Processing Accounting Data

Study Unit 4 showed you how double-entry works. Study Unit 5 shows you where transactions are first recorded. Journals are the gateway into the accounting system — nothing reaches the ledger without passing through a journal first.

1. The accounting cycle

All accounting data is processed within a structured, repeating framework called the accounting cycle. Each period (usually a month or year) follows the same steps, in order.

2. Books of first entry: journals

In a manual system, recording every transaction directly in the ledger is impractical — the ledger becomes unmanageably large, and only one person can use it at a time. Journals solve this by grouping similar transactions together and recording them in summary form before they reach the ledger.

A journal is the link between source documents (invoices, receipts, cheque counterfoils) and the general ledger. At month-end, the journal totals are posted — transferred — to the relevant ledger accounts in summary form.

3. Types of journals

4. Cash receipts journal (CRJ)

Every amount received and deposited into the entity’s bank account is recorded in the CRJ. At month-end, the total of the Bank column is debited to the Bank account in the ledger. All other column totals — and individual entries in the Sundry column — are credited to their respective accounts.

CRJ format — Fix-‘n-Mat, February 20.1

5. Cash payments journal (CPJ)

Every payment made by cheque from the entity’s bank account is recorded in the CPJ. At month-end, the total of the Bank column is credited to the Bank account. All other column totals and individual Sundry amounts are debited to their respective accounts.

CPJ format — Fix-‘n-Mat, February 20.1

6. Credit journals: debtors & creditors ledgers

When businesses buy and sell on credit, they deal with many individual debtors and creditors. If all their accounts were in the general ledger, it would become unmanageable. The solution: subsidiary ledgers.

• A Debtors ledger holds an individual account for every customer who owes money
• A Creditors ledger holds an individual account for every supplier owed money
• The general ledger holds a single Debtors control account and Creditors control account — their balances must always equal the totals of all individual accounts in the subsidiary ledgers

7. Purchases journal (PJ) & purchases returns journal (PRJ)

Only merchandise purchased on credit is recorded in the PJ. At month-end, the total is posted as a single debit to the Purchases account and a single credit to the Creditors control account in the general ledger. Each individual supplier’s account is credited in the creditors ledger.

PJ format — ABC Dealers, May 20.3

The Purchases Returns Journal (PRJ) records returns of merchandise to creditors. Month-end posting: Dr Creditors control / Cr Purchases returns.

8. Sales journal (SJ) & sales returns journal (SRJ)

Only merchandise sold on credit is recorded in the SJ. At month-end, the total is posted as a single credit to the Sales account and a single debit to the Debtors control account in the general ledger. Each individual customer’s account is debited in the debtors ledger.

SJ format — ABC Dealers, May 20.3

The Sales Returns Journal (SRJ) records goods returned by customers. Month-end posting: Dr Sales returns / Cr Debtors control.

9. General journal (GJ)

The general journal captures everything that doesn’t belong in any of the specialised journals above. Every entry must include a narration — a brief explanation referring to the source document. This is not optional.

Common general journal entries include:

• Non-merchandise credit purchases (e.g. vehicle, equipment bought on credit)
• Correction of errors (e.g. amount posted to wrong account)
• Credit losses written off (bad debts)
• Year-end adjustments (covered in Study Unit 6)
• Opening entries

GJ format — ABC Dealers, May 20.3

10. Posting rules summary

After journals are written up, their totals (and individual sundry entries) are posted to the ledger. The table below summarises exactly what gets debited and credited in the general ledger for each journal.

11. Settlement discount

Settlement discount (also called cash discount) is offered to encourage early payment. It is conditional — the debtor only earns it if they settle within the stated credit period. It is different from trade discount, which is unconditional and never recorded.

12. Value-Added Tax (VAT)

VAT is levied at every point in the production and distribution chain. The VAT system is designed so that each business only pays tax on the value it adds — it can recover the VAT it paid on purchases against the VAT it collected on sales.

Key VAT rules

• VAT can only be charged by registered vendors. Registration is compulsory once taxable supplies exceed the threshold in a 12-month period.
• Taxable supplies are standard-rated (15% in SA) or zero-rated (0%). Exempt supplies are not subject to VAT at all.
• The current SA VAT rate (as at this module) is 15%.
• To extract VAT from a VAT-inclusive amount: Amount × 15/115 (or × 3/23 at 15%)
• Two accounting bases: Invoice basis (tax triggered by invoice or payment, whichever comes first) and Payments basis (tax triggered only when paid/received).
• VAT returns are typically submitted every two months.

VAT in the journals

When VAT is included, each journal needs additional columns. For example, in the CRJ: a VAT Output column captures the tax portion of each sale. In the CPJ: a VAT Input column captures the tax portion of each purchase. At month-end these totals are posted to the VAT Output and VAT Input ledger accounts respectively, and then closed off to the VAT Control account to determine the net amount payable or receivable.

13. Worked exercises

Journal classification and posting questions in the FAC1502 exam style.

14. Quick quiz

Twelve questions covering the full study unit. No notes — test yourself first.