The process of gathering and storing Financial Transaction data in
the Accounting System is accomplished through the use of both:
I’m starting with Ledgers because we’ve gone through the basic organization of the Accounting System from Double Entry (debit/credit) Transaction Posting, to the Chart of Accounts and finally the General Ledger. I’ll stay on the topic of the General Ledger first and then back up to the Journals where each transaction is originally posted.
In Accounting, there are two types of Ledgers, the General Ledger (Book of final entry) and Subsidiary (Sub) Ledgers. The Accounts for the General Ledger come from the Chart of Accounts. The Accounts for the Subledgers depend on the specific purpose of the Subledger.
If you remember in the “Chart of Accounts - Basics”, I said that Accounts should only be created to describe types of things not individual things themselves. Well, in some cases especially in the case of cash substitutes like Accounts Payable and Accounts Receivable more detail is required. So, to maintain the summary nature of the Chart of Accounts/General Ledger and to provide more detail, Subsidiary (Sub) Ledgers were developed.
Everything that is posted into Subledgers is also posted into the General Ledger and they act together to provide progressive levels of detail/summary.
The two most common Subledgers are:
The listings above are Ledger Account summaries. Both the General
Ledger and the Subledgers actually have a more detailed section for
each Account. Those sections include summarized entries and balances
along with references indicating which journals those entries originated
in.
The tables below show an example of a Subledger Account and an example of the corresponding General Ledger Account.
All financial transactions are recorded in Journals. The Journal maintains each individual transaction line by line. Just as there are two types of Ledgers, there are also two types of Journals: The General Journal and the Subsidiary Journals. Most entries will originate in Subsidiary Journals, however, if none of the GL Accounts affected by an entry have a related subsidiary journal, the entry will originate in the General Journal.
Everything that is posted into Subsidiary Journals is also posted into the General Journal. Journals act together with Ledgers to provide progressive levels of detail/summary.
Subsidiary Journal:
The format for Transactions in the the Subledger Journals is similar to the format for the General Journal that I’ve used in previous posts except they require at least three more columns in the grid. One for the Subledger Account, one for an Invoice Number and one for a Reference Number. This entry in the Accounts Payable Journal shows the detail for the both of the Ledger entries above that indicate Jrnl = AP and Ref = 55.
This entry records A Credit Card Statement into Accounts Payable, which includes the purchase of a Chair and a Desk along with Credit Card charges.
Since the system requires that all financial transactions have an entry in the General Ledger, they must also have an entry in the General Journal. This requires some duplication of effort but it is necessary. So, once the entries are posted to the Subledger Journals, they are then summarized and posted to the General Journal after which the Balances in the General Ledger are updated.
The Path of entries for Financial Entries:
Transactions containing a GL Account that is related to a subsidiary journal start with the Subsidiary Journal otherwise they start with the General Journal
Subsidiary Journal –> Post to Subsidiary Ledger by its Account –> Post to General Journal —-> Summarize and post to General Ledger by GL Account.
- Ledgers: which maintain Account Balances
- Journals: which maintain the line by line detail of each Transaction.
I’m starting with Ledgers because we’ve gone through the basic organization of the Accounting System from Double Entry (debit/credit) Transaction Posting, to the Chart of Accounts and finally the General Ledger. I’ll stay on the topic of the General Ledger first and then back up to the Journals where each transaction is originally posted.
In Accounting, there are two types of Ledgers, the General Ledger (Book of final entry) and Subsidiary (Sub) Ledgers. The Accounts for the General Ledger come from the Chart of Accounts. The Accounts for the Subledgers depend on the specific purpose of the Subledger.
If you remember in the “Chart of Accounts - Basics”, I said that Accounts should only be created to describe types of things not individual things themselves. Well, in some cases especially in the case of cash substitutes like Accounts Payable and Accounts Receivable more detail is required. So, to maintain the summary nature of the Chart of Accounts/General Ledger and to provide more detail, Subsidiary (Sub) Ledgers were developed.
Everything that is posted into Subledgers is also posted into the General Ledger and they act together to provide progressive levels of detail/summary.
The two most common Subledgers are:
- The Accounts Payable Subledger: which maintains a list of Vendors (or creditors) and their individual Account Balances. Each individual Vendor represents a Subledger (Accounts Payable - Vendor) Account.
- The Accounts Receivable Subledger: which maintains a list of Customers and their individual Account Balances. Each individual Customer represents a Subledger (Accounts Receivable - Customer) Account.
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The tables below show an example of a Subledger Account and an example of the corresponding General Ledger Account.
Accounts Payable Subledger | Account: ACEC | |||||
Transaction Date | Jrnl | Ref | Description | Debit | Credit | Balance |
Beginning Balance | $0 | |||||
8/01/08 | AP | 23 | 123_0808 (invoice) | $2,500 | $2,500 | |
8/31/08 | CD | 37 | 123_0808 (payment) | $2,500 | $0 | |
9/01/08 | AP | 55 | 123_0908 (invoice) | $1,700 | $1,700 |
General Ledger | Account: 2000 | |||||
Transaction Date | Jrnl | Ref | Description | Debit | Credit | Balance |
Beginning Balance | $0 | |||||
8/01/08 | AP | 23 | Accounts Payable Invoices | $2,500 | $2,500 | |
8/31/08 | CD | 37 | Cash Disbursements | $2,500 | $0 | |
9/01/08 | AP | 55 | Accounts Payable Invoices | $1,700 | $1,700 |
Because there can be multiple Subledgers,
there are also multiple Journals. The Jrnl field indicates which
journal the entry came from. The AP’s in the jrnl field mean that those
entries came from the Accounts Payable Journal and the CD entry came
from the Cash Disbursements Journal which is the journal that maintains
detail for Cash Outflows. The Jrnl and Ref field together give a cross
reference that enable the user to access more detail about each entry.
Journals:All financial transactions are recorded in Journals. The Journal maintains each individual transaction line by line. Just as there are two types of Ledgers, there are also two types of Journals: The General Journal and the Subsidiary Journals. Most entries will originate in Subsidiary Journals, however, if none of the GL Accounts affected by an entry have a related subsidiary journal, the entry will originate in the General Journal.
Everything that is posted into Subsidiary Journals is also posted into the General Journal. Journals act together with Ledgers to provide progressive levels of detail/summary.
Subsidiary Journal:
The format for Transactions in the the Subledger Journals is similar to the format for the General Journal that I’ve used in previous posts except they require at least three more columns in the grid. One for the Subledger Account, one for an Invoice Number and one for a Reference Number. This entry in the Accounts Payable Journal shows the detail for the both of the Ledger entries above that indicate Jrnl = AP and Ref = 55.
This entry records A Credit Card Statement into Accounts Payable, which includes the purchase of a Chair and a Desk along with Credit Card charges.
Accounts Payable Journal | |||||||
Subledger Account | Invoice # | Transaction Date | Ref | GL Account | Description | Debit | Credit |
ACEC | 123_908 | 9/01/08 | 55 | 2000 | Ace Credit Card Corp. | $1,700 | |
1520 | Chair | $750 | |||||
1520 | Desk | $900 | |||||
7300 | Credit Card Interest & Fees | $50 |
Note that the Vendor Account, the Invoice
#, Transaction Date and Ref# are not re-entered for each line. It is
assumed that those three items remain the same for each of their
balancing entries.
** Important: Individual
transactions for each Subledger Account must have a unique identifying
number, in this case, its an Invoice Number. That number combined with
the Subledger Account creates a unique pair that prevents duplicate
payments and provide a way for each party to reference the transaction
for payments or if disputes or questions arise.
General Journal:Since the system requires that all financial transactions have an entry in the General Ledger, they must also have an entry in the General Journal. This requires some duplication of effort but it is necessary. So, once the entries are posted to the Subledger Journals, they are then summarized and posted to the General Journal after which the Balances in the General Ledger are updated.
General Journal | ||||||
Transaction Date | Jrnl | Ref | Account | Description | Debit | Credit |
9/01/08 | AP | 55 | 1520 | Furniture & Fixtures | $1,650 | |
9/01/08 | AP | 55 | 7300 | Credit Card Interest & Fees | $50 | |
9/01/08 | AP | 55 | 2000 | Accounts Payable | $1,700 |
Transactions containing a GL Account that is related to a subsidiary journal start with the Subsidiary Journal otherwise they start with the General Journal
Subsidiary Journal –> Post to Subsidiary Ledger by its Account –> Post to General Journal —-> Summarize and post to General Ledger by GL Account.