Explain- Module 8 Special AND Combination Journals, AND Voucher System PDF

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Special Journals...

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LIMITATIONS OF USING THE GENERAL JOURNAL AND THE GENERAL LEDGER The discussions in the previous chapters were limited to processing transactions recorded in the general journal and posted to the general ledger. This type of accounting system is satisfactory for introducing basic accounting procedures. However, this system would be inadequate for a business having even a moderate volume of transactions for some reasons:  Only a limited number of transactions can be processed daily because only one person at any one time can introduce entries into the general journal.  Transactions recorded in the general journal must be posted individually in the general ledger, resulting to a great deal of posting later. To overcome these limitations, entities adopt an accounting system that incorporates either the use of the usual special journals (non-voucher) or the voucher system. Also, the illustrations have utilized only one account of accounts receivable and another one for accounts payable. Entities that maintain accounts with numerous customers and creditors will find it burdensome to work with a general ledger containing a large number of customer and creditor accounts. Therefore, entities adopt an accounting system that uses control accounts in the general ledger and separate subsidiary ledgers to record and control the accounts of individual customers and creditors. CONTROL ACCOUNTS AND SUBSIDIARY LEDGERS When an entity keeps charges to and payments from all customers in a single accounts receivable account in the general ledger, the account in T-account form would appear as follows:

Using this procedure, the entity can not easily bill or mail statements to customers, answer inquiries about individual customer balances, or make any collection efforts if it has only a single record showing total claims against all customers. The entity needs to know each customer’s name and address, transaction dates, amounts billed and amounts received on account for each account receivable. The problem can be partly solved by maintaining in the general ledger an account for each customer. The trial balance of such general ledger may appear as follows:

This approach has limitations too. The general ledger becomes unreasonably large when hundreds of customers’ accounts are involved. With thousands of customers, it becomes unworkable.

This problem can be best addressed using an accounts receivable control account in the general ledger; and individual customer accounts in a subsidiary ledger. Under this approach, the general ledger is kept to a manageable size, and a detailed record of transactions with individual customers exist in the subsidiary ledger. It is a controlling account in the sense that its balance should equal the total of the individual account balances in the

subsidiary ledger. The individual customer accounts are the subsidiary accounts. They are controlled by the accounts receivable account in the general ledger. The accounts receivable subsidiary ledger, like the general ledger, may simply be a group of accounts in a binder, or it may be a file card arrangement. In either case, the order is either numerical by customer number or alphabetical by customer name. The following shows the relationships between the accounts receivable control account in the general ledger and the accounts receivable subsidiary ledger.

The control account-subsidiary ledger technique can be used to yield a detailed breakdown of many general ledger accounts, not just accounts receivable. Subsidiary ledgers are often used for accounts payable, inventory, and property and equipment. SPECIAL JOURNAL These are journals of original entry other than the general journal that are designed for recording specific types of transactions of a similar nature. Most entities use the following special journals: Journal Abbreviation Sales Journal Cash Receipts Journal CR Purchase Journal Cash Disbursement Journal CD General Journal

Specific Transactions Recorded

Posting

Sales of merchandise on account Receipts of cash

S

Credit purchases of merchandise and other items Payments of cash

P

Entries that do not fit in the other journals

GJ

Cash sales are usually recorded in the cash receipts journal rather than in the sales journal because cash is best controlled when all routine cash receipts are recorded in one journal. Similarly, an entity can increase control over cash disbursements by recording cash purchases of merchandise or other items in the cash disbursements journal rather than in the purchases

journal. When special journals are used, the general journal is maintained for adjusting, closing and reversing entries; and for recording transactions that do not fit in other special journals.

Examples of the latter include the recording of purchases returns and allowances, and sales returns and allowances. Advantages of Using Special Journals A major advantage of special journals is that their use permits division of labor. When special journals are used, the recording step in the accounting cycle can be divided among several persons, each of whom is responsible for particular types of transactions. Personnel making entries in special journals need not have a thorough knowledge of the entire accounting system. The use of special journals often reduces recording time. Special journal transactions need no routine explanation for each entry. Also, because special column headings are used, account titles need not be repeated unlike in the general journal. Probably, the most significant advantage of using special journals is the time saved in posting from the journals to the ledgers. When a general journal is used, each entry must be posted separately to the general ledger. The tabular arrangement of special journals, however, often permits all entries to a given account in a specific journal to be added and posted as a single aggregate posting. For instance, if you entered 800 sales transactions in a general journal, you would make 800 debit postings to the accounts receivable account and another 800 separate credit postings to the sales account. Using the sales journal, however, there will only be two postings from the sales journal to the general ledger; one to accounts receivable and another to sales. Clearly, as more transactions are involved, more posting time is saved. SALES JOURNAL The sales journal of the Nazario Sea Products, shown in Exhibit 8-1, is designed for an entity using the periodic inventory system. This journal lists all credit sales for the month of June. The information for each sale is obtained from a copy of the related sales invoice, which should be prenumbered for control purposes. This journal is specifically designed to record sales of merchandise on account. In contrast, cash sales are recorded in the cash receipts journal. Credit sales of assets other than merchandise inventory (e.g. property and equipment) are entered in the general journal. For each transaction, the accountant enters the date, sales invoice number, and customer account to be debited along with the amount. If the same credit term is extended to all customers, as assumed in the illustration, there is no need to insert a column to describe the sales terms in the sales journal. The posting of any journal to the general ledger may result in equal debits and credits. In addition, for any posting to a control account in the general ledger, the same total amount must be posted to one or more related subsidiary ledger accounts. Exhibit 8-1 illustrates how to post the amounts in Nazario Sea Products sales journal. Amounts recorded in the sales journal are posted daily to the subsidiary ledger to keep a current record of the accounts receivable from each customer. Daily posting permits the business to answer customer inquiries promptly. A check mark (  ) is placed in the posting reference column of the sales journal to signify that the amount has been posted to the customer’s account in the subsidiary ledger. Updating the subsidiary ledger daily also allows the credit department to review and monitor a customer’s account balance at times other than the billing date. Cycle billings may likewise be implemented; for example, billing customers whose names begin with different letters at different times of the month. The advantage of cycle billings is that statements of account can be mailed throughout the month rather than in one large group at the end of the month. At the end of the month, when all sales have been recorded and sales journal has been totaled and ruled, the total sales figure is posted to the general ledger as a debit to the accounts receivable control account and as a credit to the sales account. Note that the double

posting reference at the bottom of the sales journal; this indicates that accounts receivable is account no. 120 in the general ledger and sales is account no. 410.

When amounts are posted to the ledgers, the journal page number is entered in the account to identify the source of the data. In Exhibit 8-1, all journal references in the ledger are “S1” since the postings originated from page 1 of the sales journal.

Sales journals may accommodate additional information. For example, columns could be included for sales by department or by product, so that a breakdown of sales is available to management. Columns may also be provided for output tax information, when necessary. CASH RECEIPTS JOURNAL All transactions involving cash receipts are recorded in a cash receipts journal. Exhibit 8-2 showed the cash receipts journal for an entity using the periodic inventory system. In a merchandising business, the main sources of cash are collections of account and cash sales. Thus, this journal has debit columns for cash and sales discounts; the credit columns for accounts receivable and sales. In addition, there are columns on the right-hand side of the journal which can be used to record the account titles and credits to other accounts resulting from cash receipts not related to cash sales and collections on account. Examples of these include investments by the owner and loan releases. Cash receipts are evidenced by source documents like prenumbered official receipts (OR), cash register tapes (CRT) or cash slips, and bank credit memorandum (CM). Note that the entries on June 15 and June 30, debiting cash and crediting sales, recorded cash sales for a certain period. In practice, cash sales, which are usually supported by cash register tapes, should be recorded daily rather than semi-monthly. The June 8 entry recorded P19,600 cash collection from Zamboanga Exports related to sales on account on June 1 of P20,000. The cash discounts were taken. The entry debited cash for P`19,600 and sales discounts for P400; and credited accounts receivable for P20,000. Official Receipt (OR) no. 001 was issued to acknowledge the cash receipt of P19,600. The entry for Dipolog Traders on June 29 is similar. The June 21 transaction illustrated the use of two journals, cash receipts and general journal, to record a business event. Here, Cagayan de Oro Stores settled its P100,000 June 12 account by issuing a promissory note for P50,000 and remitting P49,000 (P50,000 less 2% sales discounts) for the balance. In the cash receipts journal, the debits are to cash, P49,000 and sales discounts, P1,000; and accounts receivable is credited for P50,000. The receipt of notes receivable in lieu of an existing accounts receivable is a non-cash transaction that should be recorded in the general journal. The entry debits notes receivable and credits

accounts receivable for P50,000 each. The June 1 entry represented cash received as investments by the owner, Milavel Nazario. The June 10 cash receipts pertained to a DBA Bank loan released through a

credit to the current account of Nazario Sea Products maintained in the same bank. In both cases, the other accounts’ columns are used.

Before posting the cash receipts journal, each column is added and the journal balanced to make sure that total debits equal total credits. In the illustration, P1,348,000 + P2,000 = P100,000 + P450,000 + P800,000. The totals of the cash, sales discounts, accounts receivable, and sales columns are posted to the general ledger, as noted by the posting references below these columns. In addition, the individual items in other accounts’ column are posted to the general ledger. The total of this column is used only to balance the journal and are not posted. Individual items in the accounts receivable column are posted on a daily basis to the customer’s subsidiary ledger to keep this ledger in balance with the accounts receivable control account. Postings to the customer’s accounts are indicated by a check mark (√). A schedule of account balances in the subsidiary ledger is usually prepared at the end of each accounting period to verify that the subsidiary ledger agrees with the related control account. The schedule of accounts receivable for Nazario Sea Products indicated that the subsidiary ledger agreed with its control account in the general ledger.

PURCHASES JOURNAL Merchandising business frequently purchase merchandise and supplies. Such purchases are usually made on account. The purchase journal is designed to account

for purchases, supplies and other assets on account. In contrast, cash purchases are recorded in the cash disbursements journal. Exhibit 8-3 illustrated the purchases journal for an entity using the periodic inventory system. In the illustration, the primary source documents used as the basis for the entries in the journal is the receiving report (RR). The journal showed special columns for debits to purchases, office supplies, and store supplies, as well as for credits to accounts payable. A column is provided for debits to accounts for which no special column is available. In practice, a column for input taxes may be included. A separate column for purchase terms may also be provided to help identity the due date and the discounts available. The amounts in the accounts payable column are posted to the accounts payable subsidiary ledger on a daily basis. A check mark in the posting reference column indicates that this has been done. At the end of the month, the columns are totaled, and the journal is balanced to ensure that total debits equal total credits. The posting pattern for the purchases journal is diagrammed in Exhibit 8-3. CASH DISBURSEMENTS JOURNAL All cash payments are recorded in a cash disbursements journal. Exhibit 8-4 showed the June cash disbursements journal for Nazario Sea Products after the related transactions have been recorded, and the journal balanced and posted. Note the special columns for credits to cash and purchases discounts, and for debits to accounts payable and purchases. Ordinarily, these accounts will have the most entries. This special journal has columns for the date and the number of checks issued for each cash payment. Also, the other accounts column is available for recording debits to other accounts....