We will begin by reviewing how transactions are recorded in a manual accounting informa- tion system. You may be wondering why we cover manual accounting information systems when many businesses have computerized systems. There are three main reasons:
1. Learning a manual system equips you to work with both manual and computerized systems. The accounting is the same regardless of the system.
2. Few small businesses have computerized all their accounting. Even companies that use QuickBooks or Sage 50 Accounting, two popular entry-level accounting information systems, keep some manual accounting records.
3. Learning a manual system helps you master accounting.
Special Journals
In a manual system, transactions are classified by type. It is inefficient to record all transac- tions in the general journal, so businesses use special journals. A special journal is an accounting journal designed to record a specific type of transaction. Sales on account, cash receipts, purchases on account, and cash payments are treated as four separate categories and, therefore, create the four special journals. For example:
• Sales on account are recorded in a sales journal.
• Cash receipts are recorded in a cash receipts journal.
Learning Objective 2 Journalize and post sales and cash receipts in a manual accounting information system using special journals and subsidiary ledgers
Special Journal
An accounting journal designed to record one specific type of transaction.
Try It!
Match the benefit of an effective accounting information system with the definition.
Benefit Definition
1. Control a. Works smoothly with the business’s employees and organization structure 2. Relevance b. Can accommodate changes in the business over time
3. Flexibility 4. Compatibility
5. Positive cost/benefit relationship
c. Provides safeguards for a business’s assets and reduces the likelihood of fraud and errors
d. Benefits received outweigh the cost of the system
e. Provides information that will improve decision making and reduce uncertainty
Check your answers online in MyAccountingLab or at http://www.pearsonhighered.com/Horngren.
For more practice, see Short Exercises SB-1 and SB-2. MyAccountingLab
The five types of transactions, the related journal, and the posting abbreviations used in a manual system are summarized in Exhibit B-2.
Exhibit B-2 | Manual Accounting Information System
Sale on account Cash receipt Purchase on account Cash payment
Sales journal Cash receipts journal Purchases journal Cash payments journal All others
S CR
P CP J General journal
Journal
Transaction Posting Abbreviation
Subsidiary Ledgers
In addition to special journals, an accounting information system also uses subsidiary ledgers. A subsidiary ledger holds individual accounts that support a general ledger account. There are two common subsidiary ledgers: accounts receivable subsidiary ledger and accounts payable subsidiary ledger.
Accounts Receivable Subsidiary Ledger
The accounts receivable subsidiary ledger includes a receivable account for each customer. The customer name and account balance is detailed in the subsidiary ledger.
In addition, the subsidiary ledger contains detailed information such as the amount sold, received, and still due for each customer. The total of the accounts in the accounts receivable subsidiary ledger must equal the Accounts Receivable balance in the general ledger. This is demonstrated in Exhibit B-3. The Accounts Receivable balance of $4,319 in the general ledger equals the sum of the accounts in the accounts receivable subsidiary ledger ($935 + $907 + $694 + $1,783).
Subsidiary Ledger Record of accounts that provides
supporting details on individual balances, the total of which appears in a general ledger account.
Accounts Receivable Subsidiary Ledger A subsidiary ledger that includes
an accounts receivable account for each customer that contains detailed information such as the amount sold, received, and owed.
ExhibitB-3 | Accounts Receivable Subsidiary Ledger Accounts Receivable
GENERAL LEDGER:
4,319 Bal.
Accounts Receivable—Galvez 935
Bal.
Accounts Receivable—Harmon 694
Bal.
Accounts Receivable—Schmidt 1,783
Bal.
Accounts Receivable—Levy 907
Bal.
ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER:
The Accounts Receivable account in the general ledger is called a control account. A control account’s balance equals the sum of the balances of the accounts in a subsidiary ledger.
Accounts Payable Subsidiary Ledger
To pay debts on time, a company must know how much it owes each supplier. Accounts Payable in the general ledger shows only a single total for the amount owed on account. It does not indicate the amount owed to each vendor. Companies keep an accounts payable subsidiary ledger that is similar to the accounts receivable subsidiary ledger.
The accounts payable subsidiary ledger lists vendors in alphabetical order, along with amounts purchased from the vendors, amounts paid to the vendors, and the remaining amounts owed to them. The total of the individual balances in the subsidiary ledger equals the Accounts Payable (control account) balance in the general ledger.
Control Account
An account whose balance equals the sum of the balances in a group of related accounts in a subsidiary ledger.
Accounts Payable Subsidiary Ledger
A subsidiary ledger that includes an accounts payable account for each vendor that contains detailed information such as the amount purchased, paid, and owed.
The Sales Journal
Most merchandisers sell merchandise inventory on account. These credit sales are entered in the sales journal. The sales journal is used when recording the sale of merchandise inventory on account. The sale of merchandise inventory for cash is not recorded in the sales journal, but instead, it is recorded in the cash receipts journal. In addition, credit sales of assets other than merchandise inventory—for example, buildings—occur infrequently and are not recorded in the sales journal. They are, instead, recorded in the general journal.
Recording Transactions
Exhibit B-4 (on the next page) illustrates a sales journal (Panel A) and the related posting to the ledgers (Panel B). When a business completes a sale, the accountant enters the following information in the sales journal:
• Date
• Invoice number
• Customer name
• Transaction amount
Sales Journal
Special journal used to record credit sales.
Don’t confuse the terms customers and vendors. Remember that a company sells to customers and purchases from vendors.
ExhibitB-4 | Sales Journal with Posting
Accounts Receivable DR
Sales Revenue CR Cost of Goods Sold DR Merchandise Inventory CR Sales Journal
Date 2018
422
Clay Schmidt Total Susan Levy Brent Harmon Maria Galvez 423
424 425 Nov. 2
13 18 27 Nov. 30
Invoice
No. Customer
Account Debited Post. Ref.
Page 3
1,783 4,319
(115/410) (511/131)
907 694
935 505
361 517 431 1,814
Totals are posted
at the end of the
month.
Totals are posted
at the end of the
month.
PANEL B—Posting to the Ledgers:
Accounts Receivable Subsidiary Ledger General Ledger
Clay Schmidt
Date Nov. 27
Post. Ref. Debit Credit
Balance Debit Credit
1,783 1,783
S.3 Susan Levy
Date Nov. 18
Post. Ref. Debit Credit
Balance Debit Credit
907 907
S.3 Brent Harmon
Date Nov. 13
Post. Ref. Debit Credit
Balance Debit Credit
694 694
S.3 Maria Galvez
Date Nov. 2
Post. Ref. Debit Credit
Balance Debit Credit
935 935
S.3
Cost of Goods Sold
Date Nov. 30
Post. Ref. Debit Credit
Balance Debit Credit
1,814 1,814
S.3 Sales Revenue
Date Nov. 30
Post. Ref. Debit Credit
Balance Debit Credit
4,319 4,319
S.3
Merchandise Inventory
Date
30 Nov. 1 Bal.
Post. Ref. Debit Credit
Balance Debit Credit
1,814 2,071 3,885 S.3
Accounts Receivable
Date Nov. 30
Post. Ref. Debit Credit
Balance Debit Credit
4,319 4,319
S.3
No. 115
No. 131
No. 410
No. 511 Individual
accounts receivable are posted
daily.
PANEL A—Sales Journal:
Consider the first transaction in Panel A. On November 2, the business sold mer- chandise inventory on account, terms 15/20, n/30, to Maria Galvez for $1,100 with a cost of $505. The invoice number is 422. In Chapter 5, you learned that this transaction was recorded as follows when using the general journal:
Sales Revenue ($1,100 – ($1,100 × 0.15))
Cost of Goods Sold Merchandise Inventory Recorded the cost of goods sold.
Accounts Receivable
935 Sale on account less discount.
505 Accounts and Explanation
Nov. 2
2 Date
935
505
Debit Credit
= Sales
Revenuec Ec Accounts
Receivablec
Ac L
Cost of Goods Soldc
ET Merchandise
InventoryT AT
= L
When using special journals, instead of recording this transaction in the general jour- nal, the business records the transaction in the sales journal. All of the information related to the sale appears on a single line in the sales journal as follows:
Accounts Receivable DR
Sales Revenue CR Cost of Goods Sold DR Merchandise Inventory CR Sales Journal
Date 2018
Nov. 2 422 Maria Galvez
The Post. Ref.
column is not used until the transaction
is posted.
This part of the journal records the sales revenue and associated
receivable.
This part of the journal records the expense and
the reduction of merchandise inventory.
Invoice
No. Customer
Account Debited Post. Ref.
Page 3
935 505
The entry records the sales revenue and associated accounts receivable by entering the net amount of the sale, $935, in the Accounts Receivable DR, Sales Revenue CR column. The entry also records the expense of the sale and the reduction of merchandise inventory by recording the cost of the sale, $505, in the Cost of Goods Sold DR, Merchandise Inven- tory CR column. By using a sales journal, the recording of sales is streamlined, thus saving a significant amount of time.
It’s important to remember that a transaction is recorded in either the general journal or a special journal, but not in both. We are illustrating the general journal entry as a teaching tool to help you understand how the entry is recorded in the special journal. Transactions
are not recorded in both journals. To do so would be to record the entry twice.
In the sales journal that we are using in this example, there are only two columns used for dollar amounts. One column records the sales revenue and accounts receivable, and the other column records the expense of the sale. Businesses that collect sales tax would need to modify the sales journal shown to include an additional column for Sales Taxes Payable.
The modified sales journal would have the following headings:
Sales Journal
Date Accounts
Receivable DR Sales Taxes
Payable CR Sales
Revenue CR Cost of Goods Sold DR Merchandise Inventory CR Invoice
No. Customer
Account Debited Post.
Ref.
Page 3
Each business will modify its sales journal to fit the types of sales it makes. Remember, though, that only sales on account are recorded in the sales journal.
Posting
Entries in the sales journal are posted to both the accounts receivable subsidiary ledger and the general ledger.
Posting to the Accounts Receivable Subsidiary Ledger Individual accounts receivable are posted daily from the sales journal to the accounts receivable subsidiary ledger. For example, on November 2, the accountant posts the $935 receivable to the individual accounts receivable for Maria Galvez. Entries in the Accounts Receivable DR, Sales Revenue CR column in the sales journal are posted daily to the subsidiary ledger to keep a current record of the amount receivable from each customer.
After posting to the subsidiary ledger, the accountant enters a check mark in the post- ing reference column of the sales journal (see Exhibit B-4). That lets the business know that the transaction was posted to Galvez’s account.
Posting to the General Ledger At the end of the month, the accountant totals (commonly called footing) the Accounts Receivable DR, Sales Revenue CR, and Cost of Goods Sold DR, Merchandise Inventory CR columns. The totals of these columns are posted from the sales journal to the general ledger.
In Exhibit B-4 (Panel A), November’s credit sales total $4,319. The $4,319 is posted to the Accounts Receivable and Sales Revenue accounts in the general ledger. The account numbers of each account are then printed beneath the total in the sales journal. In Panel B of Exhibit B-4, the account number for Accounts Receivable is 115 and the account num- ber for Sales Revenue is 410. Entering these account numbers in the sales journal shows that the $4,319 has been posted to the two accounts.
The debit to Cost of Goods Sold and the credit to Merchandise Inventory for the monthly total of $1,814 are also posted at the end of the month. After posting, these accounts’ numbers are entered beneath the total to show that Cost of Goods Sold and Merchandise Inventory have been updated.
As the accountant posts to the ledgers, the journal page number and journal name abbreviation are entered in the ledger account to show the source of the data. All transaction data in Exhibit B-4 originated on page 3 of the sales journal, so all posting references are S.3. “S” indicates sales journal. After posting, the Accounts Receivable balance in the general ledger should equal the sum of the individual customer balances in the subsidiary ledger.
Trace all the postings in Exhibit B-4. The way to learn an accounting information system is to study the flow of data. The arrows indicate the direction of the information.
The Cash Receipts Journal
All businesses have lots of cash transactions, and therefore a cash receipts journal comes in handy. The cash receipts journal is a special journal that is used to record cash receipts.
Exhibit B-5 illustrates the cash receipts journal. Every transaction recorded in this journal is a cash receipt.
Cash Receipts Journal Special journal used to record cash
receipts.
ExhibitB-5 | Cash Receipts Journal with Posting
PANEL A—Cash Receipts Journal:
General Ledger
Note Payable to First Bank
Date Nov. 11
Post. Ref. Debit Credit
Balance Debit Credit
1,000 1,000
CR.5
No. 221 Cash
Date Nov. 30
Post. Ref. Debit Credit
Balance Debit Credit
6,569 6,569
CR.5
No. 101
Accounts Receivable Date
30 Nov. 30
Post. Ref. Debit Credit
Balance Debit Credit 4,319
1,629 2,690 4,319 S.3
CR.5
No. 115
Merchandise Inventory Date
30 30 Nov. 1
Post. Ref. Debit Credit
Balance Debit Credit
1,814
1,707 364
2,071 3,885 S.3
CR.5 Bal.
No. 131
Sales Revenue Date
30 Nov. 30 S.3
Post. Ref. Debit Credit
Balance Debit Credit 4,319
3,172 7,491
4,319 CR.5
No. 410
Interest Revenue
Balance No. 460 Sales Discounts Forfeited
Date Nov. 30
Post. Ref. Debit Credit
Balance Debit Credit
CR.5 6 6
No. 420 PANEL B—Posting to the Ledgers:
Accounts Receivable Subsidiary Ledger Maria Galvez
Date 14 Nov. 2 S.3
Post. Ref. Debit Credit Credit Balance Debit 935
935 0
935 CR.5
Brent Harmon Date
22 Nov. 13 S.3
Post. Ref. Debit Credit
Balance Debit 694
694 0
694 CR.5
Susan Levy
Date Nov. 18
Post. Ref. Debit Credit
Balance Debit
907 907
S.3
Clay Schmidt
Date Nov. 27
Post. Ref. Debit Credit
Balance Debit
1,783 1,783
S.3
Other
Accounts CR Cost of Goods Sold DR Merchandise Inventory CR Cash Receipts Journal
Date 2018
Nov. 6 290
935
853 426
700
762 762
1,802 6,569
(101) (X) (511/131)
1,762 1,707
991 221
460
1,000 1,000
517
Totals
Interest Revenue 11
14 19 22 25 28 Nov. 30
Account Credited Post
Ref. Cash DR
6 6
(420) Sales Discounts
Forfeited CR
935 694
(115) 1,629 Accounts Receivable CR
853
(410) 3,172 1,802 517 Sales Revenue CR
Page 5
Note Payable to First Bank Maria Galvez
Brent Harmon
Totals are posted
at the end of the month. Individual accounts
receivable are posted daily. Total is
not posted. Total is posted at the end of the month.
Individual amounts are posted at the end of the month.
Credit
Credit
Credit
The main sources of cash are collections on account and cash sales. Collections on account are recorded in the Accounts Receivable CR column and the Cash DR column.
Cash sales are recorded in the Sales Revenue CR column, the Cash DR column, and Cost of Goods Sold DR, Merchandise Inventory CR column. The cash receipts journal also has an Other Accounts CR column that is used to record miscellaneous cash receipt transactions and a Sales Discounts Forfeited CR column used to record sales discounts forfeited.
Recording Transactions
In Exhibit B-5, the first cash receipt occurred on November 6 and was a cash sale for $517 (cost of goods sold, $290). If the transaction had been recorded in the general journal, the following entries would have been recorded:
Sales Revenue
Cost of Goods Sold Merchandise Inventory Recorded the cost of goods sold.
Cash
517 Cash sale.
290 Accounts and Explanation
Nov. 6
6 Date
517
290
Debit Credit Sales
Revenuec Ec Cashc
Ac
= L
= Cost of
Goods Soldc ET Merchandise
InventoryT
AT L
Received cash in exchange for note.
Note Payable to First Bank Cash
1,000 1,000
Accounts and Explanation Nov. 11
Date Debit Credit
Cashc = Ac
Notes Payablec
Lc E
By recording the transaction in the cash receipts journal instead, the entries can be recorded on one line. Observe the debit to Cash and the credit to Sales Revenue ($517) and the debit to Cost of Goods Sold and credit to Merchandise Inventory ($290) for the cost of the merchandise sold.
On November 11, the business borrowed $1,000 from First Bank. If the transaction had been recorded in the general journal, the following entry would have been made:
By recording it in the cash receipts journal instead, the accountant would record the $1,000 in the Cash DR column. The Other Accounts CR column is used for the Notes Payable credit because there is no specific credit column for borrowings. For this transaction, the account title, Note Payable to First Bank, is entered in the Account Credited column. The Other Accounts CR column is used when a transaction involves a credit entry that is not listed in the headings (columns) of the cash receipts journal. The entry on November 25 is another example. On November 25, the business received $762 cash of interest revenue.
The cash receipts journal does not include a column for credits to interest revenue; there- fore, the Other Accounts CR column must be used and the credit account must be written in the Account Credited column.
On November 14, the business collected $935 from Maria Galvez. Back on November 2, the business sold $1,100 of merchandise to Galvez, terms 15/20, n/30 and recorded the net sale in the sales journal. This credit sale allowed a $165 discount for prompt payment, and Galvez paid within the discount period. The business records this cash receipt in the cash receipts journal by debiting Cash for $935 and by crediting Accounts Receivable for
$935. The customer’s name appears in the Account Credited column.
The business does not have to deal with the sales discount associated with the Galvez sale because the sale was recorded net of discount at the time of sale. Only when a customer does not take advantage of the discount will the business use the Sales Discounts Forfeited CR column. Let’s look at Brent Harmon as an example. On November 22, the business collected $700 from Brent Harmon representing the $694 he owed plus $6 sales discounts forfeited. Because Harmon did not pay within the discount period, he must pay more than the amount of the receivable. The transaction is recorded in the cash receipts journal as a
$700 Cash DR, $694 Accounts Receivable CR, and $6 Sales Discounts Forfeited CR.
Posting
As with the sales journal, entries in the cash receipts journal are posted daily to the accounts receivable subsidiary ledger and monthly to the general ledger.
Posting to the Accounts Receivable Subsidiary Ledger Amounts from the cash receipts journal are posted to the accounts receivable subsidiary ledger daily. The postings are credits. Trace the $935 credit to Maria Galvez’s account. It reduces her balance to zero.
The receipt from Brent Harmon reduces his balance to $0. After posting, the accountant enters a check mark in the posting reference column of the cash receipts journal and shows the CR.5 posting reference in the subsidiary ledger. CR.5 signifies that the posting is transferred from the cash receipts journal, page 5.
The posting reference CR.5 should not be confused with the abbreviation for credit, CR. The posting reference for the cash receipts journal always includes a page
reference while the abbreviation for credit does not.
Posting to the General Ledger At the end of the month, each column in the cash receipts journal is totaled. The equality of the debits and credits is verified by comparing the sum of all debit columns to the sum of all credit columns.
Debit Columns Credit Columns
Cash $ 6,569 Accounts Receivable $ 1,629
Cost of Goods Sold 1,707 Sales Revenue 3,172
Sales Discounts Forfeited 6
Other Accounts 1,762
Merchandise Inventory 1,707
Total $ 8,276 $ 8,276
All columns, except for the Other Accounts CR column, are posted in total to the general ledger. For example, the total for Cash ($6,569) is posted as a debit in the Cash account in the general ledger. After posting, the account number is printed below the col- umn total in the cash receipts journal. The account number for Cash (101) appears below the column total, and likewise for the other column totals. The journal reference (CR) and page number (5) are shown in the general ledger as reference of the posting. Follow the