6 - Chapter 6 Notes - General Journal, Source Documents & Sales Taxes

Section 6.1 - General Journal

In earlier chapters, we used either the transaction analysis sheet or the equation analysis sheet in order to record business transactions.

However, in today's business world bookkeepers often employ a formal official document known as a general journal in order to record such transactions.

Both hard-copy and electronic versions of the general journal are in use today.

A general journal is essentially a book containing a chronological listing of each and every business transaction for a particular business where each transaction is recorded separately.

Each recorded transaction in the general journal is known as a journal entry. A single journal entry contains all of the changes (debits/credits) to the accounts for one transaction.

The process of recording accounting entries in the general journal is known as journalizing.

The general journal is considered a book of original entry because each transaction is first recorded there before the information is transferred (posted) to the affected ledger accounts. (see chapter 7)

Please note that at the top of every journal page, you must record the following:

• the page number - for a new business, this page number will always be '1'

• the year

• the month

(Please note that if either the year or the month changes in the middle of a page, the new year or month must also be listed on that same page.)

Then, for each business transaction that occurs, you must record the following:

• the date (day of month) - please note that the date must be recorded for each transaction, even if there is more than one transaction on the same date

• the account(s) to be debited and the amount(s)

• the account(s) to be credited and the amount(s) - the names of credited accounts must be indented

• finally, a brief line of explanation describing what took place in a few words

Please note the following formatting issues concerning the two-column general journal:

• a blank line must exist between each journal entry

• each journal entry must contain at least one debit entry and at least one credit entry

• debit values = credit values for each entry

• debits always come first, credits second, line of explanation last for each entry

• only credited accounts are indented

• the month may be abbreviated in the date column if necessary

• a compound entry affects more than two accounts

• lines of explanation should be brief and should not be redundant (unnecessarily repetitive)

• cheque serial numbers of cheques written should be included in lines of explanation where appropriate

• dollar signs do not appear in the general journal at any time

• the PR column (posting reference) is only useful in old-fashioned, paper and pencil accounting systems

The main purpose of the general journal is to provide a continuous record of all business transactions in the order in which they occur.

And as you will soon learn in section 6.2, the bookkeeper must determine the appropriate journal entry based on the source documents provided to him/her (e.g., cheques, invoices, receipts, order forms, etc.)

Example of 2016 general journal entries

June 3 - Purchased supplies for cash, $100

June 3 - Cash sale of goods, $500

June 5 - Received $250 from debtor customer

July 1  - Purchased supplies on account, $800

                               GENERAL JOURNAL

For a look at a typical general journal page used in grade 11 accounting, with Ontario sales taxes included (see below), click the following: ch 6 General Journal.pdf

Opening entry

Each brand new business is created with an initial journal entry known as an opening entry which contains all of the assets and liabilities (and resulting capital figure -> A - L) as of the first day of operations.

The line of explanation for the opening entry is usually as follows:  Opening entry for (name of business)

Example of opening entry

Bank                            20000

Equipment                   10000

       Bank Loan                       25000

       B. Gold, Capital               5000

Opening entry for Gold Industries

Section 6.2 - Source Documents

The information necessary to accurately record a business transaction in the general journal is usually obtained from source documents.

A source document is a business document that provides all of the information necessary to record a business transaction in proper form (i.e., names of parties, sale price, terms of sale, description of items purchased, and transaction and/or delivery date).

Companies are required by law to maintain all source documents on file for several years.

Below we will now look at eight of the most common source documents in business today. The journal entry most often associated with each document will follow.

For 1 - 4 below, we are the vendor (seller):

1) Cash sales slip - shows details of a single transaction in which low-volume, high-margin goods or services are sold for cash (e.g., automobiles, furniture, appliances, jewellery, etc.); also acts as a receipt (proof of payment)

Bank (or Cash) - dr

        Revenue (Sales or Fees Earned) - cr

2) Point of sale summary - shows a detailed summary of all cash sales (currency, debit card and credit card) for the business for one day, all of which are treated as cash sales from the perspective of the seller; generally refers to sales of high-volume, low-margin goods or services (e.g., daily convenience store sales); also known as a Host Reconciliation/Card Summary; the key point to remember is that from a bookkeeping perspective, a point of sale summary is treated just like a cash sale

Bank - dr

        Revenue - cr

3) Sales invoice - shows details of a single transaction in which goods or services are sold on account; also known as a bill

A/R - (debtor customer) - dr

                                  Revenue - cr

4) Cash receipts daily summary - shows a detailed summary of all cheques and all other forms of delayed customer payment including debit card payments, credit card payments, and electronic transfers (Interac Online, Interac e-Transfer, online banking payees and third-party service providers such as PayPal) received from debtor customers for one day; essentially a listing of daily receipts on account

Bank - dr

       A/R - (debtor customer) - cr

       A/R - (debtor customer) - cr

       A/R - (debtor customer) - cr

For 5 - 6 below, we are the purchaser (buyer):

5(a) Purchase invoice - represents a single purchase of either goods (asset) or services (expense) on account; also known as a bill

(asset purchased/expense incurred) - dr

                          A/P - (creditor supplier) - cr

5(b) Seller-generated credit card payment receipt - seller-generated receipts detailing payment by credit card (e.g., VISA, MasterCard, American Express) can also be used by purchasers as evidence of a purchase on account and result in similar bookkeeping entries as described above with one notable difference

(asset purchased/expense incurred ) - dr

                          A/P - (credit card issuer) - cr

6) Cheque copy/photo or seller-generated/bank-generated receipt - represents a single immediate payment by cheque or other means (currency, debit card, electronic transfer including Interac Online, Interac e-Transfer, online banking payees, third-party service providers such as PayPal, etc., but not payment by credit card) whether for a/an 

(a) payment of outstanding account payable

(b) cash purchase of an asset 

(c) cash payment of an expense 

(d) owner withdrawal of cash 

With respect to cheque payments, before the cheque is handed over a copy/photo of the cheque is made and sent to the accounting department to be recorded

A/P - (creditor supplier or credit card issuer)/(asset purchased)/(expense incurred)/Owner, Drawings - dr

                                                                                                                                                            Bank - cr

For 7 - 8 below, our own bank is communicating with us via delivery of a memo, often in the form of a notation on our monthly bank statement:

7) Bank debit memo - bank document informing us that our bank has decreased (credited) our bank balance. For example, the bank may inform us by way of debit memo that interest on our bank loan has been deducted from our account or that a monthly service charge has been incurred.

Bank Service Charges Expense/Interest Expense - dr

                                                                        Bank - cr

8) Bank credit memo - bank document informing us that our bank has increased (debited) our bank balance. For example, the bank may inform us by way of credit memo that interest has been earned on one of our investments (e.g., GIC, term deposit) or that our request for a bank loan has finally been approved.

Bank - dr

        Interest Earned (revenue) or Bank Loan - cr

Note: Most bank debit or credit memos appear as line notations on monthly bank statements (hard-copy or electronic) delivered by banks to their clients.

Examples of common source documents

Purchase Invoice #236

Sales Invoice #95502

Cash Sales Slip #31

Cheque Copy/Photo #243

POS Summary 4/8/13

Cash Receipts Daily Summary 3/9/12

Bank debit memos and bank credit memos (DM/CM) appearing on monthly bank statement

Additional Notes on Source Documents

a. For most journal entries from now on, the line of explanation will simply contain the name of the source document and its pre-printed document number where provided, e.g., Cheque copy #123, Purchase invoice No. 567.

b. Sometimes a written memorandum (memo) from the owner is the only source document available to indicate that a transaction has taken place, e.g., owner investment or owner withdrawal of non-cash assets

c. A purchase invoice is simply a sales invoice in the hands of the purchaser. When a sales invoice arrives at the purchaser’s place of business, it immediately becomes a purchase invoice.

d. A cheque copy/cheque photo used in the cash purchase of an asset or the cash payment of an expense must be accompanied by a receipt as proof of purchase to support the accounting entry.

e. A vendor is the accounting term for a seller of goods and services. A purchaser is the accounting term for a buyer of goods and services.

Example of journal entry

June 3 - Cash sales slip #101, $100

                                       GENERAL JOURNAL

For a detailed summary chart of all source documents and their corresponding journal entries, click the following: ch 6 source document chart summary.docx

Sections 6.3 and 6.4 - Sales Taxes - GST/PST/HST

Sales taxes come in many forms in Canada - the federal/national GST (Goods and Services Tax - currently 5% in Canada), the provincial PST or RST or QST (Provincial Sales Tax or identical Retail Sales Tax or Quebec Sales Tax) and the new HST (Harmonized Sales Tax) which combines both GST and PST into a single sales tax.

HST is currently in use in five of the ten Canadian provinces, including Ontario.

The other five provinces use both GST and PST, except for Alberta which only uses GST and not PST. The three territories also use only GST.

In this classroom, we will focus almost exclusively on Ontario's HST. The current rate of HST in Ontario is 13%.

Rather confusingly, GST and HST are paid by all customers – manufacturers, wholesalers, retailers, consumers – on the purchase of all goods and services (with several exceptions) while only final customers (consumers) must pay PST (where it exists) on the purchase of all goods, but not services (but again, with several exceptions.)

And please remember that sales taxes are not charged on all transactions that you will encounter in this class but rather only on the sale (or corresponding purchase) of goods and services, with some exceptions - see below.

Sales and HST Payable

Businesses are required by law to collect HST (or GST and/or PST where applicable) from their customers on all sales and then remit (return) those sales taxes to the federal government at a later date.

These sales taxes are accumulated in an account known as HST Payable (or GST Payable and/or PST Payable where applicable).

HST Payable is an ordinary liability account (with a credit balance) because it represents accumulated sales taxes collected by a business from its customers that are due and payable (owing) to the federal government.

Purchases and HST Recoverable

Even though businesses are required to pay the HST (or GST and/or PST where applicable) on all of their purchases, those same businesses are also entitled by law to fully recover (or get back) from the federal government, at a later date, all HST or GST (but not PST) paid on any "eligible business purchase or expense related to their commercial activities" such as legal fees, supplies and inventory, sometimes known collectively as "eligible business expenses."

This recoverable HST (and GST) is properly called an input tax credit (ITC) by the CRA or, as it is known in grade 11 Accounting, HST Recoverable (or GST Recoverable where applicable).

Click here for more information on input tax credits on eligible business expenses.

HST Recoverable represents the HST already paid by a business on its eligible purchases and now owing to that business by the federal government.

HST Recoverable is not an asset though - rather it is considered a contra liability account because it represents a liability account with a debit balance which is contrary to the ordinary rules of debit and credit theory.

Accounting for HST on sales and purchases

On a cash sale (or sale on account) of goods or services in Ontario:

Bank or A/R - dr - 113

        Revenue (Sales or Fees Earned) - cr - 100

        HST Payable - cr - 13

On a cash purchase (or purchase on account) of supplies by a business in Ontario:

Supplies - dr - 100

HST Recoverable - dr - 13

                 Bank or A/P - cr - 113

Please keep in mind that for a sale or purchase on account, sales taxes are only calculated and reported on the initial sale or purchase (sell/buy now) and not on the subsequent payment of the outstanding debt (collect/pay later). For example:

A/R - dr - 113

       Revenue (Sales or Fees Earned) - cr - 100

       HST Payable - cr - 13

Bank - dr - 113

          A/R -cr - 113

- or -

Supplies - dr - 100

HST Recoverable - dr - 13

                           A/P - cr - 113

A/P - dr - 113

         Bank - cr - 113

Remittance of HST to the Government

At the end of every federal sales tax reporting period (usually monthly, quarterly or annually depending on sales figures), the balance in a firm's HST Recoverable account is subtracted from the balance in the firm's HST Payable account and only the difference (net HST Payable) is remitted (returned) to the federal government's Canada Revenue Agency (CRA), assuming HST Payable is greater than HST Recoverable in the first place. 

The federal government will then distribute a share of those taxes to the appropriate provincial government equivalent to that province’s former rate of PST (e.g., 8% in Ontario). 

(Please note that if the balance in HST Payable is less than the balance in HST Recoverable, the difference is actually a refund owing to our company from the federal government.)

Businesses usually have one month from the end of each reporting period within which to remit net HST Payable. (Remittance of GST, where applicable, follows the same rules as those for HST. PST, where applicable, must usually be remitted to the provincial government at the end of every month, and normally within fifteen days of the end of each provincial reporting period.)

Think of the transaction as follows:

HST Payable (amount owed by our business to federal government)

- HST Recoverable (amount federal government owes our business)

= net HST Payable (amount actually remitted/returned to federal government)

Furthermore, when HST is remitted (returned) to the CRA at the end of each sales tax reporting period, a journal entry must be prepared. A sample journal entry for the remittance of HST at the end of a reporting period appears as follows, assuming total HST Payable of $2000 and total HST Recoverable of $1400:

HST Payable - dr - 2000

         HST Recoverable - cr - 1400

         Bank - cr - 600

This journal entry has the effect of bringing the balances in both HST Payable and HST Recoverable to zero. In the above example, the business was required to remit net sales taxes to the federal government (CRA) in the form of a $600 payment ($2000 - $1400) payable to the Receiver General of Canada.

HST on the Balance Sheet

You will remember that both HST Payable and HST Recoverable are classified as liabilities (although HST Recoverable is a contra liability) in the books of the business.

Accordingly, in the liabilities section of the balance sheet, HST Recoverable is subtracted from HST Payable to arrive at net HST Payable:

Liabilities

Accounts Payable                      5000

HST Payable                  2000

Less: HST Recoverable  1400

Net HST Payable                         600

Bank Loan                                9500

GST/HST-Exempt and Zero-Rated Goods and Services

Several goods and services are zero-rated with respect to GST/HST, meaning a zero per cent rate of GST/HST is charged on the sale of these items. Examples of zero-rated goods include groceries and prescription medications.

Other goods and services are tax-exempt from GST/HST altogether, including education, residential rents and most financial services including bank service charges and loan interest charges.

Whether goods or services are classified as either zero-rated or tax exempt, ultimately the key is that purchasers will not be required to pay any sales taxes on any of those items.

Click here for a discussion of zero-rated and tax-exempt goods and services in Ontario.

Sales Tax Rates Across the Country

Please note that unlike the federal/national GST (5%), PST and HST rates across the country differ from province to province.

Furthermore and as previously noted, Alberta and the three Territories charge GST only and no PST whatsoever.

Moreover, Quebec only charges PST once GST has already been added to the base price of items.

And currently in five provinces (Ontario, PEI, New Brunswick, Newfoundland and Nova Scotia), PST and GST have been harmonized or combined into a single sales tax known as the HST.

Once again, in Ontario the current rate of HST is 13%.

Click here for a link to current sales tax rates for each Canadian territory and province.

Exercise - Journal Entries using Source Documents with Sales Taxes

Journalize the following transactions for the month of July 2014 for ABC Hair Salon using the account names most commonly employed in this class:

1 Sales invoice #101, $300 plus sales taxes for sale of shampoos

A/R dr 339

..... Sales cr 300

..... HST Payable cr 39

Sales invoice #101

5 Cash receipts daily summary - cheque received for full payment of sales invoice #101 above

Bank dr 339

..... A/R cr 339

Cash receipts daily summary

7 Cash sales slip #201, $150 plus sales taxes for hair styling services

Bank dr 169.50

..... Fees Earned cr 150

..... HST Payable cr 19.50

Cash sales slip #201

9 POS summary, $1500 plus sales taxes for daily currency, debit card and credit card sales of combs

Bank dr 1695

..... Sales cr 1500

..... HST Payable cr 195

POS summary

14 Purchase invoice #301, $500 plus sales taxes for purchase of store supplies from Staples

Supplies dr 500

HST Recoverable dr 65

..................... A/P - Staples cr 565

Purchase invoice #301

19 Cheque copy #901, for full payment of purchase invoice #301 above

A/P dr 565

..... Bank cr 565

Cheque copy #901

21 Cheque copy #902, $1000 to owner H. Styles for personal use

H. Styles, Drawings dr 1000

.............................Bank cr 1000

Cheque coy #902

23 Online banking receipt #903, $55 plus sales taxes for cash payment of hydro bill

Hydro Expense dr 55

HST Recoverable dr 7.15

........................... Bank cr 62.15

Online banking receipt #903

25 Credit card receipt (VISA) #904, $90 plus sales taxes for purchase of store furniture

Store Furniture dr 90

HST Recoverable dr 11.70

............ A/P - VISA cr 101.70

Credit card receipt #904

27 Written memo from owner H. Styles indicating removal of store furniture valued at $240 for personal use

H. Styles, Drawings dr 240

............ Store Furniture cr 240

Written memo

28 Bank debit memo, $12 (tax exempt) for monthly bank service charges

Bank Service Charges (expense) dr 12

.................................................. Bank cr 12

Bank debit memo

30 Bank credit memo, $75 for monthly investment interest earned

Bank dr 75

... Interest Earned (revenue) cr 75

Bank credit memo

31 Online banking receipt # 905 to Receiver General of Canada, $800 for monthly remittance of net HST Payable (HST Payable $1400, HST Recoverable $600)

HST Payable dr 1400

....... HST Recoverable cr 600

....... Bank cr 800

Online banking receipt #905