Basic Accounting Crash Course: Small Business Accounting training: General Journal and General Ledger

As mentioned before, all the transactions that do not involve cash or do not deal with inventory will go to the general journal first and then to the relevant ledgers. Examples of such transactions can be the sale and purchase of fixed assets, adjustments that need to be made in the accounts, accrual, amortization and reversal entries etc.

We will be learning more and more about which transactions to put in the general journal but as a general rule remember that anything that is not recorded in any other books is recorded in the general journal.

Following is an excerpt from the General Journal:

General journal excerpt

Lets first try to understand the layout of the general journal. It has five columns date, description, folio, debit and credit. For every transaction, the effects of it in all the different accounts are written down in the journal. At the bottom of the transaction there are narratives that explain the transaction. Folio, debit and credit columns are pretty much self-explanatory.

Let’s consider the first transaction. The narratives are telling us that we bought machinery on credit from James. Since this is not the purchase of inventory so we cannot take this into the purchases journal and also it does not involve any cash so we cannot take it to the cash book as well, therefore, we will record it in the general journal.

The effect of this transaction is the increase in the plant and machinery account (under fixed assets) and an increase in our accounts payable, therefore, we will debit machinery by $15,000 and credit James account by $15,000 as well. Remember for every entry the debit and credit must balance. We expect to see the machine’s account in the general ledger and James’s account in the purchases ledger. Note that purchases ledger contain the personal accounts of all our accounts payable and not only the accounts payable from inventory. Same is true for sales ledger as well. This is how we record an entry in the general journal.

The last two entries are new. Let’s consider the bad debts first. If one of our customers owes us payment for the inventory bought on credit and is unable to clear their debt what will we record as an accounting entry. In that case, we will consider them as bad debts. In this example, Andrew cannot pay his debt of $500, so we will credit Andrew’s account (which will clear his account) and debit bad debts. Bad debts are an expense and we expect to find the bad debts account in the general ledger. We will be revisit bad debts later.

On Jan. 15, rent is charged into the business’s accounts. In accounting, all expenses and revenues that are relevant to one financial year are recorded in that financial year, irrespective of the fact whether they have actually been paid or received. This principle is called matching principle in accounting. In this example, the business’s rent is due on the 15 of every month and so it is due on 15 Jan. Irrespective of the fact whether the business has actually paid that rent or not, we have to charge that rent in the business’s accounts. To do that we will debit the rent account in the general journal and credit rent expense payable account by the same amount as well. This rent payable account is our liability and we expect to find this account in the general ledger. We will be talking more about the accrued and prepaid expenses later on in our basic accounting crash course.