Week 8
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Using an expanded journal is not practical or
efficient as the amount of transactions grows.
Special journals that capture a specific type of
transaction can be used.
The journalizing effort can be shared among
multiple bookkeepers/accounting clerks.
The posting effort can be shared among
multiple bookkeepers/accounting clerks.
There are several special journals, the
business decides which it will use.
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Transaction: purchase by business of merchandise
on account ONLY!
Debit Purchases/Credit Accounts Payable
Need to identify the vendor
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Purchase Requisition: submitted by business
department “requesting” something. Usually
sent to purchasing department.
Purchase Order: prepared by purchasing
department and sent to vendor.
Purchase Invoice: prepared by vendor and
sent to business. Identifies products,
quantities, amount due, terms of sale.
Packing Slip: accompanies shipment.
Identifies contents shipped.
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Transaction: any cash payments made by
business recorded in this journal.
Source document is usually a check.
Anytime business spends cash/money.
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Offered by vendor to encourage early
payment of invoice.
Terms: 2/10, n/30 translates to 2% off if paid
within 10 days of invoice date otherwise net
(full) amount due in 30 days.
Business can reduce amount they have to pay
on invoice.
Amount of reduction known as a purchase
discount. Amount is reflected in an account
known as Purchases Discount.
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Purchases Discount has normal credit balance. It
affects the Purchases account which has a normal
debit balance. So, Purchases Discount reduces the
account it affects, namely Purchases. So, Purchases
Discount is referred to as a “contra” account since
it runs contrary to or opposite the account if
affects.
Recall, the business has an accounts payable at the
full amount that they owe however they end up
paying less than they owe so Purchases Discount
reflects that difference.
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Business purchases $2,000 worth of merchandise
on account. Terms of sale are 2/10, n/30. Business
pays within 10 days so they can take discount.
$2,000 * .02 = $40 discount on purchase. Business
pays $2,000 - $40 = $1,960 to vendor.
How is this payment journalized?
Debit Accounts Payable full amount $2,000
Credit Cash $1,960 to reflect payment
Credit Purchases Discount $40 to reflect discount
$2,000 debit = $1,960 credit + $40 credit
Debits = Credits, which is what we want!
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Recognize that not all transactions can be
entered in a special journal so the business
will maintain a general journal to act as a
catch all for transactions that can not be
journalized in a special journal.
Purchase Returns: business sends product
back to the vendor.
Purchase Allowance: business keeps shipment
but vendor grants allowance so business pays
less than invoice.
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Business will prepare a debit memorandum to
send to vendor identifying the amount of the
debit or reduction to their Accounts Payable.
Debit memo will be source document for
these return and allowance transactions.
Business captures the return or allowance
amount in an account known as
Purchases Returns and Allowances
As with Purchases Discounts this lets
business track returns and allowances in
place of crediting the Purchases account.
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Purchases Returns and Allowances (PRA) has
normal credit balance. It affects the
Purchases account which has a normal debit
balance. So, PRA reduces the account it
affects, namely Purchases. So, PRA is
referred to as a “contra” account since it
runs contrary to or opposite the account if
affects.
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To journalize a return you DEBIT Accounts
Payable/Vendor the amount of the return and
CREDIT Purchases Returns and Allowances
the amount of the return.
To journalize an allowance you DEBIT
Accounts Payable/Vendor the amount of the
allowance and CREDIT Purchases Returns and
Allowances the amount of the allowance.
These contra accounts are used so the
Purchases account is not affected with
credits.