Chapter 10 Journalizing Purchases and Cash Payments Using Special Journals

Partnerships Encore Music, the business described in Cycle 1, is a small business owned by one person Proprietorship A business in which two or more persons combine their assets and skills is called a partnership As in proprietorships, reports and financial records of the business are kept separate from personal records

10-1 Journalizing Purchases Using a Purchases Journal

The Business - Omni Import A business that purchases and sells goods is called a merchandising business A merchandising business that sells to those who use or consume the goods is called a retail merchandising business Differs from a service business by actually selling merchandise, a tangible product

Using Special Journals A business with a limited number of daily transactions may record all entries in one journal A business with many daily transactions may choose to use a separate journal for each kind of transaction A journal used to record only one kind of transaction is called a special journal

Using Special Journals Omni Imports uses five journals to record daily transactions: Purchases journal: For all purchases of merchandise on account Cash payments journal: For all cash payments

Using Special Journals Sales Journal: For all sales of merchandise on account Cash Receipts Journal: For all cash receipts General Journal: For all other transactions

Purchasing Merchandise The price a business pays for goods it purchases to sell is called cost of merchandise The selling price of merchandise must be greater than the cost of the merchandise for the business to make a profit

Purchasing Merchandise The amount added to the cost of merchandise to establish the selling price is called markup Revenue earned from the sale of merchandise includes both the cost and markup Only the markup increases capital

Purchasing Merchandise Accounts for the cost of merchandise are kept in a separate division of the general ledger The cost of merchandise division is shown on p. 219

Purchasing Merchandise A business from which merchandise is purchased or supplies or other assets are bought is called a vendor The account used for recording the cost of merchandise is titled Purchases

Purchasing Merchandise Purchases is classified as a cost account because it is in the cost of merchandise division in the chart of accounts Because the cost of merchandise reduces capital when merchandise is purchased, it has a normal debit balance

Purchases on Account The cost account, Purchases, is used only to record the cost of merchandise purchased Supplies, other items are not recorded here A transaction at which the merchandise purchased is to be paid at a later date is known as a purchase on account

Purchases on Account Most businesses will keep separate ledgers for each vendor The total amount owed to all vendors can be summarized in a single general ledger account

Purchases on Account A liability account that summarizes all amounts owed to vendors is Accounts Payable The liability account, Accounts Payable, has a normal credit balance

Purchases Journal Omni uses a special journal to record only purchases of merchandise on account Purchases Journal Purchases journal records on only one line Amount column has two headings p. 224 All purchases on account involve a debit to Purchases and a credit to Accounts Payable

Purchase Invoice When a vendor sells merchandise to a buyer, the vendor prepares a form showing what has been sold Purchase Invoice This invoice lists the quantity, the description, price of each item and total amount of invoice

Purchasing Merchandise on Account Purchased merchandise on account from Crown Ltd., $2039.00. Purchase Invoice No. 83.

Totaling and Ruling a Purchases Journal Omni always rules its purchases journal at the end of each month, even if the page for the month is not full

Totaling and Ruling a Purchases Journal Steps Rule a single line across the amount column under the last entry Write the date in date column Write “Total” in account credited column Add the amount column / verify Write the total below the single line Rule double lines under the total

10-2 Journalizing Cash Payments Using a Cash Payments Journal

Cash Payments Journal A special journal used to record only cash payment transactions is called a cash payments journal Amount columns Cash Accounts Payable General (used for amounts that don’t occur frequently)

Cash Payments Journal Source document is usually check issued For payments not using a check, source document is memorandum

Purchasing Merchandise for Cash Purchased merchandise for cash, $575. Check No. 290.

Buying Supplies for Cash Paid cash for office supplies, $34.00 Check No 292 Supplies are not recorded in purchases account b/c they aren’t intended for sale Increases office supplies account balance, decreases cash account balance Same steps as journalizing purchasing merch for cash

Cash Payment on Account Paid cash on account to Pacific Imports, $1050.00, covering Purchase Invoice No. 81. Check No 294.

Cash Payment of an Expense Paid cash for advertising, 150.00. Check No 296.

10-3 Performing Additional Cash Payments Journal Operations

Cash Payment to Replenish Petty Cash Paid cash to replenish the petty cash fund, $205: office supplies, $35; store supplies, $47; advertising, $92; miscellaneous, $31. Check No 297.

Cash Withdrawals by Partners Assets taken out of a business for the personal use of an owner are known as withdrawals Cash and Merchandise generally taken out of a merchandising business Withdrawals reduce the amount of a business’s capital

Cash Withdrawals by Partners Since capital accounts have credit balances, partners’ drawing accounts have normal debit balances p. 235 Michelle Wu, partner, withdrew cash for personal use, $1200. Check No 298.

Totaling, Proving, and Ruling a Cash Payments Journal to Carry Totals Forward A journal is proved and ruled whenever a journal page is filled and always at the end of a month Total debits must equal total credits After a journal is proved, the journal is ruled in preparation for forwarding to the next page Example p. 236

Starting a New Cash Payments Journal Page The totals from the previous journal page are carried forward to the next journal page The total are recorded on the first line of the new page p. 237 example

Totaling, Proving and Ruling a Cash Payments Journal at the End of a Month Equality of debits and credits in a journal is proved at the end of each month Example p. 238

10-4 Journalizing Other Transactions Using a General Journal

General Journal Not all transactions can be recorded in special journals Transactions that can’t be are recorded in a general journal If a transaction is not recorded in the purchases journal, cash payments journal, sales journal or cash receipts journal - it will be recorded in the general journal

Buying Supplies on Account p. 241 Example Bought store supplies on account from Foxfire Supply $210 Memorandum No 52 General Journal

Merchandise Withdrawals by Partners p. 242 Example Karl Koehn, partner, withdrew merchandise for personal use, $300. Memorandum No 53 General Journal