Accounting Journal: Adjusting Entries and General Ledger

10 Questions

What is the purpose of the general ledger in accounting?

To record and track financial transactions

In which category would 'Net Loss' typically be found in the general ledger?

Operating Expenses

What happens to dividends declared in terms of equity?

They increase owners' equity

Where do businesses record their financial transactions initially before transferring them to the general ledger?

Journal

Which of the following is NOT a category typically found in the general ledger?

Tax Expenses

What is the purpose of adjusting entries in accounting?

To reflect income revenue and expenses accurately for the previous accounting period

When are adjusting entries recorded in the accounting process?

After an accounting period ends but before the next one begins

In accounting journals, what do adjusting entries primarily help in achieving?

Reflecting accurate financial data for external auditors

Which financial statement is impacted by adjusting entries related to deferred items like interest and benefits?

Income Statement

How are financing activity accounts affected by adjusting entries for stock options granted by companies?

Increased by the cost of shares granted

Study Notes

Accounting Journal

Accounting journals are an essential part of accounting record keeping. They serve the dual purpose of providing both financial data and documentation for external auditors and management reporting purposes. This section discusses two critical components related to accounting journals: adjusting entries and the general ledger.

Adjusting Entries

Adjusting entries refer to transactions recorded after an accounting period has ended but before the next one begins. These entries aim to reflect income revenue and expenses incurred during the previous accounting period accurately. Examples of such entries include the following:

Deferred Tax Expense and Pretax Income Statement Items

At year-end, the tax expense is recognized based on the amount of taxes owed by the company. At the same time, if there were deferred items like interest and benefit, they are adjusted to absorb them into pretax lines in the consolidated statement of activities. For example, a $100,000 item might need to be added back to pre-tax net income to determine post-tax net income:

Deferral of Interest and Benefits: Add to Pretax Lines
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Pretax income                       $100,000
Increase in accrued liabilities      $100,000
Total                                $200,000

Changes in Ownership Equity

For companies with stock options outstanding, the financing activity account is increased by the cost of the shares granted instead of the exercise price paid by employees. Additionally, dividends declared, if already recorded as current assets, become equity:

Dividends Declared: Increase Owners' Equity
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Cash                                    $50,000
Net increase in stockholders' equity   $50,000
Total                                   $100,000

General Ledger

The general ledger is the primary accounting record used by businesses and organizations to keep track of their financial transactions over a given period of time. It serves as the starting point from which all other financial statements are derived and provides information about the financial position of the organization. The general ledger typically consists of several accounts organized into various categories:

Assets
Liabilities
Capital Stock
Retained Earnings
Revenue
Cost of Goods Sold
Operating Expenses
Net Loss

Each transaction must be posted to the appropriate account within these categories. Once the journal entry is made, it can then be transferred to the general ledger account.