1. Financial and Managerial Accounting
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Wild/Shaw/Chiappetta
Fourth Edition
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Accounting with Special Journals
Appendix E
Accounting with Special Journals
This chapter is devoted to the discussion of special journals.

3. Conceptual Chapter Objectives
C1: Identify the principles and components of accounting information systems.
C2: Explain the goals and uses of special journals.
C3: Describe the use of controlling accounts and subsidiary ledgers.
Conceptual Chapter Objectives:
C1: Identify the principles and components of accounting information systems.
C2: Explain the goals and uses of special journals.
C3: Describe the use of controlling accounts and subsidiary ledgers.
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4. Analytical Chapter Objectives
A1: Compute segment return on assets and use it to evaluate segment performance.
Analytical Chapter Objectives:
A1: Compute segment return on assets and use it to evaluate segment performance.
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5. Procedural Chapter Objectives
P1: Journalize and post transactions using special journals.
P2: Prepare and prove the accuracy of subsidiary ledgers.
P3: Journalize and post transactions using special journals in a periodic inventory system (see text for details).
Procedural Chapter Objectives:
P1: Journalize and post transactions using special journals.
P2: Prepare and prove the accuracy of subsidiary ledgers.
P3: Journalize and post transactions using special journals in a periodic inventory system (see text for details).
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6. Fundamental System Principles
Control Principle Internal controls for management to monitor the business.
Relevance Principle Provide relevant, timely and pertinent information.
Flexibility Principle System needs to meet the changing needs of company.
In an accounting system, the fundamental principles that must be included are: control, relevance, compatibility, flexibility, and cost-benefit.
Internal controls are an integral part of an accounting system to help management monitor the business. We also hope that an accounting system provides information that is relevant, timely and pertinent. The accounting system should also be compatible with the aims of the company. Flexibility in an accounting system is important to be able to meet the changing needs of the company. But as with most things, the benefits of the accounting system should outweigh the costs incurred.
Compatibility Principle System must be compatible with aims of the company.
Cost-Benefit Principle Benefits of the system must outweigh the costs incurred.
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7. Components of Accounting Systems
Source Documents
Invoice from supplier
Billings to customers
Employee earnings records
Increasingly, source documents are electronic files creating a “paperless” system.
In an accounting system, the source documents provide the support for recording and processing transactions in the system. Source documents can be on paper or in electronic form.
To enter the information in the accounting system, several input devices may be used, such as a keyboard, scanner, modem or bar-code reader.
Once information is entered in the system, it is processed using hardware and software. Professional judgment is needed to understand and use the results.
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8. Components of Accounting Systems
Source Documents
Input
Several storage devices can be used to archive data, such as a CD, hard drive, tape, or paper. CD
Hard Drive
Tape
Paper Document
Processor
Storage
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9. Components of Accounting Systems
Printer
Monitor
Telephone CD
Tape
Disk
Electronic File
Source Documents
Input
Information may be provided to users via a printer, monitor, telephone, CD, tape, disk, or electronic file.
Now, let’s look at how we use special journals in accounting.
Processor
Storage
Output
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10. Special Journals in Accounting
Sales Journal
For recording credit sales
Cash Receipts Journal
For recording cash receipts
Purchases Journal
For recording credit purchases
Cash Disbursements Journal
For recording cash payments
Special journals provide a place to record transactions of a similar nature. The Sales Journal is used to record credit sales. The Cash Receipts Journal is used to record cash receipts. The Purchases Journal is used to record credit purchases. The Cash Disbursements Journal is used to record cash payments. The General Journal is used for transactions not included in any of the special journals.
So far in this class, we have been using a General Journal for all entries.
General Journal
For transactions not in special journals
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11. Subsidiary Ledgers C3
How much do we owe Ajax Company? How much do we owe Bear Company? How much does Taylor Company owe us? How much does Reilly Company owe us?
To answer these specific questions, we must use the subsidiary ledgers. A subsidiary ledger keeps track of the transactions related to a specific vendor or customer.
Let’s look at an example.
Subsidiary ledgers are a listing of individual accounts with common characteristics.
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12. Accounts Receivable Ledger
After all items are posted, the balance in the accounts receivable controlling account is equal to the sum of the balances in the accounts receivable subsidiary ledger.
In the General Ledger, the control account for Accounts Receivable indicates that customers owe us one thousand, nine hundred fifteen dollars. But, it does not tell us how much Cook Company owes us. To find that, we must look at the Accounts Receivable Subsidiary Ledger for Cook Company. Looking there, we see that Cook Company owes us four hundred fifteen dollars.
By looking in the subsidiary ledgers, we can find the detail for each specific customer.
The total of the balances in all the subsidiary accounts should total to the balance in the control account.
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13. Sales Journal P1
Remember that only sales on credit are recorded in the Sales Journal. As a result, we know that every transaction in this journal ultimately requires a debit to Accounts Receivable and a credit to Sales. On a regular basis, the column total for the amount will be posted to these two accounts.
Each transaction yields a debit to Accounts Receivable and a credit to Sales. Also, we need to record the cost of the sale for the transaction. This column total is posted monthly.
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14. Sales Journal P1
On January 1, Jim Carson purchased $600 of merchandise on account from Barry’s Bikes. The cost of the bikes was $400. Record the entry in the Sales Journal.
(Assume the use of a perpetual inventory system.)
Now, let’s see how a sales journal works.
On January first, Jim Carson purchased six hundred dollars of merchandise on account from Barry’s Bikes. The cost of the bikes was $400. Barry’s Bikes uses the perpetual inventory system. Let’s record the sale for Barry’s Bikes in the Sales Journal.
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15. Sales Journal P1
However, on a daily basis, we want to update our accounts receivable subsidiary ledgers with the recorded transactions. In this case, we would debit Jim Carson’s subsidiary ledger for the six hundred dollar sale.
Daily, each transaction is posted to the appropriate accounts receivable subsidiary account.
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16. Sales Journal P1
After posting to the accounts receivable subsidiary ledger, we will place a check mark in the posting reference column of the Sales Journal to indicate that the transaction was posted to the subsidiary account.
As part of the posting process, we enter S one in the subsidiary ledger’s posting reference column to indicate that the posting came from page one of the Sales Journal.
A ü in the posting reference column indicates the transaction was posted to the subsidiary account.
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17. Post the total to the General Ledger accounts.
Sales Journal
Now we have posted the column total of one thousand, seven hundred dollars to the Accounts Receivable control account and to Sales.
Post the total to the General Ledger accounts.
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18. Here is the Sales Journal after recording some additional sales.P1
At the end of the month, we have posted the accounts receivable subsidiary accounts, but we still have not posted the column total of one thousand, seven hundred dollars to the Accounts Receivable control account and to Sales. (Also, we haven’t posted the Cost of Goods Sold and Inventory account totals.)
Here is the Sales Journal after recording some additional sales.
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19. Sales Journal P1
As part of the posting process, we enter S one in the ledgers’ posting reference column to indicate that the posting came from page one of the Sales Journal. We would perform the same posting exercise for the debit to Cost of Goods sold and the credit to Inventory.
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20. P1
Sales Journal
Back in the Sales Journal, we enter the account numbers under the column total to indicate the column amount was posted to these accounts.
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21. Proving the Subsidiary Ledgers
The Accounts Receivable controlling account and the subsidiary ledger are in balance.
At any point, the total of the balances in the subsidiary ledgers should equal the balance in the control account.
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22. Sales Taxes P2
Here is an example of a more detailed Sales Journal that includes a column for sales taxes payable.
On January 4, Jeri’s Jewelry sold a necklace for $450 plus 8% sales tax ($450 x .08 = $36) on credit to Joan Oakes. The cost of the merchandise was $302.
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23. Column totals are posted monthly.
Sales Tax P2
Each transaction is posted daily to the appropriate Accounts Receivable Ledger account.
Column totals are posted monthly.
We would post to the subsidiary accounts daily and post the column totals on a regular basis, perhaps monthly.
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24. Sales Returns and AllowancesP2
If a company has few sales returns, they may be recorded in the General Journal.
A company with few sales returns and allowances may choose to record them in the General Journal. As you can see, the return would need to be posted to the accounts receivable subsidiary ledger and to the Accounts Receivable control account. In addition the amounts would also need to be posted to the appropriate general ledger accounts.
A company with many sales returns may use a Sales Returns and Allowances Journal.
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25. Cash Receipts Journal Categories of Cash Receipts Cash from cash sales
The Cash Receipts Journal records cash receipts transactions resulting from cash sales, customer payments on accounts, and other cash sources.
Categories of Cash Receipts
Cash from cash sales
Cash from credit customers
Cash from other sources
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26. Cash Receipts Journal ü ü
CASH RECEIPTS JOURNAL (partial)
Page 1
Date
Accounts
Credited
Explanation PR
Cash
Dr.
Sales
Disc.
Accts.
Rec.
Cr.
Sales Cr.
Other
Accts. Cr.
May 7
Cash Sales
300 16
Jane Waters
Invoice 656
441 9
450 31
Interest Revenue
Bank Acct.
409 15
Total
756
(101)
(415)
(106)
(413) ( ) ü
The first transaction on May seventh records a cash sale. The amounts are entered in the Cash and the Sales columns. These columns will be posted in total at a later date. The double red check marks in the posting reference column indicate that the transaction is not posted to any individual accounts.
The second transaction on May sixteenth records a customer payment on account within the discount period. Again, the amounts are entered in columns that will be posted at a later date. The blue check mark in the posting reference column indicates that, on May sixteenth, the customer’s payment is posted to Jane Waters’ subsidiary accounts receivable account.
The third transaction on May thirty first records interest received from the bank. The amounts are entered in the Cash and the Other Accounts columns. The Cash column will be posted at a later date. The account number of four hundred nine in the posting reference column indicates that the transaction was posted to Interest Revenue.
The column totals for Cash, Sales Discounts, Accounts Receivable, and Sales are posted at one time. After posting, the appropriate account number is placed under the column total.
Amount is not posted individually to an account.
Amount is posted individually to subsidiary ledger.
Acct. No.
Amount is posted to specified account. ü
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27. The Purchases Journal is used to record all purchases on credit.
Let’s look at the Purchases Journal on the next slide.
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28. Purchases Journal P2 APPE-28
The first transaction on May seventh records a purchase of inventory on credit. The amounts are entered in the Accounts Payable and the Inventory columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on May seventh, the purchase is posted to Langley Products’ subsidiary accounts payable account.
The second transaction on May eighteenth records the purchase of office supplies and another asset on credit. The amounts entered in the Accounts Payable and the Office Supplies column will be posted at a later date. The blue check mark in the posting reference column indicates that, on May eighteenth, the purchase is posted to Office World’s subsidiary accounts payable account. The amount entered in the Other Accounts column is posted to account number one hundred twenty-five.
The third transaction on May twenty eighth records the purchase of inventory and office supplies on credit. The amounts are entered in the Accounts Payable, Inventory, and Office Supplies columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on May twenty eighth, the purchase is posted to Fife Company’s subsidiary accounts payable account.
The column totals for Accounts Payable, Inventory, and Office Supplies are posted at one time. After posting, the appropriate account number is placed under the column total.
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29. Cash Disbursements JournalP2
The Cash Disbursements Journal is used to record all payments of cash.
The Cash Disbursements Journal is used to record all payments of cash.
Let’s look at the Cash Disbursements Journal on the next slide.
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30. Cash Disbursements JournalP2
( )
The first transaction on June second records a payment on account within the discount period. The amounts are entered in the Cash, Inventory, and Accounts Payable columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on June second, the payment is posted to Fife Company’s subsidiary accounts payable account.
The second transaction on June fifteenth records the payment of salary to Jane Hooks. The amount entered in the Cash column will be posted at a later date. The amount entered in the Other Accounts column is posted to account number six hundred twenty-two.
The third transaction on June twenty eighth records the purchase of inventory. The amount entered in the Cash column will be posted at a later date. The amount entered in the Other Accounts column is posted to account number five hundred five.
The column totals for Cash, Purchase Discounts, and Accounts Payable are posted at one time. After posting, the appropriate account number is placed under the column total.
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31. General Journal TransactionsP2
Adjusting Entries
Reversing Entries
Closing Entries
Other transactions that are entered in the General Journal include adjusting entries, reversing entries, closing entries, and other transactions not recorded in special journals.
Other transactions not recorded in Special Journals
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32. Technology-Based Accounting Systems
Hardware
Processing units
Hard Drives
RAM
Modems
CD-ROM Drives
Speakers
Monitors
Servers
Printers
Software
Programs with a series of commands directing operations of computer hardware such as data input, storage, processing, or output.
There are several affordable computerized accounting software packages available. As a result, most accounting systems, even in small companies, are computerized.
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33. Computer Technology in Accounting
Integrated accounting programs automatically update related accounts, journals, and ledgers for a single transaction.
One advantage of computerized accounting systems is that they automatically post transactions to the proper accounts, journals, and ledgers.
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34. Data Processing in Accounting
On-line processing enters and processes data immediately.
Batch processing accumulates information for a period of time and then processes all the data at one time (daily, weekly, or monthly).
In on-line accounting systems, entered information immediately updates accounts, journals, and ledgers when it is entered in the system.
In a batch system, entered information is accumulated and then processed later at predetermined times, such as daily, weekly or monthly.
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35. Enterprise Resource Planning Software
Enterprise resource planning software, such as SAP or Oracle, links ordering, inventory, production, purchasing, planning, tracking and human resources for many of the world’s largest companies.
Enterprise resource planning software allows companies to link ordering, inventory, production, purchasing, planning, tracking, and human resources activities.
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36. Segment Return on Assets
A good AIS collects financial data for a company’s various segments.
A segment is a part of a company that is separately identified by its products, services, or geographic market.
A good accounting information system collects financial data for a company’s various segments. This allows managers to make better decisions for different segments of the company.
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37. Segment Return on Assets=
Segment operating income Segment average assets
The Segment Return on Assets ratio reflects the profitability of the segment. It is calculated as segment operating income divided by segment average assets.
This ratio reflects the profitability of the segment.
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38. Special Journals Under a Periodic System
Many of the same concepts that we have been studying for a perpetual system can also be used with a periodic inventory system. Here are some differences:
The sales journal and cash receipts journal both have one less column as there is no need to record the cost of goods sold.
The purchases account replaces the inventory account in the purchases journal.
The purchases discounts account replaces the inventory column in the cash disbursements journal.
Special journals have many similarities under both the periodic and perpetual inventory systems. The main differences have to do with the cost of goods sold account (which is not needed under the periodic system) in the sales journal. In addition, the merchandise inventory account used in a perpetual system is replaced by the purchases account. We encourage you to take a look at the subtle differences in the text.
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39. End of Appendix E
This completes our discussion of Appendix E. We have introduced many new concepts and procedures.
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