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Slides 1-2 (1M:20S) Slide 1 Welcome to Introduction to Accounting Preparing for a User's Perspective Subsidiary Ledgers and Sp Slides 1-2 (1m:20s) Slide 1 Welcome to Introduction to Accounting Preparing for a User’s Perspective Subsidiary Ledgers and Special Journals Slide 2 In prior videos I introduced the concept of recording entries in the general journal and then posting them to the general ledger using T-accounts. This allowed us to compute the new balance in each respective account. This T-account representation, seems to be easier for students to understand. But in the real world, it looks a little bit more like this. You have the general journal again, and I’ve included the posting reference to show an indication of when we have actually posted the entry to the respective account. The actual general ledger accounts look more like this where we have a debit in one column, credit in the other and the balance is maintained on the right-hand side. So we can take this debit from accounts receivable and post it to the accounts receivable ledger account and indicate that we’ve done that posting process by writing in the account number to where that particular debit was posted. The balance can then be computed to be a debit of $800. We then posted the credit from consulting revenues into the consulting revenue account and recorded account 4100 to show that the posting had been done. The new balance in consulting revenue is a credit of $2,100. This is how it is really done in a manual accounting system. Slides 3-4 (3m:00s) Slide 3 This slide will work through a posting process example and it will help me to indicate why we use subsidiary ledgers and special journals which is the topic of this particular video. Imagine we start the month with a debit of $35,000 of cash, debit of $15,000 of accounts receivable, credit of $50,000 of retained earnings, and a credit in consulting revenue of $0. If we were to then take these general journal entries and post them into their general ledger accounts, we can compute the balance of each individual ledger account. Let’s do that. On January 8th a sale on account of $8,000 was made to Customer B. By posting that to the respective accounts [Debit accounts receivable $8,000 and Credit consulting revenue $9,000] we can then compute the new balance for total receivables and for total revenues. January 17th a sale on account of $10,000 to Customer A, we then posted that to the ledger accounts [Debit accounts receivable $10,000 and Credit consulting revenue $10,000]. January 20th we collected $3,000 from Customer A and posted that to the receivables [Credit $3,000] and cash [Debit $3,000] account. January 23rd we then made a sale of $9,000 on account to Customer B and posted that to the respective accounts [Debit accounts receivable $9,000 and Credit consulting revenue $9,000]. January 29th we then collected $7,000 from Customer C and posted that to the respective ledger accounts [Debit cash $7,000 and Credit accounts receivable $7,000]. We can now compute the balance in each of these accounts. Cash has a debit balance of $45,000. That indicates that we are holding $45,000 of cash to be used in the future. Accounts receivable had $42,000 of debits thus increasing receivables and $10,000 of credits thus reducing receivables arriving at a balance of a debit of $32,000 indicating how much all of the customers still owe the company as of January 31st. Retained earnings stays at a $50,000 credit because the closing process has not yet been performed. All the temporary accounts, in this case consulting revenue, still have their balances. They have not yet been closed into retained earnings. Therefore, this credit balance of $50,000 is actually the January 1st balance which will need to be updated through the closing process. Consulting revenue has a credit of $27,000. That’s what you are used to. We record entries in the general journal and post to the ledger. That is the posting process that I have introduced so far. We record entries in the general journal and post to the general ledger and determine the new balances which will be used on the trial balance. Slide 4 Let’s now ask a few questions. How much is receivable from Customer B as of the end of January? We really don’t know. We do know that all of our customers owe us $32,000, but we don’t know the break-out between Customers A, B or C. What if we had a sub-ledger for each customer, the total of which was $32,000? Wouldn’t that be a little more helpful, that way we could track the balance receivable from each individual customer? Let’s look at it. Slide 5 (2m:08s) Slide 5 This example will show how subsidiary ledgers are used. Companies maintain a general ledger which keeps track of the total balance of all receivables. It is updated monthly. In addition, outside of the general ledger system, they have what are called subsidiary ledgers, these are updated daily based on sales on account and collections on account. And then monthly, the total of all these subsidiary accounts are reconciled to the general ledger account. Let’s go ahead and record those same entries from the prior pages. Let’s do all of the sales first. We had a sale to Customer B of $8,000, to Customer A of $10,000 and then another sale to Customer B of $9,000. In total, that’s $27,000 of sales on account which would be posted to the general ledger at the end of the month based on the sales journal. Let’s look at the collections for the month. On January 20th, we collected $3,000 from Customer A, and then on January 29th we collected $7,000 from Customer C. Total collections for the month were $10,000 that would be posted from the cash receipts journal to the accounts receivable general ledger at the end of the month, credit $10,000. Let’s compute the balance of accounts receivable. If we take all the debits of $42,000, less the credits of $10,000 we arrive at an ending receivables balance of $32,000 which is receivable from all their customers. Going down to the respective subsidiary ledgers for these customers we show that Customer A owed $10,000, Customer B owed $22,000 and Customer C $0. The total of these three accounts adds up to $32,000 and reconciles to the general ledger. Having this process of subsidiary ledgers is beneficial for a variety of reasons. 1) you are able to track the balances for each individual customer, send out customer statements, if a customer calls and asks how much they owe, you can tell them. Also, it improves internal control because someone will be managing these subsidiary ledgers and someone else will be managing the general ledger, and since these are reconciled monthly, it helps improve its completeness and accuracy. Slide 6 (0m:39s) Slide 6 Let’s move into special journals. Special journals save time and divide labor. The four special journals are: 1. The sales journal in which we record all sales on account or all credit sales where you sell now and receive payment later. 2. The cash receipts journal, this is where we record all cash sales, collections and other receipts. This is where you receive payment now even if the service may not be provided until later. 3. The purchases journal is used to record all purchases on account where you make payment later. 4. The cash payments journal is used to record all cash purchases and other cash payments, where you make payment now. Slide 7 (1m:42s) Slide 7 I’m going to now work through an example where we deal with a sales journal. All this means [is that] rather than recording all transactions of a business in a general journal, we group like kind transactions based on the type of transaction it is, so we are going to keep all sales in a sales journal and it will work like this. We have a January 8th sale, the invoice number of that sale, the customer is Customer B and it is a sale on account of $8,000. What you should see is we are only having to write down the number $8,000 one time because that $8,000 represents a debit to receivables and a credit to sales. This saves us time, because we only have to write down the $8,000 amount one time. It also divides labor because we can put one person in charge of just the sales journal and someone else would be in charge of the purchases journal. Once we’ve posted this, we would record the posting entry as account number 110 and indicating that it is Customer B. On January 17th we have a sale on account of $10,000 which we post to Customer A and then on January 23rd we have a sale on account of $9,000 which we post to Customer B. The total of all sales is $27,000. Down here I have the subsidiary ledgers which we post to on a daily basis when the transaction occurs but then in total we take the full $27,000 and post to the general ledger accounts receivable account. In other words, these amounts effectively get posted twice, once in detail to the subsidiary ledger and another time in total to the general ledger.
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