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Unit 9
Book of Accounts

Book of Accounts

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.

The journal makes several significant contributions to the recording process:

• It discloses in one place the complete effects of a transaction.
• It provides a chronological record of transactions.
• It helps to prevent or locate errors because the debit and credit amounts for each
entry can be easily compared.

Shown below is an example of a general journal

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General Journal
Date Account Title and Explanation Ref Debit Credit

Journalizing process

Entering transaction data in the journal is known as journalizing. Companies make

separate journal entries for each transaction. A complete entry consists of:

• The date of the transaction which is entered in the Date column.

• The debit account title (that is, the account to be debited) which is entered
first at the extreme left margin of the column headed “Account Titles and
Explanation,” and the amount of the debit is recorded in the Debit column.

• The credit account title (that is, the account to be credited) which is indented
and entered on the next line in the column headed “Account Titles and
Explanation,” and the amount of the credit is recorded in the Credit column.

 A brief explanation of the transaction which appears on the line below the
credit account title. A space is left between journal entries. The blank space
separates individual journal entries and makes the entire journal easier to
read.

• The column titled Ref. (which stands for Reference) which is left blank when
the journal entry is made. This column is used later when the journal entries
are transferred to the ledger accounts.

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 sale for that day
amounting to PHP20,000.

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We will now record the above transactions in the general journal.

General Journal
Date Account Title and Explanation Ref Debit Credit
9/1/15 Cash 500,000 500,000
B. Mabait, Capital
9/5/15 Kitchen Appliance 100,000 100,000
Cash
To record purchase of kitchen appliance.
9/6/15 Cash 20,000 20,000
Sales
To record sales for the day.

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 Account Title and Explanation Ref Debit Credit
9/7/15 Transportation Equipment 80,000 30,000
Cash 50,000
Accounts Payable
To record purchase of motorcycle by paying cash and the
balance on account.

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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)

Cash Receipts Journal is used to record transaction involving receipt or collection

of cash. The following illustrate the format of a cash receipts journal:

Cash Receipts Journal

Date Description (Particulars) Ref Debit Credit Credit Credit
Cash Sales Accounts Sundry
Receivable

• The date of the transaction is entered in the date column.

• A brief explanation of the transaction is entered in the description column.

• The column titled Ref. (which stands for Reference) which is left blank when
the journal entry is made. This column is used later when the journal entries
are transferred to the ledger accounts.

• The Debit Cash column represents the amount of cash received for a
particular transaction.

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• Major categories of receipts, such as cash sales and collection of accounts

receivable are provided with separate columns. These transactions are
frequent and repetitive items; therefore, a separate column is provided.

• The column sundry is used for various miscellaneous and less regular
items, such as capital investment, receipt of loan proceeds, among others.

• The source document for this journal is the Official Receipts or Cash
Receipts issued by the business.

Cash Disbursements Journal (CDJ)

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:

Cash Disbursements Journal

Date Description Ref Check or Credit Debit Debit Debit Credit
(Particulars) Voucher
Number
Cash Accounts Salaries Supplies Sundry
Payable

• The date of the transaction is entered in the date column.

• A brief explanation of the transaction is entered in the description column.

• The column titled Ref. (which stands for Reference) which is left blank when
the journal entry is made. This column is used later when the journal entries
are transferred to the ledger accounts.

• The Check or Voucher number represents the identifying number of the

check issued for the related cash payment. Most of the time, a check or
cash voucher accompanies the disbursement. The voucher number may be
used as the alternative for this column.

• The Debit Cash column represents the amount of cash received for a
particular transaction.

• Major categories of receipts, such cash sales and collection of accounts

receivable are provided with separate columns. These transactions are
frequent and repetitive items, therefore a separate column is provided.

• The column sundry is used for various miscellaneous and less regular
items, such as capital investment, receipt of loan proceeds, among others.

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• The source documents used to update this journal are the check voucher
or cash voucher, cash receipts or official receipts from suppliers or vendors.

Sales Journal (Sales on Account Journal)

The Sales Journal or Sales on Account Journal is used in recording several sales
transactions on account. The source document for this journal is the charge invoice
or sales invoice (for credit transactions) to various customers or clients. An
example of a sales journal is shown below:

Sales Journal
Date Description (Particulars) Ref Charge Invoice Debit Credit
or Sales invoice
No.
Accounts Sale
Receivable

• The date of the transaction is entered in the date column.

• A brief explanation of the transaction is entered in the description column or

the name of the customer.

• The column titled Ref. (which stands for Reference) which is left blank when
the journal entry is made. This column is used later when the journal entries
are transferred to the ledger accounts.

• The Charge Invoice Number or Sales Invoice Number represents the

identifying number of the source document issued to the customer when the
sale was made.

• The Debit Accounts Receivable column represents the amount of the sale
transactions indicated in the charge invoice.

• The Credit Sales column represents the amount of the sale transactions
indicated in the charge invoice.

The source document for this journal is the Charge Invoice issued by the business.
Purchase Journal (Purchases on Account Journal)

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The Purchase journal or the Purchases on Account Journal is used to record

recurring transactions of purchases on account. The source documents for
purchase journal are the invoices from the supplier of the company. An example
of a Purchase Journal is shown below:

Purchase Journal
Date Description (Particulars) Ref Charge Invoice Debit Credit
or Sales invoice
No. (from
Suppliers)
Purchases Accounts
Payable

• The date of the transaction is entered in the date column.

• A brief explanation of the transaction is entered in the description column or

the name of the supplier

• The column titled Ref. (which stands for Reference) which is left blank when
the journal entry is made. This column is used later when the journal entries
are transferred to the ledger accounts.

• The Charge Invoice Number or Sales Invoice Number represents the

identifying number of the source document issued by the supplier when the
items, goods or merchandise were delivered to the company when the
purchase was made.

• The Debit Purchases column represents the amount of the goods

purchases as indicated in the charge invoice from the supplier

• The Credit Accounts Payable column represents the amount of the goods
or items purchased on credit from the supplier. The amount is indicated in
the charge invoice issued by the supplier.

• The source document for this journal is the charge invoice from the supplier
or vendor.

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2. The ledger

The ledger refers to the accounting book in which the accounts and their related
amounts as recorded in the journal are posted periodically.

The ledger is also called the ‘book of final entry’ because all the balances in the
ledger are used in the preparation of financial statements. This is also referred to
as the T-Account because the basic form of a ledger is like the letter ‘T’.

There are two kinds of ledgers, namely; the general ledger and the subsidiary
ledgers.

GENERAL LEDGER

The general ledger (commonly referred by accounting professionals as GL) is a

grouping of all accounts used in the preparation of financial statements. The GL is
a controlling account because it summarizes all the activities that have taken place
as recorded in its subsidiary ledger.

The format of a general ledger is shown below:

General ledger
Account: CASH Account No..1000
Date Item Ref Debit Credit Balance

• The account portion refers to the account title for example: cash, accounts
receivable.

• The account number is an assigned number for each account title to

facilitate ease in recording and cross-referencing.

• The Date column identifies when the transaction happened.

• The item represents the source journal and the nature of the transactions

• The Reference identifies the page number of the general our special journal
from which the information was taken.

• The Debit and Credit columns are used in recording the amount of
transactions from the general journal or special journal.
• The Balance Column represents the running balance of the Account after
considering the debit and credit amounts. If the running balance amount is

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positive, the account has a debit balance whereas if it has a negative

running balance, the accounts has a credit balance.

SUBSIDIARY LEDGER

A subsidiary ledger is a group of like accounts that contains the independent data
of a specific general ledger. A subsidiary ledger is created or maintained if
individualized data is needed for a specific general ledger account. An example of
a subsidiary ledger is the individual record of various payables to suppliers. The
total amount of these subsidiary ledgers should equal the balance in the Accounts
Payable general ledger.

An example of a subsidiary ledgers are shown below:

Accounts Payable
Subsidiary Ledger
Vendor/Supplier: Joy Food Corporation Vendor No.. 201
Address: Jose St, Sampaloc, Manila
Date Item Ref Debit Credit Balance

• The upper portion indicates the name and address of the vendor or supplier.

• The vendor number is an assigned number for each vendor as reference in

keeping the records of a supplier.

• The Date column identifies when the transaction happened.

• The description column describes the nature of transaction.

• The Reference identifies the page number of the general our special journal
from which the information was taken.

• The Debit and Credit columns reflect the various effects of every transaction
to the record of the supplier or vendor.
• The Balance column provides the running balance of every supplier.

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ENRICHMENT

1. Differentiate General Ledger from a Subsidiary Ledger

Suggested Answer: A subsidiary ledger contains the details supporting the

balance in the general ledger account. For example, a subsidiary ledger is
maintained for all receivables from customers; the sum of balances per
customer should equal the balance of Accounts Receivable Account in the
general ledger account.

2. Differentiate General Journal from a General Ledger

Suggested Answer: Accounting transactions are first recorded in the general

journal and in order of their occurrence. A general ledger contains a summary
at the account level of every transaction that a business has engaged in. The
general journal records all the transactions whereas the general ledger the effect
of these journal entries to every account title. The general journal is called the
book of original entry while the general ledger is called the book of final entry.

3. Types of transactions recorded in the cash receipts journal:

• cash received from a charge (on account) customer

• cash received from a charge (on account) customer less a cash discount
• cash sales
• cash received from sale of other assets.
• all other transactions that require the issuance of a Cash receipt or Official
Receipt document

4. A sales journal is used when two conditions are met:

• merchandise is sold
• the sale is on account

5. A cash disbursements journal (cash payments journal) is used to record

the following transactions:
• purchase of merchandise for cash
• payment to creditor, vendors or suppliers
• all cash payments

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Test
1. Match: Match column A with Column B.

Column A Column B
a. Collected PHP10,000 from a customer in payment  Cash Receipts
of his account. Journal
b. Bought 100 pieces of mugs to be sold in the store  Purchase Journal.
amounting to PHP1,500 on account
c. Sold five pieces of mugs to X, PHP320 cash.  Cash Receipts
Journal
d. Sold two pieces of mugs to Y, PHP112 cash  Cash Receipts
Journal
e. Purchased office supplies for cash, PHP500.  Cash
Disbursement
Journal
f. Paid PHP20,000 monthly rental.  Cash
Disbursements
Journal
g. Paid salary of staff, PHP15,000  Cash
Disbursement
Journal
h. Sold 100 pieces of mugs to Unicup, Inc., PHP5,600  Sales Journal
on account.
i. Sold 500 pieces of mugs to Bugsmore Corp. for  Sales Journal
PHP15,300 payable one month after delivery.
j. Purchase on account 1,000 pieces of mugs for  Purchase Journal
PHP12,400

2. Enumerate all special journals. (4 points)

3. Essay. Why do companies use special journals?

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