Whilst chatting to a colleague the other day we struck on a perennial topic, journals and the fact that a common error made by learners is to post them the wrong way round.
It started me thinking about why this happens, and I wonder whether a possible explanation is that at Foundation level our understanding of accounting theory is new. We are still struggling with which elements of it are double entry and which are not.
So let’s go back to basics and think about an accounting system. It’s there to record the transactions of a business which are evidenced by primary records, such as invoices, credit notes and bank statements. There are lots of documents but no double entry. The details of these documents are then recorded in the books of prime entry; sales, sales returns, discounts allowed, purchases, purchase returns and discounts received daybooks plus the petty cash book, cash book and journals. The day books are fundamentally just lists of transactions designed to summarise information from primary records. They are the first point of entry for transactions to be included in an accounting system but they are not part of the double entry system.
The journal is slightly different to the other day books as it is an instruction rather than a list. It is used less frequently and often for non-routine transactions, for example, opening balances, the correction of errors and year end adjustments. However, the important point is, that like the other day books it sits just outside of the double entry system, setting up the information to be double entered but not actually doing it.
Let’s think about the sales daybook for a moment, it lists the details of credit sales invoices and totals the gross, net and VAT amounts at the bottom. It is only at the point that these three total amounts are posted into the sales ledger control account, sales and VAT accounts in the general ledger that the double entry happens. Likewise when we prepare journal entries we are simply writing down an instruction. That instruction will be to make a double entry posting in accounts in the general ledger but until the journal is posted, no double entry has taken place.
One of the confusing issues with journals is that in order to be able to write them we need to understand the double entry required. Therefore whilst we are learning we often sketch T accounts to help us think about what to debit and what to credit, and that can make us think that the double entry comes before the journal. The other issue is that when we complete a journal in a computerised accounting program, the result of saving or approving it also initiates its posting. The reality is, that when we use accounting software, writing journals (not double entry) and posting them (double entry) becomes integrated.
We need to be aware of these issues and understand what they mean for us whilst we study manual accounting. Let’s work through an example to correct an error that has arisen because an invoice for a £120 credit sales has been posted as a credit note.
The first thing we need to do is work out what has happened and sketching T accounts is a really good way of doing that as long as we remember these are just workings:
Then we need to think about what should have happened:
By comparing the two, we can work out what instructions need to be given in a journal, to remove the incorrect entry……
…and post the correct one:
We can now prepare the journal entries needed, remembering that the journal is the first step in the accounting system to correct the error but not part of the double entry system:
If we were using accounting software, the program would now take over, follow the instructions in our journal and make the entries into the accounts. However, as we are learning manual accounting we have to complete step two of the correction ourselves. We have already worked out the double entry so just have to post the entries, in other words, simply follow the instructions in the journal:
Whilst the journal tells us the amounts to enter and which accounts to enter them in, the details that we write in those accounts follows the simple rule that:
The details should reflect the name of the account to which the other half of the double entry is posted
Extra care needs to be taken to ensure we do not reverse the journal but that we do reference correctly to the opposite account.
The final point to note is that as journals only give instructions to make double entry postings, they only include accounts in the general ledger. As our example corrected an error in the sales ledger control account then the error may have been replicated in the customer’s individual account in the sales ledger. If that is the case, then a further correction will be required but as the subsidiary ledgers (sales and purchases) are not part of the double entry system and only contain memorandum posting, this will not be instructed by a journal.
Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.