A Review of the Accounting Cycle

Use special journals and

subsidiary ledgers to
process accounting information more efficiently
and to provide additional
useful information.

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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.

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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 individuallydata affecting individual accounts receivable and accounts payable and data
reported in the Sundry columnsbut 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.

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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)

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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)

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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

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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

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