Accounting 1

Instructor Notes

CHAPTER 5

ACCOUNTING SYSTEMS

SPECIAL JOURNALS AND SUBSIDIARY

You interact with accounting systems, maybe even everyday. You write a check, you use your debit or credit cards, you make a deposit into your checking or savings accounts. These are all types of business transaction, taking place between you and your bank. You record deposits in your check registrar as additions, you subtract out when you use your debit card.

Now imagine how complicated this type of daily transactions can become for a large business? Think about how long it took you to post each transaction in the chapter 2 problems? This is where Special Journals come into the picture. They can be used to total and summarize a group of transactions to be posted, instead of posting each transaction individual to the accounts. There is also programs (for example, Quicken or Quickbooks) that can handle easily large amounts of transactions.

We will also be talking about subsidiary ledgers. A company lists one balance for Accounts Receivable on the , but how do they keep track of how much is owed and by whom? Subsidiary ledgers can provide that information.

Introduction

A. Subsidiary ledgers (detailed in next section) are used to provide information on the amounts due from various customers (AR) and amounts owed to various creditors (AP). Remember General Ledgers still keep a total balance of all subsidiary ledgers (example all that is owed in AR or AP).

B. Special Journals for certain transactions that occur frequently can eliminate some needless writing.

1. or Sales Journal (abbreviated by R or S) -- Sale of merchandise on account. Therefore it must be Dr.-- AR Cr.-- Fees Earned or Sales

2. Receipts Journal (CR) -- Receipt of cash from any source. Therefore it must be Dr. -- Cash Cr. -- can be Fees Earned, Sales, Capital, Cash refund, AR payment, etc.

3. Purchases Journal (P) -- Purchase of merchandise or other items on account. Therefore it must be Cr. -- AP Dr. -- can be Merchandise , Equipment, Supplies, anything that is bought on Account.

4. Cash Payments Journal (CP) -- Payment of cash for any purpose. Therefore it must be Cr. -- Cash Dr. -- can be Merchandise Inventory, Equipment, Supplies, Drawing, payment on AP, , etc.

5. (G) -- same old journal you are used to. Used for anything else that does not fit in any of the above journals such as returns and allowances. Adjusting and closing entries would also be in the General Journal.

A transaction will go to one journal or another journal, not more than one journal!!!!

SUBSIDIARY LEDGERS

There should also be forms filled out for what we call subsidiary ledgers. This is to keep track of the individual companies that we buy from (AP), and sell to (AR). That way we know exactly which company owes us how much and vise versa.

A way to help you out would be to look at the following:

For an Accounts Receivable customer: A. Look at the Sales/Revenue journal for sales on account to be recorded to customer's individual subsidiary ledger. B. Look at the Cash Receipts journal and record any cash received from the customer also record on their subsidiary ledger. C. Look at the General Journal incase there is a credit for the customer that needs to be recorded on the subsidiary ledger.

For Accounts Receivable, fees that we earned on account, would be a debit (or the left side of a T-Account). When we receive payment from a customer on account that would be a credit (or the right side of a T-account). The T-Accounts for a customer would be increase on the left, decrease on the right, just like the AR account itself. Invoiced ABC Company for fees earned on Account $2,000. You would debit the account.:

ABC Company 2,000 l l l

As we receive payment from the customer, you would credit the account.

A Customer Balance Summary (AR Subsidiary):

This is just listing all customers and how much they owe us (balance in account). We total it, then put it as a debit to AR.

For example, suppose we have ABC Company balance and two other companies that owe us for fees earned on account:

ABC Company $2,000 EFT Company $1,000 TTT Company $3,000 Total AR $6,000 The $6,000 total is then posted as a debit to AR account.

Accounts Receivable 6,000 l l l

For an Accounts Payable: A. Look at the Purchases Journal for purchases on account to be recorded to the individual subsidiary ledger of the company from which the purchase was made. B. Look at the Cash Payments Journal and record any cash payments we made to the company we purchased from also to be recorded on the subsidiary ledger. C. Look at the General Journal incase there is a credit given to us that needs to be recorded on the subsidiary ledger.

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SAMPLE PROBLEMS:

Look at this sample problem with sample transaction that identifies which of the five special journals the entry would be written in.

Special Journals Problem

May 1 Owner invested $20,000 cash - CR

May 2 Cash sale of $1,000 - CR May 3 Credit sale of $2,000 to Sooner Enterprises - R May 4 Credit sale of $2,000 to Baker Corp. - R May 5 Purchase Merchandise on Credit for $3,000 from Bigger Corporation - P May 6 Purchased equipment for cash of $5,000 - CP May 7 Received $500 on account from Sooner Enterprise - CR May 8 Made a $500 payment on account to Bigger Corporation - CP May 9 Gave $300 credit to Baker Corp. for merchandised returned - G May 10 Purchased $500 worth or supplies with cash - CP May 11 Received cash of $100 for supplies we returned - CR May 12 Made payment to Bigger of $500 - CP

Subsidiary Ledgers Problem

1. Accounts Payable

Based on the transaction above, those items that were purchased on account would go in an accounts payable subsidiary ledger. If we made any payments on our account or received any credit, that would also go in the AP subsidiary. Here is how it would look as a t-account and in a subsidiary ledger for Bigger, the only company we purchased from on account.

Accounts Payable T-account and Subsidiary Ledger. What is the amount we owe to: __- Bigger ______+______│ May 5 $3,000 May 8 $500 │ May 12 $500 │ │ Balance $2,000

Bigger

DATE Debit Credit Balance (to AP - (to AP - payment) purchase) May 5 3,000 3,000 May 8 500 2,500 May 12 500 2,000

2. Accounts Receivable

Based on the transaction above, fees earned or sales on account would go in an accounts receivable subsidiary ledger. If we received any payments on our customers on their account or issued any credit, that would also go in the AR subsidiary. Here is how it would look as a t-account and in a subsidiary ledger for Sooner and Baker, the two companies we earned fees from on account. Accounts Receivable T-account and Subsidiary Ledgers. T he following companies owe us:

__+ __ Sooner ______-______+ Baker ______-_ May 3 $3,000 │ May 4 $2,000 │ │ May 7 $500 │ May 9 $300 │ │ Balance $2,500 │ Balance $1,700 │

Sooner DATE Debit Credit Balance (to AR - (to AR - purchase) Payment) May 3 3,000 3,000 May 7 500 2,500

Baker DATE Debit Credit Balance May 4 2,000 2,000 May 9 300 1,700

TEST NUMBER 2

You are now ready for Test #2.

You will be tested over:

Worksheet Adjusting Entries Closing Entries Financial Statements Special Journals Identification (which journal an entry would be recorded) Subsidiary Ledgers

Again, your homework and chapter notes are excellent study tools. Especially Problem 4-3A, Ex 5-2, 5-3, and 5-4.