The (General) Journal

All monetary transactions conducted by the business should be recorded in one of the books of original
(prime) entry BEFORE being posted to the ledger accounts.
The (general) journal is THAT book of original entry used for transactions for which there is no other
book of prime entry.
The journal is therefore used for the following entries/transactions-:
Purchase and sale of items OTHER than stock in trade. [fixed assets, shares]
Opening entries in a new set of ledgers
Transfers between accounts
[such as closing entries]
Adjustments to accounts
[such as prepayment of expenses]
Corrections to errors which occurred during posting to the ledgers
The journal should provide the following information -:
The types (classification) of accounts involved in the transaction [asset, liability, expense, revenue]
The effect of the transaction on the accounts
[did they increase or decrease?]
The action taken as a result of the effect of the transaction
[which to debit or to credit]
The brief explanatory narration of the reason for the entry.
The journal should always show the account to be DEBITED before the one to be CREDITED.
DATE
Date
Date

ACCOUNT
To be debited

DEBIT

CREDIT

amount

To be credited

amount

The narrative (reason why the entry has been made) goes here

The journal follows the general rules associated with the double-entry principle of accounting, such that
if the transaction causes

the value of an asset to INCREASE then DEBIT the account of that asset;
the value of an asset to DECREASE then CREDIT the account of that asset;
the value of a liability to INCREASE then CREDIT the account of that liability;
the value of a liability to DECREASE then DEBIT the account of that liability

Journal entries regarding certain types of activities:

Shares- These represent (shareholders) equity or capital investment in the business entity. They may
be classified as common (ordinary) shares or preference shares. They may have been issued at
par, at premium (in excess of par), [at discount (under par)] or at no par value.
Par is the face or nominal value of the share [note: it may differ from the issue price or the current market price] . Par
value is the least amount a share of stock can be sold for. No par shares can be issued and sold at any
price.
Issued shares or share capital are thus displayed as equity
If on January 1, 2012 an entity sold 20000 ordinary $1 shares at $1.50 each the journal entry
DATE
Jan 1

ACCOUNT
Cash
Ordinary shares
Share premium

DEBIT

CREDIT
30000
20000
10000

To record the issue of 20000 ordinary shares at a premium of $0.50

If on January 1, 2012 an entity sold 20000 ordinary shares (no par) at $1.50 each the journal entry

DATE
Jan 1

ACCOUNT
Cash
Ordinary shares

DEBIT

CREDIT
30000
30000

To record the issue of 20000 no par ordinary shares

Dividends - These represent the return on the investment made by the shareholders in the entity.
Dividends reduce the entitys retained earnings, but they are not treated as an (operating)
expense. Dividends are paid at the determination of the board of directors [that is if, when, and
how much]!
Dividend transactions necessitate two accounting actions:
On declaration it requires shareholders to be disclosed as creditors since the entity now has a
legal liability to pay.
On payment it requires retained earnings to be reduced in the process of honouring the legal
debt created (at declaration).
If an entity declares a dividend of $40000 on August 1st , 2012 payable on November 10th 2012

DATE
Aug 1

ACCOUNT
Dividends declared
Dividends payable

DEBIT

CREDIT
40000
40000

To record the declaration of dividends payable on ordinary shares

DATE
Nov 10

ACCOUNT
Dividends payable
cash

DEBIT

CREDIT
40000
40000

To record the payment of dividends payable on ordinary shares

DATE
Dec 31

ACCOUNT
Retained earnings
Dividends declared

DEBIT

CREDIT
40000

To close off the declaration of dividends on ordinary shares

40000

Liabilities
A liability is an obligation to pay cash or provide goods/services to another entity.
Liabilities can be

current (settlement is due within 12 months of the balance sheet date) or

long-term (settlement is due beyond 12months of the balance sheet date)

Bonds
A formal agreement of indebtedness represented by a promise to pay interest in cash at a
specific annual rate; and the principal amount at a specific maturity date.
They are issued above or below face value (principal amount). The interest (coupon) rate is the
lenders return on their investment. Thus the bond interest is an expense to the borrower.
A bond issued at discount - the amount is less than its face value; the difference is disclosed as discount
on bonds. The discount is DEBITED to the bond interest expense account.
DATE
date

ACCOUNT
Cash
Discount on bonds
Bonds payable

DEBIT
amount
amount

CREDIT

amount

To record the issuance of bonds

A bond issued at premium the amount is greater than its face value; the difference is disclosed as
premium on bonds. The premium is CREDITED to the bond interest expense account.
DATE
date

ACCOUNT
Cash
Premium on bonds
Bonds payable

DEBIT
amount
amount

CREDIT

amount

To record the issuance of bonds

Bonds are amortised over their life based on the formula

= bond discount (premium) amortisation.
Bonds may be callable (redeemable before maturity at the option of the issuer); and may be so done at
a premium (in excess of par).
Mortgages and debentures
Mortgage a formal agreement of long-term indebtedness secured by the pledge of specific property.
Debenture a formal agreement of indebtedness secured by a general claim against all assets (rather
than a specific claim)