Specialized Journals and Methods of Processing Accounting Data

OBJECTIVE

After studying this expanded discussion, you should be able to: Identify (a) the use and types of subsidiary ledgers and (b) the use and types of special journals.



A business constantly needs detailed information about its dealings with individual customers and creditors. Imagine a business with several thousand charge (credit) customers and the transactions with these customers are shown in only one account, Accounts Receivable, in the general ledger. It would be virtually impossible to determine the balance owed by an individual customer at a specific time. Similarly, details of transactions affecting a single creditor are needed from time to time, and a single Accounts Payable account in the general ledger cannot make this information available.


EXPANSION OF THE LEDGER -- SUBSIDIARY LEDGERS

To provide this information, companies use a subsidiary ledger to keep track of individual balances. A subsidiary ledger is a group of accounts with a common characteristic, e.g., all are customer accounts, that is, all are accounts receivable. The subsidiary ledger facilitates the recording process by freeing the general ledger from the details of individual balances. Thus, a typical merchandising enterprise has subsidiary ledgers containing accounts with customers (accounts receivable or customers' ledger) and creditors (accounts payable or creditors' ledger). The enterprise maintains an account in the general ledger that summarizes the details in the accounts receivable and accounts payable ledgers. This summary account in the general ledger is called a control account, because the summary account controls the subsidiary ledger. The general ledger control account balance must equal the composite balance of the individual accounts in the subsidiary ledger.

As indicated, two common subsidiary ledgers are: (1) the
accounts receivable ledger or customers' ledger, controlled by the general ledger account, Accounts Receivable; and (2) the accounts payable ledger or creditors' ledger, controlled by the general ledger account, Accounts Payable. In subsidiary ledgers, the individual accounts are usually arranged in alphabetical order.

An example of a control account and subsidiary ledger for accounts receivable is provided in Illustration 1.


ILLUSTRATION 1: Relationship between General and Subsidiary Ledgers
Illustration 1 is based on the following transactions:

Sales and Collection Transactions
                  Credit Sales                             Collections on Account        
Jan. 10 Aaron Co. $ 6,000   Jan. 19 Aaron Co. $ 4,000
12 Branden Inc. 3,000   21 Branden Co. 3,000
20 Caron Co. 3,000   29 Caron Co. 1,000
  $12,000     $ 8,000
  =======     =======


The total debits and credits in Accounts Receivable in the general ledger are reconcilable to the detailed debits and credits in the subsidiary accounts. The balance of $4,000 in the Accounts Receivable control account agrees with the total of the balances in the individual accounts receivable accounts ($2,000 + $0 + $2,000) in the subsidiary ledger.

Postings are made to the control accounts in the general ledger monthly for the purpose of preparing monthly financial statements. Postings to the individual accounts in the subsidiary ledger are made daily. The rationale for posting daily is to ensure that current account information can be used as a basis for monitoring credit limits, for billing customers, and also to answer inquiries from customers about their account balances.

Note also in this example that postings to the control account are made in total at the end of the month, whereas each of the individual transactions is posted daily to the subsidiary ledger. Procedures used for posting entries to the subsidiary ledger and to the general ledger control account generally involve the use of special journals, discussed in the next section.

In summary, the advantages of using subsidiary ledgers are that they:

  1. Show transactions affecting one customer or one creditor in a single account, thus providing necessary up-to-date information on specific account balances.
  2. Free the general ledger of excessive details relating to accounts receivable and accounts payable. As a result, a trial balance of the general ledger does not contain vast numbers of individual account balances.
  3. Help locate errors in individual accounts by reducing the number of accounts combined in one ledger and by using control accounts.
  4. Make possible a division of labor in posting by having one employee post to the general ledger and a different employee post to the subsidiary ledgers.

Note that a business may also use control accounts and subsidiary ledgers for other accounts such as inventory, equipment, and selling and administrative expenses.


EXPANSION OF THE JOURNAL SPECIAL JOURNALS

So far you have learned to journalize transactions in a two-column general journal and post these entries individually to the general ledger. This procedure is satisfactory in only the very smallest companies. To expedite journalizing and posting transactions, most companies use special journals in addition to the general journal.

A
special journal is used to group similar types of transactions, such as all sales of merchandise on account, or all cash receipts. The types of special journals an enterprise uses depend largely on the types of transactions that occur frequently in its business. Most merchandising enterprises use the following journals to record transactions daily:

Sales journal -- all sales of merchandise on account.
Cash receipts journal -- all cash received (including cash sales).
Purchases journal -- all purchases of merchandise on account.
Cash payments journal -- all cash paid (including cash purchases).

If the transaction cannot be recorded in a special journal, it is recorded in the general journal. For example, if you had special journals for only the four types of transactions listed, purchase returns and allowances or sales returns and allowances woulld be recorded in the general journal. Similarly, correcting, adjusting, and closing entries are recorded in the general journal. Other types of special journals may be used in some situations. For example, where purchase returns and allowances or sales returns and allowances are frequent, special journals may be employed to record these transactions.

The journalization and posting process is illustrated using the sales journal and the cash receipts journal. The same procedures apply to all special journals with only the column and account names being different.


Sales Journal
The sales journal is used to record sales of merchandise on account. Cash sales of merchandise are entered in the cash receipts journal. Similarly, credit sales of assets other than merchandise are entered in the general journal.


Journalizing Credit Sales
Each entry in the sales journal used here results in a debit to Accounts Receivable and a credit to Sales. Since each sale on account involves a debit to Accounts Receivable and a credit of equal amount to Sales, only one line is used to record the transaction. Postings from the sales journal are made daily to the individual accounts receivable in the subsidiary ledger and monthly to the general ledger.


ILLUSTRATION 2: Posting the Sales Journal

A check mark is inserted in the reference posting column instead of an account number to indicate that the daily posting to the customer's account has been made. A check mark is used when subsidiary ledger accounts are not numbered. A typical sales journal with related accounts is shown in Illustration 2.

At the end of the month, the column total of the sales journal is posted to the general ledger-as a debit to Accounts Receivable (account No. 4) and as a credit to Sales (account No. 60). The insertion of the respective account numbers below the column total in the sales journal indicates that the postings have been made. In both the general ledger and subsidiary ledger accounts, the reference S1 indicates that the posting came from page 1 of the sales journal.


Cash Receipts Journal
All receipts of cash are recorded in the cash receipts journal. The most common types of cash receipts are cash sales of merchandise and collections of accounts receivable. Many other possibilities exist, however, such as receipt of money from bank loans and cash proceeds from disposals of equipment, buildings, or land. As a result, a one-column cash receipts journal is not sufficient to accommodate all possible cash receipts transactions; therefore, a multiple-column cash receipts journal is used. Generally, a cash receipts journal includes debit columns for cash and sales discounts and credit columns for accounts receivable, sales, and "other" accounts. The other accounts category is used when the cash receipt does not involve a cash sale or a collection of accounts receivable. A five-column cash receipts journal is shown in Illustration 3. When a special journal has more than one column it is often referred to as a columnar journal.


ILLUSTRATION 3: Journalizing and Posting Cash Receipts Journal


Additional credit columns may be used if they significantly reduce postings to a specific account. For example, the cash receipts of a loan company, such as Household Finance, include thousands of collections from customers that are credited to Loans Receivable and Interest Revenue. A significant saving in posting would result from using separate credit columns for Loans Receivable and Interest Revenue. In contrast, a retailer that has only one interest collection a month would not reduce its postings by using a separate column for interest revenue.

In a columnar journal, as in a single-column journal, only one line is needed for each entry. However, in contrast to a single-column journal, an explanation is given for each entry, and there must be equal debit and credit amounts for each line. When the collection from Abbot Sisters on May 10 is journalized, for example, three amounts are indicated. Note also that the Accounts Credited column is used to identify both general ledger and subsidiary ledger account titles. The former is illustrated in the May 1 entry for Karns' investment; the latter is illustrated in the May 10 entry for the collection in full from Abbot Sisters.


Posting the Cash Receipts Journal
Posting a columnar journal involves the following procedures:

  1. All column totals except the total for the Other Accounts column are posted once at the end of the month to the account title specified in the column heading, such as Cash or Accounts Receivable.

  2. The total of the Other Accounts column is not posted. Instead, the individual amounts comprising the total are posted separately to the general ledger accounts specified in the Accounts Credited column. See, for example, the credit posting to D. A. Karns, Capital. The symbol (X) is inserted below the total of this column to indicate that the amount is not posted.

  3. The individual amounts in a column, posted in total to a control account (Accounts Receivable, in this case), are posted daily to the subsidiary ledger account specified in the Accounts Credited column. See, for example, the credit posting of $10,600 to Abbot Sisters.

Therefore, cash is posted to account No. 1, accounts receivable to account No. 4, sales to account No. 60, and sales discounts to account No. 61. The symbol CR is used in the ledgers to identify postings from the cash receipts journal.


Format of Purchases Journal and Cash Payments Journal
The column headings that might be used in a typical single-column purchases journal and a multiple-column cash payments journal are shown in Illustration 4.

Purchases Journal
  P1
Date Account Credited Terms Ref. Purchases Dr.
Accounts Payable Cr.
 


ILLUSTRATION 4:
Purchases Journal and Cash Payments Journal

Cash Payments Journal
  P1
Date Ck.
No.
Explanation Accounts
Debited
Ref. Other
Accounts
Dr.
Accounts
Paybale
Dr.
Store
Supplies
Dr.
Purchase
Discounts
Cr.
Cash
Cr.
 


SUMMARY OF LEARNING OBJECTIVES

Identify (a) the use and types of subsidiary ledgers and (b) the use and types of special journals. Subsidiary ledgers facilitate the recording process by freeing the general ledger from the details of individual entries and balances. Subsidiary ledgers group accounts with common characteristics (e.g. customers' accounts, creditors' accounts, inventory accounts, and equipment accounts).

Special journals expedite the journalizing and posting process for frequently occurring transactions. The most common special journals are: sales journals, purchases journal, cash receipts journal, and cash payments journal.


Key Terms

[Click here for exercises.]