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Module 6 - The 2 Major Types of Accounts - Revised
Module 6 - The 2 Major Types of Accounts - Revised
Introduction
To keep track of its transactions more efficiently, companies keep and maintain a
set of books and/or records called books of accounts. Books of accounts are the finance
records, ledgers, and journals that compose the company’s accounts. These serve as a
company’s financial memory and comprise of every single business transactions and
financial information of a company. Aside from decision-making and analysis of a
business’ performance, books of accounts are also crucial in ensuring regulatory
compliance as they also serve as a proof of the business transaction reflected in the
financial statements.
The two major types of books of accounts are journal and ledger.
1 . THE JOURNAL
Companies initially record transactions and events in chronological order (the
order in which they occur). thus, the journal is referred to as the book of original entry. for
each transaction the journal shows the debit and credit effects on specific accounts.
There are two types of journals, the general journal and the special journal
General Journal
• The general journal is the most basic journal. typically, a general journal has spaces
for dates, account titles and explanations, references, and two amount columns.
GENERAL JOURNAL
The general journal is the most basic journal. typically, a general journal has
spaces for dates, account titles and explanations, references, and two amount columns.
THE JOURNAL MAKES SEVERAL SIGNIFICANT CONTRIBUTIONS TO THE RECORDING
PROCESS:
1. it discloses in one place the complete effects of a transaction.
2. it provides a chronological record of transactions.
3. it helps to prevent or locate errors because the debit and credit amounts for each entry
can be easily compared.
GENERAL JOURNAL
To illustrate the recording of transactions in the general journal, let us use the following
transactions as an example:
• September 1, 2015 Mr. Ben Mabait invested PHP500,000 in a restaurant business
by opening an account with SuperBank.
• September 5, 2015 purchased kitchen appliances for his business amounting to
PHP100,000 by issuing a check.
• September 6, 2015 started his operations a made a sales for that day amounting
to PHP20,000.
GENERAL JOURNAL
Some entries involve only two accounts, one debit and one credit. An entry like these is
considered a simple entry. Some transactions, however, require more than two accounts
in journalizing. An entry that requires three or more accounts is a compound entry. All of
the transactions in the above examples are simple entries. An example of a compound
entry is the following:
• On September 7, 2015, Mr. Mabait purchased a motorcycle costing PHP80,000. He
pays PHP30,000 cash and agrees to pay the remaining PHP50,000 on account (to
be paid later). The compound entry is as follows:
GENERAL JOURNAL
Date (1) Account title and Explanation (2) Ref (3) Debit (4) Credit (5)
2016 Cash 101 200,000
January 1 Shayne, Capital 301 200,000
Owner’s capital of cash in the business
Inventory
January 3 Cash 121
20,500
Purchase of inventories from suppliers through cash 101
20,500
Accounts Receivable
Sales 111
January 4 50,000
Sale of inventories to customer on account 400
50,000
Cost of Good Sold
Inventory 500
Sale of inventories to customers 121 15,000
15,000
Inventory
Accounts Payable 121
Purchase of inventories from suppliers on account 201
January 8 40,000
40,000
Cash
Sales
101
Sale of inventories to customers
January 12 400 60,000
Cost of Good Sold 60,000
Inventory
Sale of inventories to customers 500
121
18,000
Cash 18,000
Accounts Receivable
Collection of customer’s account receivable 101
111
January 14 24,000
Sales Return
Accounts Receivable 24,000
Return of merchandise from customer 401
111
January 15 Inventory 5,000
Cost of good sold 5,000
Return of merchandise from customer
121
500
Accounts Payable
1,500
Cash
Payment of accounts payable to supplier 1,500
201
101
Shayne, Drawing
Cash 10,000
January 25
Withdrawal of cash from the business for personal 10,000
used 302
101
Salaries Expense 2,000
January 30 Cash
2,000
Paid salaries to employees for the month
505
101
5,000
January 31
5,000
Note: Transactions of the company are journalized in chronological order in the General
Journal.
2. Account titles and explanation. The account to be debited and the account to be
credited are recorded. The account titles are referenced to the chart of accounts
as discussed in the previous chapter
3. Reference number- reference number of each account journalized. The ref column is
left blank during the journalizing process and is filled out during the posting process.
With the foregoing illustration, we can see the significance of the journal in the
accounting process. First it shows a chronological record of the company’s transaction.
Through the journal, companies can easily detect if there is /are missing or unrecorded transactions.
SPECIAL JOURNALS
Some businesses encounter voluminous quantities of similar and recurring
transactions which may create congestion if these transactions are recorded repeatedly in
a single day or a month in the general journal. Take the case of our example above, if Mr.
Mabait will record the sales per day using the Official Receipt or Cash Sales Invoice issued,
it would be unnecessary and impractical to credit “sales” account repeatedly. In order to
facilitate efficient and practical recording of similar and recurring transactions, a special
journal is used.
The following are the commonly used special journals:
• Cash Receipts Journal – used to record all cash that has been received
• Cash Disbursements Journal – used to record all transactions involving cash
payments
• Sales Journal (Sales on Account Journal) – used to record all sales on credit (on
account)
• Purchase Journal (Purchase on Account Journal) – used to record all purchases of
inventory on credit (or on account)
The cash disbursements journal is the opposite of the cash receipts journal. It is the
journal where all cash payments are recorded. An example of a cash disbursement journal
is shown below:
SALES JOURNAL
Date Description Ref Charge Invoice, OR, sales invoice # Debit Credit
ACCOUNTS SALES
RECEIVABLE
PURCHASE JOURNAL
Charge Invoice, OR, sales Debit Credit
Date Description Ref invoice #
(FROM SUPPLIER)
PURCHASES ACCOUNTS PAYABLE
LEDGERS
After journalizing the business transactions in the general journal and special journals, the
company will now proceed to the process of posting. Posting involves the transferring of Journal
entries to the ledger accounts to bring together the effect of the transactions to the individual
accounts of the company.
The ledger is the grouping of accounts of a company showing its respective outstanding
balances. It is also called the book of final entry of accounting transactions. It presents the changes
in specific account balances in specific account balances like cash, accounts receivable, accounts
payable, etc. All account balances presented in the financial reports of the company are derived from
the ledger. The two kinds of ledgers are the general ledger and the subsidiary ledger.
General Ledger
The general ledger contains all the asset, liability, and owners equity accounts of the
company. Unlike journals that are arranged chronologically ( regardless of the accounts), the ledgers
are usually grouped according to their chart of accounts and arranged according to the order on how
they appear on the financial statements, starting from the asset accounts,, followed by the liability
accounts, And finally, the equity accounts, including the revenues and expenses accounts as shown
in the figure. Each account is numbered based on the chart of accounts for easier reference. The
general ledger shows the amount outstanding on each of the company’s accounts as of a certain date.
GENERAL LEDGER
Account Title : CASH (1) Account No. : 00101 (2)
Date Item Ref Debit Credit Balance
(3) (4) (5) (6) (7) (8)
1. Account Title- The general ledger contains all of the company’s accounts and its
balances
3. Date. The date of the transaction is also entered in reference to the journal.
8. Balance. What distinguished a ledger from the journal is the running outstanding
balances provided by the ledger. After every transaction, the balances of each of the
accounts are known without the need for further computations. On year-end, these
balances will be the amounts presented in the financial statements of the company
Assets Accounts Liability Accounts Owner’s Equity Account
GENERAL LEDGER
(1) Account Title : CASH (2) Account No. : 00101
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 1 Investment of capital by owner 200,000 200,000
31 Balances 246,500
GENERAL LEDGER
(1) Account Title : ACCOUNTS RECEIVBLE (2) Account No. : 00111
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 4 Sale Of to customers on account 50,000 50,000
14 Collection of customer’s accounts receivable 24,000 26,000
15 Return of merchandise from customers 5,000 21,000
31 Balances 21,000
GENERAL LEDGER
(1) Account Title : INVENTORY (2) Account No. : 00121
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 3 Purchase inventories from suppliers through cash 20,500 20,500
4 Sale of inventories to customer 15,000 5,500
8 Purchase inventories from suppliers on account 40,000 45,500
12 Sale of inventories to customer 18,000 27,500
15 Return of merchandise from customer 1,500 29,000
31 Balances 29,000
GENERAL LEDGER
(1) Account Title : PROPERTY,PLANT, AND EQUIPMENT (2) Account No. : 00140
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 2 Owner’S investment of equipment in the business 50,000 50,000
31 Balances 50,000
GENERAL LEDGER
(1) Account Title : ACCOUNTS PAYABLE (2) Account No. : 00201
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 8 Purchase of inventories from suppliers on account 40,000 40,000
25 Payment of accounts payable to supplier 10,000 30,000
31 Balances 30,000
GENERAL LEDGER
(1) Account Title : SHAYNE, CAPITAL (2) Account No. : 00301
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 1 Investment of capital by owner 200,000 200,000
2 Owner’s investment of equipment 50,000 250,000
31 Balances 250,000
GENERAL LEDGER
(1) Account Title : SHAYNE, DRAWING (2) Account No. : 00302
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 30 Withdrawal of cash from the business 2,000 2,000
31 Balances 2,000
GENERAL LEDGER
(1) Account Title : SALES (2) Account No. : 00400
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 4 Sale of inventories to customer on account 50,000 50,000
12 Sale of inventories to customer 60,000 110,000
31 Balances 110,000
GENERAL LEDGER
(1) Account Title : SALES RETURN (2) Account No. : 00401
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 15 Return Of merchandise from the customer 5,000 5,000
31 Balances 5,000
GENERAL LEDGER
(1) Account Title : COST OF GOOD SOLD (2) Account No. : 00500
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 4 Sale of inventories to customer 15,000 15,000
12 Sale of inventories to customer 18,000 33,000
15 Return Of merchandise from the customer 1,500 31,500
31 Balances 31,500
GENERAL LEDGER
(1) Account Title : SALARIES EXPENSE (2) Account No. : 00405
Date Explanation Ref Debit Credit Balance
(3)
2015 (4) (5) (6) (7) (8)
Jan. 31 Paid salaries to employees for the month 5,000 5,000
31 Balances 5,000
Assets:
Cash 246,500
Accounts Receivable 21,000
Inventory 29,000
PPE 50,000
Total Assets 346,500
Liabilities:
Accounts Payable 30,000
Total Liabilities 30,000
Owner’s Equity:
Shayne, Capital 250,000
Shayne, Drawing (2,000)
Sales 110,000
Sales Return (5,000)
Cost of Good Sold (31,500)
Salaries Expense (5,000 )
Total Owner’s Equity 316,500
Total Liabilities & Owner’s Equity 346,500
This General Ledger aids in knowing the balances of each accounts at any given
time.
Special Journals
Transaction of small business such as sari-sari stores are often a few, and
as such, journalizing using the general journal is enough. Large companies,
however, often engage in hundreds of transactions each day. In order to expedite
the journalizing process a company usually utilizes special journals in addition to
the general journal. Special journals managed by the a company is dependent on
the types of transactions that occur frequently. For example, merchandizing
companies usually have numerous recurring sales of merchandise on account or
purchases of supplies on account. Thus, these companies can adopt two
additional special journals.
1) Special Journal Title. The name of the special journal- Sales Journal
2) Special Journal Reference. Reference number of the Special Journal that is used
during posting to the ledgers.
3) Date. The date at which the transaction occurred.
4) Account Debited. Each of the company’s individual customer is shown. This will be
helpful during the posting process to the subsidiary ledgers.
5) Invoice Number. Pre numbered invoices ensure that all invoices transactions are
journalized
6) Reference . A check mark is inputted under this column when posting are made in
the ledger. This is to ensure all transactions are posted and, at the same time, to
prevent double postings.
7) 7. Dr. Accounts Receivable, Cr. Sales. Since all transactions in each special journal
are of the same type, explanations of transactions in each journal entry are
eliminated. In our example, it is shown that all the transactions inputted in the
sales journal included a debit to accounts receivable and a credit to sale. Under
this column, the respective amounts of each transaction are entered.
8) 8. Total. At the end of the month, the total is computed. This will be then posted
to the general ledger rather than the individual entries. This saves time and, at
the same time , reduces the possibilities of errors in posting.
1. Special Journal title. The name of the special journal – Purchase Journal.
2. Special Journal Reference Number . Reference number of the special journal
that is used during posting to the ledger.
3. Date. The date at which the transaction occurred.
4. Account Credited . The company’s individual suppliers are shown. This will be
helpful during the posting process to the subsidiary ledgers.
5. Terms. Suppliers usually provide discounts on its regular customers. The
payment term include the discount rate, discount period, and payments period.
Foe example “2/10n/30” indicates a 2% discount is paid within 10 days;
otherwise, the payment should be made within 30 days .
6. Reference. This column is left blank upon journalizing and is filled out with a
check during the posting process to ensure all transactions are posted and to
eliminate double postings to the ledger.
7. Dr. Merchandise Inventory, Cr. Accounts Payable. The purchases journal contains
all purchases on account. All the transactions inputted in the purchases journal
include a debit to Merchandise Inventory and a credit to Accounts Payable. Under
this column, the respective amounts of each transaction are entered.
8. Total. At the end of each month, the total is computed. This will then be posted
to the general ledger rather than the individual entries. This saves time and, at
the same time, reduces the possibilities of errors in posting
1. Special Journal title. The name of the special journal- Cash Payment s Journal.
2. Special Journal Reference Number . Reference number of the special journal
that is used during posting to the ledger.
3. Date. The date at which the transaction occurred.
4. Check No. The corresponding check numbers of each payment are recorded to
maintain a record of the disbursed checks .
5. Account Debited. The account that is debited
6. Reference. This column is left blank upon journalizing and is filled out with a
check during the posting process to ensure all transactions are posted and to
eliminate double postings to the ledger.
7. Dr. Accounts Payable, Other Accounts. The respective amount debited is entered
8. Cr, Cash. The corresponding amount of Cash credited is entered.
9. Total. These will be posted to the general ledger rather than individual entries
SubsidiaryLedger
To ease their burden ,large companies use subsidiary ledger. A subsidiary ledger is
a group of accounts with a similar characteristics (e.g. accounts receivable and
accounts payable). It is an additional record to the general ledger utilized by the
company to track the per-individual accounts of the company’s customers,
creditors, and the like.
Kerokeropi & co. distributes school and office supplies. Transactions with
customers are paid with cash or check only. Kerokeropi transactswith three major
customers that have established accounts. These approved customers routinely
buy on credit.