7 - Chapter 7 Notes - Posting & Correcting Entries & Accounting Cycle

Opening an account

Every new business account must first be created in the ledger. To do this one must:

a. Write the name of the new account (account title) at the top of the account.

b. Write the account number (from the chart of accounts) at the top of the account.

c. Place the account in its proper numeric location in the ledger.

Posting

Posting refers to the transfer of information from the general journal to the appropriate ledger accounts so that accurate and up-to-date financial statements (T/B, I/S, B/S) can ultimately be prepared at the end of each fiscal period.

In other words, posting refers to the process whereby debit and credit entries in the general journal are updated to the appropriate accounts in the ledger, trial balance, income statement and balance sheet.

This ultimately allows for the accurate and up-to-date completion of the financial statements at the end of each period.

Manual Posting using Paper and Pencil

In order to post using paper and pencil, each individual dollar figure in the general journal must be transferred (posted) to the appropriate ledger account one at a time.

There are several steps involved in manual posting:

• in the appropriate ledger account:

a. Record the date in the ledger account.

b. Record the page number of the general journal where the transaction was initially journalized using the Posting Reference (P.R.) column of the ledger account. The letter J and the journal page number is used, e.g., J23.

c. Record the amount of the transaction in the appropriate debit or credit column of the ledger account.

d. Calculate and enter the new balance in the balance column of the ledger account.

e. Indicate whether the new balance is a debit balance or a credit balance (DR/CR).

• in the general journal:

f. Go back to the general journal and record the account’s chart of account number (e.g., 105) in the appropriate P.R. column.

Cross-referencing

Cross-referencing is the recording of the general journal page number in the ledger account and the recording of the account number in the general journal. If the posting process is interrupted, cross-referencing makes it easy to determine where to pick up the process again. Only those accounts that have been fully posted will show the account number in the P.R. column of the general journal.

Forwarding

When an account page is full, both the date and the balance must be carried forward onto a new account page (see p. 218). The term “Forwarded” is used in the Particulars column in both the last row of the old account and the first row of the new account to indicate this process has taken place.

Computerized Posting using Accounting Software

As previously stated, posting refers to the transfer of information from the general journal to the appropriate ledger accounts.

Once an entry has been recorded in the general journal using modern accounting software like QuickBooks or Sage 50 or Wave Accounting, posting to the appropriate ledger accounts and the various financial statements can be completed instantaneously by simply clicking on the “Post” button (or a similar button) at the bottom of the screen, thereby saving enormous amounts of time and energy.

Correcting Errors in the General Journal

Professional accountants never erase their mistakes. Instead, errors noticed immediately must be neatly crossed out with the correct figure placed immediately above the error in small print (see p. 216). Of course in modern times with computerized accounting programs, errors spotted immediately can simply be deleted and corrected on the spot.

Errors found after the transaction has already been posted to the ledger accounts require a different approach though. Whether you are using old-fashioned paper and pencil or accounting software, a journalizing error detected after posting may be approached in one of two ways:

1. A single correcting entry may be used to bring the proper accounts up to date after the error is detected (see p. 217). However, this method may require some fairly complicated mathematical and logical reasoning.

2. Alternatively, a single reversing entry may be used (whereby the original erroneous entry is simply reversed) followed by a second entry, this time the correct entry.

Example of correcting and reversing entries

Let's assume that a $500 cash purchase of supplies was mistakenly journalized as follows:

Automobile - dr - 500

.............Bank - cr - 500

1) Single correcting entry

Supplies - dr - 500

........ Automobile - cr - 500

Correcting entry

2) Reversing entry and correct entry

Bank - dr - 500

........ Automobile - cr - 500

Reversing entry

Supplies - dr - 500

......... Bank - cr - 500

Cash purchase

Accounting Cycle

The complete set of accounting procedures that must be carried out each and every fiscal period is known as the accounting cycle.

The accounting cycle consists of the following steps:

1. Business transactions occur daily as evidenced by source documents

2. Transactions are recorded daily as accounting entries in the general journal

3. Journal entries are posted (transferred) to the appropriate ledger accounts daily (using modern accounting software)

4. Ledger is balanced by means of a trial balance daily, weekly, monthly, quarterly or annually

(trial balance includes all accounts --> debits = credits)

5. Profit or loss is calculated by means of a formal income statement at close of fiscal period

(revenues – expenses = net income)

6. Owner’s equity is calculated by means of a formal balance sheet at close of fiscal period

(assets = liabilities + owner’s equity)

(equity equation to calculate owner's equity à beginning capital + net income – drawings = ending capital)

Chapter 7.2 - Trial Balance out of Balance

When the trial balance is out of balance (debits do not equal credits), there are several procedures (four quick tests or five long steps) that one can undertake to locate the source of the discrepancy. One must look either to the general journal, the ledger or the trial balance in order to determine the reason for the problem.

Four quick tests

Calculate the difference between debits and credits (i.e., the amount of the error) on the trial balance. Then proceed with the following steps:

1. If the difference is a multiple of 10, an addition error is likely the source of the discrepancy. Recalculate the trial balance columns. Then recalculate the balance of each ledger account.

2. If the difference is equal to an amount entered in the journal or the ledger, check to see if that amount has been handled properly.

3. Divide the difference by two. Then search the trial balance, the ledger accounts and the journal for that figure. If such a figure is located, check to see if a debit amount has been posted or transferred as a credit amount, or vice-versa.

4. If the difference is a multiple of nine, a transposition error (reversal of two numbers during transfer) or decimal point error (erroneously adding or removing zero) has likely occurred. Check transfer of figures from journal to ledger accounts (posting) and transfer of balances from ledger to trial balance. Pay particular attention to incorrect amounts, amounts not transferred, amounts transferred twice and amounts transferred to wrong column.

If quick tests fail to reveal the source of the discrepancy, proceed to five long steps as you work backwards from trial balance to ledger to journal:

Five long steps

1. Recalculate trial balance debit and credit columns.

2. Check transfer of balances from ledger accounts to trial balance.

3. Recalculate individual ledger balances.

4. Check postings (transfers) from journal to ledger accounts. Watch for incorrect amounts, amounts not posted, amounts posted twice, and amounts posted to wrong column.

5. Check to determine whether each individual journal entry balances (debits equal credits) in the general journal.

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