The steps that we have taken in the preparation of the accounts were:
The adjustment for stock was done by means of an entry debiting one account and crediting another - this is often termed a journal entry or adjustment. Indeed the recording of our transactions was all done by entries in our accounts or journal entries.
A journal entry does not necessarily have only one debit entry and one credit - there may be many, but always the total debits must equal the total credits so that double entry is maintained, and therefore the accounting equation stays in balance.
In practice there will usually be many adjustments necessary to produce a meaningful profit and loss account and balance sheet.
These include:
In this lesson we will consider the general recording of adjustments, including the correction of errors. Other special adjustments will be considered in later lessons.
Note that adjustments will not necessarily be put through only when the accounts are to be produced at the year-end. They will often be put through monthly, particularly if monthly management accounts are required. This is very common now, in even smallish businesses, as they can be produced easily from computerised accounting systems.
In a manual system the entry will be recorded initially in a book, or journal - hence the term journal entry.
It will take the form:
Date | Account name 1 | X | |
Account name 2 | X | ||
Narrative |
2008 | Stock | 3,375 | |
Cost of sales | 3,375 | ||
Closing stock at 30/09/08 |
or, as seen before, it may consist of more than two entry lines as long as:
total debits = total credits.
Date | Account name 1 | X | |
Account name 2 | X | ||
Account name 3 | XX | ||
Account name 4 | X | ||
XX | XX | ||
Narrative |
In a computerised system a print-out of similar format will usually be produced at the time of making the entry, or at a later stage as part of the audit trail of transactions. For best control of the system, the entry should first be recorded in a journal or on a journal entry sheet.
For the purpose of learning double entry, and looking at the recording of transactions in accounts, we will continue to use T accounts. Even though the practical recording of transactions may well look very different, T accounts are the simplest way of representing debits and credits clearly.
Whatever the format of recording being used, you can still think of entries on either side of the T.
Remember, we can draw a T between the Debit and Credit columns.
Bank | ||||
---|---|---|---|---|
2009 | Dr | Cr | Bal | |
Apr 1 | Capital | 2,000 | 2,000 Dr | |
15 | Purchases | 2,200 | 200Cr | |
20 | Sales | 1,450 | 1,250 Dr | |
25 | Rent | 1,000 | 250 Dr | |