December 1, 2020

SB-Accounting

Accounting + Finance Blog

How to use Journal to Open the Books of Accounts for a New Business

How to use Journal to Open the Books of Accounts for a New Business
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When a business commenced trading, it is normal to raise Journal Entry on the day the business resumed. This will help show how the entity is faring as when it begins doing business. This article is devoted to showing you how to raise a Journal entry for this purpose.

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In a previous post, the definition and work-through posting of transactions in The Journal has been explained. Therefore, the Daybook is used for posting transactions that cannot be in other subsidiary books. This includes when the business commenced trading.

What makes up the Books of Accounts

The basic items in the book of account when the business resumes trading is the assets, liabilities and capital. Generally, assets are the properties of the business.

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Liabilities are debts the business must pay people and other stakeholders that are not members of the business. And capital is the amount required by the businessman to begin operation.

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In summary, the items in the books of account will be – Assets, Liabilities and Capital.

Examine the work through an example with Google Sheet

Below is a work through example of how an entity can use Google Sheet to handle Journal entry when the books are opened.

Ewoma begins the manufacturing and selling of soaps on 1st September 2020.

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He has bought furniture with cash for N70,000.
Materials required to make soaps for N93,000.
Rent a store for N120,000.
He has some cash in his business bank account of N81,000.
A total of N54,000 was on his hand when he resumed trading.
Ewoma borrowed N200,000 from a family friend.

Question:
What is the capital of Ewoma?
Post the opening entries in The Journal using Google Sheet.

The capital (opening capital) with Ewoma when he begins trading can be computed using the accounting equation. Capital = Assets – Liabilities.

The Assets available with Ewoma as at 1st September are:

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How to use Journal to Open the Books of Accounts for a New Business

Assets are N418,000. The liability is 200,000 Naira borrowed from a family friend. And the Capital is not provided. However, using the accounting equation, Capital is N218,000 (that is, N418,000 – N200,000).

Note that rent is regarded as assets. Generally, rent is an expense. But, the business is about to start trading, therefore, it has no expenses. As a rule, any expenses made before a business commences is regarded as assets.

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The opening Journal entry is displayed in a Google Sheet below.

How to use Journal to Open the Books of Accounts for a New Business

From the worksheet, cash and cash equivalent are the addition of cash at bank and cash on hand. As a rule in Journal entries, Debit entries are posted first. So, assets are posted before liabilities and capital.

What to do next?

Now that the opening entries have been done. The next task is to open an account for each item. This can be done in a spreadsheet or accounting software.

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Conclusion

From the foregoing, you should have learnt that journal entries can be used when a business commences trading. An illustration has been provided to explain how it can be done in a Google Sheet.

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