Chapter 7 – Books of Accounts

At the end of this chapter, the students should be able to:

1. Identify the uses of the two books of accounts: journals and ledgers;

2. Illustrate the format of a general and special journals; and

3. Illustrate the format of a general and subsidiary ledgers.

Introduction

In a single day, a company engages in hundreds and thousands of business transactions.

Some of these include cash and credit sales, purchases of inventories, payment of expenses,
acquisition of equipment, and many more. A company should be able to collect and process these
financial information in order to summarize them at year-end and to be able to prepare its annual
financial statements for its internal and external users.

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 proof of the business transactions reflected in
the financial statements.

There are two major books of accounts-the journals and ledgers. A company usually has two kinds
of journals. First is the general journal wherein all business transactions are recorded in chronological
order and special journals which are used by large companies for recurring transactions such as sales
on account and purchases of merchandise on account. Ledgers, on the other hand, also have two
types. The general ledger is a grouping of all accounts (assets, liabilities, and equity) with their
balances and the subsidiary ledgers which are also used as an expansion of the general ledger. The
subsidiary ledger provides more detailed individual balances of accounts such as accounts receivable
and accounts payable.

Journals

A journal is a chronological record of all company's transactions listed by date. It is often

referred to as the book of original entry. This is because we first record the business transaction in
this book. The recording of financial information into the journal is known as the process of
journalizing.

General Journal

Most businesses, especially large companies, may adopt different kinds of journals but all
business organizations use the most basic type of journal which is the general journal. The general
journal typically displays the transaction's date, account titles and explanations, references, and
respective amounts of corresponding accounts. A sample format of a journal is shown as follows.
 Date Account Titles and Explanation 2 Ref Debit Credit
1 3
2016 2 4 5

January 1 Cash 101 200 000

Shayne, Capital 301 200000
Owner's investment of cash in the business

Property, Plant & Equipment 140 50000

January 2
Shayne, Capital 301 50 000
Owner's investment of equipment in the business

January 3
Inventory 20500
121 20 500
Cash
101
Purchase of inventories from supplier through
cash

January 4 Accounts Receivable 111 50 000

50000
Sales 400
Sale of inventories to customer on account

Cost of Goods Sold 500

15 000
Inventory 121 15000
Sale of inventories to customer

January 8 Inventory
121 40 000
Accounts Payable
Purchase of inventories from supplier on account 201 40 000

101 60 000
January 12 Cash
400 60 000
Sales
Sale of inventories to customer
 January 14 Cash 101 24000
Accounts Receivable 111 24000
Collection of customer's accounts receivable

January 15 Sales Return 401 5000

Accounts Receivable 111 5000
Return of merchandise from customer

Inventory 121 1500

Cost of Goods Sold 500 1500
Return of merchandise from customer

January 25 Accounts Payable 201 10000

Cash 101 10000
Payment of accounts payable to supplier

January 30 Shayne, Drawing 302 2000

Cash 101 2000
Withdrawal of cash from the business for her
personal use

January 31 Salaries Expense 505 5000

Cash 101 5000
Paid salaries to employees for the month

Note: Transactions of the company are journalized in chronological order in the General Journal.

① Date. The date at which the transaction occurred.

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. Correct and proper
usage of the account titles are necessary for a clear and accurate presentation of amounts in the financial
statements. In the given illustration, account titles used are (1) Cash, (2) Property, Plant & Equipment, (3)
Shayne, Capital, (4) Inventories, etc. Notice that accounts credited are indented. Also, a brief explanation of the
business transaction is described. In the January 1 journal entry, a brief explanation was stated as follows:
Owner's investment of cash in the business.
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.
④ Debit. Corresponding amount of the account debited is entered. In the January 1 journal entry, the accounts
Cash and Property, Plant & Equipment are debited for 200 000 and 50 000, respectively.
⑤ Credit. Corresponding amount of the account credited is entered. In the January 1 journal entry, the account
Shayne, Capital is credited for 50 000.

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 transactions. Through the journal, companies can easily detect
if there are missing or unrecorded transactions. Like a person's diary, the journal narrates the different business
dealings of the company by date of occurrence. Next, it discloses the full effect of each of the transactions per
entry. Like in the first journal entry of the given illustration, we can easily identify that the transaction has an
effect on the company's assets (Cash and Property, Plant & Equipment) and equity (Shayne, Capital). Lastly, the
journal serves as a check-and-balance tool of the company. It provides the transaction's corresponding debits
and credits. We know from the preceding chapters that the debits should always equal the credits of each entry.
As such, each entry in the journal helps prevent and locate errors as the debits and credits can be easily
compared.

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 all 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
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
ledgers.
General Ledger

The general ledger contains all the asset, liability, and owner's 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 and faster reference. The general ledger shows the amount outstanding on each of
the company's accounts as of a certain date.
 Using the information from the sample general journal, a sample format of a general ledger is illustrated
as follows.

① CASH
② NO.101

Date ③ ④ Explanation Ref Debit Credit Balance

2015 ⑤ ⑥ ⑦ 8

Jan 1 Investment of Capital by owner J1 200 000 200000

3 Purchase of inventories from supplier J1 20 500 179500

12 Sale of inventories to customer J1 60 000 239500

14 Collection of customer's accounts receivable J1 24 000 263 500

25 Payment of accounts payable to supplier J1 10000 253 500

30 Withdrawal of cash from the business J1 2000 251 500

31 Paid salaries to employees for the month J1 5000 246 500

Balance 246 500

ACCOUNTS RECEIVABLE NO.111

Date Explanation Ref Debit Credit Balance

2015

Jan 4 Sale of inventories to customer on account J1 50 000 50 000

14 Collection of customer's accounts receivable J1 24 000 26 000

15 Return of merchandise from customer J1 5 000 21 000

31 Balance 21 000
 INVENTORY NO.121

Date Explanation Ref Debit Credit Balance

2015

Jan 3 Purchase of inventories from supplier J1 20 500

20 500
through cash

4 Sale of inventories to customer J1 15 000 5500

8 Purchase of inventories from supplier on J1 45 500

40,000
account

12 Sale of inventories to customer 18000 27 500

15 Return of merchandise from customer J1 1500 29000

31 29,000

PROPERTY, PLANT AND EQUIPMENT NO.140

Date Explanation Ref Debit Credit Balance

2015

Jan 2 Owner’s investment of equipment in the business J1 50 000 50 000

31 Balance 50 000

ACCOUNTS PAYABLE NO.201

Date Explanation Ref Debit Credit Balance

2015

Jan 8 Purchase of inventories from supplier on account J1 40 000 40 000

25 Payments of accounts payable to supplier J1 10,000 30 000

31 Balance 30 000

SHAYNE, CAPITAL NO.301

Date Explanation Ref Debit Credit Balance

2015

Jan 1 Investment of capital by owner J1 200,000 200 000

2 Owner’s investment of equipment J1 50,000 250 000

31 Balance 250 000

SHAYNE, DRAWING NO.302

Date Explanation Ref Debit Credit Balance

2015

Jan 30 Withdrawal of cash from the business J1 2,000 2 000

31 Balance 2 000

SALES NO.400

Date Explanation Ref Debit Credit Balance

2015

Jan 4 Sale of inventories to customer on account J1 50,000 50 000

12 Sale of inventories to customer J1 60,000 110 000

31 Balance 110 000

 SALES RETURN NO.401

Date Explanation Ref Debit Credit Balance

2015

Jan 15 Owner’s investment of equipment in the business J1 5 000 5 000

31 Balance 5 000

COST OF GOODS SOLD NO.500

Date Explanation Ref Debit Credit Balance

2015

Jan 4 Sale of inventories to customer J1 15 000 15 000

12 Sale of inventories to customer J1 18 000 33 000

15 Return of merchandise from customer J1 1 500 31 500

31 Balance 31 500

SALARIES EXPENSE NO.405

Date Explanation Ref Debit Credit Balance

2015

Jan 31 Paid salaries to employees for the month J1 5 000 5 000

31 Balance 5 000

① Account Title. The general ledger contains all of the company's accounts and its balances. Each T-
account is labeled with its corresponding account title (e.g., Cash, Accounts Receivable, Accounts
Payable, Retained Earnings, etc.)

② Ledger Account Reference Number. With reference to the company's Chart of Accounts, each of
the account titles corresponds to a reference number. In the above example, the Cash account is
assigned to Reference Number 101 while the Accounts Receivable account corresponds to Reference
Number 111.
③ Date. The date of the transaction is also entered in reference to the journal.

Explanation. A brief description of the business transaction is defined. This is sometimes omitted
since the entries on the journal already provide an explanation of the transaction.

⑤ Reference. This column displays the journal page number from which the transaction was posted.
⑥ Debit. Amounts debited to the account are inputted.
⑦ Credit. Amounts credited to the account are entered.
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 basis of the
amounts presented in the financial statements of the company.
With the illustration, it will be easier for the company to determine the balances of each of its
accounts. These are as follows:
Assets

 Cash 246,500
 Accounts Receivable 21,000
 Inventory 29,000
 Property, Plant & Equipment 50,000

Liabilities

 Accounts Payable 30,000

Equity

 Shayne, Capital 250,000

 Shayne, Drawing 2,000
 Sales 110,000
 Sales Return 5,000
 Cost of Goods Sold 31,500
 Salaries Expense 5,000
The general ledger aids in knowing the balances of each of the accounts at any given time. Unlike
the journal, the general ledger classifies the transactions into accounts and provides the
outstanding balances of each. Additionally, the general ledger, together with the subsidiary
ledgers, serves as a control account to check for errors and misstatements in posting. At month-
end or year-end, the company reconciles the balances of its general ledger and subsidiary
ledgers.