Starting a small business requires many decisions. For example, you have to decide where to locate, how much space you need, how much inventory to have, how many employees to hire, and where to advertise. Small business owners are typically so concerned about the product and sales side of their business that they often do not give enough thought to something that is critical to their success—how to keep track of financial results.
Small business owners today can choose either manual or computerized accounting systems. For example, Paul and Laura West are the owners of the first independent dealership of Carvin guitars and professional audio equipment. When they founded their company, in Sacramento, California, they decided to purchase a computerized accounting system that would integrate many aspects of their retail operations. They wanted to use their accounting software to manage their inventory of guitars and amplifiers, enter sales, record and report financial data, and process credit card and debit card transactions. They evaluated a number of options and chose QuickBooks® by Intuit Inc.
QuickBooks®, like most other popular software packages, has programs designed for the needs of a specific business, which in this case is retailing. This QuickBooks® retailing package automatically collects sales information from its point-of-sale scanning devices. It also keeps track of inventory levels and automatically generates purchase orders for popular items when re-order points are reached. It even supports sales efforts by compiling a customer database from which the Wests send out targeted direct mailings to potential customers. The computerized system enables data files to be emailed to the company's accountant. This keeps costs down and makes it easier and more efficient to generate financial reports as needed. The Wests believe that the investment in the computerized system has saved them time and money, and allowed them to spend more time on other aspects of their business.
Source: Intuit Inc., “QuickBooks® and ProAdvisor® Help Make Guitar Store a Hit,” Journal of Accountancy (May 2006), p. 101.
Preview of Chapter 7
As you see from the Feature Story, a reliable information system is a necessity for any company. Whether companies use pen, pencil, or computers in maintaining accounting records, certain principles and procedures apply. The purpose of this chapter is to explain and illustrate these features.
The content and organization of Chapter 7 are as follows.
The accounting information system collects and processes transaction data and communicates financial information to decision-makers. It includes each of the steps in the accounting cycle that you studied in earlier chapters. It also includes the documents that provide evidence of the transactions, and the records, trial balances, worksheets, and financial statements that result. An accounting system may be either manual or computerized. Most businesses these days use some sort of computerized accounting system, whether it is an off-the-shelf system for small businesses, like QuickBooks or Peachtree, or a more complex custom-made system.
Efficient and effective accounting information systems are based on certain basic principles. These principles, as described in Illustration 7-1, are (1) cost-effectiveness, (2) usefulness, and (3) flexibility. If the accounting system is cost-effective, provides useful output, and has the flexibility to meet future needs, it can contribute to both individual and organizational goals.
Many small businesses eventually replace their manual accounting system with a computerized general ledger accounting system. General ledger accounting systems are software programs that integrate the various accounting functions related to sales, purchases, receivables, payables, cash receipts and disbursements, and payroll. They also generate financial statements. Computerized systems have a number of advantages over manual systems. First, the company typically enters data only once in a computerized system. Second, because the computer does most steps automatically, it eliminates many errors resulting from human intervention in a manual system, such as errors in posting or preparation of financial statements. Computerized systems also provide information up-to-the-minute. More timely information results in better business decisions. Many different general ledger software packages are available.
To identify the right software for your business, you must understand your company's operations. For example, consider its needs with regard to inventory, billing, payroll, and cash management. In addition, the company might have specific needs that are not supported by all software systems. For example, you might want to track employees’ hours on individual jobs or to extract information for determining sales commissions. Choosing the right system is critical because installation of even a basic system is time-consuming, and learning a new system will require many hours of employee time.
Software publishers tend to classify businesses into groups based on revenue and the number of employees. Companies with revenues of less than $5 million and up to 20 employees generally use entry-level programs. The two leading entry-level programs are Intuit's QuickBooks and The Sage Group's Sage 50. These programs control more than 90% of the market. Each of these entry-level programs comes in many different industry-specific versions. For example, some are designed for very specific industry applications such as restaurants, retailing, construction, manufacturing, or nonprofit.
Quality entry-level packages typically involve more than recording transactions and preparing financial statements. Here are some common features and benefits:
Ethics Note
Entire books and movies have used computer-system tampering as a major theme. Most programmers would agree that tamper-proofing and debugging programs are the most difficult and time-consuming phases of their jobs.
Enterprise resource planning (ERP) systems are typically used by manufacturing companies with more than 500 employees and $500 million in sales. The best-known of these systems are SAP AG's SAP ERP (the most widely used) and Oracle's ERP. ERP systems go far beyond the functions of an entry-level general ledger package. They integrate all aspects of the organization, including accounting, sales, human resource management, and manufacturing. Because of the complexity of an ERP system, implementation can take three years and cost five times as much as the purchase price of the system. Purchase and implementation of ERP systems can cost from $250,000 to as much as $50 million for the largest multinational corporations.
ETHICS INSIGHT
Curbing Fraudulent Activity with Software
The Sarbanes-Oxley Act (SOX) requires that companies demonstrate that they have adequate controls in place to detect significant fraudulent behavior by employees. Recently, about 15% of publicly traded companies reported at least one material weakness in their controls that needed to be remedied.
The SOX requirements have created a huge market for software that can monitor and trace every recorded transaction and adjusting entry. This enables companies to pinpoint who used the accounting system and when they used it. These systems also require “electronic signatures” by employees for all significant transactions. Such signatures verify that employees have followed all required procedures, and that all actions are properly authorized. SOX-related technology spending was estimated to be approximately $2 billion at one time. One firm that specializes in compliance software had 10 clients prior to SOX and 250 after SOX.
Source: W. M. Bulkeley and C. Forelle, “Anti-Crime Program: How Corporate Scandals Gave Tech Firms a New Business Line,” Wall Street Journal (December 9, 2005), p. A1.
Why might this software help reduce fraudulent activity by employees? (See page 371.)
Manual accounting systems perform each of the steps in the accounting cycle by hand. For example, someone manually enters each accounting transaction in the journal and manually posts each to the ledger. Other manual computations must be made to obtain ledger account balances and to prepare a trial balance and financial statements. In the remainder of this chapter, we illustrate the use of a manual system.
You might be wondering, “Why cover manual accounting systems if the real world uses computerized systems?” First, small businesses still abound. Most of them begin operations with manual accounting systems and convert to computerized systems as the business grows. You may work in a small business or start your own someday, so it is useful to know how a manual system works. Second, to understand what computerized accounting systems do, you also need to understand manual accounting systems.
The manual accounting system represented in the first six chapters of this textbook is satisfactory in a company with a low volume of transactions. However, in most companies, it is necessary to add additional ledgers and journals to the accounting system to record transaction data efficiently.
Imagine a business that has several thousand charge (credit) customers and shows the transactions with these customers in only one general ledger account—Accounts Receivable. It would be nearly impossible to determine the balance owed by an individual customer at any specific time. Similarly, the amount payable to one creditor would be difficult to locate quickly from a single Accounts Payable account in the general ledger.
Instead, companies use subsidiary ledgers to keep track of individual balances. A subsidiary ledger is a group of accounts with a common characteristic (for example, all accounts receivable). It is an addition to and an expansion of the general ledger. The subsidiary ledger frees the general ledger from the details of individual balances.
Two common subsidiary ledgers are:
1. The accounts receivable (or customers’) subsidiary ledger, which collects transaction data of individual customers.
2. The accounts payable (or creditors’) subsidiary ledger, which collects transaction data of individual creditors.
In each of these subsidiary ledgers, companies usually arrange individual accounts in alphabetical order.
A general ledger account summarizes the detailed data from a subsidiary ledger. For example, the detailed data from the accounts receivable subsidiary ledger are summarized in Accounts Receivable in the general ledger. The general ledger account that summarizes subsidiary ledger data is called a control account. Illustration 7-2 presents an overview of the relationship of subsidiary ledgers to the general ledger. There, the general ledger control accounts and subsidiary ledger accounts are in green. Note that Cash and Owner's Capital in this illustration are not control accounts because there are no subsidiary ledger accounts related to these accounts.
At the end of an accounting period, each general ledger control account balance must equal the composite balance of the individual accounts in the related subsidiary ledger. For example, the balance in Accounts Payable in Illustration 7-2 must equal the total of the subsidiary balances of Creditors X + Y + Z.
Illustration 7-3 lists credit sales and collections on account for Pujols Company.
Illustration 7-4 provides an example of a control account and subsidiary ledger for Pujols Company. (Due to space considerations, the explanation column in these accounts is not shown in this and subsequent illustrations.) Illustration 7-4 is based on the transactions listed in Illustration 7-3.
Pujols can reconcile the total debits ($12,000) and credits ($8,000) in Accounts Receivable in the general ledger to the detailed debits and credits in the subsidiary accounts. Also, the balance of $4,000 in the control account agrees with the total of the balances in the individual accounts (Aaron Co. $2,000 + Branden Inc. $0 + Caron Co. $2,000) in the subsidiary ledger.
As Illustration 7-4 shows, companies make monthly postings to the control accounts in the general ledger. This practice allows them to prepare monthly financial statements. Companies post to the individual accounts in the subsidiary ledger daily. Daily posting ensures that account information is current. This enables the company to monitor credit limits, bill customers, and answer inquiries from customers about their account balances.
Subsidiary ledgers have several advantages:
1. They show in a single account transactions affecting one customer or one creditor, thus providing up-to-date information on specific account balances.
2. They free the general ledger of excessive details. As a result, a trial balance of the general ledger does not contain vast numbers of individual account balances.
3. They help locate errors in individual accounts by reducing the number of accounts in one ledger and by using control accounts.
4. They make possible a division of labor in posting. One employee can post to the general ledger while someone else posts to the subsidiary ledgers.
ACCOUNTING ACROSS THE ORGANIZATION
“I'm John Smith, a.k.a. 13695071642”
Rather than relying on customer or creditor names in a subsidiary ledger, a computerized system expands the account number of the control account in a pre-specified manner. For example, if Accounts Receivable was numbered 10010, the first account in the accounts receivable subsidiary ledger might be numbered 10010–0001. Most systems allow inquiries about specific accounts in the subsidiary ledger (by account number) or about the control account. With the latter, the system would automatically total all the subsidiary accounts whenever an inquiry to the control account was made.
Why use numbers to identify names in a computerized system? (See page 371.)
DO IT!
Subsidiary Ledgers
Presented below is information related to Sims Company for its first month of operations. Determine the balances that appear in the accounts payable subsidiary ledger. What Accounts Payable balance appears in the general ledger at the end of January?
Action Plan
Subtract cash paid from credit purchases to determine the balances in the accounts payable subsidiary ledger.
Sum the individual balances to determine the Accounts Payable balance.
Solution
Subsidiary ledger balances:
Devon Co. $4,000 ($11,000 − $7,000)
Shelby Co. $5,000 ($7,000 − $2,000)
Taylor Co. $5,000 ($14,000 − $9,000)
General ledger Accounts Payable balance: $14,000 ($4,000 + $5,000 + $5,000)
Related exercise material: BE7-4, BE7-5, E7-1, E7-2, E7-4, E7-5, and DO IT! 7-1.
So far you have learned to journalize transactions in a two-column general journal and post each entry to the general ledger. This procedure is satisfactory in only very small companies. To expedite journalizing and posting, most companies use special journals in addition to the general journal.
Companies use special journals to record similar types of transactions. Examples are all sales of merchandise on account or all cash receipts. The types of transactions that occur frequently in a company determine what special journals the company uses. Most merchandising companies record daily transactions using the journals shown in Illustration 7-5.
If a transaction cannot be recorded in a special journal, the company records it in the general journal. For example, if a company had special journals for only the four types of transactions listed above, it would record purchase returns and allowances in the general journal. Similarly, correcting, adjusting, and closing entries are recorded in the general journal. In some situations, companies might use special journals other than those listed above. For example, when sales returns and allowances are frequent, a company might use a special journal to record these transactions.
Special journals permit greater division of labor because several people can record entries in different journals at the same time. For example, one employee may journalize all cash receipts, and another may journalize all credit sales. Also, the use of special journals reduces the time needed to complete the posting process. With special journals, companies may post some accounts monthly, instead of daily, as we will illustrate later in the chapter. On the following pages, we discuss the four special journals shown in Illustration 7-5.
In the sales journal, companies record sales of merchandise on account. Cash sales of merchandise go in the cash receipts journal. Credit sales of assets other than merchandise go in the general journal.
To demonstrate use of a sales journal, we will use data for Karns Wholesale Supply, which uses a perpetual inventory system. Under this system, each entry in the sales journal results in one entry at selling price and another entry at cost. The entry at selling price is a debit to Accounts Receivable (a control account) and a credit of equal amount to Sales Revenue. The entry at cost is a debit to Cost of Goods Sold and a credit of equal amount to Inventory (a control account). Using a sales journal with two amount columns, the company can show on only one line a sales transaction at both selling price and cost. Illustration 7-6 shows this two-column sales journal of Karns Wholesale Supply, using assumed credit sales transactions (for sales invoices 101–107).
Helpful Hint Postings are also made daily to individual ledger accounts in the inventory subsidiary ledger to maintain a perpetual inventory.
Note that, unlike the general journal, an explanation is not required for each entry in a special journal. Also, note that use of prenumbered invoices ensures that all invoices are journalized and no invoices are duplicated. Finally, note that the reference (Ref.) column is not used in journalizing. It is used in posting the sales journal, as explained in the next section.
Companies make daily postings from the sales journal to the individual accounts receivable in the subsidiary ledger. Posting to the general ledger is done monthly. Illustration 7-7 (page 338) shows both the daily and monthly postings.
A check mark () is inserted in the reference column to indicate that the daily posting to the customer's account has been made. If the subsidiary ledger accounts were numbered, the account number would be entered in place of the check mark. At the end of the month, Karns posts the column totals of the sales journal to the general ledger. Here, the column totals are as follows. From the selling-price column, a debit of $90,230 to Accounts Receivable (account No. 112), and a credit of $90,230 to Sales Revenue (account No. 401). From the cost column, a debit of $62,190 to Cost of Goods Sold (account No. 505), and a credit of $62,190 to Inventory (account No. 120). Karns inserts the account numbers below the column totals to indicate 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.
The next step is to “prove” the ledgers. To do so, Karns must determine two things: (1) The total of the general ledger debit balances must equal the total of the general ledger credit balances. (2) The sum of the subsidiary ledger balances must equal the balance in the control account. Illustration 7-8 (page 339) shows the proof of the postings from the sales journal to the general and subsidiary ledgers.
The use of a special journal to record sales on account has a number of advantages. First, the one-line entry for each sales transaction saves time. In the sales journal, it is not necessary to write out the four account titles for each transaction.
Second, only totals, rather than individual entries, are posted to the general ledger. This saves posting time and reduces the possibilities of errors in posting. Finally, a division of labor results because one individual can take responsibility for the sales journal.
In the cash receipts journal, companies record all receipts of cash. The most common types of cash receipts are cash sales of merchandise and collections of accounts receivable. Many other possibilities exist, such as receipt of money from bank loans and cash proceeds from disposal of equipment. A one- or two-column cash receipts journal would not have space enough for all possible cash receipt transactions. Therefore, companies use a multiple-column cash receipts journal.
Generally, a cash receipts journal includes the following columns: debit columns for Cash and Sales Discounts, and credit columns for Accounts Receivable, Sales Revenue, and “Other Accounts.” Companies use the “Other Accounts” category when the cash receipt does not involve a cash sale or a collection of accounts receivable. Under a perpetual inventory system, each sales entry also is accompanied by an entry that debits Cost of Goods Sold and credits Inventory for the cost of the merchandise sold. Illustration 7-9 (page 340) shows a six-column cash receipts journal.
Companies may use additional credit columns if these columns significantly reduce postings to a specific account. For example, a loan company such as Household International receives thousands of cash collections from customers. Using separate credit columns for Loans Receivable and Interest Revenue, rather than the Other Accounts credit column, would reduce postings.
To illustrate the journalizing of cash receipts transactions, we will continue with the May transactions of Karns Wholesale Supply. Collections from customers relate to the entries recorded in the sales journal in Illustration 7-6. The entries in the cash receipts journal are based on the following cash receipts.
May | 1 | D. A. Karns makes an investment of $5,000 in the business. |
7 | Cash sales of merchandise total $1,900 (cost, $1,240). | |
10 | Received a check for $10,388 from Abbot Sisters in payment of invoice No. 101 for $10,600 less a 2% discount. | |
12 | Cash sales of merchandise total $2,600 (cost, $1,690). | |
17 | Received a check for $11,123 from Babson Co. in payment of invoice No. 102 for $11,350 less a 2% discount. | |
22 | Received cash by signing a note for $6,000. | |
23 | Received a check for $7,644 from Carson Bros. in full for invoice No. 103 for $7,800 less a 2% discount. | |
28 | Received a check for $9,114 from Deli Co. in full for invoice No. 104 for $9,300 less a 2% discount. |
Further information about the columns in the cash receipts journal is listed on page 341.
1. Cash. Karns enters in this column the amount of cash actually received in each transaction. The column total indicates the total cash receipts for the month.
2. Sales Discounts. Karns includes a Sales Discounts column in its cash receipts journal. By doing so, it does not need to enter sales discount items in the general journal. As a result, the cash receipts journal shows on one line the collection of an account receivable within the discount period.
Credit Columns:
3. Accounts Receivable. Karns uses the Accounts Receivable column to record cash collections on account. The amount entered here is the amount to be credited to the individual customer's account.
4. Sales Revenue. The Sales Revenue column records all cash sales of merchandise. Cash sales of other assets (plant assets, for example) are not reported in this column.
5. Other Accounts. Karns uses the Other Accounts column whenever the credit is other than to Accounts Receivable or Sales Revenue. For example, in the first entry, Karns enters $5,000 as a credit to Owner's Capital. This column is often referred to as the sundry accounts column.
Debit and Credit Column:
6. Cost of Goods Sold and Inventory. This column records debits to Cost of Goods Sold and credits to Inventory.
Helpful Hint When is an account title entered in the “Account Credited” column of the cash receipts journal?
Answer: A subsidiary ledger account is entered when the entry involves a collection of accounts receivable. A general ledger account is entered when the account is not shown in a special column (and an amount must be entered in the Other Accounts column). Otherwise, no account is shown in the “Account Credited” column.
In a multi-column journal, generally only one line is needed for each entry. Debit and credit amounts for each line must be equal. When Karns journalizes the collection from Abbot Sisters on May 10, for example, three amounts are indicated. Note also that the Account Credited column identifies both general ledger and subsidiary ledger account titles. General ledger accounts are illustrated in the May 1 and May 22 entries. A subsidiary account is illustrated in the May 10 entry for the collection from Abbot Sisters.
When Karns has finished journalizing a multi-column journal, it totals the amount columns and compares the totals to prove the equality of debits and credits. Illustration 7-10 shows the proof of the equality of Karns's cash receipts journal.
Totaling the columns of a journal and proving the equality of the totals is called footing and cross-footing a journal.
Posting a multi-column journal (Illustration 7-9, page 340) involves the following steps.
1. At the end of the month, the company posts all column totals, except for the Other Accounts total, to the account title(s) specified in the column heading (such as Cash or Accounts Receivable). The company then enters account numbers below the column totals to show that they have been posted. For example, Karns has posted Cash to account No. 101, Accounts Receivable to account No. 112, Inventory to account No. 120, Sales Revenue to account No. 401, Sales Discounts to account No. 414, and Cost of Goods Sold to account No.505.
2. The company separately posts the individual amounts comprising the Other Accounts total to the general ledger accounts specified in the Account Credited column. See, for example, the credit posting to Owner's Capital. The total amount of this column has not been posted. The symbol (X) is inserted below the total to this column to indicate that the amount has not been 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 Account Credited column. See, for example, the credit posting of $10,600 to Abbot Sisters.
The symbol CR, used in both the subsidiary and general ledgers, identifies postings from the cash receipts journal.
After posting of the cash receipts journal is completed, Karns proves the ledgers. As shown in Illustration 7-11, the general ledger totals agree. Also, the sum of the subsidiary ledger balances equals the control account balance.
In the purchases journal, companies record all purchases of merchandise on account. Each entry in this journal results in a debit to Inventory and a credit to Accounts Payable. For example, consider the following credit purchase transactions for Karns Wholesale Supply in Illustration 7-12.
Illustration 7-13 shows the purchases journal for Karns Wholesale Supply. When using a one-column purchases journal (as in Illustration 7-13), a company cannot journalize other types of purchases on account or cash purchases in it. For example, in the purchases journal in Illustration 7-13, Karns would have to record credit purchases of equipment or supplies in the general journal. Likewise, all cash purchases would be entered in the cash payments journal. As illustrated later, companies that make numerous credit purchases for items other than merchandise often expand the purchases journal to a multi-column format. (See Illustration 7-15 on page 345.)
The journalizing procedure is similar to that for a sales journal. Companies make entries in the purchases journal from purchase invoices. In contrast to the sales journal, the purchases journal may not have an invoice number column because invoices received from different suppliers will not be in numerical sequence. To ensure that they record all purchase invoices, some companies consecutively number each invoice upon receipt and then use an internal document number column in the purchases journal. The entries for Karns Wholesale Supply are based on the assumed credit purchases listed in Illustration 7-12.
The procedures for posting the purchases journal are similar to those for the sales journal. In this case, Karns makes daily postings to the accounts payable ledger. It makes monthly postings to Inventory and Accounts Payable in the general ledger. In both ledgers, Karns uses P1 in the reference column to show that the postings are from page 1 of the purchases journal.
Helpful Hint Postings to subsidiary ledger accounts are done daily because it is often necessary to know a current balance for the subsidiary accounts.
Proof of the equality of the postings from the purchases journal to both ledgers is shown in Illustration 7-14.
As noted earlier, some companies expand the purchases journal to include all types of purchases on account. Instead of one column for inventory and accounts payable, they use a multiple-column format. This format usually includes a credit column for Accounts Payable and debit columns for purchases of Inventory, Supplies, and Other Accounts. Illustration 7-15 shows a multi-column purchases journal for Hanover Co. The posting procedures are similar to those shown earlier for posting the cash receipts journal.
Helpful Hint A single-column purchases journal needs only to be footed to prove the equality of debits and credits.
In a cash payments (cash disbursements) journal, companies record all disbursements of cash. Entries are made from prenumbered checks. Because companies make cash payments for various purposes, the cash payments journal has multiple columns. Illustration 7-16 (page 346) shows a four-column journal.
The procedures for journalizing transactions in this journal are similar to those for the cash receipts journal. Karns records each transaction on one line, and for each line there must be equal debit and credit amounts. The entries in the cash payments journal in Illustration 7-16 are based on the following transactions for Karns Wholesale Supply.
May | 1 | Issued check No. 101 for $1,200 for the annual premium on a fire insurance policy. |
3 | Issued check No. 102 for $100 in payment of freight when terms were FOB shipping point. | |
8 | Issued check No. 103 for $4,400 for the purchase of merchandise. | |
10 | Sent check No. 104 for $10,780 to Jasper Manufacturing Inc. in payment of May 6 invoice for $11,000 less a 2% discount. | |
19 | Mailed check No. 105 for $6,984 to Eaton and Howe Inc. in payment of May 10 invoice for $7,200 less a 3% discount. | |
23 | Sent check No. 106 for $6,831 to Fabor and Son in payment of May 14 invoice for $6,900 less a 1% discount. | |
28 | Sent check No. 107 for $17,150 to Jasper Manufacturing Inc. in payment of May 19 invoice for $17,500 less a 2% discount. | |
30 | Issued check No. 108 for $500 to D. A. Karns as a cash withdrawal for personal use. |
Note that whenever Karns enters an amount in the Other Accounts column, it must identify a specific general ledger account in the Account Debited column. The entries for checks No. 101, 102, 103, and 108 illustrate this situation. Similarly, Karns must identify a subsidiary account in the Account Debited column whenever it enters an amount in the Accounts Payable column. See, for example, the entry for check No. 104.
After Karns journalizes the cash payments journal, it totals the columns. The totals are then balanced to prove the equality of debits and credits.
The procedures for posting the cash payments journal are similar to those for the cash receipts journal. Karns posts the amounts recorded in the Accounts Payable column individually to the subsidiary ledger and in total to the control account. It posts Inventory and Cash only in total at the end of the month. Transactions in the Other Accounts column are posted individually to the appropriate account(s) affected. The company does not post totals for the Other Accounts column.
Illustration 7-16 shows the posting of the cash payments journal. Note that Karns uses the symbol CP as the posting reference. After postings are completed, the company proves the equality of the debit and credit balances in the general ledger. In addition, the control account balances should agree with the subsidiary ledger total balance. Illustration 7-17 shows the agreement of these balances.
Special journals for sales, purchases, and cash substantially reduce the number of entries that companies make in the general journal. Only transactions that cannot be entered in a special journal are recorded in the general journal. For example, a company may use the general journal to record such transactions as granting of credit to a customer for a sales return or allowance, granting of credit from a supplier for purchases returned, acceptance of a note receivable from a customer, and purchase of equipment by issuing a note payable. Also, correcting, adjusting, and closing entries are made in the general journal.
The general journal has columns for date, account title and explanation, reference, and debit and credit amounts. When control and subsidiary accounts are not involved, the procedures for journalizing and posting of transactions are the same as those described in earlier chapters. When control and subsidiary accounts are involved, companies make two changes from the earlier procedures:
1. In journalizing, they identify both the control and the subsidiary accounts.
2. In posting, there must be a dual posting: once to the control account and once to the subsidiary account.
To illustrate, assume that on May 31, Karns Wholesale Supply returns $500 of merchandise for credit to Fabor and Son. Illustration 7-18 (page 348) shows the entry in the general journal and the posting of the entry. Note that if Karns receives cash instead of credit on this return, then it would record the transaction in the cash receipts journal.
Note that the general journal indicates two accounts (Accounts Payable, and Fabor and Son) for the debit, and two postings (“201/”) in the reference column. One debit is posted to the control account and another debit to the creditor's account in the subsidiary ledger.
DO IT!
Special Journals
Swisher Company had the following transactions during March.
1. Collected cash on account from Oakland Company.
2. Purchased equipment by signing a note payable.
3. Sold merchandise on account.
4. Purchased merchandise on account.
5. Paid $2,400 for a 2-year insurance policy.
Identify the journal in which each of the transactions above is recorded.
Action Plan
Determine if the transaction involves the receipt of cash (cash receipts journal) or the payment of cash (cash payments journal).
Determine if the transaction is a sale of merchandise on account (sales journal) or a purchase of merchandise on account (purchases journal).
All other transactions are recorded in the general journal.
Solution
1. Collected cash on account from Oakland Company. | Cash receipts journal |
2. Purchased equipment by signing a note payable. | General journal |
3. Sold merchandise on account. | Sales journal |
4. Purchased merchandise on account. | Purchases journal |
5. Paid $2,400 for a 2-year insurance policy. | Cash payments journal |
Related exercise material: BE7-6, BE7-7, BE7-8, BE7-9, BE7-10, E7-6, E7-7, E7-8, E7-10, and DO IT! 7-2.
Cassandra Wilson Company uses a six-column cash receipts journal with the following columns.
Cash (Dr.) | Other Accounts (Cr.) |
Sales Discounts (Dr.) | Cost of Goods Sold (Dr.) and Inventory (Cr.) |
Accounts Receivable (Cr.) | |
Sales Revenue (Cr.) |
Cash receipts transactions for the month of July 2014 are as follows.
July | 3 | Cash sales total $5,800 (cost, $3,480). |
5 | Received a check for $6,370 from Jeltz Company in payment of an invoice dated June 26 for $6,500, terms 2/10, n/30. | |
9 | Cassandra Wilson, the proprietor, made an additional investment of $5,000 in cash in the business. | |
10 | Cash sales total $12,519 (cost, $7,511). | |
12 | Received a check for $7,275 from R. Eliot & Co. in payment of a $7,500 invoice dated July 3, terms 3/10, n/30. | |
15 | Received an advance of $700 cash for future services. | |
20 | Cash sales total $15,472 (cost, $9,283). | |
22 | Received a check for $5,880 from Beck Company in payment of $6,000 invoice dated July 13, terms 2/10, n/30. | |
29 | Cash sales total $17,660 (cost, $10,596). | |
31 | Received cash of $200 on interest earned for July. |
Action Plan
Record all cash receipts in the cash receipts journal.
The “account credited” indicates items posted individually to the subsidiary ledger or to the general ledger.
Record cash sales in the cash receipts journal— not in the sales journal.
The total debits must equal the total credits.
Instructions
(a) Journalize the transactions in the cash receipts journal.
(b) Contrast the posting of the Accounts Receivable and Other Accounts columns.
Solution to Comprehensive DO IT!