General Journal

Introduction

Many owners and managers are familiar with the General Journal . However, there still may be some of you that haven’t yet fully grasped the concept, so the following definition is for review.

A journal is a page that is divided down the middle by a line. Depending on the type of transaction , an entry will be recorded either on the left or right side of the journal page line. A set of financial statements consists of a Balance Sheet and a Income Statement(AKA: Statement of Revenue & Expense or Profit & Loss Statement). There are five primary sections within these financial statements: Assets , Liabilities , Equity , Revenue, and Expense. Each of these sections contains various related individual ledger accounts upon which all the business transactions of the company are recorded. All of the individual ledger accounts, when combined, are called the General Journal.

The “General Journal” Report

How in the world could any owner/manager/employee working in accounting get along without a detail of the General Journal report? That would be like working with your hands tied and your eyes blindfolded. Without this report you would have a very difficult time determining how a final balance in a particular account was derived. Here is why:

Picture this: Back in the not-to-distant past (before computers really caught on), accountants recorded each transaction of a business manually into a great big hardbound, three-leaf binder book with yellow pre-printed ledger pages. Obviously, this was a very time-consuming, tedious process. Each page not only recorded the numbers associated with the transaction, it also recorded where the numbers came from, the date, and, when appropriate, a very brief note to the side describing additional detail.

Here is an example of a General Journal account page:

Transactions may come from a variety of journals, but they all pyramid into the General Journal. I use the word “pyramid” because it is helpful to visualize the shape of a pyramid with all the source documents spread out at the base. The information is being summarized from each document and “migrates” upward to the General Journal and eventually to the financial statements, which are at the top of the pyramid:

If I wanted to find out how a particular balance came to be, all I had to do was look at the detail on the General Journal page. That detail would then tell me which source documents contained the numbers that contributed to the final balance. I did not have to search all over to find what I was looking for.

Nowadays, you have software like Total Office Manager. This software will give you a report of the detail in your General Journal that is laid out as cleanly and clearly as presented above just like you would find in a manual General Journal. The report should not be encumbered with all kinds of other information that makes it hard to decipher. Some software programs don’ t call this report a General Journal report; they might call it a transaction report or something similar.

Total Office Manager will allow you to print a report for any period. For instance: a year-to-date report; for just one month; or an interim period within a year. You need that flexibility. If you need to see all twelve months of activity for a particular account, then you need to see all twelve months. You should not have to print out each month separately and then manually piece them together. And, if you only need to look at one month, you don’ t want to have to print out the entire year.

An Analytic Tool

A good report will allow you to use it as an analytic tool to find mistakes. Let’s assume that after printing your financial statements you looked at the Cash-in-Bank account and it said the balance was $3,556.38. Being the good accountant that you are, you verified that balance with the bank reconciliation balance and found that it said the cash balance should be $3,656.38. The difference between the two totals is $100.00. Your first step should be to print a Detail of the General Journal report for the month such as in the example above. The first thing you notice is a $100.00 credit entry. This is suspicious because it is the exact amount you are off, so it is worth investigating. One of the nice features of this report is that it references the source of every transaction. You determine that the $100 item came from the General Journal. Sure enough, when you look at the journal entries you realize you made a mistake and you really meant for this credit entry to go to Employee Advance, which is 1110 not 1010. You simply wrote the wrong GL Account number .

The fix is simple:

We call this procedure “smoking out the error”. Sometimes errors are easy to find, sometimes not. The process consists of verifying the final balances that are on the financial statements with another document. In our example above, we used the Bank Reconciliation to verify the ending cash balance on the financial statement. Other documents used to verify balances could be the Accounts Payable Ledger, Accounts Receivable Ledger, Sales Tax Report, Payroll History Report, Inventory Control Report, Notes Payable Amortization Schedule, and so on.

Just like a carpenter who uses a level before nailing up a board, you will want to verify your balances with these other control reports before accepting the financial statements as being correct. If the board isn’t level, the carpenter must figure out why and make the adjustment. If an account balance is different than the balance found on the control document, then use your analytical tool called the Detail of the General Journal Report to discover why.