CHAPTER 7 Flashcards
General journal and why it exists
An accounting used to record infrequent, non-cash transactions, which cannot be recorded in the special journals.
There are some transactions that cannot be recorded in these special journals because they do not involve cash, and do not involve the purchase or sale of stock. Transactions like this must still be recorded in a journal before they can be posted to the ledger, but they cannot be recorded in the special journals used so far. At the same time, because they are infrequent they do not justify their own special journal as there would be only one entry to summarise.
Instead, they are recorded in the general journal.
Narrations and why they exist
A brief description of a transaction recorded in the
General Journal, including a reference to the relevant source document.
When transactions are recorded in special journals, there is no need to provide a written description of what has occurred because not only are all of a similar nature, but also they are described by the title of the journal in which they are recorded. However, because the General Journal records a wide variety of transactions, it is necessary to give a brief description of the transaction immediately after recording the debit and credit entries.
Commencing entries and purpose
A General Journal entry to establish double-entry
records by entering existing asset, liability and owner’s equity balances in the ledger account.
The purpose of a commencing entry is to open or establish ledger accounts for any existing asset, liability and owner’s equity items. This may be when the business is just starting and the owner is contributing starting capital, or when the business has been operating for some time already, and the owner decides to switch from single- entry accounting to double-entry records.
Transactions with the owner
Because the owner and business are assumed to be separate entities, transactions between the two must be recorded in the firm’s accounting records. Cash drawings will be recorded in the Cash Payments Journal and capital contributions of cash will be recorded in the Cash Receipts Journal, but drawings or capital contributions of other non-cash items (such as stock or equipment) will need to be recorded in the General Journal.
Bad debt
Not all debtors can be counted on to repay the amounts they owe, and occasionally a debt may need to be written off as ‘bad. A bad debt is an expense incurred when a debt is written off because it is deemed to be irrecoverable.
Bad debts and the accounting principles and qualitative characteristics.
According to the Conservatism principle, a should be recognised as an expense when the loss is probab/e, so that assets (in this case, Debtors Control) are not overstated. This will usually be when the debtor is in liquidation or has been declared bankrupt and the debt is deemed to be irrecoverable. Recognising a bad debt will ensure the reports contain all the information that is useful for decision-making - such as bad debts in the Income Statement and an updated amount for Debtors Control in the Balance Sheet. This ensures Relevance.
An example of how an expense does not have to involve a cash transaction
A bad debt is a good example of how an expense does not have to involve a cash payment. If a bad debt is incurred, the business will need to recognise an expense for the loss of an economic benefit in the form of a decrease in assets (Debtors Control), which decreases owner’s equity.
