The creditors journal

The purpose of the creditors journal is to record all transactions where the business obtains goods or services on credit. The business receives goods or services now, but will pay in the future. As the business now owes money it means a liability creditors control is created. Liabilities increase on the credit side, hence creditors control should be credited. As many accounts could be debited, a collective name such as sundry purchases are used as the contra entry. The accounts debited should add up to all credit purchases and other than trading stock could include equipment, maintenance, etc. Each of these accounts have as contra entry creditors control. The posting to creditors control takes place at month end whereas all sundry accounts on date of transaction and total columns also at month end.

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The Cash Payments Journal

The purpose of this journal is to record all the transaction where cash moves out of the business bank account.

Bank is an asset as the money belongs to the business. Furthermore this asset decreases as money is paid. Assets decrease on the credit side. Thus bank account should be credited with the total amount of the bank column in the journal at the end of the month. Since the amount paid during the month is made up of various types of transactions such as trading stock, rent paid, interest paid, etc a collective name “total payments” is used rather than the usual practice of an account name as contra entry.

Many other accounts will be debited when the double entry principle is applied. All these accounts that are debited should ad up to the bank amount for the month. Some will be debited at month end namely column totals such as trading stock whereas others namely those in sundry accounts such as rent paid are debited on the day of transaction. The contra entry for all these accounts are bank.

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Finally the non-cash columnĀ  discount received should be considered:

Discount is received when paying creditors early. What the business pay the creditors are less than what is owed to creditors. The difference between what is paid and owed is called discount received. The discount received therefore do not form part of bank total. The business owes creditors less money. In fact the sum of what is paid as well as the discount received is by how much the debt reduces. If money is owed to creditors it is a liability. Liabilities decrease as creditors are owed less money after paying them. Creditors control need to be debited as liabilities decrease on the debit side. The contra entry is bank and discount received as there are two legs that together resulted in less debt. According to double entry principle discount received will be credited with creditors control as contra entry. Bank was already addressed at top. As column totals are involved the posting date is month end.

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Accounting equation

For every asset in the business a corresponding claim exist either by the owner(s) or third parties. In other words the assets of a business is financed either by the owner(s) or third parties such as creditors. This hence by implication means that:

Assets (A) = Owner’s Equity (O/E) + Liabilities (L)

As this is an equation the left hand side should always equal the right hand side.

Using basic mathematical operations the equation could be manipulated so that:

O/E = A – L

L = A – O/E

Expenses

Expenses are linked to a decrease in assets or an increase in liabilities. When a businessĀ  for example have to pay for stationary it could either pay it in cash which results in a decrease of the asset bank OR will have to pay in future resulting in the increase of a liability creditors.

Expenses have the effect of decreasing what the business owes the owner(s) and hence reduces equity. Examples include: stationary, cost of sales, rent paid, interest paid, advertising, telephone, etc.

Income

Income is closely linked to increases in assets OR a decrease in liabilities. If a business sell goods or render services it will immediately receive cash or the future right to the cash i.e. debtors. Both cash and debtors are assets. When third parties i.e. creditors encourage the business to settle debt as soon as possible an income discount received will result which have the effect of reducing liabilities. Examples of income includes: Sales, Services Rendered, Rent Received, Interest Received, etc.

Income increases the equity of the owner(s). The more the income, the more the business owes the owner(s).