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Journalizing Purchases & Cash Payments

Journalizing Purchases & Cash Payments. Chapter 11. Ch.11 game. Partnerships/Merchandising Business. What is a proprietorship? Partnership: a business owned by 2 or more people. What is a service business? Merchandising business: a business that purchases and sells goods.

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Journalizing Purchases & Cash Payments

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  1. Journalizing Purchases &Cash Payments Chapter 11

  2. Ch.11 game

  3. Partnerships/Merchandising Business • What is a proprietorship? • Partnership: a business owned by 2 or more people. • What is a service business? • Merchandising business: a business that purchases and sells goods.

  4. Using an Expanded Journal • Service businesses have large amounts of cash transactions. • Merchandising business have large amounts of noncash payments. • Need to use different journal • Need columns for frequently occurring transactions • Will be using 11-column journal

  5. Journalize Purchase of Merchandise • Cost of merchandise: the price that a business pays for the goods that it sells. • Ex. How much Footlocker pays Nike to buy shoes to sell in its stores. • How does Footlocker make money/profit from selling a pair of shoes? • Markup: amount added to the cost of merchandise to establish a selling price. • 10 products with big markups

  6. Revenue earned from the sale of mdse. includes both the cost of mdse. and markup. • Only the markup increases capital. • In addition to purchasing mdse., business also buy supplies and other assets. • They buy these items from vendors. A vendor is a business from which merchandise is purchased or other assets are bought.

  7. PURCHASES • Account for recording the cost of merchandise purchased. • Account is classified as a COST Account. • Temporary account • Reduces capital when merchandise is purchased • Normal DEBIT balance • Only used for the purchases of merchandise

  8. PURCHASES • Ex: Purchased merchandise for cash, $483. C259 • What 2 accounts are used? • Purchases and Cash • Purchases increases, Cash decreases • Debit Purchases, Credit Cash

  9. PURCHASES on ACCOUNT • A transaction in which merchandise purchased is to be paid for at a later date. • To avoid a bulky general ledger, the total amount due to all vendors can be summarized in a single general ledger account. • ACCOUNTS PAYABLE

  10. ACCOUNTS PAYABLE • Keeps track of all amounts owed to vendors. • Liability • Normal Credit balance • An invoice used as a source document for recording a purchases on account transaction is called a purchases invoice.

  11. ACCOUNTS PAYABLE • Ex: Purchased merchandise on account from Veloz Automotive, $1754. P74 • What 2 accounts are used? • Purchases and Accounts Payable • Purchases increases, Cash decreases • Debit Purchases, Credit Accounts Payable

  12. ACCOUNTS PAYABLE • Ex: Bought store supplies on account from Antelo Supply, $160. M43 • What 2 accounts are used? • Supplies-Store and Accounts Payable • Supplies-Store increases, Accounts Payable increases • Debit Supplies-Store, Credit Accounts Payable

  13. Merchandise Withdrawal • Ex: Dan Smith, partner, withdrew merchandise for personal use, $200. M44 • What 2 accounts are used? • Purchases and Drawing • Purchases decreases, Drawing increases • Debit Drawing, Credit Purchases • TAKES UP TWO LINES IN JOURNAL

  14. CORRECTING ENTRY • What happens when an error is made in a journal entry has been posted? • Needs to be corrected with a journal entry. • Correcting entry: a journal entry made to correct an error in the ledger. • Source document is a Memorandum

  15. CORRECTING ENTRY • Ex: Discovered that a payment of cash for advertising in October was journalized and posted in error as a debit to Miscellaneous Expense instead of Advertising Expense, $120. M21 • What 2 accounts are used? • Advertising Expense and Miscellaneous Expense • Need to add $120 to Advertising Expense • Need to deduct $120 from Miscellaneous Expense • Advertising increases, Miscellaneous decreases • Debit Advertising Expense, Credit Miscellaneous Expense

  16. What do you think? • Frances Phillips and Stella Rushing are partners in a frozen food market named The Fishing Net. The partners continually monitor the expiration dates of their inventory to assure that only fresh products are stored in the freezers. Rather than discarding the inventory, the partners agreed to donate the inventory to an orphanage just prior to its expiration date. After several months, Ms. Rushing began to take some of the expiring home for personal use. Lately, Ms. Rushing has even taken home new items.

  17. What do you think? • Analyze whether Stella Rushing’s latest actions demonstrate ethical behavior. • Is the action illegal? • Does the action violate company or professional standards? • Who is affected, and how, by the action? • What actions should her partner, Ms. Phillips take? Explain your position.

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