Tag Archives | journal entries

Journal Entries (JEs)

See Also:
Double Entry Bookkeeping
Journal Entries For Factoring Receivables
Accounting Principles
Accounting Concepts
Adjusting Entries

Journal Entries Definition

A journal entry is a recording of a transaction into a journal like the general journal or another subsidiary journal. Journal entries for accounting require that there be a debit and a credit in equal amounts. Oftentimes, there is an explanation that will go along with this to explain the transaction.

Journal Entries Meaning

A journal entry means that a transaction has taken place whether it is a sale to a customer, buying goods from a supplier, or building a warehouse. These transactions affect both the balance sheet and income statement.

As said before, journal entry accounting requires that there be an equal debit and credit for every transaction. This is also known as double entry bookkeeping. Many journal accounts have a normal balance. For example, assets have a normal debit balance if the account is increased and it is a credit if it is decreased.


Click here to download: The Smart Back Office for SMBs


Journal Entries Example

The following example will use both balance sheet and income statement accounts to show how they work.

Bill has been looking for a certain toy for his son. He walks into Toys Inc. to find it. After some searching, Bill finds a GI Joe for $14 and buys it to take home to his son. The toy cost Toys Inc. $9 to get the toy from its supplier. Thus, Toys inc. will record the following journal entries into the Sales Journal:

Cash………….$14

Sales Revenue…………..$14

COGS………….$9

Inventory…………………..$9

New Call-to-action


If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Journal Entries

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Journal Entries

Originally posted by Jim Wilkinson on July 24, 2013. 

0

General Ledger Reconciliation and Analysis

See also:
Account Reconciliation
Standard Chart of Accounts
Problems in Chart of Account Design
Cash Flow Statement
Income Statement
Subsidiary Ledger

General Ledger Reconciliation and Analysis Definition

Define a general ledger as the financial record of every transaction of a company. Commonly, it is referred to as the “books” of the company. In the general ledger, record each of the transactions twice as both a subtraction (debit) and addition (credit). The general ledger is the main accounting record of the company.

Consequently, general ledger reconciliation is the process of ensuring that accounts contained in the general ledger are correct. In short, reconciliation makes sure you place the appropriate credit and debit in the associated accounts. Seemingly simple, this process requires an experienced bookkeeper when applied to small companies. Complicated applications require the hand of a trained CFO or equivalent controller. In either situation, a general ledger reconciliation policy must by enacted to ensure consistency.


Download The CEO's Guide to Keeping Score


General Ledger Reconciliation Explanation

Not every general ledger account has a detail subsidiary ledger to reconcile to. Monthly all balance sheet accounts should be analyzed for accuracy. In addition, periodically it may be necessary to reconcile revenue accounts, expense accounts and miscellaneous balance sheet accounts.

In these cases the procedures are similar to reconciling an account to a subsidiary ledger. Print a detail general ledger transaction report for the account. Then, eliminate reversing journal entries correcting errors. Finally, investigate any transactions that are unusual in nature. For example a debit entry or decrease to a revenue account would be unusual.

Finally, prepare a detailed schedule of transactions remaining in the final balance.

General Ledger Reconciliation Process

Some wonder “what is general ledger reconciliation?”. Others wonder how to do general ledger reconciliation. For bookkeepers, adhere to the following process:

First, study the accounting policy of the company. Ignorance to this is missing the essential foundation of the process; knowing the rules is key.

Then, gather information. These include receipts, invoices, account statements, invoices, and related financial reports. This data is the information the accounting staff puts into accounts.

Third, ask questions about the accounts. What items did the company purchase? Do they relate to company policy? Why are they included in the given account? When were they spent/made?

Finally, document your work. Proper documentation ensures properly reconciled accounts as much as it ensures effective bookkeeping in the first place.

General Ledger Reconciliation Template

A general ledger reconciliations template can be found at: Microsoft Templates.

The CEO's Guide to Keeping Score


Is your closing process as efficient as it could be? Access our Complete Monthly Close Checklist to use when closing your company’s or your client’s monthly books.

Periodic inventory System

 

General Ledger Reconciliation and analysis

Originally posted by Jim Wilkinson on July 23, 2013. 

8

Payroll Accounting

See also:
Commission Accounting
PEO Arrangement Compared to Outsourcing Payroll
Direct Labor
Pension Plans
Federal Unemployment Tax Act (FUTA)

Payroll Accounting

Payroll Accounting is the function of calculating and distributing wages, salaries, and withholdings to employees and certain agencies. It is generally done through different documents such as time sheets, paychecks, and a payroll ledger. Payroll Accounting also involves the process of issuing reports to upper management, so that they are able to make informed decisions about the company’s labor-cost data.

Payroll Accounts

Below are some payroll basic accounts that are used in association with accounting payroll entries as well as a description of each one and the relevance towards payroll.

Assets

Cash is the petty cash account which is used to empty the accrued payroll account when the payroll is distributed to the company’s employees.

Liabilities

Accrued Payroll represents a liability calculated by taking the gross pay and subtracting all deductions, or the amount that is due to the employees.

Federal Income Taxes Withheld

This account serves as a deduction from the gross pay or payroll account. It is an accumulation of payroll taxes as a percentage amount which is due to the U.S. Government. Payroll tax rates differ from business to business.

Federal Insurance Contributions Act (FICA) Taxes Payable

The FICA Taxes Payable represents a liability that is due to the U.S. Government. It is then used to fund institutions like Medicare and the Social Security Administration.

Insurance Withheld

Insurance withheld is another deduction from the gross pay and represents a contribution to the employee’s insurance provided by the employer.

Note: Other voluntary payroll deductions and withholdings can be present like bond or stock withholdings that a company would use for investments on the employee’s behalf. Other deductions include union dues or pension funds that the company may hold for its employees.

Expenses

The payroll account is the gross pay that is calculated by a payroll accountant (i.e. the salary payment or the hourly rate times the number of hours worked).

Payroll Accounting Journal Entries

This is a typical accounting payroll example of journal entries when a company is calculating and distributing the payroll.

Account                           Dr.               Cr.

Calculation:
Payroll                           xxxx

Federal Income Taxes Withheld                       xxxx

FICA Taxes Payable                                  xxxx

Union Dues Withheld                                 xxxx

Bond Withholdings                                   xxxx

Accrued Payroll                                     xxxx
Distribution:
Accrued Payroll                   xxxx
Cash                                                xxxx

Payroll Accountant Duties

Oftentimes, companies outsource their payroll accounting to specialized firms. These firms can perform the same function for a much lower cost than if the company generated them in-house.


Click here to download: The Guide to Outsourcing Your Bookkeeping & Accounting for SMBs


There are six major job functions that the payroll department or specialized company must perform throughout the year, including the following:

1)  Compute gross pay (hourly or salary)

2)  Compute the total amount of deductions (FICA, taxes, etc.)

3)  Calculate the total amount due to employees i.e. the gross pay minus the amount of deductions.

4)  Authorize the amount of payments due to employees.

5)  Distribute the payroll once authorized.

6)  Issue reports to upper management concerning labor-cost data.

Accounting Payroll System

In the past, accounting payroll systems consisted of two journals. The first is the payroll journal. Then, the second is the payroll disbursements journal. Companies used the payroll journal to accrue for salaries and wages towards employees as well as government obligations withheld from the employee’s paycheck. Thus, companies used disbursements journal to pay off these accumulated accruals when they became due.

But thanks to computer systems like Peachtree and Quickbooks, they have combined both of these journals into a payroll ledger. Furthermore, you can outsource these payroll functions at a lower cost and efficiency for a company.

Guide to Outsourcing Your Business's Bookkeeping and Accounting


Payroll Accounting

Originally posted by Jim Wilkinson on July 24, 2013. 

0

Prepaid Income Tax

In accounting, Prepaid Income Tax is defined as an asset listed on the balance sheet that represents taxes that have been already paid despite not yet having been incurred. It is also called a deferred income tax asset.

Prepaid Income Tax Explanation

Prepaid income tax is a form of prepaid expense. The most common reason why prepayment on income taxes occurs is due to over-estimation of tax deposits. In this situation, taxes are estimated from the financial records of the previous year. These estimated taxes are paid. Then, when the year-end taxes are found to be less than the taxes paid earlier, prepayment on income taxes has occurred. This prepayment can create one of two results. Either it results in a tax refund or the credit written off towards the tax liability of the next period.

(NOTE: Want to take your financial leadership to the next level? Download the 7 Habits of Highly Effective CFOs. It walks you through steps to accelerate your career in becoming a leader in your company. Get it here!)

The difference between prepaid income tax and a deferred tax asset is that prepaid income tax occurs within one year. Conversely, a deferred income tax asset can occur for a period of longer than one year.

Often, prepaid income taxes are the result of poor assumptions. Generally, company controllers overestimate the needed tax deposits. In conclusion, this is one of the most common cases leading to prepaid income taxes.

Prepaid Income Tax Journal Entry

The following is what the prepaid income tax journal entry may look like:

DR                                                    CR
Prepaid Income Tax               $100,000
Cash                                                                                              $100,000

Income Tax Expense              $25,000
Prepaid Income Tax                                                                   $25,000

Result: Prepaid income tax balance = $75,000

Download the 7 Habits of Highly Effective CFOs to find out how you can become a valuable financial leader.

Prepaid Income Tax

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before your financial statements are prepared.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Prepaid Income Tax

See Also:

Marginal Tax Rate
Tax Brackets
Flat Tax Rates
Cash Flow After Tax
Unclaimed Property

3

Journal Entries For Factoring Receivables

See Also:
Factoring
Another Way To Look At Factoring
Accounting for Factored Receivables
Can Factoring Be Better Than a Bank Loan?
Factoring is Not for My Company
History of Factoring
How Factoring Can Make or Save Money
The What, When, and Where about Factoring
Journal Entries (JEs)

Journal Entries for Factoring Receivables

The following scenario will provide a clear, simple and effective way to record journal entries for factored receivables. In the spirit of simplicity and efficiency, remember that your journal entries ought to be booked only once per day on a daily summary basis (i.e. ‘ONE BIG JE ONCE PER DAY‘). You should then use the lender’s reports as the source document for these journal entries. But make sure you double-check your journal entries by auditing the report(s) sent by the factoring lender.

Case 1- Selling Receivables

Assumptions:

  1. Factored Receivable: $ 100,000
  2. Advance Rate: 80%
  3. Factored Fee Expense (FFE): $ 1,000

There are three accounts which need to be created to account for a factoring relationship based on With Recourse Conditions, including the following:

Step 1- Initial Funding by Lender

To account for the initial funding (when the lender selects the invoices from the Schedule A form to advance funds), make the following entry:

Assuming a $100,000 receivable with an 80% advance rate:

Dr. Cash 80,000
Cr. FIS 80,000

(If you want to manage and improve your company’s cash flow in 24 hours, download the 25 Ways to Improve Cash Flow whitepaper.)

Step 2- Receipt of Customer Payment

Accounting for customer payments will require the use of the Collections Report, which is produced daily by the lender. As you identify each invoice and the net reserve (i.e. the extra $ 20,000) is remitted by the lender, apply the payment to the invoice in the accounts receivable journal by debiting the FIS account.

Assuming a $100,000 payment in full by customer:

Dr. Cash 19,000
Dr. FFE 1,000
Dr. FIS 80,000
Cr. A/R 100,000

In booking the journal entries in this manner, your cash balance will increase by $99,000 at the end of the transaction cycle. And the other $ 1,000 will show up as a fee expense on the P&L statement. Upon full payment, “zero out” both the A/R (asset account) and the FIS (contra asset account).

Step 3- Partial Payment of Invoice(s) by Customer

If a customer short pays, then only apply the amount paid to the invoice in the journal in the manner above. For payments on non-factored invoices, apply against the FIR account.

Case 2- Handling Invoice Buybacks (When the Customer Doesn’t Pay You)

To handle the buyback of an invoice, make the following entry:

Dr. FIS 80,000
Dr. FFE 1,000
Cr. FIR 81,000

By tracking your cash flow, this just one of the many ways as a financial leader you can add value. For more ways to improve your cash flow, download the free 25 Ways to Improve Cash Flow whitepaper.

Journal entries for factoring receivables

Strategic CFO Lab Member Extra

Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

3

Interest Expense Formula

Interest Expense Formula

Interest expense calculations involve 4 parts: Principal, Rate, Time, and Compounding.

Use the following formula to calculate simple interest expense (which excludes compounding):

Interest Expense = Principal X Rate X Time

To calculate the compound interest rate, use the following formula:

Principal X (1+ (R / N))(N X T)

Where:
R = Interest rate
N = Number of times interest is compounded in a year
T = Time in years

Interest Expense Calculation Principal = $50,000 Interest Rate = 7% Time = 3 years

$50,000 X .07 X 3 = $10,500 in interest expense

(NOTE: Want to take your financial leadership to the next level? Download the 7 Habits of Highly Effective CFOs. It walks you through steps to accelerate your career in becoming a leader in your company. Get it here!)

Interest Expense Journal Entry

When recording an interest expense journal entry, the interest expense account is debited and the cash account or the interest payable account is credited. This represents money coming out of the cash or interest payable account and going into the interest expense account.

If you have already recorded the interest payment as a liability, then it may show up on the balance sheet as interest payable. If it has not already been recorded as a liability on the balance sheet, then the amount used to pay for the interest expense will come out of the cash account or the prepaid interest account on the balance sheet. Make this journal entry when the interest expense is recognized.

Journal Entry Example

Depending on the circumstances, the journal entry may look like one of the following:

                                 Debit                Credit

Interest Expense                  $1,000
Cash                                          $1,000

Interest Expense                  $1,000
Interest Payable                              $1,000

Interest Expense                  $1,000
Prepaid Interest                              $1,000

Interest Expense Example

Dwayne has started a company which rents party equipment. The equipment in which he rents are too expensive to buy straight up. Dwayne is considering financing some equipment, mainly the additional trucks he needs to move supplies, so that he could provide a high level of service. Dwayne wonders what his interest expenses would be. He looks on the web to find an “interest expense calculator”. Dwayne calculates these results:

Principal: $50,000 Interest: 7% Time: 3 years Compounding: None

So:

$50,000 X .07 X 3 = $10,500 in interest expense

As you calculate the interest expense in your company, learn how to be a highly effective CFO or financial leader. Download the free 7 Habits of Highly Effective CFOs whitepaper.

interest expense formula

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

interest expense formula

2