Chapter XXX concerned itself with the statement and explanation of the principles on which the controlling account rests, the manner of its construction, its advantages, and with the changed application of the fundamental scheme of debit and credit under a system of records operating controlling accounts. The present chapter will be devoted to a consideration of the problems met with in the practical operation of these accounts.
Introduction of the Controlling Account.—Upon the installation of a new system or set of books, the controlling account feature may be incorporated from the start. The new system must provide for the separation from the general ledger, of the ledgers over which control is to be established. The method of securing controlling totals for posting to the general ledger controlling accounts was indicated in the preceding chapter.
Where it is desired to introduce controlling accounts into a system which has not formerly used them, certain adjustments must be made, i.e., the accounts to be controlled must be segregated and controlling account columns must be provided for in the books of original entry. With the transfer of these accounts to a separate ledger, together with the introduction of the controlling accounts into the general ledger, the equilibrium of that ledger is maintained. The opening entry in the newly established controlling account is of course the sum of the balances of the transferred accounts.
If it is desired to establish the new controlling account by journal entry, that entry would appear somewhat as shown on page 279, Form 34, with suitable explanation added. All these items should be posted to the general ledger as shown by the entry, and in addition the detailed items should be posted as debits to the accounts in the customers ledger. The effect of these postings would be, first, to close the individual customers’ accounts formerly carried in the general ledger and open up in their stead the controlling account; and second, to set up on the subsidiary ledger the detail of the customers’ accounts.
Recording Withdrawals of Stock-in-Trade.—The original basis for separating the main journal into its subsidiary parts was the analysis of transactions by kinds, such as sales, purchases, cash, etc. The sales journal was presumed to contain only sales of stock-in-trade. Departure from this principle was advisable in the case of goods drawn at cost, for use in the business or by the proprietor or for other purposes. This is done because withdrawals of stock-in-trade, at whatever price and for whatever purpose, can be recorded more conveniently in the sales journal than elsewhere.
It is theoretically incorrect, however, to enter such items in the Sales account because withdrawals at cost do not represent actual sales, and for this reason they should be regarded as deductions from purchases or from inventory. The only proper place for their record, under this view, is the general journal, entry in which would have to be by detailed debit and credit for each item. However, because this requires much more work than entry in the sales journal, this last method is more commonly employed. Usually the volume of such transactions is not large and would not seriously vitiate the use of the Sales account as the basis for estimating percentages of cost of goods sold, gross profit, selling expenses, etc. Moreover, as the total amount of these withdrawals is often fairly constant as between periods their record in the sales journal is countenanced.
The Problem of the Sales Journal Summary.—When withdrawals from stock at cost price are recorded in the sales journal, a new problem arises in summarizing the sales journal when operating under a controlling account system. The customers or sales ledger is usually limited absolutely to customers’ accounts. Accounts with the proprietors, and with all other titles under which withdrawals for other purposes may be recorded, are almost invariably carried in the general ledger. Therefore, while most of the items entered in the sales journal are posted to the customers ledger, these withdrawal items must be posted in detail to the general ledger. Thus the total of the sales journal does not represent the correct debit to accounts receivable in the general ledger. Evidently an analysis of the content of the sales journal must be made in order to obtain the correct controlling figure.
Such analysis may be made in several ways. Where possible, three columns in addition to the departmental columns should be used. The column titles would be “Sales Ledger,” “Cash,” and “Sundry.” The sum of these three would give the total to check against the total of the other distributive columns, but only the “Sales Ledger” total would be posted to Accounts Receivable, and the individual items in that column would be posted to the customers’ accounts in the sales ledger. The items in Sundry column would be posted to their named accounts in the general ledger. This method secures an automatic separation of the controlling account total from other items, and should be used where possible.
If the number of these extraneous items is too small to warrant the use of a separate column, they may be recorded in the Sales Ledger column and indicated by means of an “❌” or some other mark. At summary time, the sales journal must be looked over and these items picked out. Subtraction of their sum from the Sales Ledger column total would give the correct controlling account posting.
Still another method requires a correcting general journal entry at the time the sales journal entry is made. Under this method these special items are included in the Sales Ledger column, thereby causing an overcharge to Accounts Receivable. The correcting general journal entry must therefore credit Accounts Receivable by the amount of the overcharge for each item. For instance, if stock has been drawn by the proprietor, the general journal entry at the time the sales journal entry is made would be:
the debit to proprietor being checked here and posted from the sales journal, or vice versa. This method, however, results in a duplication of work. It would be preferable not to enter these items in the sales journal and to make the record only in the general journal, and so leave the Sales Ledger column total in the sales journal the correct controlling figure.
In a complicated controlling account system, where for current entry a simple bookkeeping routine must be established and all items of whatever kind be handled in the same way, the withdrawals by proprietors are recorded in accounts opened with them in the sales ledger just as with customers. At the end of the period, before closing the books, these proprietors’ accounts are transferred by general journal entry to the general ledger, requiring one entry—like the one last shown above—for the drawings of the period.
Cash sales may also be handled without the use of a separate column in the sales journal. Two methods are used for this. Under the one, cash sales are included in the Accounts Receivable debit total of the sales journal, although the individual items are not posted to the subsidiary ledger, and they are also included in the Accounts Receivable credit total of the cash receipts journal. The inflated debit in the general ledger controlling account is thus offset by an equally inflated credit, the balance therefore being the correct amount to control the sales ledger.
Under the other method the postings to the general ledger controlling account are the same as in the first method. The two methods differ, however, in that under the second method an account is opened in the subsidiary ledger entitled “Cash Customers” or “Cash Sales,” to the debit of which are posted in detail the cash sales items from the sales journal and to the credit of which are posted in detail the cash sales items from the cash receipts journal. The account is thus only a “wash” or clearing account. This method, however, prevents the inflated debits and credits in the controlling account.
The methods last described for handling proprietors’ withdrawals and cash sales are the ones most frequently used in large businesses where simplicity of routine for current entry must be secured.
The Problem of the Purchase Journal Summary.—The practice of recording extraneous transactions in the purchase journal brings about at summary time a situation similar to that of the sales journal, when a controlling Accounts Payable account is maintained. The purchase journal is, and should be, the place of record for purchases made for the business. If the proprietor (or other person), for his personal account and use, purchases through the business merchandise which never goes into stock, accurate accounting requires such transactions to be charged direct to the proprietor and not to the Purchases account of the business. Inasmuch as the liability is assumed by the business and the creditor’s account will appear in the purchase ledger, the use of the purchase journal total for credit to the Accounts Payable controlling account gives the correct figure. The trouble comes in because this same figure cannot be used as the debit to Purchases. Subtraction of these extraneous items must be made to determine the proper amount chargeable to the Purchases account, thus necessitating an analysis at summary time.
Accounts Both Receivable and Payable.—It frequently happens that purchases from, and sales to, the same party are made, i.e., goods are sometimes bought from and sold to a customer. If the account of this debtor-creditor is normally a purchase account, it is set up in the purchase ledger. If a sale is made to this debtor-creditor and charged to his purchase ledger account, such transaction should not be included in the Accounts Receivable controlling figure from the sales journal unless an adjusting entry is made through the general journal. Such entry would affect only the controlling accounts and would be:
Or the item might be omitted from the sales journal controlling figure and stated separately in the summary entry for the sales journal.
A more satisfactory method is to set up two accounts with such parties—one as a creditor, the other as a customer. Then no adjustment need be made at the time of summarizing the journals, because the two accounts are treated as entirely independent of each other. The settlement of these two accounts may be handled separately or by a payment of the balance between the two. If settled by balance, an adjusting journal entry should be made to show on the books the two separate elements involved. This would of course affect both the controlling accounts and the two individual accounts.
The Problem of the Note Journals Summaries.—Of notes receivable the large majority are usually received from customers. The summary entry for such is:
Where notes are received from other sources, as from officers, partners, or from outside parties to whom loans have been made, it is evident that these must not be included in the credit to Accounts Receivable, and it may be advisable also to eliminate them from Notes Receivable unless they are short-term, current items, as only such should be carried under Notes Receivable. These special notes may be carried in a “Notes Receivable Special” account.
If, as sometimes happens, interest is included in the face of a note, this must be adjusted by the summary entry, as follows:
The considerations stated above as applicable to the notes receivable journal, are of equal importance in handling the notes payable journal. A very careful analysis of the note journals should be made at a summary time, which analysis should be shown by the summary entry.
Summary Entries for Columnar Books.—Illustration will now be given of some standard forms for summarizing the columnar journals. Sometimes the summary entries for the various subsidiary journals are made in the general journal. This seems to accomplish no good purpose and is not usually recommended. Theoretically it is desirable to show a formal debit and credit summary for each journal footing posted to the ledger. If, however, the number of columns is small and it is readily seen that the debits and credits are equal, the formal summary is often dispensed with. So also, if there are many distributive columns of the same effect, i.e., debit or credit, as in the large departmental sales journal or the voucher register referred to on page 144, formal summary is not shown, the posting being made from the column totals as illustrated for Petty Cash on page 369.
The Sales Journal Summary.—An illustration of the sales journal summary is given in Form 35. The Sundry items should be posted in detail from their column and their total checked in the summary entry. Where a Sundry column is not used and the Sundry items are included in the Sales Ledger column, they must be separated before the summary entry can be made.
Form 34. General Journal
Form 35. Sales Journal Summary
Where, also, a Cash column is not carried, as is so often the case, there being just one column for Sales Ledger, Cash, and Sundry items, from which distribution is made, the separation of the Cash items need not be shown in the summary entry, provided those items are entered also in the Sales Ledger column of the cash book. Where, due to the large number of distributive columns, the sales journal can ill afford the room for a Cash column, the above method offers the best solution of the problem.
The purchase journal summary is similar to that of the sales journal, and therefore no separate illustration need be given here.
The General Journal Summary.—As shown by the illustration in Form 36, in summarizing the general journal the Accounts Receivable and Accounts Payable columns are formally totaled, ruled off, and their totals brought into the General columns on both debit and credit sides and these columns are totaled and ruled off, thus showing the equilibrium of the journal. This summary entry is posted to the proper accounts in the general ledger. There is no particular advantage, however, in this formal summary entry because the postings could easily be made directly from the column totals.
The Cash Book Summaries.—As illustrated in Forms 37 and 38, the formal summary for each side of the cash book shows the equality of the Bank and Discount columns total against the General and Accounts Receivable and Payable columns. To show the correct debit to the bank for the present month, the balance brought forward from last month and entered in both the General and Bank columns on December 1, must now be subtracted from both.
On the disbursements side no explanation of the summary entry is necessary. It will be noted that, to show the balance of the bank account, a restatement of the Bank column total is necessary.
Form 36. General Journal Summary
Form 37. Cash Summary Book—Receipts Side
Form 38. Cash Summary Book—Disbursements Side
Other Controlling Accounts.—It is frequently desirable to keep some accounts of the business private, such as those showing partners’ investments, drawings, ratios of sharing profits, the adjusting and closing entries, the profit and loss, etc. This can be accomplished through the use of a private ledger supported by a private journal and sometimes a private cash book. For their operation a controlling account of the private ledger is set up in the general ledger, and similarly a controlling account of the general ledger appears in the private ledger. The use of private books is explained in Volume II of this work.
Sometimes subsidiary expense ledgers are used to carry a minute division of each expense group, with corresponding controlling accounts, such as Selling Expense, Office Expense, General Expense, Factory Expense. Similarly, if the consignment sales of a business are large enough to justify a separate record in a consignments ledger, a controlling account is set up in the general ledger. In a manufacturing business, Raw Materials, Goods in Process, and Finished Goods accounts are often controlling accounts for the stores, jobs, and finished stock ledgers. In a corporation the Capital Stock account (or accounts) is a controlling account over the stock ledger.
Principle Governing Content of Subsidiary Ledgers.—Before closing this chapter, it should be stated as a fundamental principle that no accounts should be carried in a subsidiary ledger except such as are of the same general kind and can without misrepresentation be carried under the group title of the controlling account.