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Summarizing Business Transactions in Excel 2010: From the Journals to the Balance Sheet

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This chapter shows how you can use Excel to create an account structure in a workbook that contains both a general journal and special journals, and in a workbook that contains both a general ledger and subsidiary ledgers.
This chapter is from the book

In This Chapter

  • Understanding Journals 97
  • Excel Tables and Dynamic Range Names 104
  • Understanding Ledgers 110
  • Getting a Current Liabilities Balance 121

Chapter 3, "Valuing Inventories for the Balance Sheet," covered the topic of inventory valuation in detail. The various methods discussed there are needed to fill in the current assets section of the balance sheet. This chapter focuses on recording transactions in journals, cataloging transactions in ledgers, and summarizing the information in the balance sheet.

Following is the basic structure of a balance sheet:

  • The Assets section consists of the company's current assets (typically including cash, accounts receivable, inventory, and prepaid expenses) and its fixed assets. This section also contains any other assets that do not fit neatly within the current and fixed classifications.
  • The Liabilities and Owner's Equity section consists of the company's current and long-term liabilities; it also includes the owner's equity as described next. Typically, these include accounts payable, short- and tong-term notes payable, and a few other types of liabilities that vary according to a company's line of business.
  • The difference between the company's assets and its liabilities is the equity—that portion of the company's worth that belongs to its owner or owners.

The first three chapters of this book introduced some fundamental concepts, such as accounts, revenues, assets, debits, and credits. They also discussed some of the functional relationships among these concepts.

This chapter introduces ways that you can use Excel to establish the structural relationships among accounts, journals, and ledgers. It describes how to manage the flow of information about revenue, expenses, and profit by using Excel workbooks, worksheets, and Visual Basic for Applications (VBA) code.

Understanding Journals

The basic flow of information for business transactions follows this sequence of events:

  1. A business transaction occurs—usually, a sale or a purchase.
  2. Information about the transaction is recorded in a journal. The journal usually records the information about the transactions in chronological order. For example, one record might contain data on a sale that took place on March 1, the second record might describe a purchase that was made on March 2, the third record might have data on a payment that was made on March 3, and so on.
  3. Information about the transactions is copied (or posted) from the journal to a ledger. This ledger has a different section for each account, such as accounts receivable or notes payable. Within each section, information is usually recorded chronologically. The main difference between the journal and the ledger is that the ledger categorizes the information from the journal into specific accounts, whereas the journal records the information chronologically—transactions involving several different accounts would be adjacent if they occurred on the same date.
  4. Information in the ledger is summarized to obtain a total for each account at the end of an accounting period. These totals are used to prepare financial statements such as the income statement and the balance sheet.

See Figure 4.1 for an example of a general journal.

Figure 4.1

Figure 4.1 Use the general journal as a catchall for transactions that don't belong in special journals.

Why qualify the term journal with the word general? Because keeping only one journal and one ledger gets cumbersome. Notice in Figure 4.1 that only three transactions are shown in the general journal. These transactions pertain to three relatively infrequent events: the return of some merchandise from a customer, the return of some inventory to a supplier, and the purchase of office equipment. All the remaining transactions during June are kept together in special journals.

If you had only one journal, the task of posting information from the journal to the ledger could become too time-consuming. Furthermore, using only one journal makes finding information about a specific sale or payment more tedious, even if you use Excel's lookup functions. However, computer applications whose sole purpose is accounting largely do away with this problem, and with special journals as well.

Understanding Special Journals

Companies sometimes use special journals, which are places to record information about particular types of transactions. The most frequently occurring transactions tend to be sales to customers and payments to creditors. Also, many companies do business with their customers and suppliers on both a cash basis and a credit basis. These frequent transactions create the need for four special journals—two for payments and two for receipts, two for cash and two for credit:

  • A cash receipts journal contains information about payments that you receive from customers. These payments could take the form of currency, such as when a customer hands you $20 to purchase an item, or a check, such as when you receive payment for an earlier credit purchase. It might also contain information about other cash receipts, such as capital investments in the company.
  • A cash payments journal contains information about payments that you make to creditors and suppliers. Normally, these payments are checks that you write, but they could also be payments made using currency. This journal also contains information about operating expenses that you pay in cash, such as salaries or office rent.
  • A sales journal contains information about credit sales that you make. Together with sales information in the cash receipts journal, the sales journal accounts for all sales that your business makes.
  • A purchases journal contains information about credit purchases that you make from your suppliers. Together with cash purchase information in the cash payments journal, the purchases journal accounts for all purchases that your business makes from suppliers.

Various other types of transactions exist that aren't recorded in these special journals—they are recorded in the general journal, which acts as a catchall for miscellaneous transactions.

Your own business might have a category of transactions that occur frequently but do not fit well into these four special journals. If you're going to use special journals at all, you should choose the ones that make sense for your line of business; any structure that has special journals for the most frequently occurring types of transactions will do.

For example, suppose that you run a car rental agency. You probably don't purchase cars from suppliers very often, but you might regularly send your cars to garages and body shops for maintenance. In that case, you might use a special repairs and maintenance journal instead of a special purchases journal.

Structuring the Special Sales Journal

The structure of your special journals depends on the journal's purpose and the information you intend to keep in it. Figure 4.2 shows an example of a special sales journal.

Figure 4.2

Figure 4.2 The special sales journal for Bell Books records credit purchases by its customers.

Notice these key elements of the sales journal:

  • Each account has a different customer name (for example, Fred Howell, Ellen Jackson, and so on). These accounts are summarized in the accounts receivable ledger so that Bell Books can keep track of whether a customer owes money on an account (and, if so, how much). See the "Creating Subsidiary Ledgers" section later in this chapter for more information on the accounts receivables ledger.
  • Each customer account in the sales journal is an individual account receivable—an asset account—therefore, the transaction amount is recorded in the sales journal as a debit. (Recall that asset accounts and expense accounts record increases as debits.)
  • A sales journal usually contains several transactions, and a particular customer often shows up more than once. For example, Figure 4.2 shows that Fred Howell has made two purchases during June. But the journal itself does not summarize his account. Customer account summaries are found in the accounts receivable ledger.
  • Unlike the general journal shown in Figure 4.1, the special sales journal has no column titled Credit. The reason is that the offsetting credit amounts are accumulated in the general ledger's sales account.
  • The check marks in Column D, shown in Figure 4.2, indicate that a particular transaction has been posted from the sales journal to the sales account in the general ledger.

Structuring the Special Purchases Journal

The purpose of the special purchases journal differs from that of the special sales journal, and it's structured a little differently. Figure 4.3 shows Bell Books' special purchases journal.

Figure 4.3

Figure 4.3 The special purchases journal for Bell Books records credit purchases from its suppliers.

For tracking purposes, the sales journal uses the invoice number in column C. In contrast, the purchases journal uses the date of the supplier's invoice; this helps Bell Books track the length of time a payable invoice has been outstanding. Of course, if you want, you can also show the supplier's invoice number in the purchases journal. Doing so will help you keep your records straight if you have a supplier who might send you more than one invoice with the same date.

Another difference between the sales and purchases journals is that the purchases journal shows the amount of the purchase as a credit, whereas the sales journal shows the amount of a sale as a debit. The purchases are posted to accounts payable, a liability account that records the company's noncash purchases, so an increase in its balance is recorded as a credit. The sales are posted to accounts receivable, an asset account that records the company's noncash sales, so balance increases are recorded as debits.

Again, there is no debit column in the purchases journal because all entries in this journal are noncash purchases. The offsetting debit entry is found in the accounts payable ledger.

Structuring the Cash Receipts Journal

The two special journals named Sales and Purchases account for all of Bell Books' noncash transactions. It's still necessary to account for the cash receipt and cash payment transactions. Figure 4.4 shows the special cash receipts journal.

Figure 4.4

Figure 4.4 Normally, a cash account is debited for cash payments.

The structure of the cash receipts journal is quite different from the structure of the sales and purchases journals. As explained previously, all transactions entered in the sales journal are credit transactions that are posted to one ledger account: the sales account. Similarly, all transactions in the purchases journal, also credit transactions, are posted to the purchases ledger account. However, you might want to post cash transactions, both receipts and payments, to one of several accounts. The structure of the cash receipts and cash payments journals builds in the additional flexibility required.

Usually, a transaction in the cash receipts journal is posted to the cash ledger account. The total ($84,794.10) of all the individual transactions that appears in column C of Figure 4.4 is posted to the cash account in the general ledger. For example, the owner of Bell Books invests an additional $52,000 in the company on June 1 (see cell C5 of Figure 4.4). This investment comes in the form of cash and, consequently, is posted—as part of the total cash receipts in column C—as a debit here. It also appears as a debit in the general ledger's cash account. (See the "Creating the General Ledger" section later in this chapter for more information about the general ledger.)

Notice that on June 12, Bell Books sold the third floor of its building to another company for $24,000. (It's a small building.) Bell Books received $18,000 of the $24,000 in cash and accepted a note receivable from the buyer for the remaining $6,000. (See cells C9 and E9 of Figure 4.4.) The $6,000 could have been entered in the general journal instead of in the cash receipts journal; however, it's convenient to keep the two portions of the transaction together so that you can see the entire transaction in one place.

This transaction illustrates the purpose of the columns titled Other Accounts, shown in columns D and E of the worksheet in Figure 4.4. Column D contains the name of the ledger account where the transaction will be posted, and column E contains the debit amount that will be posted there.

The amounts in the Debits section of the cash receipts journal are posted to the general ledger as follows:

  • The total of the receipts in column C, $84,794.10, is shown in cell C15 of Figure 4.4. It is posted as one total value to the general ledger's cash account. (Again, see the "Creating the General Ledger" section later in this chapter for more information about the general ledger.)
  • The individual amounts of any receipts in column E are posted in the general ledger to the accounts that are named in column D. In Figure 4.4, that's just one account: notes receivable (abbreviated in the figure as Notes Rcvble).

Figure 4.4 also shows the Credits section of the cash receipts journal, which has a structure similar to its Debits section. Two main ledger accounts are credited when transactions are posted from the cash receipts journal: accounts receivable (column I) and sales (column J).

For example, Bell Books received a check on June 8 from Fred Howell as payment for an invoice dated June 3. The transaction is shown in row 8 of the cash receipts journal, in Figure 4.4, as follows:

  1. An entry for the amount of the check is made in cell C8, indicating that the general ledger account Cash is to be debited by $326.67.
  2. An entry showing the account that is to be credited is made in cell G8: Fred Howell's account will be credited by $326.67. That's an account receivable, thus an asset, so a reduction in its balance due to a payment is recorded as a credit in the next step.
  3. An entry showing the amount of the check is made in cell I8, indicating that the ledger account named Accounts Receivable is to be credited by $326.67.
  4. When the amount of $326.67 is actually posted to accounts receivable, a check mark is entered in cell H8 to indicate that the posting has been made.

The posting of $326.67 as a debit to Cash and as a credit to accounts receivable shows that the amount is moved into Cash from accounts receivable at the point that the payment is received.

Entering Sales in Cash and Sales Ledgers

As another example, when a customer pays $76.68 by check on June 6 (see row 6 in Figure 4.4), that amount is entered into cell C6 to show that the account named Cash is to be debited by $76.68. The same figure is entered into cell J6 to show that the account named Sales is to be credited by $76.68.

The reason for entering the sale amount of $76.68 in both the cash and the sales ledger accounts is due to a concept that this book has assumed but not yet made explicit: double-entry accounting. Every business transaction must be entered as both a debit and a credit, and the debits and credits must be made in different accounts. The double-entry method has various benefits, one of which is that the sum of all debit entries in the ledger should equal the sum of all credit entries. If the two sums are not equal, you know that the business's accounts are not in balance and an error has been made somewhere.

For example, consider the transaction shown in row 13 of Figure 4.4. On June 29, Bell Books took out a bank loan for $13,000. In exchange for the loan papers, the bank wrote a check to Bell Books for $13,000, and the company deposited it in a checking account. Therefore, Bell Books' cash assets have increased by $13,000. But the company has not suddenly become $13,000 richer by depositing a check; eventually, it will need to repay the loan. Therefore, the company's liabilities have also increased by $13,000, which is documented by increasing the account named Notes Payable by $13,000.

The net effect, of course, is that the company's worth remains the same because loans aren't profits. In contrast, when Bell Books sells a book to a customer for cash, four events occur:

  1. Its cash account (an asset account) is debited.
  2. Its sales account (a revenue account) is credited.
  3. Its inventory account (an asset account) is eventually credited.
  4. Its cost of goods sold account (a revenue account) is eventually debited.

If the amount involved in 1 and 2 is greater than the amount involved in 3 and 4, the company makes a profit. Buy low and sell high.

Finally, notice that column H, in the Credits section of the cash receipts journal, indicates with a check mark whether a receipt of funds has been posted. The only entries in this journal that are ever marked as posted are payments to accounts receivable. The reason is that accounts receivable maintains detailed information about specific accounts (for example, Fred Howell's account, Ellen Jackson's account, and so on). Therefore, when it receives funds for a specific customer account, Bell Books posts the amount to that account.

In contrast, the company can post a total amount for cash sales to the general ledger's sales account. In that account, there's no particular reason to maintain information about who bought an item from Bell Books for cash.

Structuring the Cash Payments Journal

The sales journal and the purchases journal collect information about noncash transactions, and the cash receipts journal collects information about cash paid to the company. Unfortunately, the company must also pay out cash, and those payments are recorded in the cash payments journal, shown in Figure 4.5.

Figure 4.5

Figure 4.5 Normally, the cash account is credited for cash payments.

The overall structure of this journal is the same as that of the cash receipts journal, with one major difference: The Credits section is shown to the left of the Debits section, instead of to the right. Normally, debits are shown to the left of credits, but in a special journal, you can put the columns in any sequence.

It's more convenient to show the Credits section to the left of the Debits section in the cash payments journal because it places the Cash column on the left side of the worksheet, where it's more easily accessible. The accessibility is important because, in cash transaction journals, every transaction contains a cash entry.

Notice in Figure 4.5 that the specific ledger accounts in columns J and K are accounts payable and purchases, respectively. The reason is that they are the accounts most frequently debited when your company makes a cash payment. Typically, you use other accounts, such as salaries and telephone expenses, only once a month when checks are written to employees and to the phone company. Again, the way your company does business should determine which accounts you show as columns in the cash payments journal and which ones you show as line items in the Other Accounts column, such as column L in Figure 4.5.

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