Chapter 11 Journalizing Purchases and Cash Payments

Partnership--A business in which two or more persons combine their assets and skills.

Partner--Each member of a partnership.

Partners must agree on how each partner each partner will share in the business' profit or loss, if not stated specifically then it is equal for each partner.  Each partners duties must also be determined.  As in proprietorships business records are kept separate from personal records.

Merchandising Business--A business that purchases and sells merchandise.

Merchandise--Goods a merchandising business purchases for resale.

FORM OF EXPANDED JOURNAL---The reason an expanded journal is used is to save time and space in the journalizing process.  An expanded journal is commonly used by small merchandising businesses in which only one person records transactions.  The number and arrangement of columns in a journal is determined by the type and frequency of transactions.  Accounts Rec., Acct.s Payable are arranged in pairs for ease.  The general columns are placed near the account title column so they are close to the account title column.

JOURNALIZING PURCHASES OF MERCHANDISE--

Cost of Merchandise--The price a business pays for goods it purchases to sell.

Markup--The amount added to the cost of merchandise to establish the selling price.

Revenue earned from the sale of merchandise includes both  the cost of merchandise and markup.  Only the markup increases capital.  Accounts for the cost of merchandise are kept in a separate division of the general ledger.

Vendor--A business from which merchandise if purchased or supplies or other assets bought.

The account used for recording the merchandise bought for resale is purchases.

PURCHASE OF MERCHANDISE FOR CASH

Debit Purchases, Credit Cash, Source document will be a check number.

PURCHASE OF MERCHANDISE ON ACCOUNT

Purchase on Account--A transaction in which the merchandise purchased will be paid for later.

Accounts Payable is a liability account located in the general ledger that summarizes the amounts owed to all vendors.  It is called the controlling account for the subsidiary ledger known as the Accounts Payable Ledger.

Invoice--A form describing the goods sold, the quantity, and the price.

Purchase Invoice--An invoice used as a source document for recording a purchase on account transaction.

Terms of Sale--An agreement between a buyer and a seller about payment for the merchandise.
Example---2/10, n/30 means a 2 percent discount is given if paid within 10 days and the net is due in 30 days.
                 3/15, eom means a 3 percent discount is given if paid within 15 days and the balance is due at the end of
                the  month.

Debit Purchases, Credit Acct.s Payable column and write the name of the vendor in the account title column. The source document will be a Purchase Invoice Number.  The debit to purchases and the credit to Accounts Payable are recorded in special amount columns.  Therefore, writing the titles of either general ledger account in the Account Title column is not necessary.  However, the name of the vendor is written in the Account Title column to show to whom the amount is owed.  This is done keep track of what is owed to each vendor.

BUYING SUPPLIES FOR CASH

Supplies are not recorded in the purchases account because supplies are not intended for resale.

Debit Supplies and Credit Cash--Source Document is a Check number.

BUYING SUPPLIES ON ACCOUNT

Source document for this is a memorandum--This is a two line entry with Supplies being debited and Accounts Payable being credited along with the vendor name written in the account title column.

JOURNALIZING CASH PAYMENTS

The cash payment on account transaction decreases the amount owed to vendors---Account Payable is debited while Cash is credited.  The name of the vendor is written in the account title--A check is the source document.

The cash payment of an expense is to debit the expense and credit cash with a check being the source document.

CASH PAYMENT TO REPLENISH PETTY CASH --This cash payment increases the balances of the supplies accounts and several expense accounts and decreases the cash account balance.  The source document is a check

JOURNALIZING OTHER TRANSACTIONS

Most transactions of merchandising businesses are related to purchasing and selling merchandise.  A merchandising business, however, has other transactions that must be recorded.

Withdrawals by partners---Assets taken out of a business for personal use of an owner are known as these.  Withdrawals could be recorded as debits directly to capital however, they are normally record in separate accounts so that the total amounts are easily determined for each accounting period.

Cash withdrawal---Debit drawing, credit cash-Source document is a memo.

Merchandise withdrawal-  Debit drawing, credit Purchases---two line entry general debit column, general credit column.  Source document is a memo. 

CORRECTING ENTRIES

A memorandum is the source document for this entry.  These entries may be one or two liners.