3 Subsidiary LedgersA subsidiary ledger is a group of accounts that share a common characteristic (e.g. all accounts receivable)The subsidiary ledger is in addition to, and expands on, the general ledger; subsidiary ledgers show the detailsThe two most common are the accounts receivable ledger and the accounts payable ledger; these ledgers show the details of individual customers and suppliers respectivelyThere is control account in the general ledger for each subsidiary ledger; each general ledger control account balance must equal the total of the individual records in the related subsidiary ledger
4 Relationship of General Ledgers and Subsidiary Ledgers Accounts receivable controls a subsidiary ledger of many different customers.Accounts payable controls a subsidiary ledger of many different creditors.GeneralLedgerAccountsReceivableAccountsPayableOwner’sCapitalCashCustomerABCCreditorXYZSubsidiaryLedgers
5 Advantages of Subsidiary Ledgers Subsidiary ledgers show transactions that affect one customer or one creditor in a single account, providing up-to-date information on specific account balancesThey free the general ledger of excessive detailsIn a manual system, they help locate errors in individual accounts by reducing the number of accounts combined in one ledger and by using controlIn manual systems, they make possible a division of labour in posting to the general ledger and subsidiary ledgers, which strengthens internal control
6 Special Journals in a Perpetual Inventory System A special journal is used to record similar types of transactionsThe use of special journals reduces the time needed for the recording and posting processSpecial journals permit greater division of labour because different employees can record entries in different journalsFor a merchandising company the same special journals are used for both periodic or perpetual inventory systems; the only difference is the number of, and title for, the columns each journal usesThe following examples are for the perpetual inventory system. Special journals under a periodic inventory system are shown at the end of the presentation.
7 Use of Special Journals and the General Journal Cash ReceiptsJournal(CR)Cash PaymentsJournal(CP)SalesJournal(S)Purchases Journal(P)GeneralJournal(J)Used for:All purchasesofmerchan-dise on accountUsed for:All cash paid(includingcashpurchases)Used for:Transactionsthat cannotbe enteredin a specialjournal, includingcorrecting, adjusting, and closing entriesUsed for:All sales ofmerchan-dise on accountUsed for:All cashreceived(includingcash sales)The types of special journals used depend largely on the types of transactions that occur frequently in a business enterprise.
8 Journalizing the Sales Journal Perpetual Inventory System Karns Wholesale SupplySales JournalS1Only one line is needed to record each transaction and all entries are made from pre-numbered sales invoices.One entry at selling price in the Sales Journal results in a debit to Accounts Receivable and a credit to Sales. Another entry at cost results in a debit to Cost of Goods Sold and a credit to Merchandise Inventory. Column totals are posted to the general ledger at the end of each month.Postings are made daily to the accounts receivable subsidiary ledger. A check in the reference column shows that the amount has been posted to the customer’s account.
9 Proving the Accuracy of the Accounts Receivable Subsidiary Ledger General LedgerAccounts Receivable $90,230Accounts Receivable Subsidiary LedgerAbbot Sisters $26,000Babson Co ,920Carson Bros ,800Deli Co ,510$90,230To prove the accuracy of the ledgers it is necessary to determine two things: (1) the sum of the accounts receivable subsidiary ledger balances equals the balance in the general ledger’s Accounts Receivable control account.
10 Cash Receipts JournalAll receipts of cash are recorded in the cash receipts journalOnly one line is needed for each entry and each line must have equal debit and credit amountsAt the end of each month columns are totalled and compared for equality; this process is called footing and cross-footingThe individual amounts in the Accounts Receivable column are posted daily to the subsidiary ledger account specified in the Accounts Credited columnThe total of the Other Accounts column is not posted; the individual amounts comprising the total are posted separately to the general ledger accounts specified in the Accounts Credited columnAll column totals except for the Other Accounts total are posted at the end of the month; G/L account numbers are listed below the column totals to show that posting has been done
11 Cash Receipts Journal Perpetual System Karns Wholesale SupplyCash Receipts Journal54,550The debit columns for cash and cost of goods sold must be equal to the total of the credit columns for accounts receivable, sales, inventory, and other accounts
12 Proving the Ledgers after Posting the Sales and the Cash Receipts Journals Accounts ReceivableSubsidiary LedgerAbbot Sisters $15,400Babson Co ,570Deli Co ,210$51,180General LedgerDebitsCash $54,550Accounts Receivable ,180Cost of Goods Sold ,120$170,850CreditsMerchandise Inventory $ 65,120Notes Payable ,000D. A. Karns, Capital ,000Sales ,730After the posting of the cash receipts journal is completed, it is necessary to prove the ledgers. The general ledger totals are in agreement and the sum of the subsidiary ledger balances equals the control account balance.
13 Purchases Journal Perpetual System Karns Wholesale SupplyPurchases JournalAll purchases on account are recorded in the purchase journalIn a perpetual system, each entry results in a debit to Merchandise Inventory and a credit to Accounts PayablePostings are made daily to the accounts payable subsidiary journal and monthly to the general ledger for Merchandise Inventory and Accounts Payable
14 Proving the Accuracy of the Accounts Payable Subsidiary Ledger General LedgerDebitsCash $54,550Accounts Receivable ,180Cost of Goods Sold ,120$170,850CreditsMerchandise Inventory $ 1,120Notes Payable ,000Accounts Payable ,900D. A. Karns, Capital ,000Sales ,730Accounts Payable Subsidiary LedgerEaton and Howe, Inc. $19,800Fabor and Son ,600Jasper Manufacturing Inc ,500$63,900To prove the ledgers it is necessary to determine that the sum of the subsidiary ledger balances equals the balance in the control account.
15 Cash Payments Journal Perpetual System Karns Wholesale SupplyCash Payments JournalAll disbursements of cash are entered into the cash payments journal. Entries are made from pre-numbered chequesEach transaction is entered on one line and there must be equal debit and credit amountsJournalizing procedures are similar to cash receipts journalPosting procedures are also like the cash receipts journal
16 Proving the Accuracy of the Accounts Payable Subledger General LedgerDebitsCash $ 5,750Accounts Receivable ,180Merchandise Inventory ,280Prepaid Insurance ,200D. A. Karns, DrawingsCost of Goods Sold ,120$127,030CreditsAccounts Payable $ 21,300Notes Payable ,000D. A. Karns, Capital ,000Sales ,730Accounts Payable Subsidiary LedgerEaton and Howe, Inc $12,600Fabor and Son ,700$21,300To prove the ledgers it is necessary to determine that the sum of the subsidiary ledger balances equals the balance in the control account
17 General Journal: Effects of Special Journals Special journals for sales, purchases and cash greatly reduce the number of entries that are made in the general journalOnly transactions that cannot be entered in a special journal are recorded in the general journal. Examples include sales returns from credit sales, adjusting entries and closing entriesWhen the entry involves both control and subsidiary accounts, both the control and subsidiary accounts must be identified in the journalIn posting there must be a dual posting: once to the control account and once to the subsidiary account
19 Special Journals in a Periodic Inventory System Two differences exist between special journals for aperiodic inventory system and a perpetual inventorysystem:The columns in the sales journal and cash receipts journal that are used to record the cost of goods sold debit and merchandise inventory credit are not required when using a periodic inventory system.Purchases and Freight-In are the accounts used to record the cost of inventory bought when using a periodic system; cost of goods sold is not recorded until determined at the end of the period.