Special Journals

Entering transactions in the general journal and posting them to the correct general ledger accounts is time consuming. In the general journal, a simple transaction requires three lines—two to list the accounts and one to describe the transaction. The transaction must then be posted to each general ledger account. If the transaction affects a control account, the posting must be done twice—once to the subsidiary ledger account and once to the controlling general ledger account. To speed up this process, companies use special journals to record repetitive transactions that affect the same set of accounts and have a consistent description. Such transactions can be documented on one line in a special journal. Then, instead of separately posting individual entries, each column's total is posted at the end of the accounting period.

Although companies create special journals for other types of repetitive transactions, almost all merchandising companies use special journals for sales, purchases, cash receipts, and cash disbursements.







Sales journal. The sales journal lists all credit sales made to customers. Sales returns and cash sales are not recorded in this journal. Entries in the sales journal typically include the date, invoice number, customer name, and amount. Invoices are the source documents that provide this information. In its most basic form, a sales journal has only one column for recording transaction amounts. Each entry increases (debits) accounts receivable and increases (credits) sales.

Notice the dates and posting references applied to each entry in the illustration to the right. Each day, individual sales journal entries are posted to the accounts receivable subsidiary ledger accounts so that customer balances remain current. Customer account numbers (or check marks if customer accounts are simply kept in alphabetical order) are placed in the sales journal's reference column to indicate that the entries have been posted. At the end of the accounting period, the column total is posted to the accounts receivable and sales accounts in the general ledger. Account numbers are placed in parentheses below the column to indicate that the total has been posted.

Many companies use a multi‐column (columnar) sales journal that provides separate columns for specific sales accounts and for sales tax payable. Each line in a multi‐column journal must contain equal debits and credits. For example, the entries in the sales journal to the right appear below in a multi‐column sales journal that tracks hardware sales, plumbing sales, wire sales, and sales tax payable. Individual entries are still posted daily to the accounts receivable subsidiary ledger accounts, and each column total is posted at the end of the accounting period to the appropriate general ledger account.











Purchases journal. The purchases journal lists all credit purchases of merchandise. Entries in this journal usually include the date of the entry, the name of the supplier, and the amount of the transaction. Some companies include columns to identify the invoice date and credit terms, thereby making the purchases journal a tool that helps the companies take advantage of discounts just before they expire. The purchases journal to the right has only one column for recording transaction amounts. Each entry increases (debits) purchases and increases (credits) accounts payable.

Each day, individual entries are posted to the accounts payable subsidiary ledger accounts. Creditor account numbers (or check marks if the creditor accounts are not numbered) are placed in the purchases journal's reference column to indicate that the entries have been posted. At the end of the accounting period, the column total is posted to purchases and accounts payable in the general ledger. Account numbers are placed in parentheses below the column to indicate that the total has been posted.

Companies that frequently make credit purchases of items other than merchandise use a multi‐column purchases journal. For example, the purchases journal below includes columns for supplies and equipment. Of course, every purchase in the journal below must credit accounts payable; equipment purchased with a note payable or supplies purchased with cash would not be recorded in this journal. Individual entries are still posted daily to the accounts payable subsidiary ledger accounts, and each column total is posted at the end of the accounting period to the appropriate general ledger account.











Cash receipts journal. Transactions that increase cash are recorded in a multi‐column cash receipts journal. If sales discounts are offered to customers, the journal includes a separate debit column for sales discounts. Credit columns for accounts receivable and for sales are normally present, but companies that frequently receive cash from other, specific sources use additional columns to record those types of cash receipts. In addition, the cash receipts journal includes a column named Other, which is used to record various types of cash receipts that occur infrequently and therefore do not warrant a separate column. For example, cash receipts from capital investments, bank loans, and interest revenues are generally recorded in the Other column. However, a company that provides consumer loans and receives interest payments from many customers would probably include a separate column for interest revenue. Whenever a credit entry affects accounts receivable or appears in the Other column, the specific account is identified in the column named Account.

Accounts receivable payments are posted daily to the individual subsidiary ledger accounts, and customer account numbers (or check marks if the customer accounts are not numbered) are placed in the cash receipts journal's reference column. At the end of the accounting period, each column total is posted to the general ledger account listed at the top of the column, and the account number is placed in parentheses below the total. Entries in the Other column are posted individually to the general ledger accounts affected, and the account numbers are placed in the cash receipts journal's reference column. A capital X is placed below the Other column to indicate that the column total cannot be posted to a general ledger account.







Cash disbursements journal. Transactions that decrease cash are recorded in the cash disbursements journal. The cash disbursements journal to the right has one debit column for accounts payable and another debit column for all other types of cash payment transactions. It has credit columns for purchases discounts and for cash. Since each entry debits a control account (accounts payable) or an account listed in the column named Other, the specific account being debited must be identified on every line.

The nature of each company's transactions determines which columns this journal includes. For example, companies sometimes choose to include separate debit columns for regularly used accounts such as salaries expense, sales commissions expense, or other specific accounts affected by cash disbursements.

Entries that affect accounts payable are posted daily to the individual subsidiary ledger accounts, and creditor account numbers (or check marks if the creditor accounts are not numbered) are placed in the cash disbursements journal's reference column. At the end of the accounting period, each column total is posted to the general ledger account listed at the top of the column, and the account number is placed in parentheses below the total. Entries in the Other column are posted individually to the general ledger accounts affected, and the account numbers are placed in the cash disbursements journal's reference column. A capital Xis placed below the Other column to indicate that the column total cannot be posted to a general ledger account.







General journal entries. The general journal is used for adjusting entries, closing entries, correcting entries, and all transactions that do not belong in one of the special journals. If a general journal entry involves an account in a subsidiary ledger, the transaction must be posted to both the general ledger control account and the subsidiary ledger account. Both account numbers are placed in the general journal's reference column to indicate that the entry has been posted correctly.

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Subsidiary Ledgers

A subsidiary ledger is a group of similar accounts whose combined balances equal the balance in a specific general ledger account. The general ledger account that summarizes a subsidiary ledger's account balances is called a control account or master account. For example, an accounts receivable subsidiary ledger (customers' subsidiary ledger) includes a separate account for each customer who makes credit purchases. The combined balance of every account in this subsidiary ledger equals the balance of accounts receivable in the general ledger. Posting a debit or credit to a subsidiary ledger account and also to a general ledger control account does not violate the rule that total debit and credit entries must balance because subsidiary ledger accounts are not part of the general ledger; they are supplemental accounts that provide the detail to support the balance in a control account.






The accounts receivable subsidiary ledger is essential to most businesses. Companies may have hundreds or even thousands of customers who purchase items on credit, who make one or more payments for those items, and who sometimes return items or purchase additional items before they finish paying for prior purchases. Recording all credit purchases, returns, and subsequent payments in a single account would make an individual customer's balance virtually impossible to calculate because the customer's transactions would be interspersed among thousands of other transactions. But the accounts receivable subsidiary ledger provides quick access to each customer's balance and account activity.

Companies create subsidiary ledgers whenever they need to monitor the individual components of a controlling general ledger account. In addition to the accounts receivable subsidiary ledger, companies often use an accounts payable subsidiary ledger (creditors' subsidiary ledger), which has separate accounts for each creditor, an inventory subsidiary ledger, which has separate accounts for each product, and a property, plant, and equipment subsidiary ledger, which has separate accounts for each long‐lived asset.

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Recording Sales

Sales invoices are source documents that provide a record for each sale. For control purposes, sales invoices should be sequentially prenumbered to help the accounting department determine the disposition of every invoice. Sales revenues equal the selling price of all products that are sold. In accordance with the revenue recognition principle, sales revenue is recognized when a customer receives title to the merchandise, regardless of when the money changes hands. If a customer purchases merchandise at a sales counter and takes possession of the goods immediately, the sales invoice or cash register receipt is the only source document needed to record the sale. However, if merchandise is shipped to the customer, a delivery record or shipping document is matched with the invoice to prove that the merchandise has been shipped to the customer.

Suppose a company named Music Suppliers, Inc., sells merchandise worth $1,000 on account to a retail store named Music World. Music Suppliers, Inc., records the sale with the journal entry below.







For reference purposes, the journal entry's description often includes the invoice number.

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Purchases Discounts

Companies that take advantage of sales discounts usually record them in an account named purchases discounts, which is another contra‐expense account that is subtracted from purchases on the income statement. If Music Suppliers, Inc., offers the terms 2/10, n/30 and Music World pays the invoice's outstanding balance of $900 within ten days, Music World takes an $18 discount. To record this payment to Music Suppliers, Inc., Music World makes a compound journal entry that decreases (debits) accounts payable for $900, decreases (credits) cash for $882, and increases (credits) purchases discounts for $18.

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Accounting Inventory

Although the accounting cycle and the basic accounting principles are the same for companies that sell merchandise and companies that provide services, merchandising companies use several accounts that service companies do not use. The balance sheet includes an additional current asset called merchandise inventory, or simply inventory, which records the cost of merchandise held for resale. On balance sheets, the inventory account usually appears just below accounts receivable because inventory is less liquid than accounts receivable.

Music World Partial Balance Sheet June 30, 20X3


ASSETS


Current Assets


Cash

$10,000


Accounts Receivable

2,000


Inventory

37,000


Supplies

1,000


Prepaid Insurance

2,000


Total Current Assets

$52,000




Merchandising companies also have several specific income statement accounts designed to provide detailed information about revenues and expenses associated with salable merchandise.

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Returns and Allowances

When a purchaser receives defective, damaged, or otherwise undesirable merchandise, the purchaser prepares a debit memorandum that identifies the items in question and the cost of those items. The purchaser uses the debit memorandum to inform the seller about the return and to prepare a journal entry that decreases (debits) accounts payable and increases (credits) an account named purchases returns and allowances, which is a contra‐expense account. Contra‐expense accounts normally have credit balances. On the income statement, the purchases returns and allowances account is subtracted from purchases.

If Music World discovers $100 worth of defective merchandise in the shipment from Music Suppliers, Inc., Music World prepares a debit memorandum, returns the merchandise, and makes a journal entry that decreases (debits) accounts payable for $100 and that increases (credits) purchases returns and allowances for $100.







For reference purposes, the journal entry's description may include the debit memorandum number and the seller's invoice number.

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Recording Purchases

Under the periodic system, a temporary expense account named merchandise purchases, or simply purchases, is used to record the purchase of goods intended for resale. The source documents used to journalize merchandise purchases include the seller's invoice, the company's purchase order, and a receiving report that verifies the accuracy of the inventory quantities. When Music World receives a shipment of merchandise worth $1,000 on account from Music Suppliers, Inc., Music World increases (debits) the purchases account for $1,000 and increases (credits) accounts payable for $1,000.






For reference purposes, the journal entry's description usually includes the invoice number.

When a seller pays to ship merchandise to a purchaser, the seller records the cost as a delivery expense, which is considered an operating expense and, more specifically, a selling expense. When a purchaser pays the shipping fees, the purchaser considers the fees to be part of the cost of the merchandise. Instead of recording such fees directly in the purchases account, however, they are recorded in a separate expense account named freight‐in or transportation‐in, which provides management with a way to monitor these shipping costs.

If Music World pays a shipping company $30 for delivering the merchandise from Music Suppliers, Inc., Music World increases (debits) freight‐in for $30 and decreases (credits) cash for $30.









Freight terms, which indicate whether the purchaser or seller pays the shipping fees, are often specified with the abbreviations FOB shipping point or FOB destination. FOB means free on board. FOB shipping point means the purchaser pays the shipping fees and gains title to the merchandise at the shipping point (the seller's place of business). FOB destination means the seller pays the shipping fees and maintains title until the merchandise reaches its destination (the purchaser's place of business).

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Inventory Systems

There are two systems to account for inventory: the perpetual system and the periodic system. With the perpetual system, the inventory account is updated after every inventory purchase or sale. Before computers became widely available, only companies that sold a relatively small number of high‐priced items used this system. Under the periodic system, a careful evaluation of inventory occurs only at the end of each accounting period. At that time, each product available for sale is counted and multiplied by its per unit cost, and the total of all such calculations equals the value of inventory.

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Net Sales

Net sales is calculated by subtracting sales returns and allowances and sales discounts from sales. Suppose Music Suppliers, Inc., sells merchandise worth $116,500 during June and, in conjunction with these sales, handles $9,300 in returns and allowances and $1,200 in sales discounts. The company's net sales for June equal $106,000.

Music Suppliers, Inc. Calculation of Net Sales For the Month Ended June 30, 20X3

Sales		$116,500
Less: Sales Returns and Allowances	$9,300
Sales Discounts	1,200	10,500
Net Sales		$106,000

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Sales Discounts

A sales discount is an incentive the seller offers in exchange for prompt payment on credit sales. Sales discounts are recorded in another centra‐revenue account, enabling management to monitor the effectiveness of the company's discount policy. Invoices generally include credit terms, which specify when the customer must pay and define the sales discount if one is available. For example, the credit terms on the invoice below are 2/10, n/30, which is read “two‐ten, net thirty.”

The terms 2/10, n/30 mean the customer may take a two percent discount on the outstanding balance (original invoice amount less any returns and allowances) if payment occurs within ten days of the invoice date. If the customer chooses not to take the discount, the outstanding balance is due within thirty days. An abbreviation that sometimes appears in the credit terms section of an invoice is EOM, which stands for end of month. The terms n/15 EOM indicate that the outstanding balance is due fifteen days after the end of the month in which the invoice is dated.

If Music World returns merchandise worth $100 after receiving a $1,000 order, they still owe Music Suppliers, Inc., $900. Assuming the credit terms are 2/10, n/30 and Music World pays the invoice within ten days, the payment equals $882, an amount calculated by subtracting $18 (2% of $900) from the outstanding balance. To record this payment from Music World, Music Suppliers, Inc., makes a compound journal entry that increases (debits) cash for $882, increases (debits) sales discounts for $18, and decreases (credits) accounts receivable for $900.

 

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