Understanding Accounting

1. Chapter 9 Vocab Test Review Understanding Accounting Work to understand accounting instead of memorizing. If you can understand the concepts, there will be a bonus. When you sit down to begin studying for a big vocabulary test, you will discover that you know the material much better. In fact, if you work for understanding, your study time for big tests may drop dramatically as you discover that you “know it”.  .

2. Lesson 9-1 Merchandising Businesses • A merchandising business that sells to those who use or consume the goodsis called a retail merchandising business. (You commonly buy from retailers.) • A wholesale merchandising business buys and resells merchandise primarily to other merchandising businesses. (Wholesalers own those trucks parked by Witbecks in the mornings before school.)

3. Lesson 9-1 Forming a Corporation • A corporation is an organization with the legal rights of a personwhich many persons or other corporations may own. (Corporations can own property and enter into contracts, just like a person can.) • Each unit of ownership in a corporation is called a share of stock. • The owner of one or more shares of stock is called a stockholder. • The total shares of ownership in a corporation are called capitalstock. (Capital Stock Account)

4. Lesson 9-1 Forming a Corporation Continued from previous slide. • The articles of incorporation, a legal document that identifies basic characteristics of a corporation, is a part of the application submitted to a state to become a corporation.

5. Lesson 9-1 Subsidiary Ledgers and Controlling Accounts • A business from which merchandise, supplies, or other assets are purchased is called a vendor. • A ledger that issummarized in a single general ledger account is called a subsidiary ledger. • The subsidiary ledger containing vendor accounts is called an accounts payable ledger. • An account in a general ledger that summarizes all accounts in a subsidiary ledger is called a controlling account. • If the General Ledger’s Accounts Payable account balance equals the total of all of the accounts in the Accounts Payable Subsidiary Ledger, you control accuracy. And your work is correct.**Check out the example on the next slide.

6. Lesson 9-1 Subsidiary Ledgers and Controlling Accounts The total of the accounts in the Accounts Payable Subsidiary Ledger equals the balance of the controlling account, Accounts Payable.

7. Lesson 9-2 Measuring Inventory • A list of assets, usually containing the value of individual items, is called an inventory. • Remember the supply inventory? • The goods a business has on hand for sale to customers is called merchandise inventory.

8. Lesson 9-2 Perpetual Inventory Method • An inventory determined by keeping a continuous (AKA PERPETUAL) record of increases, decreases, and the balance on hand of each item of merchandise is called a perpetual inventory.

9. Lesson 9-2 Periodic Inventory Method • A merchandise inventory evaluated at the end of a fiscal period is called a periodic inventory. • When a periodic inventory is conducted by (physically) counting, weighing, or measuring items of merchandise on hand, it is called a physical inventory. • Note: A periodic inventory method does not require records of the quantity and cost of individual goods. (It is the perpetual inventory that requires the records.)

10. Lesson 9-2 Purchasing Merchandise to Sell • The amount a business pays for goods it purchases to sell is called cost of merchandise. • Asset? Liability? Owners Equity? Nope… There is a new account classification: The Purchases account is classified as a “Cost of Goods Sold” account. It is listed in the “Cost of Goods” section of the Income Statement. • On the Income Statement: • Sales – Cost of Goods Sold – Expenses = Net Income

11. Lesson 9-2 Ordering Merchandise • Requisition: A form requesting the purchase of merchandise. (You are asking for permission, which is approved by management.) • PurchaseOrder: A form requesting that a vendor sell merchandise to a business.

12. Lesson 9-2 Using Different Journals • A journal used to record only one kind of transaction is called a special journal. • Businesses typically use five journals: • Purchases journal—for all purchases of merchandise on account • Cash payments journal—for all cash payments • Sales journal—for all sales of merchandise on account • Cash receipts journal—for all cash receipts • General journal—for all other transactions

13. Lesson 9-2 A Special Journal • Purchase on Account: A transaction in which the items purchased are to be paid for later. • A purchases journal is a special journal used to record only purchases of merchandise on account. • A journal amount column headed with an account title is called a special amount column.

14. Lesson 9-2 Purchasing • An invoice used as a source document for recording a purchase on account transaction is called a purchase invoice. • An agreement between a buyer and a seller about payment for merchandise is called the terms of sale. (2/10, n/30 = 2% deduction if paid in 10 days; otherwise, the full amount is due in 30 days.) • Example: Merchandise with a list price of $1,500 was purchased on account for $900.00 on May 8. Terms of sale are 2/10, n/30 • If you pay on account in ten days, you would pay $882.00. • If you pay on account after May 18, you would pay $900.00.

15. Lesson 9-2 Purchasing Merchandise on Account November 6. Purchased merchandise on account from Wynn Lighting, $1,082.50. Purchase Invoice No. 525. Purchases 1,082.50 Accounts Payable 1,082.50

16. Lesson 9-3 Posting from a Purchases Journal to an Accounts Payable Ledger (Subsidiary Ledger) 1

17. Lesson 9-3 Posting the Total of a Purchases Journal to a General Ledger (Total is posted to two accounts.)

18. Lesson 9-4 Special Journal • A cash payments journal is a special journal used to record only cash payment transactions.

19. Lesson 9-4 Trade Discount • List Price: The retail price listed in a catalog or on an Internet site. • A trade discount is a reduction in the list price granted to a merchandising business. (Example: 60% Trade Discount means 60% off list price.) • The price after the trade discount has been deducted from the list price is referred to as the net price. • Remember: When journalizing a cash purchase of merchandise that had a trade discount, debit purchases for the net price, and credit cash for the net price. • Just record how much the merchandise cost you.

20. Lesson 9-4 Cash Discount • A cash discount is a deduction that a vendor allows on an invoice amount to encourage prompt payment. (Remember: 2/10, n/30) • A journal amount column that is not headed with an account title is called a general amount column.

21. Buying Supplies for Cash (Supplies bought for use in the business must be recorded in the supplies account.) Supplies—Office November 6. Wrote a check to Wells Office Supply for store supplies, $56.20. Check No. 690. 56.20 Cash 56.20

22. Lesson 9-4 Cash Payments on Account with Purchases Discounts • The period of time during which a customer may take a cash discount is called the discount period. • Typically 10 days. (2/10 n/30) • When a company that has purchased merchandise on account takes a cash discount, it is called a purchases discount. • An account that reduces a related account on a financial statement is called a contra account. • (Purchases Discount is a contra account to the Purchases account.) • Since contra accounts offset their related accounts, their normal balance side is opposite the normal balance of their related accounts. (Purchases=Debit; so Purchases Discount has aCredit normal balance)

23. Lesson 9-4 Cash Payments on Account with Purchases Discounts November 14. Paid cash on account to Galle Electric, $627.20, covering Purchase Invoice No. 489 for $640.00, less 2% discount, $12.80. Check No. 702. Accounts Payable 640.00 Purchases Discount Cash Cash Discount Purchase Invoice Amount Less the Cash Discount 12.80 627.20

24. Lesson 9-4 Replenishing a Petty Cash Fund November 22. Paid cash to replenish the petty cash fund, $214.82: advertising, $124.00; store supplies, $62.18; miscellaneous, $28.95; cash over, $0.31. Check No. 707. Total CashPayment Cash Short and Over is a temporary expense account.

25. Lesson 9-4 Lesson 9-4 Audit Your Understanding 1. What is the net price of an item with a $1,000.00 list price having a 60% trade discount? (60% off means you pay 40% of the list price) ANSWER • $400.00 (Multiply 1,000 by 40%) To journalize this transaction: Debit Purchases for 400.00 and credit cash (or accounts payable for 400.00)

26. Lesson 9-5 Posting from a Cash Payments Journal to an Accounts Payable Ledger • A credit limit is the maximum outstanding balance allowed to a customer by a vendor. • Note: It is important to post to an accounts payable ledger frequently to pay accounts on time, take advantage of cash discounts for paying within ten days, and avoid reaching credit limits.

27. Lesson 9-5 Posting from a Cash Payments Journal to an Accounts Payable Ledger (Subsidiary Ledger) Remember: If an employee needs to trace a transaction back to the correct journal, he/she would simply refer to the post reference column. Journal Entry: Page 21 of the Cash Payments Journal

28. Lesson 9-5 Posting from the General Amount Columns of a Cash Payments Journal to a General Ledger Note: A purchase of merchandise for cash must be posted individually to the Purchases General Ledger card. It’s recorded in the general debit column. (The 480.00 Cash credit will be posted when the column total is posted.)

29. Lesson 9-5 Posting from the Special Amount Columns of a Cash Payments Journal to a General Ledger

30. Lesson 9-5 Completed Accounts Payable Ledger Next Step: Create a Schedule of Accounts Payable (Proves accuracy of posting)

31. Lesson 9-5 Proving the Accounts Payable Ledger • A listing of vendor accounts, account balances, and the total amount due to all vendors is called a schedule of accounts payable. (Like your class schedule is a list of your classes for the semester, this schedule is a list of accounts owed.)

32. Chapter 9 The EndThank you for your extra effort!