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A Review of the Accounting Cycle Use special journals and subsidiary ledgers to process accounting information more efficiently and to provide additional useful information. ❘ EM ❘ Chapter 2 ❘ 69 Some examples of special journals are the sales journal, the purchases journal, the cash receipts journal, the cash disbursements journal, the payroll register, and the voucher register. Sales on account are recorded in the sales journal. The subsequent collections on account, as well as other transactions involving the receipt of cash, are recorded in the cash receipts journal. Merchandise purchases on account are entered in a purchases journal or a voucher register. Subsequent payments on account, as well as other transactions involving the payment of cash, are recorded in a cash disbursements journal or a check register. A payroll register may be employed to accumulate payroll information, including payroll deductions and withholdings for taxes. Column headings in the various journals specify the accounts to be debited or credited; account titles and explanations may therefore be omitted in recording routine transactions. A Sundry column is usually provided for transactions that are relatively infrequent, and account titles must be entered in recording such transactions. 70 ❘ Part 1 ❘ EM ❘ Foundations of Financial Accounting The use of special journals facilitates recording and also simplifies the posting process, because the totals of many transactions, rather than separate data for each transaction, can be posted to the ledger accounts. Certain data must be transferred individually—data affecting individual accounts receivable and accounts payable and data reported in the Sundry columns—but the overall volume of posting is substantially reduced. The format of a particular journal must satisfy the needs of the individual business unit. For example, with an automated or computerized system, the general journal, any specialized journals, and subsidiary ledgers may be modified or eliminated. Recognizing that modifications are necessary for individual systems, the following sections discuss a voucher system and illustrate some special journals that are commonly used with manual accounting systems. VOUCHER SYSTEM Relatively large organizations ordinarily provide for the control of purchases and cash disbursements through adoption of some form of a voucher system. With the use of a voucher system, checks may be drawn only upon a written authorization in the form of a voucher approved by some responsible official. A voucher is prepared not only in support of each payment to be made for goods and services purchased on account but also for all other transactions calling for payment by check, including cash purchases, retirement of debt, replenishment of petty cash funds, payrolls, and dividends. The voucher identifies the person authorizing the expenditure, explains the nature of the transaction, and names the accounts affected by the transaction. For control purposes, vouchers should be prenumbered, checked against purchase invoices, and compared with receiving reports. Upon verification, the voucher and the related business documents are submitted to the appropriate official for final approval. When approved, the prenumbered voucher is recorded in a voucher register. The voucher register is a book of original entry and takes the place of a purchases journal. Charges on each voucher are classified and recorded in appropriate Debit columns, and the amount to be paid is listed in an Accounts Payable or Vouchers Payable column. After a voucher is entered in the register, it is placed in an unpaid vouchers file together with its supporting documents. Checks are written in payment of individual vouchers. The checks are recorded in a check register, which is used in place of a cash payments journal, as debits to Accounts Payable or Vouchers Payable and credits to Cash. Since charges to the various asset, liability, or expense accounts were recognized when the payable was recorded in the voucher register, these accounts need not be listed in the payments record. When a check is issued, payment of the voucher is reported in the voucher register by entering the check number and the payment date. Paid vouchers and supporting documents are removed from the unpaid file, marked “paid,”and placed in a separate paid vouchers file. The balance of the payable account, after the credit for total vouchers issued and the debit for total vouchers paid, should be equal to the sum of the unpaid vouchers file. The voucher register, while representing a journal, also provides the detail in support of the accounts payable or vouchers payable total. ILLUSTRATION OF SPECIAL JOURNALS AND SUBSIDIARY LEDGERS Assume that Central Valley, Inc., maintains the following books of original entry: sales journal, cash receipts journal, voucher register, check register, and general journal. As noted, the format of a particular journal must satisfy the needs of the individual business unit. Those presented for Central Valley, Inc., are illustrative only. A Review of the Accounting Cycle ❘ EM ❘ Chapter 2 ❘ 71 Sales Journal The sales journal for the month of July 2002 appears as follows: SALES JOURNAL Date 2002 July 2 6 10 12 15 18 20 23 27 29 31 Invoice No. 701 702 703 704 705 706 707 708 709 710 711 Page 6 Post. Ref. Account Debited The Chocolate Factory Huffman Company Stocks and Co. Bennet, Inc. The Chocolate Factory Ridnour Corporation Hillcrest Sales Co. Kirstein, Inc. Datamark Systems Inc. Fuller Distributing Co. Stocks and Co. ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Accts. Rec. Dr. Sales Cr. 3,450 6,510 1,525 4,860 2,000 5,940 1,910 7,650 1,280 2,925 2,100 40,150 (116) (41) As illustrated, credit sales are recorded by debits to Accounts Receivable and credits to Sales. The sales invoice number provides a reference to the original source document for each transaction. Debits are posted to individual customers’ accounts in the accounts receivable subsidiary ledger as indicated by a check (✓) in the Posting Reference column. The total sales for the month ($40,150) are posted to Accounts Receivable and Sales (accounts #116 and #41, respectively). Cash Receipts Journal The cash receipts journal for Central Valley, Inc., for July 2002 appears as follows: CASH RECEIPTS JOURNAL Date 2002 July 3 7 8 10 11 14 16 17 21 22 25 29 31 31 Account Credited Hamilton Sign Co. DataMark Systems Inc. Sales The Chocolate Factory Sawyer Co. Rohas, Inc. Milo Company Poynter Corp. Earnst Co. Tax Refund Receivable Sales Hillcrest Sales Co. The Chocolate Factory Notes Receivable Interest Revenue Post. Ref. ✓ ✓ 41 ✓ ✓ ✓ ✓ ✓ ✓ 120 41 ✓ ✓ 113 72 Sundry Accounts Cr. Page 8 Accounts Receivable Cr. Sales Discounts Dr. 5,650 1,400 113 28 3,450 2,735 4,875 920 6,100 6,870 69 1,900 2,000 38 365 5,780 440 8,500 65 Cash Dr. 5,537 1,372 365 3,381 2,735 4,875 920 6,100 6,870 5,780 440 1,862 2,000 8,565 15,150 35,900 248 50,802 (✓) (116) (42) (111) 72 ❘ Part 1 ❘ ❘ EM Foundations of Financial Accounting The cash receipts journal records all receipts of cash. Collections of cash from previously recorded credit sales are posted in total as a credit to Accounts Receivable (account #116) and as debits to Sales Discounts (account #42) and Cash (account #111). The credits to Accounts Receivable are posted to the individual customer accounts in the subsidiary ledger as noted by the check (✓) in the Posting Reference column. Cash sales, for example, as shown for July 8 and July 25, are posted individually as a credit to Sales (account #41) and as a part of the total debit to Cash. Other transactions involving cash receipts, for example, the collection of a note receivable on July 31, are posted individually as credits and as a part of the total debit to Cash. Voucher Register As noted, the voucher register takes the place of a purchases journal, providing a record of all authorized payments to be made by check. A partial voucher register is presented below. For illustrative purposes, separate debit columns are provided for two accounts— Purchases and Payroll. Other items are recorded in the Sundry Dr. column. Additional separate columns could be added for other items, such as advertising, if desired. The total amount of each column is posted to the corresponding account, with the exception of the Sundry Dr. and Cr. columns, which are posted individually. VOUCHER REGISTER Date Vouch. No. 31 7132 31 31 31 31 7133 7134 7135 7136 Payee Date Ck. No. Accounts Payable Cr. Security National Bank Payroll 7/31 7/31 3106 3107 9,120 1,640 Paid Sundry Purchases Dr. Payroll Dr. Account Notes Payable Far Fabrications Midland Inc. Nyland Supply Co. 2,130 FICA Taxes Payable Income Taxes Payable Amount Post. Ref. 211 Dr. Cr. 9,120 215 90 214 400 3,290 1,500 3,290 1,500 5,550 55,375 5,550 24,930 2,130 33,645 (213) (51) (620) (✓) 5,330 (✓) Check Register A partial check register is illustrated below. It accounts for all the checks issued during the period. Checks are issued only in payment of properly approved vouchers. The payee is designated together with the number of the voucher authorizing the payment. CHECK REGISTER Date Check No. 31 31 31 3106 3107 3108 Account Debited Security National Bank Payroll Pat Bunnell Voucher No. 7132 7133 7005 Accounts Payable Dr. Purchase Discounts Cr. Cash Cr. 9,120 1,640 1,500 61,160 30 275 9,120 1,640 1,470 60,885 (213) (52) (111) A Review of the Accounting Cycle ❘ EM ❘ Chapter 2 ❘ 73 General Journal Regardless of the number and nature of special journals, certain transactions cannot appropriately be recorded in the special journals and are recorded in the general journal. A general journal with an illustrative entry during the month of July is illustrated below. This general journal is prepared in two-column format. Debit and Credit columns is provided for the entries that are to be made to the general ledger accounts. GENERAL JOURNAL Date Post. Ref. Description 2002 July 31 Page 3 Allowance for Doubtful Accounts Accounts Receivable To write off uncollectible account. (The Rit-Z Shop) 117 116 Debit Credit 1,270 1,270 Subsidiary Ledgers Subsidiary ledgers provide the detail of individual accounts in support of a control account in the general ledger. Whenever possible, individual postings to subsidiary accounts are made directly from the business documents evidencing the transactions. This practice saves time and avoids errors that might arise in summarizing and transferring this information. If postings to the subsidiary records and to the control accounts are made accurately, the sum of the detail in a subsidiary record will agree with the balance in the control account. A reconciliation of each subsidiary ledger with its related control account should be made periodically, and any discrepancies found should be investigated and corrected. As an illustration of the relationship of a general ledger control account to its subsidiary ledger accounts, the accounts receivable control account is shown. Three of the subsidiary accounts are also shown. GENERAL LEDGER Account: ACCOUNTS RECEIVABLE Date 2002 July 1 31 31 31 Item Balance Sales on account Collections on account Write - off of uncollectible account (The Rit - Z Shop) Account No. 116 Post. Ref. S6 CR8 Debit Credit Balance 35,900 9,200 49,350 13,450 1,270 12,180 40,150 J3 ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER Name: Stock and Co. Address: 546 South Fox Rd., Chicago, IL 60665 Date 2002 July 1 10 31 Item Balance Purchase Purchase Post. Ref. S6 S6 Debit 1,525 2,100 Credit Balance 1,000 2,525 4,625 74 ❘ Part 1 ❘ ❘ EOC Foundations of Financial Accounting Name: The Chocolate Factory Address: 7890 Redwood Dr., Pittsburgh, PA 15234 Date 2002 July 2 10 15 31 Post. Ref. Item Purchase Payment Purchase Payment S6 CR8 S6 CR8 Debit Credit 3,450 3,450 2,000 2,000 Balance 3,450 –0– 2,000 –0– Name: The Rit-Z Shop Address: 789 Cotton Drive, Phoenix, AZ 85090 Date 2002 July 1 31 Post. Ref. Item Balance Write - off of uncollectible account (6 months old) Debit Credit Balance 1,270 J3 1,270 –0– REVIEW OF LEARNING OBJECTIVES Identify and explain the basic steps in the accounting process (accounting cycle). The accounting process, often referred to as the accounting cycle, generally includes the following steps in well-defined sequence: analyze business documents, journalize transactions, post to ledger accounts, prepare a trial balance, prepare adjusting entries, prepare financial statements (using a work sheet or from the adjusted individual accounts), close the nominal accounts, and prepare a post-closing trial balance. This process of recording, classifying, summarizing, and reporting of accounting data is based on an old and universally accepted system called double-entry accounting. Analyze transactions and make and post journal entries. Transactions are events that transfer or exchange goods or services between two or more entities. Business documents, such as invoices, provide evidence that transactions have occurred as well as the data required to record the transaction in the accounting records. The data are recorded with journal entries using a system of double-entry accounting. The journal entries are subsequently posted to ledger accounts. Make adjusting entries, produce financial statements, and close nominal accounts. Adjusting entries are made at the end of an accounting period prior to preparing the financial statements for that period. Adjusting entries are often required to update accounts so that the data are current and accurate. Generally, the required adjustments are the result of analysis rather than based on new transactions. Once adjusting entries are journalized and posted, the balance sheet, income statement, and statement of cash flows can be prepared and reported. At the end of each accounting cycle, the nominal or temporary accounts must be transferred through the closing process to real or permanent accounts. The nominal accounts (all income statement accounts plus dividends) are left with a zero balance and are ready to receive transaction data for the new accounting period. The real (balance sheet) accounts remain open and carry their balances forward to the new period. Distinguish between accrual and cash-basis accounting. Accrual accounting recognizes revenues when they are earned, not necessarily when cash is received. Similarly, expenses are recognized and recorded under accrual accounting when they are incurred, not necessarily when cash is paid. Some organizations (and most individuals) use cash-basis accounting, which recognizes revenues when cash is received and expenses when cash is paid. The FASB has indicated that accrual accounting generally provides a better basis for financial reports, especially in reporting