Journal Entries

The general journal is the book of original entry. Each transaction is recorded in the journal in chronological order, in double-entry form, before it is posted to the general ledger. The journal provides a complete, dated, and traceable record of every economic event affecting the entity and forms the first link in the audit trail that connects source documents to the financial statements.

PURPOSE OF THE JOURNAL

• Provides a single chronological record of all transactions, so that the complete effect of each transaction is visible in one place.

• Reduces posting errors, because equality of debits and credits is confirmed for each entry before amounts are transferred to the ledger.

• Establishes the audit trail: each journal entry references its source document, and each ledger posting references the journal page or entry number.

• Supports the narrative explanation of non-routine transactions, estimates, and adjustments.

REQUIRED ELEMENTS OF A JOURNAL ENTRY

1. Date of the transaction (or, for adjusting entries, the reporting date).

2. Entry or reference number, assigned sequentially without gaps.

3. Account title(s) and account number(s) to be debited, listed first and aligned to the left.

4. Account title(s) and account number(s) to be credited, listed after the debits and indented.

5. Amounts in the debit and credit columns; total debits must equal total credits.

6. Narration: a concise description of the transaction and its business purpose.

7. Source document reference (invoice, receipt, contract, bank statement, payroll register, or internal memorandum).

8. Posting reference (PR / folio) column, completed when the entry is posted to the ledger.

9. Preparer and, where segregation of duties applies, reviewer or approver initials.

SOURCE DOCUMENTS

Every journal entry must be supported by objective evidence. Under the Income Tax Act (section 230) and the Excise Tax Act (section 286), the Canada Revenue Agency requires that books and records be kept in a form that allows taxes payable, refunds, and input tax credits to be determined and verified. Records are generally retained for six years from the end of the last tax year to which they relate.

• External documents: sales invoices issued, supplier invoices received, receipts, bank and credit card statements, loan agreements, leases, and customs documents.

• Internal documents: payroll registers, timesheets, inventory count sheets, depreciation (capital cost allowance) schedules, approved expense claims, and board or owner resolutions.

• GST/HST documentation: supplier invoices supporting input tax credits must contain the information prescribed by the Input Tax Credit Information (GST/HST) Regulations, with additional requirements at the $100 and $500 thresholds (including the supplier GST/HST registration number for amounts of $100 or more).

CLASSIFICATION OF JOURNAL ENTRIES

1. Routine (transactional) entries

Entries recorded throughout the period as transactions occur: sales, purchases, cash receipts, cash disbursements, and payroll. In most systems these are generated from special journals or subledger modules.

2. Compound entries

Entries affecting three or more accounts. A compound entry is used when a single transaction has several components, such as a sale with a sales tax element or a payment that settles both principal and interest.

3. Adjusting entries

Entries recorded at the end of a reporting period to apply the accrual basis of accounting, so that revenues are recognised when earned and expenses when incurred, irrespective of the timing of cash flows. Adjusting entries never involve the cash account (other than bank reconciliation adjustments). The principal categories are:

• Accrued revenues: revenue earned but not yet billed or received (debit a receivable, credit revenue).

• Accrued expenses: expenses incurred but not yet paid or invoiced, such as wages, interest, and utilities (debit an expense, credit a liability).

• Deferred (unearned) revenues: cash received in advance, recognised as revenue as performance obligations are satisfied (debit unearned revenue, credit revenue).

• Prepaid expenses: cash paid in advance for future benefits, such as insurance and rent, expensed as the benefit is consumed (debit an expense, credit the prepaid asset).

• Amortisation (depreciation): systematic allocation of the cost of tangible and intangible capital assets over their useful lives (debit amortisation expense, credit accumulated amortisation).

• Estimates: allowance for doubtful accounts, inventory obsolescence, warranty provisions, and income tax expense.

4. Reversing entries

Optional entries recorded on the first day of the new period that reverse certain accrual adjustments from the prior period. Their purpose is to allow subsequent routine entries to be recorded in the normal manner without double-counting. Reversing entries are appropriate for accrued revenues and accrued expenses; they are not used for amortisation or allowance adjustments.

5. Correcting entries

Entries made to correct errors discovered after posting. Erroneous entries are not erased or overwritten; the error is corrected either by a reversing entry followed by the correct entry, or by a single entry that adjusts the accounts to the correct balances. A narration referencing the original entry is mandatory.

6. Closing entries

Entries recorded at the end of the fiscal year to transfer the balances of temporary (nominal) accounts to equity, resetting revenue, expense, and drawing or dividend accounts to zero for the next period. The standard sequence is:

1. Close each revenue account by debiting it and crediting Income Summary.

2. Close each expense account by crediting it and debiting Income Summary.

3. Close Income Summary to Owner's Capital (sole proprietorship), to each partner's capital account in accordance with the partnership agreement (partnership), or to Retained Earnings (corporation).

4. Close Drawings to Owner's Capital, or Dividends Declared to Retained Earnings.

After closing, only permanent (real) accounts, being assets, liabilities, and equity, carry balances forward. A post-closing trial balance is then prepared to confirm equality of debits and credits.

STANDARD ENTRY PATTERNS

The following patterns state the general debit and credit structure for recurring transaction types. Account titles vary with the chart of accounts adopted by the entity.

• Owner or shareholder contribution of capital: Dr Cash (or asset contributed); Cr Owner's Capital or Share Capital.

• Credit sale of goods or services with GST/HST: Dr Accounts Receivable; Cr Sales Revenue; Cr GST/HST Payable.

• Collection of a receivable: Dr Cash; Cr Accounts Receivable.

• Purchase of inventory on account (perpetual system) with recoverable GST/HST: Dr Inventory; Dr GST/HST Receivable (input tax credit); Cr Accounts Payable.

• Recognition of cost of goods sold (perpetual system): Dr Cost of Goods Sold; Cr Inventory.

• Payment of a supplier: Dr Accounts Payable; Cr Cash.

• Acquisition of a capital asset: Dr Equipment (or other capital asset); Dr GST/HST Receivable; Cr Cash or Notes Payable.

• Gross payroll: Dr Wages Expense; Cr Income Tax Payable; Cr CPP Payable; Cr EI Payable; Cr Wages Payable (net pay).

• Employer payroll contributions: Dr Payroll Expense (employer CPP, EI, and Employer Health Tax where applicable); Cr CPP Payable; Cr EI Payable; Cr EHT Payable.

• Remittance of source deductions: Dr Income Tax Payable; Dr CPP Payable; Dr EI Payable; Cr Cash.

• Loan repayment: Dr Loan Payable (principal); Dr Interest Expense; Cr Cash.

• GST/HST net remittance: Dr GST/HST Payable; Cr GST/HST Receivable; Cr Cash (or Dr Cash where a refund is claimed).

• Owner withdrawal: Dr Drawings; Cr Cash. Dividend declaration: Dr Dividends Declared (or Retained Earnings); Cr Dividends Payable.

SPECIAL JOURNALS

Entities with a high volume of similar transactions use special journals to reduce repetitive recording. Column totals are posted to the general ledger periodically, while individual lines are posted to the relevant subsidiary ledger.

• Sales journal: credit sales only.

• Purchases journal: purchases on account only.

• Cash receipts journal: all inflows of cash.

• Cash disbursements (cash payments) journal: all outflows of cash.

• Payroll journal: gross pay, deductions, and net pay for each pay period.

• General journal: all transactions not recorded in a special journal, together with adjusting, correcting, reversing, and closing entries.

INTERNAL CONTROLS OVER JOURNAL ENTRIES

• Sequential numbering of entries and investigation of gaps or duplicates.

• Segregation of duties between initiation, approval, recording, and custody of assets.

• Documented review and approval of all manual and non-standard entries, particularly period-end adjustments.

• Restricted access rights in accounting software, with audit logs of entry creation and modification.

• Period-end lock dates preventing posting to closed periods.

• Retention of supporting documentation in a form readily accessible to the Canada Revenue Agency.

COMMON ERRORS

• Transposition and slide errors in amounts (a difference divisible by 9 frequently indicates a transposition).

• Debiting or crediting the wrong account, which does not cause the trial balance to be out of balance and must be detected through review.

• Omission of an entry, or recording the same transaction twice.

• Recording the gross amount of a taxable purchase as an expense without separating the recoverable input tax credit.

• Classifying capital expenditures as repairs expense, or personal expenditures as business expenses.

• Failure to record period-end accruals and deferrals.

SOURCES

• CPA Canada Handbook, Accounting, Part II: Accounting Standards for Private Enterprises (ASPE), Section 1000 Financial Statement Concepts.

• Canada Revenue Agency, Keeping Records (canada.ca/cra-records).

• Canada Revenue Agency, Guide RC4022 General Information for GST/HST Registrants.

• Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 230; Excise Tax Act, R.S.C. 1985, c. E-15, s. 286.