INTRO 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 219-220
 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 10
Journalizing Purchases and Cash
Payments Using Special Journals
Objectives:
 Define accounting terms related to purchases and
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
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 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
Partnership
ADVANTAGES
 More Capital
 More expertise
 Share losses
 Combine assets
DISADVANTAGES
 Share decisions
 Share profits
 Unlimited liability
TYPES 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 
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 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 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 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

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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 Merchandise
 ‘Purchased Merchandise’ ALWAYS means that
Purchases is DEBITED
Purchases 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 Payable
 Classification Liability - 2110
 This account summarizes the total amount owed
to all vendors in a single account.
Accounts Payable
Debit Side
Credit Side
Decrease Side
Normal Balance Side
Increase Side
Purchases Journal
 Special Journal to record ONLY purchases on
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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
in purchases journal.
1
4
2
1. Stamp date received and purchase invoice number.
**DO not confuse with Vendor’s date and number
2. Place a check mark by each amount received
3. Initials of person who checked invoice.
4. Review vendor’s terms of sale- agreement between
buyer and seller about pymt and time frame
3
PURCHASING MERCHANDISE ON ACCOUNT
November 2. Purchased merchandise on account from Crown
Ltd., $2,039.99. Purchase Invoice No. 83.
Purchases
1. Which accounts are affected?
Purchases
Accounts Payable
2. How is each account classified?
Purchases is a cost account.
Accounts Payable is a liability account.
3. How is each amount entered in the accounts?
Costs increase on the debit side.
Liabilities increase on the credit side.
2,039.00
Accounts Payable
2,039.00
PURCHASING MERCHANDISE ON ACCOUNT
1
2
3
4
1. Write the date.
2. Write the vendor name in the Account credited column.
3. Write the purchase invoice number in the Doc. No. column.
4. Write the amount of the invoice in the special amount column.
November 2. Purchased merchandise on account from Crown
Ltd., $2,039.00. Purchase Invoice No. 83.
TOTALING AND RULING A PURCHASES JOURNAL
1
2
3
1. Rule a single line across amount column.
2. Write the date.
3. Write word Total.
4. Add the amount column.
5. Write total amount below single line.
6. Rule double lines across amount column.
POSTING – CHAPTER 12
5
6
4
Chapter 10-1
 TO DO:
 Work Together, pg 228
 On Your Own
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
Cash Payments Journal
Special Journals:
 Cash payments
 Cash receipts
 Purchases
 Sales
Then, for all remaining transactions, use the
 General journal
Cash Payments Journal
 Special journal to record ONLY CASH PAYMENT
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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 CASH
November 1. Purchased merchandise for cash, $575.00 Check
No. 290.
Purchases
1. Which accounts are affected?
Purchases
Cash
2. How is each account classified?
Purchases is a cost account.
Cash is an asset account.
3. How is each amount entered in the accounts?
Costs increase on the debit side.
Assets decrease on the credit side.
575.00
Cash
575.00
Lesson 10-2, page 230
PURCHASING MERCHANDISE FOR CASH
1
4
2
5
3
November 1. Purchased merchandise for cash, $575.00 Check No. 290.
1. Write the date.
2. Write the account title column.
3. Write the check number.
4. Write the debit amount.
5. Write the credit amount.
What happened in Nov. 2 and Nov. 5 transactions???
BUYING SUPPLIES FOR CASH
November 5. Paid cash for office supplies, $34.00. Check No. 292.
3. How is each classification changed?
Assets are increased.
Assets are decreased.
4. How is each amount entered in the accounts?
Assets increase on the debit side.
Assets decrease on the credit side.
Supplies—Office
Debit
Normal Balance
34.00

Cash
Debit
Normal Balance
34.00

1. Which accounts are affected?
Supplies—Office
Cash
2. How is each account classified?
Supplies—Office is an asset account.
Cash is an asset account.
Lesson 10-2, page 230
Cash Payment on Account
Nov. 7. Paid cash on account to Pacific Imports, $1050.00,
covering Purchase Invoice No. 81. Check No. 294
1. Write date
2. Write vendor name
3. Write Check No.
4. Write Debit amount
5. Write Credit amount
CASH PAYMENT OF AN EXPENSE
1
2
1. Write the date.
2. Write the account title.
3. Write the check number.
4. Write the debit amount.
5. Write the credit amount.
3
4
5
Nov. 9. Paid cash to advertising,
$150.00. Check No. 296
Lesson 10-2, page 232
To Do:
Work Together
On Your Own
Application Problems 10-1, 10-2
Read Chapter 10
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
Operations
 What kinds of transactions
might a business typically write
checks for?
Pay an expense
Buy supplies
Purchase merchandise
Withdrawal of cash
Establish and Replenish petty cash
Make payment on account
CASH 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
Supplies—Office
35.00
Supplies—Store
47.00
Classification
Asset
Asset
Expense
Expense
Asset
Advertising Expense
92.00
Entered
Debit side
Debit side
Debit side
Debit side
Credit side
Cash
205.00
Miscellaneous Expense
31.00
Lesson 10-3, page 234
CASH PAYMENT TO REPLENISH PETTY CASH
2
1
5
3
4
1. Write the date.
2. Write the titles of accounts for which petty cash was used.
3. Write the check number.
4. Write the debit amounts.
5. Write the credit amount.
***REMEMBER – Petty Cash account is used ONLY when
establishing the account***
CASH 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
Michelle Wu, Drawing
1,200.00
Cash
1,200.00
*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 PARTNERS
2
1
3
4
5
1. Write the date.
2. Write the account title.
3. Write the check number.
4. Write the debit amount.
5. Write the credit amount.
Lesson 10-3, page 235
Prove 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
JOURNAL PAGE TO CARRY TOTALS FORWARD
1
2
3
6
4
1. Rule a single line.
2. Write the date.
3. Write Carried Forward.
4. Place check mark in Post. Ref. column.
5. Write each column total.
6. Rule double line.
5
Lesson 10-3, page 236
STARTING A NEW CASH PAYMENTS JOURNAL PAGE
1
2
3
4
5
1. Write the journal page number.
2. Write the date.
3. Write the words Brought Forward.
4. Place check mark in Post. Ref. column.
5. Record column totals brought forward from previous page.
Lesson 10-3, page 237
TOTALING, PROVING, AND RULING A CASH
PAYMENTS JOURNAL AT THE END OF A MONTH
1
2
5
3
1. Rule a single line.
2. Write the date.
3. Write Totals.
4. Write each column total.
5. Rule double line if DR=CR
MUST prove DR = CR
4
Lesson 10-3, page 238
TO DO:
 Work Together
 On Your Own
Chapter 10-4: Journalizing Other Transactions Using a
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 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
BUYING SUPPLIES ON ACCOUNT
2
4
3
1
5
6
7
Nov. 6. bought store supplies on account from Foxfire Supply, $210.
Memo no. 52.
1. Write the date.
2. Write the account title.
3. Write the
memorandum number.
4. Write the debit amount.
5. Write the account title
and vendor name.
6. Place diagonal line in Post. Ref. column.
7. Write the credit amount.
Lesson 10-4, page 241
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 Owner
 Assets
– Cash – Cash payments
– Supplies – General
– Equipment – General
– etc.
 Merchandise – General
– A withdraw of merchandise affects the
PURCHASES account - decrease
MERCHANDISE WITHDRAWALS BY PARTNERS
November 12. Karl Koehn, partner, withdrew merchandise for
personal use, $300.00. Memorandum No. 53.
Accounts Affected
Karl Koehn, Drawing
Purchases
Karl Koehn, Drawing
300.00
Purchases
300.00
Lesson 10-4, page 242
MERCHANDISE WITHDRAWALS BY PARTNERS
2
3
1
5
4
6
1. Write the date.
2. Write the account title Karl Koehn, Drawing.
3. Write the memorandum number.
4. Write the debit amount.
5. Write the account title Purchases.
6. Write the credit amount.
Lesson 10-4, page 242
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:
 Work Together
 On your Own
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?