1. Week 8

2.  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.

3.  Transaction: purchase by business of merchandise on account ONLY!  Debit Purchases/Credit Accounts Payable  Need to identify the vendor

4.  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.

5.  Transaction: any cash payments made by business recorded in this journal.  Source document is usually a check.  Anytime business spends cash/money.

6.  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.

7.  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.

8.  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!

9.  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.

10.  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.

11.  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.

12.  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.