SUBSIDIARY LEDGERS AND SPECIAL JOURNALS

- In the preceding chapters, all transactions were recorded in an all-purpose (two-column)

journal. The journal entries were then posted individually to the accounts in the ledger.
Such a system may be applicable in a small business with a few number of transactions
and accounts. But in large businesses, using only the two-column journal to record all
transactions and a single ledger is inefficient and impractical. Instead, subsidiary ledgers
and special journals are used.

LEDGERS
- A company will have hundreds or thousands of receivables from credit customers and
probably the same number of accounts payable for amounts owed to suppliers on credit,
inventory, plant assets etc. What would be the problem if a separate account for each
customer, creditor and others were included in the ledger? The ledger would be bulky and
awkward to manage and use. So as a solution to organize data and provide information
more efficiently we use subsidiary ledgers in addition to the ledger that you already know
(general ledger).
- Thus, normally companies use two types of ledgers: General Ledger and Subsidiary
Ledgers

General Ledger:
- It is the primary ledger which contains all financial statement itemsbalance sheet and
income statement. This is the ledger that we used in the previous chapters. It includes
control accounts summarizing subsidiary ledgers.

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.
- Examples of Subsidiary Ledgers:

 Accounts Receivable Subsidiary Ledger (Customers' Subsidiary Ledger)

- The accounts receivable account in the general ledger only shows summary totals. But
where are the individual customer balances? This detail is provided by the accounts
receivable ledger which includes a separate account for each customer who makes credit
purchases. The accounts receivable subsidiary ledger provides quick access to each
customer's balance and account activity.
- The combined balance of every account in this subsidiary ledger equals the balance of
accounts receivable in the general ledger.
- Note that the size of the business determines the number of ledgers used.

Page 1 of 11
- Similar to a trial balance we take from the general ledger, a schedule of accounts
receivable, which lists accounts and their balances in the accounts receivable subsidiary
ledger, should be prepared to prove the accounts receivable ledger. The only accounts that
will be listed are those accounts with a balance. The total of this schedule should match
with the accounts receivable controlling account in the general ledger.
- Posting: be careful that posting is made to BOTH the subsidiary ledger and the general
ledger. Daily posting is done to individual ledger accounts (subsidiary ledger). The totals
are posted (to the general ledger) at the end of the accounting period, usually a month.
Posting to both ledgers 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.
- 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:
 Accounts Payable Ledger (creditors' subsidiary ledger)― has separate accounts for
each creditor and is controlled by Accounts Payable account in the general ledger.
To prove this ledger, you will look at the balance of the Accounts Payable account
and the balance of the Schedule of Accounts Payable. This schedule lists the
balances of the individual accounts that have amounts due. These two figures must

Page 2 of 11
 balance.
 Inventory Ledger― has separate accounts for each type of inventory and is
controlled by Inventory account in the general ledger.
 Property, Plant, and Equipment Ledger― has separate accounts for each long-lived
asset and is controlled by Property, Plant, and Equipment account in the general
ledger.

- Be aware that the general ledger is the book of final entry, used to prepare financial
statements, used to sort transactions into appropriate accounts, etc. Subsidiary ledgers are
secondary ledgers/records containing specialized accounts.

JOURNALS
- A small company may use the general journal to record all types of transactions.
- But for a many companies recording transactions in the general journal and posting them
to the correct general ledger accounts is time consuming. Why? Because 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 in combination with
the general journal.

Special Journals

Page 3 of 11
- 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
- It is used to record only the sale of merchandise on credit
- Sale of assets other than merchandise, Sales returns and cash sales are not recorded in this
journal.
- 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.
Sales Journal S1
Dr. A/R
Date Invoice Customer P/R Cr. Sales

- Entries in the sales journal typically include the date, invoice number, customer name, and
amount. Each sales invoice is listed in numerical order. This journal is often referred to as
an invoice register.
- Many companies use a multi-column (columnar) sales journal that provides separate
columns for specific sales accounts and for sales tax payable. For example, the entries in
the sales journal appear below in a multi-column sales journal tracking hardware sales,
plumbing sales, wire sales, and sales tax payable.

Page 4 of 11
- 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

Page 5 of 11
 accounts in the general ledger. Account numbers are placed in parentheses below the
column to indicate that the total has been posted.

Purchases Journal (Voucher Register)

- It is used to record all purchases (merchandise, supplies, etc) on account.
- In its most basic form, a sales journal has only one column for recording transaction
amounts. Each entry increases (debits) purchases and increases (credits) accounts payable.
Purchases Journal P1
Dr. Purchases
Date Invoice Supplier P/R Cr. Accounts Pay.

- 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.
- 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.

Page 6 of 11
- 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.

Cash Payments Journal

- It is a special journal used to record any cash payment. This journal is often referred to as a
check register.
- The cash disbursements journal below 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

Page 7 of 11
(accounts payable) or an account listed in the column named Other, the specific account
being debited must be identified on every line.

Page 8 of 11
- 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 X is placed below the Other column to indicate that the column total cannot be
posted to a general ledger account.

Cash Receipts Journal

- It is used to record all cash received from any source.

- 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.

Page 9 of 11
- The process of posting to both the subsidiary and general ledger is of great importance.
Many errors arising on the Trial Balance are the result of poor posting technique.

Page 10 of 11
 General Journal
- If the business organization is large enough to use special journals, the general journal may
only be used to record all transactions that do not belong in one of the special journals.
These include: opening, adjusting, closing entries, correcting entries, entries for Sales and
Purchases Returns and Allowances, and other miscellaneous items.
- 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.

Page 11 of 11