1. Topic 4- Special Journals – Subsidiary Ledgers
MPA 701 Accounting
Topic 4- Special Journals – Subsidiary Ledgers
Special Journals
Subsidiary Ledgers
Conceptual Framework - Qualitative
Accounting Regulations
Measurement issues

2. Upon completing this topic you should be able to:
Understand the role of special journals, subsidiary ledgers and control accounts within the accounting recording system
Be able to record transactions using special journals, subsidiary ledgers and control accounts
Explain GAAP
Describe the set of principles that guide the preparation of financial statements
Define the elements of the financial statements and the recognition criteria
Explain the need for corporate governance and its key components
Explain the purpose of an audit and the affect of financial information on the capital market

3. Special Journals
We previously learned that transactions are entered into the general journal and posted individually to the general ledger
The most common business transactions (e.g., sales) can be recorded in special journals (see Chapter 8 - Page 328 onwards of textbook)
Common transactions are summarized in special journals and posted to the general ledger as totals (not as individual transactions)
Reduces detail (clutter) in general ledger
Improved efficiency

4. Types of Special Journals
Specific transactions recorded
A Sales journal
(SJ)
Sales on credit terms, usual entry
Dr. Accts Receivable & Cr. Sales Rev
B Purchases journal (PJ)
Purchase of inventory on credit terms, usual entry
Dr. Inventory & Cr. Accounts Payable
C Cash receipts journal (CRJ)
Receipt of cash, usual entry
Dr. Cash Cr. Sales or A/R or Interest
D Cash payments journal (CPJ)
Payment of cash, usual entry
Dr. Wages & other exps Cr. Cash

5. Example: Sales Transactions
Record the following sales transactions:
DATE INV CUSTOMER NAME SELLING PRICE
5 July M. Andrews $100,000
5 July T. Blake $300,000
5 July A. Crawford $500,000

6. Usual Typical General Journal Entries
Note the repetitive nature of the journal for such daily transactions

7. General Journals posted to General Ledger Accounts
Accounts Receivable July 5 Sales 100,000 July 5 Sales 300,000 July 5 Sales 500,000 Sales July 5 Accts Rec 100,000 July 5 Accts Rec 300,000 July 5 Accts Rec 500,000

8. (A) Sales Journal
These transactions can be recorded in a special journal named the Sales Journals
Sales journal records credit sales of inventory (goods the business trades in)
At end of month, post totals to the general ledger
NOTE: Subsidiary ledgers to be explained shortly in this lecture (where individual posting takes place daily).

9. What does the Sales Journal look like?

10. Control Accounts and Subsidiary Ledgers
Special journals are used in conjunction with subsidiary ledgers
Subsidiary ledger contains more detailed information concerning one general ledger account (e.g., Acc receivable)
Typically use subsidiary ledgers for individual debtors, creditors, and inventory items
Relevant general ledger account is called a control account (e.g., Accounts Receivable Control Account)

11. Use of control accounts and subsidiary ledgers
Common method to accommodate detailed records in the accounting system.
“Subsidiary ledger is a set of ledger accounts that collectively represent a detailed analysis of one general ledger account, e.g. Debtors”
Periodic reconciliation of subsidiary ledger to control account is needed, alignment essential to confirm accuracy of data recorded.

12. General ledger accounts
Examples of general ledger accounts that have subsidiary ledgers are:
Debtors / accounts receivable: a separate account for each debtor
Creditors / accounts payable: a separate account for each creditor
Property, plant and equipment: separate records of each piece of property, plant and equipment
Raw materials inventory: separate records of each type of raw material held
Finished goods inventory: separate records of each type of finished goods held.

13. post information to related customer account in subsidiary ledger
Sales Journal
Typical Procedure:
enter date of sale, invoice number, customer name and amount of sale (from sales invoice)
post information to related customer account in subsidiary ledger
post “month end” totals to General Ledger
check regularly the total of subsidiary ledger against accounts receivable control account

15. Debtors Control & Subsidiary
GENERAL LEDGER
**Debtors control** No. 102
2012
July 31 Sales (SJ)
SUBSIDIARY LEDGER
M. Andrews
July 5 Sales (SJ)
T. Blake
July 5 Sales (SJ)
A. Crawford
July 5 Sales (SJ)

16. (B) Purchases Journal Record purchases of inventory on credit
Typical Procedure:
Enter invoice date, supplier’s name, credit terms and amount of purchase (from suppliers invoice)
At end of each day, post information to related supplier’s account in subsidiary ledger
At end of month, post totals to general ledger
Check total of subsidiary ledger against accounts payable control account

17. What does a PJ look like?

18. Creditors Control & Subsidiary
GENERAL LEDGER
**Creditors control** No. 200
2012
July 31 Inventory (PJ)
SUBSIDIARY LEDGER
P. Renton
July 2 Inventory (PJ)
J.Quincy
July 4 Inventory (PJ) R.Lemon
July 5 Inventory (PJ)

19. (C) Cash Receipts Journal
Record all cash inflows
Includes DR and CR columns ….example on the next Slide
Typical procedure:
Amounts in accounts receivable column posted daily to subsidiary ledger
Post column totals to general ledger at end of month

21. Debtors Control & Subsidiary
GENERAL LEDGER
**Debtors control** No. 102
July 31 Sales (SJ) July 31 Bank/Disc(CRJ)
SUBSIDIARY LEDGER
M. Andrews
July 5 Sales (SJ) July 14 Bank (CRJ)
T. Blake
July 5 Sales (SJ)
A. Crawford
July 5 Sales (SJ) July 28 Bank (CRJ)
July 28 Discount (CRJ)

22. (D) Cash Payments Journal
Record all cash outflows (disbursements)
Includes DR and CR columns…..example on the next Slide
Typical procedure:
Amounts in accounts payable column posted daily to subsidiary ledger
Post column totals to general ledger at end of month

24. Creditors Control & Subsidiary
GENERAL LEDGER
**Creditors control** No. 200
July 31 Bank/Disc (CPJ) July 31 Inventory (PJ)
SUBSIDIARY LEDGER
P. Renton
July 2 Inventory (PJ)
J.Quincy
July 4 Inventory (PJ) R.Lemon
July 31 Bank/Disc (CPJ) July 5 Inventory (PJ) 3 500

25. Other Accounts GENERAL LEDGER **Bank Account** No. 101 2012 2012
July 31 Cash Rec Jnl July 31 Cash Pay Jnl
All Other General Ledger accounts such as Sales, Inventory, Cost of Sales, Wages and Discount Received and Allowed will all have amounts posted as a total with the month end date of the 31st July.
Subsidiary Ledgers of Debtors and Creditors are updated daily so that at any point in time amounts owing or owed are known and thus we chase any customer collections or make outstanding supplier payments during the month.

26. General Journal – what role?
Where a transaction does not fit into a special journal we post to the general ledger through the general journal
General journal used for all other transactions including:
sales and purchase returns
purchases of equipment (focus of Week 9)
credit transactions:
other than those related to inventory
adjusting entries (focus of Weeks 3)
closing and reversing entries (focus of Week 3)

27. Student Task – General Ledger or Subsidiary Accounts
From the Cash Receipts Journal of the 31st January transactions on the next slide determine:
Which “accounts” and “amounts” are posted to the General Ledger accounts and “construct” the Debtors control account; and
Which “accounts” and “amounts” are posted to the Subsidiary Ledger accounts and “construct” the Subsidiary Ledger accounts
(Assume Credit Sales of $12,800 has occurred previously)

28. Cash Receipts Journal for MiaPod P/L

29. Student Task – General Ledger or Subsidiary Accounts
i) The following postings would be made at the end of the month to the General Ledger accounts: Debtors Control $12,800 cr.*** (see below) Sales 8,260 cr. Rent Revenue 1,000 cr. Loan 40,000 cr. Interest Revenue 170 cr. Cash at Bank 61,930 dr. Discount Expense 300 dr.*** (see below) DEBTORS CONTROL Jan 31 Sales 12,800 Jan 31 Cash 12,500 Jan 31 Discount 300

30. Student Task – General Ledger or Subsidiary Accounts
i) The following postings would be made on a daily individual basis to the Subsidiary Ledger accounts:
Debtor – P.Lee $4,300 cr.*** (see below)
Debtor – K.McKenzie $8,100 cr.
Debtor – P.Tribe cr.
DEBTOR - P.Lee
Jan 31 Sales 4,300 Jan 31 Cash 4,200
Jan 31 Discount
DEBTOR – K.McKenzie
Jan 31 Sales 8,100 Jan 31 Cash 7,900
Jan 31 Discount
DEBTOR – P.Tribe
Jan 31 Sales Jan 31 Cash 400

31. GAAP – Generally Accepted Accounting Principles
The rules, standards and usual practices that companies are expected to follow in preparing their financial statements Components include……..
Accounting standards
AASB: Australian Accounting Standards Board.
Framework for the Preparation and Presentation of Financial Statements (The Framework).
AAG: Accounting Guidance Releases.
UIG: Urgent Issues Group statements.
Corporations Law.
ASX listing requirements.

32. The Framework …remember Week 1
Definition of a reporting entity.
Objective of general purpose financial reporting (GPFR).
Qualitative characteristics of financial information.
Definition and recognition of the elements of financial statements.
Purpose is to identify the attributes or qualitative characteristics that financial information should possess, if it is to serve the objective of the GPFR aka the published annual report of a business.
To provide information about the financial performance; financial position & cash flows of a business that will be useful to users in making economic decisions.

33. Qualitative Characteristics
We previously noted 2 essential & 4 enhancing qualitative characteristics. Within these, critics argue that there is a TRADE-OFF between:
Relevance looks towards future resource decisions.
Reliability is enhanced by a historical focus.
Information may be relevant but be so unreliable in nature or representation as to be useless or potentially misleading:
if a company had a legal action for damages and the outcome and amount of the claim is uncertain, then the company shouldn’t recognize an asset until there is a court judgment.
include it in the accompanying notes to the accounts.

34. Definition & Recognition of Elements
We also previously looked at the definition & recognition criteria for assets and liabilities and that all 5 elements needed to be present for recognition in the balance sheet.
IMPORTANT TERMS
Recognized
Item Included in the balance sheet if both the 3 elements of definition and 2 elements of recognition are met.
Disclosed in the Notes
Reported other than in the balance sheet – as the 3 elements of definition are met BUT anyone of the 2 elements of the recognition criteria are not met
Not Recognized nor Disclosed
If any of the 3 elements of the Definition criteria are NOT met.

35. Measurement & Valuation of Asset & Liabilities
Historical cost – value an asset at the amount paid or promised to acquire, also reflected in the liability value.
Price-level-adjusted historical cost - Historical cost values adjusted for changes in the value of the dollar.
Current or market value - Input market value measured by estimating ‘replacement cost’ to purchase it again or ‘reproduction cost’ to make it again. Output market value - amount an asset is worth if sold now.
Value in use (or present value) - calculating the ‘net present value’ of future cash inflows expected to be generated by the asset
Liquidation value - value that the company’s assets would bring upon being sold and that liabilities would be paid off for, if the whole company went out of business

36. Essential corporate governance principles
Principle 1 – Lay solid foundations for management and oversight
Establish respective roles and responsibilities of board & management.
Principle 2 – Structure the board to add value
Must have effective composition & size & adequately discharge duties.
Principle 3 – Promote ethical and responsible decision-making
Companies actively promote ethical and responsible decision-making.
Principle 4 – Safeguard integrity in financial reporting
Structure to independently verify & safeguard integrity of reporting.
Principle 5 – Make timely and balanced disclosure
Timely and balanced disclosure of all material matters to users.
Principle 6 – Respect the rights of shareholders
Respect the rights and facilitate the effective exercise of those rights.
Principle 7 – Recognise and manage risk
Establish sound system of risk oversight and manage internal controls.
Principle 8 – Remunerate fairly and responsibly Ensure remuneration sufficient and reasonable & relates to performance.

37. The role of External Auditors
It is management’s responsibility for the preparation and presentation of financial statements.
The role of the auditor is to add credibility to this information (not to prepare it!).
External auditing refers to the evaluation of an organisation’s financial statements by an auditor who should be independent of the management of the organisation.
Render an independent, unbiased and professional perspective.
Render a competent opinion on the fairness of the financial statements

38. Professional Code of Ethics
For members of the professional accounting bodies there are ethical standards, including APES 110 code of Ethics for Professional Accountants. Where the accounting profession is its acceptance of the responsibility to act in the public interest.
The Code sets out five fundamental principles:
Integrity – honest, fair dealings & truthfulness
Objectivity – no comprising, bias or conflict of interest
Competence – act diligently & knowledgeable
Confidentiality – refrain from disclosing or take advantage of privileged information
Behaviour – must professional, law complying & avoid discrediting with inappropriate actions.

39. Is accounting information useful in capital markets like the ASX?
The financial statements may provide new or unexpected information about the company, thereby permitting adjustments to the risk/return relationship.
Mandating disclosure of some information makes private information public.
(This is seen as one of the roles of financial accounting.)
Financial statements are just one source of information about the company. While useful, you should always remember that there are many other sources of information to make your analysis more complete such as Company Press Releases; Analyst reports; Financial Newspapers AFR; & Competitors.

40. In conclusion:
Please ensure a thorough understanding of Chapters 6 and 8 (pages ) of the textbook!!!
Review Questions:
Ch. 6, Discussion questions 1, 11 and 14
Problems 6.7, 6.11, 6.16 and 6.23
Ch. 8, Discussion questions 12 and 13
Next Week: Concentration on the internal controls, the bank reconciliation and cash budgets