Advanced Accounting
Chapter 1
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Recording Departmental Purchases and Cash Payments
The way accounting information is kept and reported depends on the size,
type, and complexity of the business.
Section 1: Using Accounting Principles and Records
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In a corporation the value of the owner’s equity is referred to as stockholders’
equity.
Accounting equation: assets = liabilities + owner’s equity
Assets listed on the left side of the equation and in the T Account
Liabilities and Owner’s Equity are on the right side of the equation and in the
T Account
Total assets must equal total liabilities plus owner’s equity
Accounting records show changes and current account balance of each A, L
and OE account
The unit of measurement concept states that business transactions are
reported in numbers that have common values.
Each journal entry must be supported by a source document proving the
transaction occurred.
Accounting equation is the basis for all double-entry accounting
The total value of all things owned by a business equals the total value of
claims of outsiders
Debits equal credits for each business transaction
A general journal may be used to record all business transactions OR special
journals can be used
o Purchases: all purchases of merchandise on account
o Cash Payments: for all cash payments
o Sales: for all sales of merchandise on account
o Cash Receipts: for all cash received by the business
Transactions are journalized in chronological order and are periodically sorted
to summarize like kinds of information.
Each business transaction causes a change in two or more account balances
Increases in an account balance are recorded in the same column as its
normal balance
Decreases in an account balance are recorded in the column opposite its
normal balance
NORMAL BALANCE SIDE
o Any Asset = DEBIT
o Any Liability = CREDIT
o Stockholders’ Equity = CREDIT
o Any Revenue = CREDIT
Any Expense = DEBIT
Accounts for customers who buy on account are kept in an accounts
receivable ledger and the controlling account is Accounts Receivable
Accounts Payable ledger is for vendors to whom money is owed and the
controlling account is Accounts Payable
Numbering System meets three needs
o A separate numeric listing is provided for each ledger division
A predesigned arrangement of numbers provided within each ledger
division
o Enough account number digits to allow addition of new accounts
New accounts are assigned numbers using the unused middle number method
– when no exact middle number use the next whole number
The rule for rounding states that decimals less than 5 are rounded down, and
decimals 5 or greater are rounded up.
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Section 2: Journalizing and Posting Purchases and Purchases Returns
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Accounting information can determine the kinds of merchandise that produce
the greatest or least profit
With departmental accounting systems, gross profit is calculated for each
department
The general ledger must then include a number of separate department
accounts (Purchases and Purchases Returns and Allowances)
Merchandising Businesses may have two types of equipment – purchase for
sale or to be used by the business
Purchase invoices are used as the source document for all purchases on
account
All departmental purchases of merchandise on account are recorded in a
purchases journal
Each purchase invoice has a notation placed on it showing to which
department the purchase applies
Each department has a separate Purchases Debit column in the purchases
journal
Journalize a Purchase on Account
o Date, vendor name, invoice number, amount recorded in Accounts
Payable credit column, amount recorded in the correct department’s
Purchases Debit column
Individual amounts in the A/P Credit column of Purchases journal are posted
to the vendor accounts – Purchases journal abbreviated P for Post. Ref.
column
Purchases of merchandise on account are recorded in the purchase journal
Purchases of merchandise for cash are recorded in the cash payments journal
The purchases journal is proved and ruled at the end of the month and the
totals of the special columns are posted to the general ledger accounts.
Merchandise may be returned to a vendor for a variety of reasons – the
business will then need an adjustment to what they owe the vendor through a
debit memo
The customer sends the debit memo to let the vendor know the details of the
purchases return or allowance
An account showing deductions from a purchases account is a contra cost
account
Purchases returns and allowances (PRA) are kept in separate account and not
deducted directly from the purchases account to help determine the
proportion of the merchandise that was returned to the vendors
Record PRA in the special journal Purchases Returns and Allowances
PRA are posted like usual from the Accounts Payable Debit column – PR to
indicate the special journal
A PRA may be made after payment so the vendor account may have a debit
balance instead of credit
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A contra balance is shown by enclosing the amount in ( ) in the account’s
Balance column
Prove, rule, and post the journal at the end of the month
Section 3: Journalizing and Posting Cash Payments and Reconciling the
Bank Statement
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Cash payments are usually made by check and are recorded in the Cash
Payments Journal
Seller’s can encourage early payment by allowing deductions from the invoice
amount
A purchases discount is usually stated as a percentage: 2/10, n/30 (2% discount
if paid in the first 10 days, net (total) due in 30 days)
A purchases discount reduces the net amount of cash paid for a purchase
Purchases discounts are kept in separate accounts and not deducted from the
purchases accounts
Help the business see what proportion of purchases on account were allowed
purchases discounts
Journalize cash payment with purchases discount: debit AP, credit Cash and
correct department’s Purchases Discounts
If discount taken after PRA then have to deduct the PRA from the invoice amount
and then figure the discount – refer to page 22
Journalize purchase of supplies and expenses like previously learned in the Cash
Payments journal
Petty Cash fund is replenished when it falls below a certain level or at the end of
the month – write a check and cash it to replenish
Should post often from the General Debit and Credit columns to the General
Ledger and also the Accounts Payable Debit column
At the end of the month prove, rule, and post the totals of the special columns –
a check mark is ( ) is used to indicate General debit and credit column totals are
not posted
Bank statements are sent to customers to summarize accounts activities – need
to reconcile the statement with the checkbook balance
All bank charges listed on a bank statement are considered cash payments – use
a memo to record the transaction in the CP journal
Bank service charges = Miscellaneous Expense
Credit Card Fees = Credit Card Fee Expense