In order to illustrate the connection between the journal and the nominal ledger, we will use a simple example - a daily paper.
It is reasonable to assume that before the paper was printed, news was received in the editing room in a different form. A first, the news is received in the editing room in chronological order and not according to any classification of the news items.
However, when the final product (the printed newspaper) is received, the news items have been classified and concentrated according to the common denominator of each section in the paper. Let us assume that items are received in the news room (by telex from various reporters - in the following form:
It may be clearly that there are 2 separate systems in the newspaper:
In the life of a business as described in bookkeeping, there are the same two systems.
The accounts in the Nominal ledger look, technically, like the letter 'T' as was demonstrated previously at the start of this Tutorial. Let's try to describe the flow of the records in bookkeeping
Just as you, when you read a newspaper, go directly to the page in the paper that interests you (the sports section, the economics and so forth), when you use bookkeeping data you go directly to the relevant account in the Nominal ledger (the Max Account - will show you how much Max owes/is entitled to receive from/to pay to the business. The Cash Account - will show you how much money has been received/paid out.
At the beginning of the tutorial, it was pointed out that an account in the Nominal ledger looks like the letter T. In fact, there are additional auxiliary data in the account Let us assume that January 1, xx, we received a loan in cash from Max in an amount of $10,000. The Journal Entry will look as follows: (let us assume that it concerns a voucher for which the serial number in the journal is xx):
xx Debit: Cash 10,000
Credit: Max 10,000
1.1.xx - Loan from Max, Receipt 013.
The Journal Entry will be transferred to 2 accounts in the Nominal Ledger as follows:
Let us analyze, for example, the "Cash" account. As you see in addition to the sum of $ 10,000 debited, there are other auxiliary data as follows:
Account - Flow and Balance
Let us go back a little, to the example that was explained at the beginning of the tutorial, The Cash Account (in the Nominal Ledger) looks like this:
We will now learn two new concepts - Flow and Balance
In our example, there is a "Debit Balance" in the Cash Account (the total debit transactions exceed the credit transactions) of $ 1,100 (1300 - 200).
Before we go on to a comprehensive example, we will change the reference to the "Goods Account" a little. Until now, to keep matters simple, we have referred to the Goods Account as to a real account (the Warehouse Account), when on purchasing goods, we have debited the Goods Account (the warehouse 'received") and on selling goods, we have credited the Goods Account (the warehouse 'gave'). In fact, the reference to goods is different as the purchase prices ( 'in' to the warehouse) is normally lower that the price on leaving the warehouse (sale price).
The correct reference to the Goods Account is as to a normal profit and loss account, as for this purpose, 2 temporary bookkeeping accounts are opened: the first "Goods Purchased" (an expense - and therefore the account will normally be debited), the second "Goods Sold" (income - and therefore the account will normally be credited). A simple example appears below (the example ignores Value added tax):
1.1.xx We bought goods for cash for a sum of $ 1,000.
5.1.xx All the goods were sold for $ 1,200 cash.
The journal entries will be as follows:
We will go on now to a comprehensive example that we will use until the end of this tutorial (in the example, we will try to imagine that your name is Miles and that you are the owner of a new business).
Pay attention to the journal entries while referring to the general debit/credit table at the beginning of the tutorial.
A normal personal account that is in credit as the owner of the business (Miles) "is credited as eligible" to receive from the business (refer to the business as a separate body) his basic investment in the sum of $ 10,000. To differentiate between the external creditors of the business (suppliers, lenders and so forth), and the owner of the business, the prefix "Owners Equity" appears at the beginning of the name of the account. Remember that from the point of view of the business, the business owners eligibility to be credited with $ 10,000 is not as important as the financial eligibility of a normal supplier to receive $ 10,000. In the current cash management of the business, the eligibility of the owner of the business can be almost completely ignored as this obligation is not immediately repayable.
** Current Account
The account can be referred to as both a real account (like Cash) or as a personal account.
1. Real account
Imagine for a moment that the money in the bank is in a metal cash box that belongs to you. On depositing money, the box "received" money (received - debit) while when drawing a check the box "gave" money (gave - credit)
2. Personal Account
In making a deposit in the current account it is as though the bank manager (personal) owes you money. When you draw money out of the account, the bank manager owes you less than he did a moment before you made the withdrawal. (A reduction of a debit is expressed in bookkeeping as a credit transaction).
Comment: For the sake of brevity, only the following details appear on each account page.
1. The journal entry number.
2. Name of the contra-account.
3. Description of the transaction.
Bank Reconciliation Salaries Tax Deduction at Source Value added tax
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