Analyzing and Recording Cash Payments Accounting II Ms. Alltucker Ch. 15 Section 3

Learning Objectives What you will learn: Why it’s important: The different kinds of cash payments made by a business. The rules of debits and credits for Purchases Discount account. How shipping charges are recorded and whether the buyer or seller pays for them. Why it’s important: About half of all business transactions result in the outflow of cash; therefore, it is essential that you understand how businesses record various cash payments transactions.

Analyzing and Recording Cash Payments Controls over Cash Cash is the lifeblood of a business Procedures to manage cash payments Authorize all cash payments. Each payment is supported by an approved source document, such as an invoice. Write checks for all payments– only authorized persons can sign checks Use pre-numbered checks Retain and account for spoiled checks—mark “void” and file

Analyzing Cash Payments Transactions All cash payments are made by check All transactions recorded on the check stub Check stub is the source document Check is prepared and signed by an authorized person

Analyzing Cash Payment Transactions Recording Cash Purchase of Insurance Businesses buy insurance to protect against losses from hazards such as theft, fire and flood Insurance policies cover varying time periods– 6 months or a year Premium cost of insurance protection Paid in advance Asset because it is paid in advance Represents a benefit to the company Account name Prepaid Insurance

Analyzing Cash Payment Transactions Business Transaction ANALYSIS Identify 1. The accounts affected are Prepaid Insurance and Cash in Bank. On December 17, On Your Mark paid $1,500 to Keystone Insurance Company for the premium on a six-month insurance policy, Check 1001.

Analyzing Cash Payment Transactions Business Transaction (cont'd.) ANALYSIS Classify 2. Both Prepaid Insurance and Cash in Bank are asset accounts. On December 17, On Your Mark paid $1,500 to Keystone Insurance Company for the premium on a six-month insurance policy, Check 1001.

Analyzing Cash Payment Transactions Business Transaction (cont'd.) ANALYSIS + / – 3. Prepaid Insurance is increased by $1,500. Cash in Bank is decreased by $1,500. On December 17, On Your Mark paid $1,500 to Keystone Insurance Company for the premium on a six-month insurance policy, Check 1001.

Analyzing Cash Payment Transactions Business Transaction (cont'd.) DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Prepaid Insurance for $1,500. 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $1,500. On December 17, On Your Mark paid $1,500 to Keystone Insurance Company for the premium on a six-month insurance policy, Check 1001.

Analyzing Cash Payment Transactions T ACCOUNTS 6. Prepaid Cash in Insurance Bank Business Transaction (cont'd.) Debit + 1,500 Credit – On December 17, On Your Mark paid $1,500 to Keystone Insurance Company for the premium on a six-month insurance policy, Check 1001.

Analyzing Cash Payment Transactions Business Transaction (cont'd.) JOURNAL ENTRY 7. On December 17, On Your Mark paid $1,500 to Keystone Insurance Company for the premium on a six-month insurance policy, Check 1001.

Recording Cash Payments for Items Purchased on Account Invoice is received by a business is verified for items, quantities, and prices, recorded in the journal and filed by due date in a tickler file The invoices due for payment are removed and checks are prepared, signed, and mailed Amount of check depends on the credit terms

Recording Cash Payments for Items Purchased on Account Business Transaction ANALYSIS Identify 1. The accounts affected are Accounts Payable (controlling), Accounts Payable—Pro Runner Warehouse (subsidiary), Cash in Bank, and Purchases Discounts. On December 24, On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise pur- chased on account, $2,300 less a discount of $46, Check 1003.

Recording Cash Payments for Items Purchased on Account Business Transaction (cont'd.) ANALYSIS Classify 2. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are liability accounts. Cash in Bank is an asset account. Purchases Discounts is a contra cost of merchandise account. On December 24, On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise purchased on account, $2,300 less a discount of $46, Check 1003.

Recording Cash Payments for Items Purchased on Account Business Transaction (cont'd.) ANALYSIS + / – 3. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are decreased by $2,300. Cash in Bank is decreased by $2,254. Purchases Discount is increased by $46. On December 24, On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise purchased on account, $2,300 less a discount of $46, Check 1003.

Recording Cash Payments for Items Purchased on Account Business Transaction (cont'd.) DEBIT-CREDIT RULE 4. Decreases to liability accounts are recorded as debits. Debit Accounts Payable (controlling) for $2,300. Also debit Accounts Payable—Pro Runner Warehouse (subsidiary) for $2,300. On December 24, On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise purchased on account, $2,300 less a discount of $46, Check 1003.

Recording Cash Payments for Items Purchased on Account Business Transaction (cont'd.) DEBIT-CREDIT RULE 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $2,254. Increases to contra cost of merchandise accounts are recorded as credits. Credit Purchases Discounts for $46. On December 24, On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise purchased on account, $2,300 less a discount of $46, Check 1003.

Recording Cash Payments for Items Purchased on Account T ACCOUNTS 6. Accounts Cash Payable in Bank Business Transaction (cont'd.) Credit + Debit – 2,300 Accounts Receivable Subsidiary Ledger Purchases Pro Runner Warehouse Discount 46 2,254 On December 24, On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise purchased on account, $2,300 less a discount of $46, Check 1003.

Recording Cash Payments for Items Purchased on Account Business Transaction (cont'd.) JOURNAL ENTRY 7. On December 24, On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise purchased on account, $2,300 less a discount of $46, Check 1003.

Other Cash Payments Shipping Charges and terms Shipping charges are an additional cost of the merchandise Account name: Transportation In FOB destination FOB free on board Supplier pays the shipping FOB Shipping Buyer pays the shipping charge from the suppliers shipping point

Other Cash Payments Transportation In Follow the same debit and credit rules as expenses Transportation In Debit Credit Decrease side Increase side

Other Cash Payments On December 24 On Your Mark issued Check 1004 for $275 to Dara’s Delivery Service for shipping charges on merchandise purchased from Sports Link Footwear. Dec 24 Transportation In 275 Cash in Bank 275 Check 1004

Recording Bankcard Fees Banks charge a fee for handling bankcard sales slips Usually a percentage of the total of the amounts recorded on the bankcard sales slips processed

Recording Bankcard Fees On December 31 On Your Mark records the Bankcard fee of $75, December Bank Statement. Dec 31 Bankcard Fees Expense 75 Cash in Bank 75 December Bank Statement

Summary Look on page 407 for a summary of all of the transaction from chapter 15.

Thinking Critically What steps are involved in the payment of an invoice? How do businesses record premium payments for insurance coverage?