases journal. The sections that follow show you how to set up and use each of these journals.

      When Cash Changes Hands

      Most businesses deal with cash transactions every day, and as a business owner, you definitely want to know where every penny is going. The best way to get a quick daily summary of cash transactions is by reviewing the entries in your Cash Receipts journal and Cash Disbursements journal.

Keeping track of incoming cash

      The Cash Receipts journal is the first place you record cash received by your business. The majority of cash received each day comes from daily sales; other possible sources of cash include deposits of capital from the company’s owner, customer bill payments, new loan proceeds, and interest from savings accounts.

      Each entry in the Cash Receipts journal must not only indicate how the cash was received but also designate the account into which the cash will be deposited. Remember, in double-entry bookkeeping, every transaction is entered twice – once as a debit and once as a credit. For example, cash taken in for sales is credited to the Sales account and debited to the Cash account. In this case, both accounts increase in value. (For more about debits and credits, flip back to Book I Chapter 1.)

In the Cash Receipts journal, the Cash account is always the debit because it’s where you initially deposit your money. The credits vary depending upon the source of the funds. Figure 4-1 shows you what a series of transactions look like when they’re entered into a Cash Receipts journal.

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       Figure 4-1: The first point of entry for incoming cash is the Cash Receipts journal.

      You record most of your incoming cash daily because it’s cash received by the cashier, called cash register sales or simply sales in the journal. When you record checks received from customers, you list the customer’s check number and name as well as the amount. In Figure 4-1, the only other cash received is a cash deposit from H.G. (the owner) to cover a cash shortfall.

      The Cash Receipts journal in Figure 4-1 has seven columns of information:

      ✔ Date: The date of the transaction.

      ✔ Account Credited: The name of the account credited.

      ✔ PR (post reference): Where the transaction will be posted at the end of the month. This information is filled in at the end of the month when you do the posting to the General Ledger accounts. If the entry to be posted to the accounts is summarized and totaled at the bottom of the page, you can just put a check mark next to the entry in the PR column. For transactions listed in the General Credit or General Debit column, you should indicate an account number for the account into which the transaction is posted.

      ✔ General Credit: Transactions that don’t have their own columns; these transactions are entered individually into the accounts impacted.

      For example, according to Figure 4-1, H.G. deposited $1,500 of his own money into the Capital account on March 4th in order to pay bills. The credit shown there will be posted to the Capital account at the end of the month because the Capital account tracks all information about assets H.G. pays into the business.

      ✔ Accounts Receivable Credit: Any transactions that are posted to the Accounts Receivable account (which tracks information about customers who buy products on store credit).

      ✔ Sales Credit: Credits for the Sales account.

      ✔ Cash Debit: Anything that will be added to the Cash account.

      

You can set up your Cash Receipts journal with more columns if you have accounts with frequent cash receipts. The big advantage to having individual columns for active accounts is that, when you total the columns at the end of the month, the total for the active accounts is the only thing you have to add to the General Ledger accounts, which is a lot less work then entering every Sales transaction individually in the General Ledger account. This approach saves a lot of time posting to accounts that involve multiple transactions every month. Individual transactions listed in the General Credits column each need to be entered into the affected accounts separately, which takes a lot more time that just entering a column total.

      

As you can see in Figure 4-1, the top-right corner of the journal page has a place for the person who prepared the journal to sign and date and for someone who approves the entries to sign and date as well. If your business deals with cash, it’s always a good idea to have a number of checks and balances to ensure that cash is properly handled and recorded. For more safety measures, see Book I Chapter 5.

Following outgoing cash

      Cash