## **Learning Outcomes**

After reading this article, you will be able to explain the use of the general journal for recording transfers and reclassifications. You will know how and when to prepare journal entries to move balances between accounts, correct previous misclassifications, and ensure that the financial records accurately reflect business activities. You will also understand exam-style scenarios where such adjustments are tested.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand the purpose and correct use of the general journal for non-routine entries. This article covers the following syllabus points:

- The role of the general journal in recording transfers and reclassifications
- Preparing journal entries for moving amounts between accounts
- Correcting mispostings and misclassified transactions using the journal
- Updating general ledger accounts following transfers and reclassifications
- Understanding how such entries relate to error correction and financial statement preparation

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. If rent expense of \$800 was incorrectly recorded as repairs expense, which journal would correct this?
2. True or false? The general journal is only used for routine daily cash transactions.
3. When an amount is transferred from one expense account to another due to an error, what is this process called?
4. Give one example of when a transfer journal entry might be required at the end of an accounting period.

## **Introduction**

In double-entry bookkeeping, most transactions are first recorded in books of prime entry, then posted to ledger accounts. However, adjustments and corrections—especially at year-end—often require moving amounts from one account to another. These transactions, known as transfers and reclassifications, are recorded in the general journal.

Transfers move amounts between accounts (for instance, between expense categories or asset types), while reclassifications correct previous mispostings to ensure the correct categorisation for financial reporting. Being able to process these accurately is a critical skill for FA2 and for real-world bookkeeping.

> **Key Term: general journal**
> A record used to document non-routine transactions, such as transfers, reclassifications, and corrections, before updating the ledger accounts.

## **General Journal Usage**

### When Is the General Journal Used?

Not all accounting entries relate to straightforward sales, purchases, or cash transactions. Some situations require adjustments outside these routine processes. The general journal is used to:

- Transfer amounts between accounts (e.g., from one expense to another)
- Reclassify transactions posted to an incorrect account
- Correct previous mispostings not spotted until after prime entry posting
- Record year-end adjustments required for accurate financial statements

These include correcting expense misclassifications, moving asset costs, reallocating income or liabilities, or reversing errors identified during reconciliations.

> **Key Term: transfer**
> The movement of an amount from one account to another to reflect the correct financial statement classification.
>
> **Key Term: reclassification**
> Adjusting a transaction previously posted to one account so that it appears in its correct account.

### Format of a Transfer Journal Entry

A transfer or reclassification is always a double-entry. You debit the account that should now receive the amount and credit the account holding the amount in error.

For example:

- A \$350 repairs expense is found to actually be advertising.
  - Debit Advertising \$350
  - Credit Repairs \$350
  - Narrative: "To reclassify repairs expense to advertising"

> **Key Term: narrative**
> A brief explanation included with a journal entry, stating the reason for the entry and referencing supporting documentation where appropriate.

## **Common Scenarios for Transfers and Reclassifications**

Entries for transfers or reclassifications arise in several situations:

- Expense misclassification (e.g., insurance posted to rent)
- Asset costs recorded as expenses or vice versa
- Reallocating income received in one category that actually relates to another
- Capitalising costs previously expensed, after review
- Adjusting for changes to estimates or policies

Such actions ensure the correct presentation of financial statements and compliance with accounting principles.

### **Worked Example 1.1**

A payment of \$200 for repairs was recorded in error as electricity expense. Prepare the journal entry to correctly reclassify this.

> **Answer:**
> Debit Repairs \$200  
> Credit Electricity \$200  
> Narrative: "To transfer wrongly classified electricity expense to repairs"

### **Worked Example 1.2**

During year-end review, \$1,000 of IT equipment was mistakenly included as office expenses. It should be recognised as a tangible non-current asset. What is the correct journal entry?

> **Answer:**
> Debit Non-current assets (IT equipment) \$1,000  
> Credit Office expenses \$1,000  
> Narrative: "To reclassify office expenses as non-current asset – IT equipment"

### **Exam Warning**

> Journal entries for transfers and reclassifications must always state both the debit and credit accounts. Missing the narrative or failing to reverse the original misposting can lead to marks being lost.

## **How Reclassifications Correct Errors**

Transfers and reclassifications are an important method for correcting errors causing accounts to be misstated. After these adjustments, the balances will reflect only the correct expense, income, asset, or liability categories as required for reporting.

The process typically involves:

- Identifying the original error (misposting or misclassification)
- Determining the correct classification
- Preparing a proper journal entry to move the amount

Some errors may also involve updating associated documents, such as the asset register or supporting schedules, to ensure consistency.

### **Revision Tip**

> When writing a journal for a transfer, always check that the affected accounts match the error being corrected. Briefly state the reason in your narrative.

## **Summary**

The general journal is essential for handling transfers and reclassifications between accounts. These entries ensure the correct reporting of transactions in the financial statements and are often required as part of year-end procedures or when errors are found. Precision and full documentation of the adjustment—including narratives—are essential for accuracy and audit trail.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Understand when to use the general journal for transfers and reclassifications
- Recognise common scenarios requiring transfer or reclassification entries
- Prepare correct double-entry journals for moving amounts between accounts
- Explain how these entries correct classification mistakes or mispostings
- Document journal entries properly with clear narratives

## **Key Terms and Concepts**

- general journal
- transfer
- reclassification
- narrative

General journal usage - Transfers and reclassifications