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

2. 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.

3. 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

4. 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

5. 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

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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

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

22. 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

23. 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

24. 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

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

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