TRANSACTIONS - - DOCUMENT - - JOURNAL - - LEDGER
Reference: FSA-2036 Farm Business Record Book
We have already discussed this briefly and called this the accounting cycle. Now we will talk about it in depth a little more. First the initial record of each transaction, or a group of similar transactions, is evidenced by a business document, such as a sales ticket, or a bill of a cash register tape. On the basis of the evidence provided by the business documents, the transactions are entered in chronological order in a journal. The amounts of the debits and the credits in the journal are then transferred or posted to the accounts in the ledger. The use of a two-column journal, two-column or four-column accounts, and posting from the journal to the ledger are easily accomplished. Before a transaction is entered in the two-column journal, it should be analyzed according to the following sequence of steps:
- 1) determine whether an asset, a liability, owner’s equity, revenue or expense account is effected
- 2) determine whether the affected asset, liability, owner’s equity, revenue, or expense increases or decreases the account
- 3) determine whether the effect of the transaction should be recorded as a debit or as a credit in an asset, liability, revenue or expense account
The process of recording a transaction in a two-column journal is summarized as follows:
- 1) record the date
- a.) insert the year at the top only of the Date column of each page, except when the year date changes
- b.) insert the month of the first line only of the date column of each page, except when the month date changes
- c.) insert the day in the date column on the first line used for each transaction, regardless of the number of transactions during the day
- 2) record the debit
- a.) insert the title of the account to be debited at the extreme left of the description column and enter the amount in the debit column
- 3) record the credit
- a.) insert the title of the account to be credited below the account debited, moderately indented, and enter the amount in the credit column
- 4) write a brief explanation
- a.) brief explanations may be written below each entry, moderately indented. Some accountants prefer that the explanation be omitted if the nature of the transaction is obvious. It is also permissible to omit a lengthy explanation of a complex transaction if a reference to the related business document can be substituted.
It should be noted that all transactions are recorded only in terms of debits and credits to specific accounts. The titles used in the entries should be the same as the titles of the accounts in the ledger. For example, supplies purchased should be entered as a debit to supplies not to supplies purchased, and cash received should be entered as a debit to cash not to cash received. The line following an entry is left blank in order to clearly separate each entry. The column headed Post Ref (posting reference) is not used until the debits and credits are posted to the appropriate accounts in the ledger. No job is complete until it is accurate and with numbers that becomes imperative.
A TRIAL BALANCE is the equality of debits and credits in the ledger and it should be verified at the end of each accounting period. The first step in preparing a trial balance is to balance each ledger account individually. The trial balance does not provide complete proof of the accuracy of the ledger. It indicates only that the debits and the credits are all equal. This proof is of value, however, because errors frequently affect the equality of debits and credits. If the two totals of a trial balance are not equal, it is probably due to one or more of the following types of errors:
- 1) error in preparing the trial balance, such as:
- a. one of the columns of the trail balance was incorrectly added
- b. the amount of an account balance was incorrectly recorded on the trial balance
- c. a debit balance was recorded on the trial balance as a credit, or vice versa, or a balance was totally omitted entirely.
- 2) error in determining the account balances, such as:
- a. a balance was incorrectly computed
- b. a balance was entered in the wrong balance column
- 3) error in recording a transaction in the ledger, such as:
- a. an erroneous amount was posted to the account
- b. a debit entry was posted as a credit or vice versa
- c. a debit or a credit posting was totally omitted
- 1) failure to record a transaction or to post a transaction
- 2) recording the same erroneous amount for both the debit and the credit parts of a transaction
- 3) recording the same transaction more than once
- 4) posting a part of a transaction correctly as a debit or credit but to the wrong account
- 1) by audit procedures
- 2) by chance discovery
- 3) through the medium of the trial balance
Among the types of errors that will NOT cause an inequality in the trial balance totals are the following:
It is readily apparent that care should be used in recording transactions in the journal and in the posting to the accounts. The desirability of accuracy in determining the account balances and reporting them on the trial balance is equally obvious. The existence of errors in the accounts may be determined in various ways:
If the debit and the credit totals of the trial balance are not in agreement, the exact amount of the difference between the totals should be determined before proceeding to search for the error. The amount of the difference between the two totals of a trial balance sometimes gives a clue to the nature of the error or where it occurred. For example, a difference of 10, 100 or 1000 between two totals is frequently the results of an error in addition. A difference between totals can also be due to the omission of a debit or a credit posting or, if it is divisible by 9, look for a transposed number. Chasing errors in a trial balance is not a fascinating sport like chasing a golf ball. It is tedious and uninteresting, the only way for an accountant or yourself to avoid it is to make no mistakes and that standard is too high for most of us to maintain continuously. The penalty for one little slip may be a night or two burning the midnight oil, figuring out where the problem is. But remember if your business partner has entered a great deal of these entries, do not get mad but rather get busy and find the error.
During an accounting period, transactions are recorded as they occur, as was discussed earlier. At the end of the period, the ledger accounts must be brought up to date, so that revenues and expenses are properly matched and the financial statements fairly present the results of operation for a period and the financial condition at the end of that period.
If you choose to not make entries in a timely manner, this task can become totally overwhelming. In our farming operation, I've chosen to use the Quick Books program. This program truly simlifies much of the guesswork for debits/credits and errors in the balancing. However, when the bank statement comes in at the end of each month, I do take the time to reconcile it at that time. Should this not be done, it becomes very time consuming and finding errors takes twice as long.
The Farm Business Record Book (FSA-2036) has great detailed pages for keeping up with any and all types of production records. Those work tables for planning, when done correctly, will benefit you this year and in the years to come due to the amount of information contained therein.