There is a cycle of action in accounting for any business.

This cycle is depicted diagrammatically

below:

1. SOURCE DOCUMENTS Source documents are documents, such as cash slips, invoices,
etc. that form the source of (and serve as proof for) a transaction. In other words, they are
the first documents that exist relating to a transaction.
Types of Source Documents
Here are some of the most common source documents:
Invoices
These are documents listing goods or services provided, as well as their prices. Suppliers
normally send an invoice together with goods (or once services have been delivered) so as
to indicate the amount of payment required to be paid to them. In addition, invoices often
indicate how soon the payment is to be made, the business banking details, etc. Invoices
thus normally relate to credit transactions.

Receipts
These are documents confirming that cash or goods have been received. Receipts thus
normally relate to payment that has been made by cash or through a debit or credit card.

Deposit Slips
These are documents serving as proof that cash has been deposited in a bank account.

Cheque and Cheque Counterfoil

This is the part of the cheque (or check in the U.S.) kept by the drawer (writer) of the
cheque as a record of the transaction.

Each check would have a counterfoil on the same page of the checkbook. The image above
shows the check on the right, which would be torn out, while the counterfoil on the left is
the stub that would remain in the checkbook.Some checkbooks don't have counterfoils.
Instead they have separate pages at the back of the checkbook (behind all the checks)
where you can hand-write the details of checks you have issued including the check number,
the value and who/what they were for.
Statement
A report showing the amount owed by one business to another, as well as details of
transactions between the two businesses.

Payment Confirmations
These are documents serving as proof that payment has been made, often used as proof of
electronic transfers (payments through the internet or using other electronic means).
Those are the most common source documents that you will find in the business world.
The next step in the accounting cycle is to take the data from these source documents and
use this data to make a journal entry.

JOURNALS - These are chronological (date-order) records of transactions entered into by a

business. Journals are that first basic entry of debit and credit for each transaction. In the
examples we have been doing in the previous chapters, where we have debited one account
and credited another, we have been doing journals.

The purpose of journals is to keep a day-to-day record of a business and its transactions.
Each transaction also requires a brief explanation of the transaction (below the debit and
credit). This explanation should accurately describe what took place, so that anyone who
glanced at it for the first time could easily identify what occurred.

Each journal can also be matched to the relevant supporting document (such as a check
stub or a receipt) by use of a cross-referencing code or folio number. This code or folio
number simply cross-references between one document and another. If the first transaction
above of $15,000 capital was made by issuing check number 38, then one could write Ch38 (for example) under the folio number.

Using the folio number to match a journal entry to a source document would enable a
person to easily trace the recorded transaction back to the source document and verify that
the transaction actually took place (as evidenced by the source document).
Journals may also often include a cross-referencing code or folio number to cross-reference
between the journal entries and the T-accounts (the next step in the accounting cycle). Each
specific item, such as bank, would have its own folio number, and this would be used to
cross-reference from the journal entry involving bank to the banks T-account in the ledger
(this will be covered in the next section). The folio numbers make it simple to trace
information through the steps in the accounting cycle.
These cross-referencing numbers or codes would work like this:

Sal-1 is the individual code for the salaries account. J-1 is the code for journal page 1.
One could thus follow information from the journal entry to an account in the ledger, or from
an account in the ledger back to the journal entries.
Types of Journal
It is common for a bookkeeper to keep seven different accounting journals (i.e. seven books
of first entry). Each journal covers a different aspect of the business.
The basic format for each of these journals is the debit and credit as listed previously. There
is, however, a more exact format of each journal, and this is shown below:
Cash Receipts Journal (CRJ)
The cash receipts journal is the journal where you record all cash that has been received.
The format of the cash receipts journal is as follows:

Major categories of receipts, such as from income or from debtors, receive their own
column. The category called sundry is used to represent various miscellaneous (and less
regular) items, such as capital or receiving cash from a loan. The word sundry actually
means "various," "miscellaneous" or "general." The "bank" column is added up to show the
total cash received for the period concerned.
Cash Payments Journal (CPJ)

The cash payments journal is the opposite of the cash receipts journal. It is the journal
where you record all transactions where cash has been paid out. Once again the "bank"
column is added up to show the total payments. The totals of the other three columns show
how much was paid to what. "Expenses" and "creditors" would be the major categories
towards which payments would be made.
Bear in mind that the cash receipts journal and cash payments journal can be replaced by
the cash book, which is simply a combination journal showing all receipts and all payments
together. The total of the cash book (and of the cash on hand) for Georges Catering after all
the transactions would come to $14,800, which is the same as the total of the cash receipts
journal ($35,500) minus the total of the cash payments journal ($20,700).
Additionally, petty cash, which is simply a sum of cash on hand kept to pay small expenses,
can also have its own separate journals (similar to the above, comprising the petty cash
receipts journal and petty cash payments journal). Petty cash is also often accounted for in
a separate journal combining receipts and payments, called the petty cash book.
Sales Journal (SJ)
The sales journal is where all sales on credit are recorded (or in this case "services
rendered" on credit).
The format of the journal is as follows:

Note that only the income on credit is recorded here. When the Smiths finally pay Georges
Catering, this is recorded in the cash receipts journal.
Sales Returns Journal (SRJ)
This journal is used specifically for transactions where goods that were originally sold have
now been returned. It would not really apply to a service business such as Georges
Catering, but rather to a trading or manufacturing business that has products returned to
them. (A trading business buys goods at a low price and sells them at a higher price. A
manufacturing business makes products using materials and then sells the finished
products. George's Catering is a service business.)
The format of this journal is:

Purchases Journal (PJ)

The purchases journal is used to record all purchases of inventory on credit. (Inventory are
stock or goods. See the lesson entitled What is Inventory? for more information.)The
purchases journal does not apply to just any assets only to inventory.
Also, note that the purchases journal applies only to a trading or manufacturing business
that purchases inventory on credit.

Purchases Returns Journal (PRJ)

The purchases returns journal shows all returns of inventory that were originally purchased
on credit (by your business). It is likewise only applicable to trading and manufacturing
businesses.

General Journal (GJ)

The general journal shows all journal entries for anything not recorded in any of the journals
above, such as adjustments of accounts. This journal has the simple format that we saw

earlier:

Depending on the syllabus of the course you are doing, the formats of the above accounting
journals may or may not be absolutely crucial. In any case they simply follow the debits and
credits format that we have been getting used to up to now, so it isn't rocket science.
If the journals appear slightly differently in your accounting textbook than in these
materials, then follow the format in your textbook (the accounting journals above have been
shown in their simplest forms so they're easier to grasp). The format in your accounting
textbook is what you will be examined on anyway, right?
3. LEDGER (T-ACCOUNTS) - The ledger is a collective term for the accounts of a business
(a ledger of accounts is like a school of fish). The accounts are in the shape of a T and thus
are often referred to as T-accounts. In this step we take all the debits and credits
(journals) relating to one account lets say bank and draw up an account for bank that
shows all the transactions relating to it.

By account, we refer to the summary record of all transactions relating to a particular item
in a business.
A ledger is a whole bunch of T-accounts grouped together.
The main ledger is called the general ledger. Virtually all T-accounts in a business fall
under the general ledger.

Subsidiary Ledgers:
We also have two subsidiary (supporting) ledgers:

Debtors (or Receivables) Ledger: This ledger only contains T accounts for each
person/business that owes our business (each debtor).

Creditors (or Payables) Ledger: This ledger only contains T-accounts for each
person/business that our business owes (each creditor).

We will discuss these subsidiary ledgers and their relation to the general ledger in more
detail a bit later.
Drawing up a T-Account
Let us take our previous transactions relating to the bank account (or cash) of Georges
Catering and see how this would be applied in drawing up the bank T-account. The first
transaction that involves the bank account occurs on the 1st of April, where Mr. Burnham
invested $15,000 in the business.

What happens to the bank account here? It is debited, as it increases. So we will do the
same to the T-account for the bank account.

We debit the bank account. (To debit an account means to make an entry on the left-hand
side and to credit an account means to make an entry on the right-hand side.)
As you can see, we record the date of the transaction also. As a general rule, we use the
opposite or contra account (in this case capital) to describe the source of this increase to the
bank account. If we were to describe each transaction occurring within the T-account above
as "bank", it would not adequately describe why our bank account increased or decreased.
Using the opposite or contra account gives us a much better description of the transaction.
The next transaction relating to the bank account was on the 7th of April.

Lets insert this in our bank account:

Once again, our journal entry relating to bank was a debit. So we debit our bank account.
The credit was to loan, so this is used to describe what has happened to our bank account
above. The third transaction was as follows:

This time bank was credited, so we do the same to our T-account:

This is the same as the previous transaction, just on the opposite side. Here are the
remainder of the journals relating to bank: Now lets see what our bank account looks like
after all the transactions above:

Now lets see what our bank account looks like after all the transactions above:

As previously mentioned, an account is the summary record of all transactions relating to a

particular item in a business. A business owner can quickly look over T-accounts such as the
one above in order to extract information. For example, if you examine the T-account above,
you can see that all increases to the bank account (receipts) occur on the left side. All the
decreases to the bank account (payments) occur on the right side.
The nature of each transaction could also be quickly determined. For example, if one looked
at the transaction on the 17th of April, one could quickly ascertain that on this day $10,500
was received due to "services rendered" (income was received immediately in cash).
If one examined the "creditors" entry on the 13th of May one could quickly determine that
$200 was paid to creditors. In this case one could add the word "telephone" in brackets next
to "creditors" to make the description even more clear the business paid the telephone
company for the bill owing.
Balancing the T-Account
The last element of the account that we need to cover is its balance. An accounts balance is
the amount of that item at a particular point in time. In a T-account we show the balance of
the item at the start of the period (month or year) and at the end of the period.
Lets say that for our examples regarding George's Catering, this was not the first period
(year) covered. Lets say Georges Catering had actually been operating for 3 years before
this year, and that the bank account had an opening balance (the balance at the beginning
of a period) of $4,300.
This would be shown as follows:

The "b/f" stands for "brought forward". Sometimes this is written as "b/d", which stands for
"brought down". At the end of the period (month or year) a brief calculation is done to work
out the closing balance (the balance at the end of a period) of the account.
This is done as follows:
1. Quickly look over the account to find the side of the account that has the bigger total.

It should be fairly apparent that the debit side is the bigger side.
2. Now add up the total of all the individual entries on this side and put it as a total below all
the other amounts on this side.

3. Put the same total on the other side below all the entries.

4. Add up all the individual amounts on the smaller side.

This comes to $20,700 in this example.

5. Work out the difference between this amount and the total inserted at the bottom.
$39,800 $20,700 = $19,100
6. Put this amount in just above the total and describe it as "Balance c/f" or "Balance c/d",
together with the date.
This will ensure that the smaller side also adds up to the total.

7. Take this same amount ($19,100) and insert it on the opposite side below the total, and
describe this as "Balance b/f" or "Balance b/d".

The "Balance b/f" is the actual closing balance of the bank account (a debit balance).
"Balance c/f" is just an entry used in calculating that the closing balance is $19,100 on the
debit side. The "Balance b/f" indicates that the debit side is greater than the credit side by
$19,100, and that we have $19,100 in our bank account at the end of May (the closing
balance of the account).
Indeed, one could merely have taken the total of the debit side ($39,800) and subtracted
the total of the credit side ($20,700) from this. We would arrive at the same answer: the
bank account has a balance of $19,100 on the debit side.

However, the steps taken above represent the system that is used in accounting to work out
the closing balances, and thus should be learned and practiced so that one knows what is
going on with ones accounts when one examines them.
So, we have our opening balance (debit) of $4,300 and our closing balance (debit) of
$19,100. Once again, this can be determined by a quick examination of the account.
Lets try another account the account "loan". There were two journals involving the loan:

What would the T-account look like?

From this account we can determine that $5,000 was loaned on the 7th of April (a credit to
the loan, meaning more of a liability), then $4,000 was repaid on the 13th of May (a debit,
meaning less of the liability), leaving us with an outstanding balance (credit) of $1,000.
One can easily cross-reference between two accounts because of the contra account being
used as the description of the transaction. In the "loan" account, "bank" is used as the
description for the credit on the 7th of April. If you look in the "bank" account above, "loan"
is inserted on the debit side of the T-account on the same date. We thus have an easy
cross-reference.
With an account with one entry on one side, we do the following to show the closing
balance:

We do not make any further entries to work out the closing balance the $4,000 balance is
self-evident from the single entry.
Remember, each account has its own code or number (called a folio number), and this
would normally be inserted next to the account name. So the final prepared T-account
would look like this:

"Sal-1" is the individual code for the account "salaries" and would also be referred to in the
journal entries relating to salaries. "J-1" is the code for "journal page 1". The folio number
or code thus helps with tracing information from the journal entry to the individual Taccounts, or from the ledger (T-accounts) back to the journal entries.

The third step is posting journals to the ledger (T-accounts).

What does this mean? Posting means to transfer the information calculated in the journals
to the various T-accounts in the ledger. Let's see exactly how this transfer is done. Look
through the journals and T-account below, then read on for the explanation:

In practice we would not put each individual transaction concerning bank into the "bank" Taccount. Instead, we would simply take the total of cash receipts from the cash receipts
journal (column "bank") and insert this on the debit side of the "bank" T-account. We would
likewise take the total of cash payments from the cash payments journal (column "bank")
and insert this on the credit side of the "bank" T-account.
This is the act of posting the journals to the ledger.
4. TRIAL BALANCE - A sheet displaying all the accounts of a business, drawn up as a trial
(test) of whether the total of all the debit balances equal the total of all the credit
balances (A balance is the amount of an item at a point in time. For example, The balance in
the bank account on the 1st of January was 5,000.). The trial balance is prepared as a final
check just before the financial statements are drawn up.
5. FINANCIAL STATEMENTS - A statement is a report. Financial statements are the most
important reports of a business. These statements are prepared from the information in
the trial balance. The purpose of these statements is to show the reader the financial
position, financial performance and cash flows of a business, as well as other useful
information concerning the business. Financial statements are usually prepared once a year.