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Principles of Accounting, Volume 1: Financial Accounting

7.2 Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders

Principles of Accounting, Volume 1: Financial Accounting7.2 Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders
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  1. Preface
  2. 1 Role of Accounting in Society
    1. Why It Matters
    2. 1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting
    3. 1.2 Identify Users of Accounting Information and How They Apply Information
    4. 1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities
    5. 1.4 Explain Why Accounting Is Important to Business Stakeholders
    6. 1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
  3. 2 Introduction to Financial Statements
    1. Why It Matters
    2. 2.1 Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate
    3. 2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses
    4. 2.3 Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet
    5. Key Terms
    6. Summary
    7. Multiple Choice
    8. Questions
    9. Exercise Set A
    10. Exercise Set B
    11. Problem Set A
    12. Problem Set B
    13. Thought Provokers
  4. 3 Analyzing and Recording Transactions
    1. Why It Matters
    2. 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements
    3. 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions
    4. 3.3 Define and Describe the Initial Steps in the Accounting Cycle
    5. 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements
    6. 3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
    7. 3.6 Prepare a Trial Balance
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  5. 4 The Adjustment Process
    1. Why It Matters
    2. 4.1 Explain the Concepts and Guidelines Affecting Adjusting Entries
    3. 4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries
    4. 4.3 Record and Post the Common Types of Adjusting Entries
    5. 4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance
    6. 4.5 Prepare Financial Statements Using the Adjusted Trial Balance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  6. 5 Completing the Accounting Cycle
    1. Why It Matters
    2. 5.1 Describe and Prepare Closing Entries for a Business
    3. 5.2 Prepare a Post-Closing Trial Balance
    4. 5.3 Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity
    5. 5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  7. 6 Merchandising Transactions
    1. Why It Matters
    2. 6.1 Compare and Contrast Merchandising versus Service Activities and Transactions
    3. 6.2 Compare and Contrast Perpetual versus Periodic Inventory Systems
    4. 6.3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System
    5. 6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System
    6. 6.5 Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods
    7. 6.6 Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies
    8. 6.7 Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  8. 7 Accounting Information Systems
    1. Why It Matters
    2. 7.1 Define and Describe the Components of an Accounting Information System
    3. 7.2 Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders
    4. 7.3 Analyze and Journalize Transactions Using Special Journals
    5. 7.4 Prepare a Subsidiary Ledger
    6. 7.5 Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  9. 8 Fraud, Internal Controls, and Cash
    1. Why It Matters
    2. 8.1 Analyze Fraud in the Accounting Workplace
    3. 8.2 Define and Explain Internal Controls and Their Purpose within an Organization
    4. 8.3 Describe Internal Controls within an Organization
    5. 8.4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries
    6. 8.5 Discuss Management Responsibilities for Maintaining Internal Controls within an Organization
    7. 8.6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
    8. 8.7 Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  10. 9 Accounting for Receivables
    1. Why It Matters
    2. 9.1 Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions
    3. 9.2 Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches
    4. 9.3 Determine the Efficiency of Receivables Management Using Financial Ratios
    5. 9.4 Discuss the Role of Accounting for Receivables in Earnings Management
    6. 9.5 Apply Revenue Recognition Principles to Long-Term Projects
    7. 9.6 Explain How Notes Receivable and Accounts Receivable Differ
    8. 9.7 Appendix: Comprehensive Example of Bad Debt Estimation
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  11. 10 Inventory
    1. Why It Matters
    2. 10.1 Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions
    3. 10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method
    4. 10.3 Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method
    5. 10.4 Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet
    6. 10.5 Examine the Efficiency of Inventory Management Using Financial Ratios
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  12. 11 Long-Term Assets
    1. Why It Matters
    2. 11.1 Distinguish between Tangible and Intangible Assets
    3. 11.2 Analyze and Classify Capitalized Costs versus Expenses
    4. 11.3 Explain and Apply Depreciation Methods to Allocate Capitalized Costs
    5. 11.4 Describe Accounting for Intangible Assets and Record Related Transactions
    6. 11.5 Describe Some Special Issues in Accounting for Long-Term Assets
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  13. 12 Current Liabilities
    1. Why It Matters
    2. 12.1 Identify and Describe Current Liabilities
    3. 12.2 Analyze, Journalize, and Report Current Liabilities
    4. 12.3 Define and Apply Accounting Treatment for Contingent Liabilities
    5. 12.4 Prepare Journal Entries to Record Short-Term Notes Payable
    6. 12.5 Record Transactions Incurred in Preparing Payroll
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  14. 13 Long-Term Liabilities
    1. Why It Matters
    2. 13.1 Explain the Pricing of Long-Term Liabilities
    3. 13.2 Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method
    4. 13.3 Prepare Journal Entries to Reflect the Life Cycle of Bonds
    5. 13.4 Appendix: Special Topics Related to Long-Term Liabilities
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  15. 14 Corporation Accounting
    1. Why It Matters
    2. 14.1 Explain the Process of Securing Equity Financing through the Issuance of Stock
    3. 14.2 Analyze and Record Transactions for the Issuance and Repurchase of Stock
    4. 14.3 Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits
    5. 14.4 Compare and Contrast Owners’ Equity versus Retained Earnings
    6. 14.5 Discuss the Applicability of Earnings per Share as a Method to Measure Performance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  16. 15 Partnership Accounting
    1. Why It Matters
    2. 15.1 Describe the Advantages and Disadvantages of Organizing as a Partnership
    3. 15.2 Describe How a Partnership Is Created, Including the Associated Journal Entries
    4. 15.3 Compute and Allocate Partners’ Share of Income and Loss
    5. 15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner
    6. 15.5 Discuss and Record Entries for the Dissolution of a Partnership
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  17. 16 Statement of Cash Flows
    1. Why It Matters
    2. 16.1 Explain the Purpose of the Statement of Cash Flows
    3. 16.2 Differentiate between Operating, Investing, and Financing Activities
    4. 16.3 Prepare the Statement of Cash Flows Using the Indirect Method
    5. 16.4 Prepare the Completed Statement of Cash Flows Using the Indirect Method
    6. 16.5 Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency
    7. 16.6 Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  18. Financial Statement Analysis
  19. Time Value of Money
  20. Suggested Resources
  21. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
  22. Index

The larger the business, the greater the likelihood that that business will have a large volume of transactions that need to be recorded in and processed by the company’s accounting information system. You’ve learned that each transaction is recorded in the general journal, which is a chronological listing of transactions. In other words, transactions are recorded into the general journal as they occur. While this is correct accounting methodology, it also can create a cumbersome general journal with which to work and may make finding specific pieces of information very challenging. For example, assume customer John Smith charged an item for $100 on June 1. In the general journal, the company would record the following.

Journal entry, dated June 1. Debit, Accounts Receivable: John Smith, 100. Credit, Sales, 100. Explanation: “To record sale on account to customer.”

This journal entry would be followed by a journal entry for every other transaction the company had for the remainder of the period. Suppose, on June 27, Mr. Smith asked, “How much do I owe?” To answer this question, the company would need to review all of the pages of the general journal for nearly an entire month to find all of the sales transactions relating to Mr. Smith. And if Mr. Smith said, “I thought I paid part of that two weeks ago,” the company would have to go through the general journal to find all payment entries for Mr. Smith. Imagine if there were 1,000 similar credit sales transactions for the month, each one would be written in the general journal in a similar fashion, and all other transactions, such as the paying of bills, or the buying of inventory, would also be recorded, in chronological order, in the general journal. Thus, recording all transactions to the general journal makes it difficult to find the particular tidbits of information that are needed for one of our customers, Mr. Smith. The use of special journal and subsidiary ledgers can make the accounting information system more effective and allow for certain types of information to be obtained more easily.

Your Turn

Using General Ledger (Control) Accounts

Here is the information from the accounts payable subsidiary ledger:

Accounts Payable Subsidiary Ledger. Six Columns, labeled left to right: Date, Item, Reference, Debit, Credit, Balance. E. Presley, Ltd. Account, AP Number 34. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 3,512. Line Two: December 31; Cash Disbursements; 144; 2,150; Blank; 1,362. M. Jackson, Inc. Account, AP Number 71. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 1,879. Line Two: December 31; Purchases Journal; Blank; Blank; 2,589; 4,468. Madonna, Inc. Account, AP Number 171. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 3,467. Line Two: December 31; Purchases Journal; Blank; Blank; 3,450; 6,917. Line Three: December 31; Purchases Journal; Blank; Blank: 1,500; 8,417. Line Four: December 31; General Journal, Return; 119; 250; Blank; 8,167.

What should the total be in the Accounts Payable Control Total?

Here is the information from the accounts receivable subsidiary ledger.

Accounts Receivable Subsidiary Ledger. Six Columns, labeled left to right: Date, Item, Reference, Debit, Credit, Balance. M. Jordan, Inc. Account, Number 102045. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 2,500. Line Two: December 4; Sales Journal; 27; 2,750; Blank; 5,250. Line Three: December 10; Cash Receipts; 24; Blank; 3,000; 2,250. R. Federer, Ltd. Account, Number 460708. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 2,670. Line Two: December 1; Cash Receipts; 24; Blank; 2,670; 0. T. Woods, Inc. Account, Number 564300. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 2,140. Line Two: December 17; Sales Journal; 27; 600; Blank; 2,740. Line Three: December 15; Cash Receipts; 24; Blank: 1,240; 1,500. S. Williams, Inc. Account, Number 42005. Line One: December 1, Beginning Balance; Blank; Blank; Blank; 7,160. Line Two: December 3; Sales Journal; 27; 1,800; Blank; 8,960. Line Three: December 8; General Journal; 119; Blank; 800; 8,160.

What should the total be in the Accounts Receivable Control Total?

Solution

Accounts Payable Control Total is: 1,362 + 4,468 + 8,167 = 13,997

Accounts Receivable Control Total is: 2,250 + 0 + 1,500 + 8,160 = 11,910

Special Journals

Instead of having just one general journal, companies group transactions of the same kind together and record them in special journals rather than in the general journal. This makes it easier and more efficient to find a specific type of transaction and speeds up the process of posting these transactions. In each special journal, all transactions are totaled at the end of the month, and these totals are posted to the general ledger. In addition, instead of one person entering all of the transactions in all of the journals, companies often assign a given special journal’s entries to one person. The relationship between the special journals, the general journal, and the general ledger can be seen in Figure 7.8.

Central circle labeled General Ledger surrounded by five boxes with arrows pointing to the General Ledger. The five boxed are labeled, clockwise from lower left: Sales Journal, Cash Receipts Journal, Cash Disbursements Journal, Purchases Journal, General Journal.
Figure 7.8 Special and General. Transaction summaries form the special journals, and all transactions in the general journal are posted to the general ledger. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Most companies have four special journals, but there can be more depending on the business needs. The four main special journals are the sales journal, purchases journal, cash disbursements journal, and cash receipts journal. These special journals were designed because some journal entries occur repeatedly. For example, selling goods for cash is always a debit to Cash and a credit to Sales recorded in the cash receipts journal. Likewise, we would record a sale of goods on credit in the sales journal, as a debit to accounts receivable and a credit to sales. Companies using a perpetual inventory system also record a second entry for a sale with a debit to cost of goods sold and a credit to inventory. You can see sample entries in Figure 7.9.

Sales Journal, page 10. Six columns, labeled left to right: Date, Account, Invoice Number, Reference, Debt Accounts Receivable and Credit Sales, Debit Cost of Goods Sold and Credit Merchandise Inventory. Line One, left to right: February 21, 2019; Jack Customer; 715; Blank; $5,200; $3,800. Line Two, left to right: February 23, 2019; Susan Carol; 716; Blank; $10,600; $8,400.
Figure 7.9 Sales Journal. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Note there is a column to enter the date the transaction took place; a column to indicate the customer to whom the transaction pertains; an invoice number that should match the number on the invoice given (in paper or electronically) to the customer; a reference box that indicates the transaction has been posted to the customer’s account and can include something as simple as a check mark or a code that links the transaction to other journals and ledgers; and the last two columns that indicate the accounts and amounts debited and credited.

Purchases of inventory on credit would be recorded in the purchases journal (Figure 7.10) with a debit to Merchandise Inventory and a credit to Accounts Payable.

Purchases Journal, page 36. Six columns, labeled left to right: Date, Account, Invoice Number, Reference, Merchandise Inventory Debit, Accounts Payable Credit. Line One: February 14, 2019; Irving’s Inventory; 1542; Blank; $35,000; $35,000. Line Two: February 27, 2019; Greta’s Goods; 612; Blank; $14,700; $14,700.
Figure 7.10 Purchases Journal. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Paying bills is recorded in the cash disbursements journal (Figure 7.11) and is always a debit to Accounts Payable (or another payable or expense) and a credit to Cash.

Cash Disbursements Journal, Page 100. Six columns, labeled left to right: Date, Account, Invoice Number, Reference, Accounts Payable (or other account) Debit, Cash Credit. Line One: February 7, 2019; Mumford, Inc.; 1100; Blank; $15,000; $15,000. Line Two: February 18, 2019; Ballyho, Company; 716; Blank; $21,200; $21,200.
Figure 7.11 Cash Disbursements Journal. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

The receipt of cash from the sale of goods, as payment on accounts receivable or from other transactions, is recorded in a cash receipts journal (Figure 7.12) with a debit to cash and a credit to the source of the cash, whether that is from sales revenue, payment on an account receivable, or some other account.

Cash Receipts Journal. Six Columns, labeled left to right: Date, Account, Invoice Number, Reference, Cash Debit, Accounts Receivable, Sales, or other accounts Credit. Line One: February 8, 2019; Connie Customer; 450. Blank; $300; $300. Line Two: February 27, 2019; Billy May; 602; Blank; $1,000; $1,000.
Figure 7.12 Cash Receipts Journal. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Table 7.1 summarizes the typical transactions in the special journals previously illustrated.

Types and Purposes of Special Journals
Journal Name Journal Purpose Account(s) Debited Account(s) Credited
Sales Journal Sales on credit Accounts Receivable, Cost of Goods Sold Sales, Inventory
Purchases Journal Purchases on credit Inventory Accounts Payable
Cash Disbursements Journal Paying cash Could be:
Accounts Payable, or other accounts
Cash
Cash Receipts Journal Receiving cash Cash Could be:
Sales, Accounts Receivable, or other accounts
General Journal Any transaction not covered previously; adjusting and closing entries Could be:
Depreciation Expense
Could be:
Accumulated Depreciation
Table 7.1

How will you remember all of this? Remember, “Cash Is King,” so we consider cash transactions first. If you receive cash, regardless of the source of the transaction, and even if it is only a part of the transaction, it goes in the cash receipts journal. For example, if the company made a sale for $1,000 and the customer gave $300 in cash and promised to pay the remaining balance in the future, the entire transaction would go into the cash receipts journal, because some cash was received, even if it was only part of a transaction. You could not split this journal entry between two journals, because each transaction’s debits must equal the credits or else your journal totals will not balance at the end of the month. You might consider splitting this transaction into two separate transactions and considering it a cash sale for $300 and a sale on account for $700, but that would also be inappropriate. Although the balances in the general ledger accounts would technically be correct if you did that, this is not the right approach. Good internal control dictates that this is a single transaction, associated with one invoice number on a given date, and should be recorded in its entirety in a single journal, which in this case is the cash receipts journal. If any cash is received, even if it is only a part of the transaction, the entire transaction is entered in the cash receipts journal. For this example, the transaction entered in the cash receipts journal would have a debit to cash for $300, a debit to Accounts Receivable for $700, and a credit to Sales for $1,000.

If you pay cash (usually by writing a check), for any reason, even if it is only a part of the transaction, the entire transaction is recorded in the cash disbursements journal. For example, if the company purchased a building for $500,000 and gave a check for $100,000 as a down payment, the entire transaction would be recorded in the cash disbursements journal as a credit to cash for $100,000, a credit to mortgage payable for $400,000, and a debit to buildings for $500,000.

If the transaction does not involve cash, it will be recorded in one of the other special journals. If it is a credit sale (also known as a sale on account), it is recorded in the sales journal. If it is a credit purchase (also known as a purchase on account), it is recorded in the purchases journal. If it is none of the above, it is recorded in the general journal.

Continuing Application

Accounting Information Systems

Let’s consider what Gearhead Outfitters’ accounting information system might look like. What information will company management find important? Likewise, what information might external users of Gearhead’s financial reports need? Do regulatory requirements dictate what Gearhead needs to track in its accounting system?

Gearhead will want to know its financial position, results of operations, and cash flows. Such data will help management make decisions about the company. Likewise, external users want this data (balance sheet, income statement, and statement of cash flows) to make decisions such as whether or not to extend credit to Gearhead.

To keep accurate records, company operations must be considered. For example, inventory is purchased, sales are made, customers are billed, cash is collected, employees work and need to be paid, and other expenses are incurred. All of these operations involve different recording processes. Inventory will require a purchases journal. Sales will require a sales journal, cash receipts journal, and accounts receivable subsidiary ledger (discussed later) journal. Payroll and other disbursements will require their own journals to accurately track transactions.

Such journals allow a company to record accounting information and generate financial statements. The data also provides management with the information needed to make sound business decisions. For example, subsidiary ledgers, such as the accounts receivable ledger, provide data about the aging and collectability of receivables. Thus, the proper design, implementation, and maintenance of the accounting information system are vital to a company’s sustainability.

What other questions can be answered through the analysis of information gathered by the accounting information system? Think in terms of the timing of inventory orders and cash flow needs. Is there nonfinancial information to extract from the accounting system? An accounting information system should provide the information needed for a business to meet its goals.

Subsidiary Ledgers

In addition to the four special journals, there are two special ledgers, the accounts receivable subsidiary ledger and the accounts payable subsidiary ledger. The accounts receivable subsidiary ledger gives details about each person who owes the company money, as shown in Figure 7.13. Each colored block represents an individual’s account and shows only the amount that person owes the company. Notice that the subsidiary ledger provides the date of the transaction and a reference column to link the transaction to the same information posted in one of the special journals (or general journal if special journals are not used)—this reference is usually a code that references the special journal such as SJ for the sales special journal, as well as the amounts owed in the debit column and the payments made in the credit column. The amounts owed by all of the individuals, as indicated in the subsidiary ledger, are added together to form the accounts receivable control total, and this should equal the Accounts Receivable balance reported in the general ledger as shown in Figure 7.14. Key points about the accounts receivable subsidiary ledger are:

  • Accounts Receivable in the general ledger is the total of all of the individual account totals that are listed in the accounts receivable subsidiary ledger.
  • All of the amounts owed to the company in the accounts receivable subsidiary ledger must equal the amounts in the accounts receivable general ledger account.
Five columns, labeled left to right: Date, Reference, Debit, Credit, Balance. Smith Account. Line One: February 1; Blank; $100; Blank: $100. Line Two: February 9; Blank; $300; Blank; $400. Jones Account. Line One: February 2; Blank; $200; Blank; $200. Line Two: February 8; Blank; $300; Blank; $500. Lee Account. Line One: February 1; Blank; $300; Blank; $300. Line Two: February 4; Blank; Blank; $200; $100.
Figure 7.13 Accounts Receivable Subsidiary Ledger. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
Comparing Accounts Receivable Subsidiary Ledger to Accounts Receivable Control Account in General Ledger. Smith Balance, $400, plus Jones Balance, $500, plus Lee Balance, $100, equals Accounts Receivable Balance, $1,000.
Figure 7.14 Accounts Receivable. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Ethical Considerations

Subsidiary Ledger Fraud6

Subsidiary ledgers have to balance and agree with the general ledger. Accountants using QuickBooks and other accounting systems may not have to perform this step, because in these systems the subsidiary ledger updates the general ledger automatically. However, a dishonest person might manipulate accounting records by recording a smaller amount of cash receipts in the control account than is recorded on the subsidiary ledger cards. The ethical accountant must be vigilant to ensure that the ledgers remain balanced and that proper internal controls are in place to ensure the soundness of the accounting system.

The accounts payable subsidiary ledger holds the details about all of the amounts a company owes to people and/or companies. In the accounts payable subsidiary ledger, each vendor (the person or company from whom you purchased inventory or other items) has an account that shows the details of all transactions. Similar to the accounts receivable subsidiary ledger, the purchases subsidiary journal indicates the date on which a transaction took place; a reference column used in the same manner as previously described for accounts receivable subsidiary ledgers; and finally, the subsidiary ledger shows the amount charged or the amount paid. Following are the transactions for ABC Inc. and XYZ Inc. The final balance indicated on each subsidiary purchases journal shows the amount the company owes ABC and XYZ.

Accounts Payable Subsidiary Ledger. Six columns, labeled left to right: Date, Reference, Item, Debit, Credit, Balance. ABC, Inc. Account. Line One: January 1; Blank; Purchase; Blank; $200; $200. Line Two: January 15; Blank; Payment; $75; Blank; $125. Line Three: January 20; Blank; Purchase; Blank; $50; $175. XYZ, Inc. Account. Line One: January 3; Blank; Purchase; Blank; $100; $100. Line Two: January 15; Blank; Payment; $20; Blank; $80. Line Three: January 20; Blank; Purchase; Blank; $50; $130.

If the two amounts are added together, the company owes $305 in total to the two companies. The $305 is the amount that will show in the Accounts Payable general ledger account.

Your Turn

Using the Accounts Payable Subsidiary Ledger

Find the balance in each account in the accounts payable subsidiary ledger that follows. Note that each vendor account has a unique account number or AP No.

Accounts Payable Subsidiary Ledger. Six Columns, labeled left to right: Date, Item, Reference, Debit, Credit, Balance. Elizabeth I, Inc. Account, AP Number 734. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 3,134. Line Two: December 15; Cash Disbursements; 124; 2,150; Blank; ?. Line Three: December 16; Purchases Journal; 76; Blank: 3,112; ?. Line Four: December 29; Cash Disbursements; 125; 1,250; Blank; ?. F. Nightingale, Inc. Account, AP Number 731. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 3,446. Line Two: December 9; Purchases Journal; 76; Blank; 2,589; ?. Line Three: December 15; Purchases Journal; 77; Blank: 1,234; ?. L. M. Alcott, Inc. Account, AP Number 671. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 3,467. Line Two: December 15; Purchases Journal; 77; Blank; 3,450; ?. Line Three: December 28; Purchases Journal; 77; Blank: 1,500; ?. Line Four: December 31; General Journal, Return; 127; 250; Blank; ?.

Solution

Accounts Payable Subsidiary Ledger. Six Columns, labeled left to right: Date, Item, Reference, Debit, Credit, Balance. Elizabeth I, Inc. Account, AP Number 734. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 3,134. Line Two: December 15; Cash Disbursements; 124; 2,150; Blank; 984. Line Three: December 16; Purchases Journal; 76; Blank: 3,112; 4,096. Line Four: December 29; Cash Disbursements; 125; 1,250; Blank; 2,846. F. Nightingale, Inc. Account, AP Number 731. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 3,446. Line Two: December 9; Purchases Journal; 76; Blank; 2,589; 6,035. Line Three: December 15; Purchases Journal; 77; Blank: 1,234; 7,269. L. M. Alcott, Inc. Account, AP Number 671. Line One: December 1; Beginning Balance; Blank; Blank; Blank; 3,467. Line Two: December 15; Purchases Journal; 77; Blank; 3,450; 6,917. Line Three: December 28; Purchases Journal; 77; Blank: 1,500; 8,417. Line Four: December 31; General Journal, Return; 127; 250; Blank; 8,167.

Footnotes

  • 6 Joseph R. Dervaes. “Accounts Receivable Fraud, Part Five: Other Accounting Manipulations.” Fraud Magazine. July/August, 2004. http://www.fraud-magazine.com/article.aspx?id=4294967822
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