INTRO to Cycle 2 - Merchandising / PartnershipINTRO to Cycle 2 - Merchandising / Partnership

Chapters 10-17 model the accounting cycle for a merchandising business and a partnership (PAGE 218-219)– has more kinds of transactions than the service business in Cycle 1.

Primary differences: – Merchandising business purchases merchandise for

resale– Charges sales tax on sales– Includes a Cost of Merchandise Sold section on the

Income Statement– Articles of Partnership Agreement: describes how

profits and losses will be distributed Partnership requires separate capital accounts for

partners Uses special journals and has a payroll system for

employees

Chart of Accounts, page 219-220Chart of Accounts, page 219-220

Similarities – Several typical divisions of accounts

• Assets• Liabilities• OE• Revenue• Expenses

– Several familiar accounts within divisions Differences

– New liability and expense accounts have been added for payroll expense and sales tax payable

– Two owners – 2 capital and 2 drawing accounts– Cost of Merchandise section– Assets section: Merchandise Inventory– Subsidiary ledger accounts

• Accounts Receivable • Accounts Payable

Chapter 10Chapter 10Journalizing Purchases and Cash Payments Using Special Journals

Objectives: Objectives:

Define accounting terms related to purchases and cash payments for a merchandising business.

Identify accounting concepts related to purchases and cash payments for a merchandising business.

Journalize purchases of merchandise using a purchases journal.

Journalize cash payments using a cash payments journal.

Total, prove, and rule a cash payments journal and start a new cash payments journal page.

Journalize other transactions using a general journal.

TYPES OF OWNERSHIP – READ PAGE 220TYPES OF OWNERSHIP – READ PAGE 220

Proprietorship – Cycle 1– One person

Partnership – Cycle 2– Two or more– Combine assets and capital– Share profits/losses– Unlimited liability

Corporation – Accounting II – More sources of capital available– Limited Liability– New legal entity

PartnershipPartnership

ADVANTAGES More Capital More expertise Share losses Combine assets

DISADVANTAGES Share decisions Share profits Unlimited liability

TYPES OF BUSINESSES - READ pg. 222TYPES OF BUSINESSES - READ pg. 222

Service – provides service for a fee Merchandise – business that purchases and sells

goods– Retail merchandising business - sells to those who

use or consume goods– Wholesale merchandising business – buys and

sells merchandise to retail merchandising business

Merchandise: goods a business purchases to sell To avoid confusion use consistent wording:

– Purchased merchandise always means Purchases is debited

– Bought supplies supplies account is debited

Omni Import -Omni Import -

Merchandising business organized as partnership

Partners: Michelle Wu and Karl Koehn

What: purchases and sells imported novelty and gift items

Where: Omni rents the building and equipment for operation

Expects to make money and continue indefinitely

Going Concern

Special JournalSpecial Journal

A journal used to record only one type of transaction. Why use special journals??

– Separate transactions by category– Separate work load and responsibility– Many daily transactions in business

Special Columns in Journals– They are used when many transactions affect the same

account.– They save time in recording and posting.

TYPES OF SPECIAL JOURNALSTYPES OF SPECIAL JOURNALS

Purchases– records all purchases of merchandise on account

Cash Payments– records all cash payments

Sales– records all sales of merchandise on account

– For charge customers only Cash Receipts

– records all cash received

General– records all other transactions

***** ALL like transactions go in one journal***

Purchasing Merchandise – New AccountPurchasing Merchandise – New Account

Cost of Merchandise: – The price a business pays for goods it purchases to sell– New classification – 5000 (Expenses move to 6000)

• Purchases 5110– COST ACCOUNT– Temporary account

Markup = Amount added to cost to establish a selling price Revenue includes both cost and markup

ONLY markup increases capital and profits

Cost of Merchandise + Markup = Sales (Operating Revenue)

Kept in separate division on chart of accounts see page 219, COST OF MERCHANDISE INCOME STATEMENT ACCOUNT

Cost of MerchandiseCost of Merchandise

‘Purchased Merchandise’ ALWAYS means that

Purchases is DEBITED

Purchases on AccountPurchases on Account

The purchases account is only used to record items bought for resale not for assets.

Vendor: A business or person from which the company purchases merchandise or assets.

Historical cost: The amount used in the transaction is the price agreed upon at the time of purchase.– Merchandise and other items bought are recorded and reported

at the price agreed upon at the time the transactions occur

Purchase on account to be paid later Some businesses keep separate ledger accounts for each

vendor Lots of vendors create a bulky ledger, so INSTEAD, we

summarize the TOTAL amount in Accounts Payable

Accounts PayableAccounts Payable

Classification Liability - 2110 This account summarizes the total amount owed

to all vendors in a single account.

Accounts Payable

Debit Side

Decrease Side

Credit Side

Normal Balance Side

Increase Side

Purchases JournalPurchases Journal

Special Journal to record ONLY purchases on account NOT FOR CASH

One special amount column where both debit and credit amount are entered.

Saves time in recording entry and in posting. Vendor’s name must be entered in Account

Credited column. Journals must be totaled, proved, and ruled (end

of month and/or page)

PURCHASE INVOICE: Source document for all entries PURCHASE INVOICE: Source document for all entries in purchases journal.in purchases journal.

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3. Initials of person who checked invoice.

1. Stamp date received and purchase invoice number.**DO not confuse with Vendor’s date and number

4. Review vendor’s terms of sale- agreement between buyer and seller about pymt and time frame

2. Place a check mark by each amount received

PURCHASING MERCHANDISE ON ACCOUNTPURCHASING MERCHANDISE ON ACCOUNT

November 2. Purchased merchandise on account from Crown Ltd., $2,039.99. Purchase Invoice No. 83.

1. Which accounts are affected?

Purchases

Accounts Payable

3. How is each amount entered in the accounts?

Costs increase on the debit side.

Liabilities increase on the credit side.

2. How is each account classified?

Purchases is a cost account.

Accounts Payable is a liability account.

2,039.00

2,039.00

Accounts Payable

Purchases

PURCHASING MERCHANDISE ON ACCOUNTPURCHASING MERCHANDISE ON ACCOUNT

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3. Write the purchase invoice number in the Doc. No. column.

1. Write the date.

4. Write the amount of the invoice in the special amount column.

2. Write the vendor name in the Account credited column.

November 2. Purchased merchandise on account from Crown Ltd., $2,039.00. Purchase Invoice No. 83.

TOTALING AND RULING A PURCHASES JOURNALTOTALING AND RULING A PURCHASES JOURNAL

3. Write word Total.

1. Rule a single line across amount column.

4. Add the amount column.

2. Write the date.

5. Write total amount below single line.

6. Rule double lines across amount column. POSTING – CHAPTER 12

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Chapter 10-1Chapter 10-1

TO DO: Work Together, pg 228 On Your Own

Review: Review:

Which of the following should be recorded in the purchases journal???– Buying supplies on account– Purchasing merchandise for cash– Purchasing merchandise on account

What kinds of transactions are recorded in a purchases journal?

Why are there two account titles in the ‘amount column’ of a purchases journal?

What is the advantage of having special amount columns?

Chapter 10-2: Journalizing Cash Payments using a Chapter 10-2: Journalizing Cash Payments using a Cash Payments JournalCash Payments Journal

Special Journals: Cash payments Cash receipts Purchases Sales

Then, for all remaining transactions, use the General journal

Cash Payments JournalCash Payments Journal

Special journal to record ONLY CASH PAYMENT transactions

Source document is usually a check stub; but might be a memo (bank service charge).

EVERY entry has a CREDIT to CASH. General amount columns: for cash payments that

do not occur often (Rent Expense payment) Special columns: Acct Pay DR and Cash CR

PURCHASING MERCHANDISE FOR CASHPURCHASING MERCHANDISE FOR CASH

November 1. Purchased merchandise for cash, $575.00 Check No. 290.

1. Which accounts are affected?

Purchases

Cash

3. How is each amount entered in the accounts?

Costs increase on the debit side.

Assets decrease on the credit side.

2. How is each account classified?

Purchases is a cost account.

Cash is an asset account. Cash

Purchases

575.00

575.00

Lesson 10-2, page 230Lesson 10-2, page 230

2. Write the account title column.

PURCHASING MERCHANDISE FOR CASHPURCHASING MERCHANDISE FOR CASH

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3. Write the check number.

1. Write the date.

4. Write the debit amount.

5. Write the credit amount.

November 1. Purchased merchandise for cash, $575.00 Check No. 290.

What happened in Nov. 2 and Nov. 5 transactions???

BUYING SUPPLIES FOR CASHBUYING SUPPLIES FOR CASH

November 5. Paid cash for office supplies, $34.00. Check No. 292.

1. Which accounts are affected?

Supplies—Office

Cash

4. How is each amount entered in the accounts?

Assets increase on the debit side.

Assets decrease on the credit side.

3. How is each classification changed?

Assets are increased.

Assets are decreased.

2. How is each account classified?

Supplies—Office is an asset account.

Cash is an asset account.

Cash

Supplies—Office

DebitNormal Balance

DebitNormal Balance

34.00

34.00

Lesson 10-2, page 230Lesson 10-2, page 230

Cash Payment on AccountCash Payment on Account

1. Write date

2. Write vendor name

3. Write Check No.

4. Write Debit amount

5. Write Credit amount

Nov. 7. Paid cash on account to Pacific Imports, $1050.00, covering Purchase Invoice No. 81. Check No. 294

CASH PAYMENT OF AN EXPENSECASH PAYMENT OF AN EXPENSE

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3. Write the check number.

1. Write the date.

4. Write the debit amount.

2. Write the account title.

5. Write the credit amount.

Lesson 10-2, page 232Lesson 10-2, page 232

Nov. 9. Paid cash to advertising, $150.00. Check No. 296

To Do: To Do: Work Together

On Your Own

Application Problems 10-1, 10-2

Read Chapter 10

REVIEW: REVIEW:

What is recorded in the general amount columns of the cash payments journal?

What is the difference between purchasing merchandise and buying supplies?

When cash is paid on account, what is the effect on the cash account?

***Remember – Special Journals eliminate the need to write general ledger account titles for each transaction***

Chapter 10-3: Additional Cash Payments Journal Chapter 10-3: Additional Cash Payments Journal OperationsOperations

What kinds of transactions might a business typically write checks for?

Pay an expenseBuy suppliesPurchase merchandiseWithdrawal of cashEstablish and Replenish petty cashMake payment on account

Cash

Supplies—Store Miscellaneous Expense

Advertising ExpenseSupplies—Office

CASH PAYMENT TO REPLENISH PETTY CASHCASH PAYMENT TO REPLENISH PETTY CASH

November 9. Paid cash to replenish the petty cash fund, $205.00: office supplies, $35.00; store supplies, $47.00; advertising, $92.00; miscellaneous, $31.00. Check No. 297.

Accounts Affected

Supplies—Office

Supplies—Store

Advertising Expense

Miscellaneous Expense

Cash

Entered

Debit side

Debit side

Debit side

Debit side

Credit side

Lesson 10-3, page 234Lesson 10-3, page 234

Classification

Asset

Asset

Expense

Expense

Asset

205.0092.0035.00

31.0047.00

CASH PAYMENT TO REPLENISH PETTY CASHCASH PAYMENT TO REPLENISH PETTY CASH

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3. Write the check number.

1. Write the date.

4. Write the debit amounts.

2. Write the titles of accounts for which petty cash was used.

5. Write the credit amount.

***REMEMBER – Petty Cash account is used ONLY whenestablishing the account***

CashMichelle Wu, Drawing

CASH WITHDRAWALS BY PARTNERSCASH WITHDRAWALS BY PARTNERS

November 10. Michelle Wu, partner, withdrew cash for personal use, $1,200.00. Check No. 298.

Accounts Affected

Michelle Wu, Drawing

Cash

1,200.001,200.00

*Must have separate drawing accounts for each partner**Recorded in separate accounts (from capital) to easily determine total amounts for each period

CASH WITHDRAWALS BY PARTNERSCASH WITHDRAWALS BY PARTNERS

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3. Write the check number.

1. Write the date.

4. Write the debit amount.

2. Write the account title.

5. Write the credit amount.

Lesson 10-3, page 235Lesson 10-3, page 235

Prove Cash Payments JournalProve Cash Payments Journal

Proved at the end of the page and ALWAYS at the end of the month.

Add all columns Add the totals of all debit columns Add the totals of all credit columns The debit total and the credit total must equal. Draw a double ruling to represent equality of DR

and CR.

TOTALING, PROVING, AND RULING A CASH PAYMENTS TOTALING, PROVING, AND RULING A CASH PAYMENTS JOURNAL PAGE TO CARRY TOTALS FORWARDJOURNAL PAGE TO CARRY TOTALS FORWARD

Lesson 10-3, page 236Lesson 10-3, page 236

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3. Write Carried Forward.

1. Rule a single line.

4. Place check mark in Post. Ref. column.

2. Write the date.

5. Write each column total.

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6. Rule double line.

STARTING A NEW CASH PAYMENTS JOURNAL PAGESTARTING A NEW CASH PAYMENTS JOURNAL PAGE

Lesson 10-3, page 237Lesson 10-3, page 237

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3. Write the words Brought Forward.

1. Write the journal page number.

4. Place check mark in Post. Ref. column.

2. Write the date.

5. Record column totals brought forward from previous page.

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TOTALING, PROVING, AND RULING A CASH TOTALING, PROVING, AND RULING A CASH PAYMENTS JOURNAL AT THE END OF A MONTHPAYMENTS JOURNAL AT THE END OF A MONTH

Lesson 10-3, page 238Lesson 10-3, page 238

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3. Write Totals.

1. Rule a single line.

4. Write each column total.

2. Write the date.

5. Rule double line if DR=CR

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MUST prove DR = CR

TO DO: TO DO:

Work Together On Your Own

Chapter 10-4: Journalizing Other Transactions Using a Chapter 10-4: Journalizing Other Transactions Using a General Journal General Journal

ALL transactions that CANNOT be recorded in a special journal

Supplies purchased on account. Partner withdrawal of merchandise.

– Debit to Drawing account– Credit to Purchases

Correcting Entry– ex) Recorded an entry as a debit to supplies and it

should have been purchases.

Buying Supplies on AccountBuying Supplies on Account

Nov. 6. bought store supplies on account from Foxfire Supply, $210. Memo no. 52.

What accounts are affected?– Supplies - Office and Accounts Payable/vendor

What is the classification of each account?– Asset Supplies/ Accounts Pay/vendor liability

How are they affected?– Supplies + Accounts Payable/vendor +

Do you debit or credit?– Supplies-debit Accounts Payable/vendor-credit

2. Write the account title.

BUYING SUPPLIES ON ACCOUNTBUYING SUPPLIES ON ACCOUNT

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3. Write the memorandum number.

1. Write the date.

4. Write the debit amount.5. Write the account title

and vendor name.

6. Place diagonal line in Post. Ref. column.

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Lesson 10-4, page 241Lesson 10-4, page 2417. Write the credit amount.

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Nov. 6. bought store supplies on account from Foxfire Supply, $210. Memo no. 52.

Why the diagonal lines????Why the diagonal lines????

The general ledger account - Accounts Payable and the vendor account - Foxfire Supply are affected by this credit part of the entry

Both titles are recorded, separated by a diagonal line Diagonal line is repeated in Post Ref column to show

that single credit amount is posted to 2 accounts (CHAPTER 12)

Withdrawals by OwnerWithdrawals by Owner

Assets– Cash – Cash payments– Supplies – General – Equipment – General – etc.

Merchandise – General – A withdraw of merchandise affects the

PURCHASES account - decrease

PurchasesKarl Koehn, Drawing

MERCHANDISE WITHDRAWALS BY PARTNERSMERCHANDISE WITHDRAWALS BY PARTNERS

November 12. Karl Koehn, partner, withdrew merchandise for personal use, $300.00. Memorandum No. 53.

Accounts Affected

Karl Koehn, Drawing

Purchases

Lesson 10-4, page 242Lesson 10-4, page 242

300.00300.00

MERCHANDISE WITHDRAWALS BY PARTNERSMERCHANDISE WITHDRAWALS BY PARTNERS

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3. Write the memorandum number.

1. Write the date.

4. Write the debit amount.

2. Write the account title Karl Koehn, Drawing.

5. Write the account title Purchases.

6. Write the credit amount.

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Lesson 10-4, page 242Lesson 10-4, page 242

REVIEW: REVIEW:

WHICH JOURNAL?????

Paying cash on account Buying supplies on account Purchasing merchandise on account Buying supplies for cash Merchandise withdrawal by partner Purchasing merchandise for cash

TO DO: TO DO:

Work Together On your Own

10-4 Review: 10-4 Review:

What journal is used to record transactions that cannot be recorded in special journals?

Why is a memo used as the source doc when supplies are bought on account?

Why are 2 account titles written for the credit amount when supplies are bought on account?

When is the equality of DR and CR proved for a general journal?

Why is the cash pymts journal NOT used when a partner withdrawals merchandise for personal use?