A well-documented transaction should be traceable. For example, if a business purchases office supplies on credit, the amount of the invoice does not appear out of thin air in the general ledger. The invoice is the source document. The journal entry is the record of the transaction. And the general ledger shows the effect of the transaction on the balance of each account. Tracking this path can help you identify mistakes and verify the accuracy of your work.
Assume that a business purchases office supplies on credit for $180. The invoice contains the name of the supplier, date of the transaction, amount, description of the product, and payment terms. Before recording the transaction, determine whether the purchase belongs to the business. Also, determine which accounts are affected. The Supplies account is increasing, and Accounts Payable is increasing because the amount has not been paid yet. For this exercise, the journal entry will have a debit of $180 for Supplies and a credit of $180 for Accounts Payable.
The general journal provides one entry for the entire transaction. The entry should contain the date of the transaction, account names, debit and credit amounts, a reference number, and a description of the transaction. The reference number helps tie the journal entry back to the invoice. If the reference number is missing, a student might not understand where the numbers came from or why particular accounts were used.
When the journal entry is posted, the information is transferred to the individual general ledger accounts. The $180 debit is posted to the Supplies account and the $180 credit is posted to the Accounts Payable account. Each line in the ledger should have the date and reference number of the journal entry. After posting, the balance of the Supplies account is higher and the amount owed to the supplier is higher. The accounting equation stays in balance because the asset and liability accounts both increased by the same amount.
You can follow the path of one transaction using one invoice and two ledger worksheets. Use a journal worksheet to record the transaction and then use the two ledger worksheets to post the transaction to the appropriate accounts. Then, compare the journal entry and the two ledger entries. Make sure the dates are the same, the amounts are on the same side, and the reference number points back to the same document. Finally, describe how the transaction affected the balance of each account without referring to the journal entry.
The trail continues after the payment is made. A check stub, bank statement, or cash register transaction serves as a source document for the transaction. The Cash account is decreased by a credit, and Accounts Payable is decreased by a debit. Even though the two transactions are related, the initial purchase and the subsequent payment are two different transactions. If they are combined, it might look like the supplies were bought on cash or the liability has disappeared.
Even if the trial balance is balanced, this does not mean that all source documents were recorded or that all transactions were posted to the correct accounts. This is why tracing is important. If a balance appears incorrect, go backwards from the ledger account to the journal entry and then to the source document (invoice, receipt, or payment record). Don’t fix the last number until you know where the trail broke.