Download Chapter 18 Notes File - National Trail Local School District

Chapter 18: Recording Purchases and Cash Payments
Using Special Journals
Objectives
1. Define an accounting term related to purchases and cash payments.
2. Identify accounting concepts and practices related to purchases and cash payments.
3. Record purchases on account and post using a purchases journal.
4. Record expenses and purchases using a cash payments journal.
5. Record petty cash and post using a cash payments journal.
6. Record transactions and post using a general journal.
Recording Financial Information
**Reliable information is important for the successful operation of a business.
**Accounting systems vary with the size and complexity of a business.
--Accounting systems are used to record, summarize, and report a business’s financial
information.
--May be small manual system operated by one accounting employee
--May be a large computerized system that requires hundreds of accountants and clerks.
**A large business using a manual system might use several different journals so that more than one
employee could journalize transactions at the same time.
**The kinds and details of information provided have a cost to the business and that the cost must be
worth the benefit provided.
Assessments
Work Together & On Your Own pgs. 459, 464, 469, & 475
Application Problems 18-1, 18-2, 18-3, 18-4, 18-5, 18-6
Mastery Problem 18-7
Audit Your Understanding pgs. 459, 464, 469, & 475
Recycling Problem if necessary
Chapter 18 Study Guide (in groups)
Chapter 18 Test
Purchases and Cash Payments Journals
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18-1 Recording Purchases on Account Using a Purchases Journal
The Business – Winning Edge, Inc.
**Corporation- organization with the legal rights of a person and which may be owned by many persons.
--Characteristics of a corporation:
1. Approved by a state or federal agency and can own property
2. Incur liabilities
3. Enter into contracts in its own name
--May sell ownership of itself through stocks
--Share of stock- each unit of ownership in a corporation
--Capital stock- Total shares of ownership in a corporation
--Why organize as a corporation? B/c several owners can provide larger amounts of capital
--Differs from proprietorships and partnerships in the nature of its capital accounts
Corporations have separate capital accounts for the stock issued and for the earnings kept
in the business
**Winning Edge
--Sells sports equipment to school districts, colleges, and businesses.
--Two categories of assets – current and plant
--New income statement sections – Other Revenue, Other Expenses, Income Tax Expense
--Unlike proprietorships and partnerships, corporations must pay income tax on their earnings
--Uses four special journals:
1. Purchases – for all purchases of merchandise on account
2. Cash payments – for all cash payments
3. Sales – for all sales of merchandise on account
4. Cash receipts – for all cash receipts
5. A general journal is used for all other transactions
Purchases Journal
**Special Journal- journal used to record only one kind of transaction
--Larger businesses having many daily transactions use several different journals
--Recording similar transactions together increases accuracy and efficiency
**Purchases Journal- special journal used to record ONLY purchases of merchandise on account
-- The special column is Purchases Dr., Accounts Payable Cr.
--Similarities to an expanded journal:
1. each journal has the date
2. account
3. source document
4. post ref
--Differences from the expanded journal:
1. account title is changed to account credited
2. doc. no. is changed to purch. no.
--Each amount recorded in the special column of the purchases journal will impact both the
purchases and accounts payable accounts.
Journalizing Purchases on Account
**Purchase Invoice—When received, it is verified by an accounts payable clerk. The date of receipt and
purchase invoice number are recorded on it before the transaction is recorded.
**Purchases are recorded at their cost and any related shipping costs and taxes.
Purchases and Cash Payments Journals
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**No abbreviation is needed in the Purch. No. column b/c only the purchase invoice number will be
entered.
**Only purchases of merchandise on account are journalized in the purchases journal.
--Items not recorded in the Purchases Journal: supplies, equipment, services.
STEPS: Recording an entry in a purchases journal.
1. Write the date
2. Write the vendor name in the Account Credited column
3. Write the purchase invoice number recorded on the invoice in the Purch. No. column
4. Record the amount of the invoice in the amount column
Posting from a Purchases Journal to an Accounts Payable Ledger
**Separate amounts are posted from the purchases journal to the A/P ledger frequently so that the vendor
accounts are up to date
**When several journals are used, an abbreviation is used in the A/P subsidiary ledger to show the journal
from which the posting is made.
--The abbreviation for the Purchases Journal is a P and the page number
STEPS: Posting from a purchases journal to an accounts payable ledger
1. Write the date
2. Write P and the page number of the journal in the Post. Ref. column
3. Write the amount in the Credit column of the vendor account
4. Add the amount in the Credit column to the previous balance in the Credit Balance column.
Write the new account balance
5. Write the vendor number in the Post. Ref. column of the purchases journal
Posting from a Purchases Journal to a General Ledger
**Column totals of all special journals are posted to the general ledger accounts described in the column
heading at the end of the month.
--Total of Purchases Dr. and A/P Cr.
STEPS: Totaling, ruling, and posting from a purchases journal to the general ledger
1. Rule a single line across the amount column of the purchases journal under the last amount
recorded.
2. Write the date of the last day of the month in the Date column.
3. Write the word Total in the Account Credited column.
4. Add and verify the amount column; write the total directly below the single line; and rule
double lines across the amount column.
5. Post the total of the purchases journal to the Dr column of Purchases. Use a P to show the
posting is from a purchases journal.
6. Post the total of the purchases journal to the Credit column of A/P.
18-2 Recording Expenses and Purchases Using a Cash Payments Journal
Journalizing Cash Payments for Expenses
**Cash Payments Journal- Special journal used to record ONLY cash payment transactions
--Differences from an expanded journal:
1. Doc. No. from expanded journal is now the check number column
--checks will be the only source document for transactions in the cash payments
journal. Write number without the C.
--Only those columns of an expanded journal needed to record cash payments are included in the
cash payments journal:
Purchases and Cash Payments Journals
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1.
2.
3.
4.
General Dr & Cr
Accounts Payable Dr
Cash Credit
Purchases Discount Cr.
--If there is a transaction that does not occur often, ie monthly rent, record in the General
columns. Why? b/c there are no special amount columns for the account debited.
**For Winning Edge, most cash payments are for expenses, cash purchases, and payments to vendors.
--All cash payments are recorded in the Cash Credit column.
--Cash payments not affecting accounts named in special amounts columns are recorded in the
General Debit and Credit columns.
STEPS: Journalizing Cash Payments for Expenses
1.
2.
3.
4.
5.
Write the date
Write the account title
Write the check number
Write the amount of the expense in the General Debit column
Write the amount in the Cash Credit column.
Journalizing Cash Payments for Cash Purchases
**Vendors may not extend credit to all customers, so businesses may have to pay with cash before
merchandise is shipped or delivered.
--Why might they do this? (Bad credit, do not know you that well, ect.)
**Trade Discount---List Price -- A businesses printed or catalog price.
--Trade Discount -- Reduction in the list price granted to customers.
--different quantities, bigger discount for more merchandise ordered.
--Do not have to change list price. “List price less trade discount”
--invoice shows actual amount charged, amount after discount
--No journal entry needed to show amount of trade discount.
--Step 1: Take total list price X Trade discount Rate = Trade discount
--Step 2: Take total list price – Trade discount = Invoice amount
Journalizing Cash Payments on Account
**Purchases on account are journalized in the purchases journal. The cash payment of those purchases is
journalized in the cash payments journal.
**Cash Discount—A deduction from the invoice amount allowed by a vendor to encourage early
payment.
**Purchases Discount—A cash discount on purchases taken by a customer.
--Customer pays less than the invoice amount previously recorded in the purchases account
--Example of a cash discount— 2/10, n/30. two ten means that 20% of the invoice amount will
be deducted it the invoice is paid within 10 days of the invoice date. Net thirty means the total
invoice must be paid within 30 days.
--Purchases discounts are recorded in General Ledger account titled Purchased Discount.
--Contra Account -- An account that reduces a related account on a financial statement. (ie.
Purchases Discount.) Purchases Discount is deducted from balance of its related account,
Purchases, on the Income Statement.
STEPS: Journalizing Cash Payments on Account:
1. Date
2. Vendor Name
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3.
4.
5.
6.
Check Number
Purchase Invoice Amount in Accounts Payable Debit
Purchase Discount, if applicable
Purchase Invoice Amount Less the Purchases Discount in Cash Credit.
18-3 Journalizing Petty Cash and Posting Using a Cash Payments Journal
Petty Cash Report
**Petty cash allows a business to pay cash for small expenses where it is not practical to write a check.
**Cash Short- petty cash on hand amount is less than a recorded amount.
**Cash Over- petty cash on hand amount is more than a recorded amount.
STEPS: Preparing a Petty Cash Report
1. Write the date and custodian name in the report heading
2. Write the fund total from the general ledger account
3. Summarize petty cash payments by general ledger account and enter the totals form each account
4. Calculate and write the total payments in the Reconciliation and Replenish Amount columns
5. Calculate and write the recorded amount on hand (reconciliation – payments)
6. Count the actual cash on hand and write the amount in the Reconciliation column
7. Subtract the actual amount on hand from the recorded amount on hand and write the amount in
the reconciliation and Replenish Amount columns
8. Add the amounts in the Replenish Amount column and write the total as the amount to replenish
Journalizing Cash Payments to Replenish a Petty Cash Fund
**Petty cash short and petty cash over are recorded in an account titled Cash Short and Over
--This is a temporary account and at the end of the year it is closed to Income Summary
--Balance can be a Dr or a Cr
--Balance is usually a Dr b/c it is more likely to be a cash short
--A cash shortage adds to the cost of operating a business
Posting from a Cash Payments Journal to an A/P Ledger
--Each entry in Accounts Payable Debit column of a cash receipts journal effects the vendor named in the
Account Title column.
1.
2.
3.
4.
5.
Date
Journal page number in Post. Ref. (CP is the abbreviation for Cash Payments Journal)
Write the Debit to the vendor account.
Write new account balance
The vendor number is placed in the Post Ref column on the Cash Payments Journal
Posting from a Cash Payments Journal to a General Ledger
--Each entry in General Columns of a cash receipts journal is posted individually to the general ledger
account named in the Account Title column. The totals of the general amount columns are not posted.
1.
2.
3.
4.
5.
Write the date
Write the journal page in Post. Ref.
Write the Debit amount
Write the new balance in the Debit column
Write the account number in the Post. Ref. Column on the Cash Payments Journal.
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Posting Totals of the Special Amount Columns of a Cash Payments Journal to a General Ledger
--At the end of the month, we prove and rule the Cash Payments Journal and post the special column
totals.
--Total columns, post to Accounts Payable Ledger, Purchases Discount Ledger, and Cash Ledger.
--Debit and Credit totals must equal.
--Check mark General columns b/c they are not to be posted.
18-4 Recording Transactions Using a General Journal
A General Journal
--The general journal has two columns and can be used to record any entry.
--Has only the Debit and Credit columns. Columns are exactly like the first 6 columns of the expanded
journal.
--Winning Edge uses the general journal to record entries that cannot be recorded in any of the special
journals.
--ie. purchases returns and allowances and buying supplies on account.
Debit Memorandum for Purchases Returns and Allowances
--Used when customers return merchandise
Ask: Why might a customer return something?
--A customer may receive merchandise that is inferior or damaged. They may return it or receive credit
for it. This is called a purchases return or allowance. This should be done in writing and usually involves
a debit memorandum (the customer records the amount as a debit to show a decrease in the amount
owed.)
Purchases return- credit allowed for the purchase price of returned merchandise, resulting in a decrease in
the customer’s accounts payable.
Purchases allowance- credit allowed fro part of the purchase price of merchandise that is not returned,
resulting in a decrease in the customer’s accounts payable.
--vendor allows customer to keep merchandise at a reduced priced.
Ask: Why might a vendor credit a customer’s account yet allow them to keep the merchandise? (it may be
costly for vendor, shipping costs, item has no value).
Debit memorandum- a form prepared by the customer showing the price reduction taken by the customer
for returns and allowances. (example on pg 471)
--Debit memo b/c the customer records the amount as a debit (deduction) to show the decrease in
the amount owed.
--a copy of the debit memo may be used as the source document for journalizing purchases
returns and allowances.
--the transaction may be recorded immediately without waiting for written confirmation
from the vendor.
Journalizing Purchases Returns and Allowances
-- Purchases Returns and Allowances is a contra account to Purchases. Thus, the normal balance is the
opposite of purchases, credit.
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STEPS: Journaling purchases returns and allowances
6.
7.
8.
9.
10.
11.
Write the date
Write the account title and vendor name (place / between two accounts)
Place a / in Post. Ref. Column to show that the single debit amount is posted to two accounts.
Write the debit memorandum number, DM xxx, in the Doc. No column.
Write the amount in the Dr. column of the first line
Write Purchases Returns and Allowances in the Account Title column on the next line, indented
about 1 centimeter. Credit entries are indented in the general journal
12. Write amount in the Cr column of the second line.
Look at the transaction on pg. 472. What accounts are affected, are they increased or decreased, and are
they debited or credited? (accts pay., decreased, acct pay sub., decreased, purchases returns and
allowances, increased)
Journalizing Buying Supplies on Account
--Supplies are not merchandise and only merchandise purchased on account is recorded in the purchases
journal.
--Any item that is not merchandise and is bought on account, the transaction is recorded in the general
journal.
--Memo used as source document so supplies will not be recorded unintentionally as merchandise.
--invoice received from vendor is attached to the memo.
STEPS: Journalizing buying supplies on account
1. Write date
2. Write the account to be debited.
3. Write the memo number in Doc. No. column
4. Write the amount of the invoice in the Dr. column on the first line
5. Indent and write the account title and vendor name on the next line in the Account Title column.
A / is placed between the two accounts.
6. Place a / in the Post. Ref. Column to show the single credit amount is posted to two accounts.
7. Write the amount of the invoice in the Cr. Column of the second line.
--Any purchases of account of goods and services, other than merchandise for sale, would be recorded in
the same manner.
Posting From a General Journal
--Each amount in the general journal Dr and Cr columns are posted separately to a general ledger account.
--Abbreviation for the general journal is G. entered in Post. Ref. column.
STEPS: Posting from a general journal
1. write the date
2. write G and the page number of the journal in the Post. Ref. column.
3. write the amount in the credit column of the Accts. Pay and of the vendor account.
4. calculate and write new balance in the balance credit column of Accts Pay. Calculate and write
new balance in the balance credit column of the vendor account.
5. write the account number for Acct Pay to the left of the / line in the Post. Ref. column of the
general journal. Write the vendor number to the right of the / line.
Purchases and Cash Payments Journals
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Ask: Explain how a transaction recording a purchases return or allowance impacts accounts payable. (It
reduces the amount owed to the vendor in the accounts payable ledger and reduces the accounts payable
general ledger account.)
Ask: What are the steps in posting from a general journal?
Ask: Why is a transaction recorded in a general journal?
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