Presentation on theme: "Week 7. Two or more individuals combine their assets and skills to go into business. Each individual is referred to as a partner. Since multiple."— Presentation transcript:
Two or more individuals combine their assets and skills to go into business. Each individual is referred to as a partner. Since multiple individuals are involved in running business the partners typically create a partnership agreement. ◦ Partner investments ◦ Partner duties ◦ How net income/net loss is divided ◦ Contingency in case of death of a partner
Business that purchases and sells goods and products (merchandise). Retail merchandiser sells to the consumer (end user). Wholesale merchandiser buys and resells to the retail merchandiser. The PURCHASES account is used to capture the cost of the merchandise purchased by merchandiser to sell to customers. Purchases has a normal debit balance.
In addition to general debit and credit columns (blue) this expanded journal has numerous SPECIAL AMOUNT COLUMNS (red). A special amount column is a journal amount column headed with an account title and used for a specific account. Since a merchandiser has lots of transactions that affect these accounts they are used to help streamline the journalizing and posting process. Many transactions can be entered on one row in the journal while the column totals for the special amount columns can be posted at the end of the month saving time and improving accuracy.
When a merchandiser buys merchandise to resell the will either pay for the merchandise with cash or purchase ON ACCOUNT. Cash: Debit Purchases and Credit Cash On Account: Debit Purchases and Credit Accounts Payable for the vendor. Vendor if the person or business from which goods or services are purchased.
The first transaction is a purchase of merchandise for cash. Notice the special amount columns are used for both the debit and credit. The second transaction shows the purchase of merchandise on account. The check mark indicates that special amount columns are used so no account needed to be identified. Remember, the account for a special amount column is identified in the heading of the column. For the on account transaction the vendor is identified in the Account Title column so the business knows to whom they OWE. It’s important to remember that the PURCHASES account is ONLY used for the purchase of MERCHANDISE. It reflects the COST to the business.
Reflect business activities where cash is spent by the business. ◦ Buy supplies ◦ Pay expense ◦ Make on account payment ◦ Owner withdrawal In all these instances CASH is CREDITED!
Notice how all the cash payment transactions have a CREDIT for cash to reduce that asset account. Notice that the source document for the cash payments are checks. Notice since multiple transactions used the general debit column an account needed to be identified so that amount could be posted correctly. ANYTIME the general debit or general credit column is used an account MUST be identified in the Account Title column otherwise you wouldn’t know where to post that amount. In the third transaction the vendor is identified in the Account Title column so the business knows who they PAID.
When a merchandiser sells merchandise to a customer for cash or sale ON ACCOUNT. The RETAIL merchandiser must collect SALES TAX from the consumer (end user). Tax is generally a percentage of the sale amount such as 6% (.06) or 7.5% (.075) Most states and localities (cities/counties) require the tax to be collected by the business. The business does NOT keep the tax that is collected.
The business collects the tax from the customer and places it in a liability account known as Sale Tax Payable. This account is a liability because the business OWES this money to the government. As with all liabilities, Sales Tax Payable has a normal CREDIT balance.
Sales tax rate is 7.5% (.075) Customer buys $96 worth of goods for cash. Sales tax on $96 is 96*.075 = $7.20 That $7.20 is added to the $96 so the customer pays $96+$7.20=$103.20 Cash is DEBITED $103.20 (amount paid) Sales is CREDITED $96 (goods bought) Sales Tax Payable is CREDITED $7.20 (tax)
Sales tax rate is 6% (.06) Customer buys $200 worth of goods on account. Sales tax on $200 is 200*.06 = $12 That $12 is added to the $200 so the customer OWES $200+$12=$212 Accounts Receivable is DEBITED $212 Sales is CREDITED $200 (goods bought) Sales Tax Payable is CREDITED $12 (tax)
The sales credit amount (the amount of goods bought) is multiplied by the sales tax rate to calculate the sales tax payable amount. The first transaction is a cash sale. Notice the debit to cash equals the sales credit PLUS the sales tax payable credit. The check mark indicates that special amount columns were used instead of the general debit and credit columns. The second transaction is a sale on account. Instead of cash, accounts receivable is debited the sum of sales credit plus sales tax payable. The customer is identified in the Account Title column so the business knows who OWES them. The source docs for the first transaction is the cash register tape (T12) for that day while the SI8 for the on account sale transaction reflects the Sales Invoice for this customer (didn’t pay cash at time of sale).
Reflect business activities where cash is received by the business. ◦ Customer makes on account payment ◦ Owner investment In these instances CASH is DEBITED!
Notice that cash receipt transactions involve a DEBIT to cash. The first transaction involves a customer paying on account. Notice that when the customer pays their accounts receivable is CREDITED (decreased) by the amount of the payment. The customer is identified in the Account Title column so the business knows who paid. The second transaction shows additional cash investment in the business by the owner. The owner’s capital account is listed in the Account Title column along with the associated amount in the general credit column. This amount, of course, matches the debit to cash.
Proving and ruling the journal involves proving the total debits equal the total credits. When the bottom of a journal page is reached and more transactions for the month need to be added to a new journal page then you prove and rule. When the end of the month arrives and you want to post the transactions to the ledger you prove and rule.
When the journal page is full and a new journal page is needed for the month the columns are totaled by drawing a single line (rule) then total debits are compared to total credits (prove). If total debits=total credits (proves) a double line is entered under the column totals and the column totals from the filled journal page are carried forward to the top of the new journal page.
The column TOTALS from the special amount columns can be posted. After all, the amount is going into the account specified in the column heading. For example, the special amount column total for CASH DEBIT can be posted as a debit to the cash account in the ledger. All of the individual cash debit amounts do NOT need to be posted. All of the column totals for the special amount columns can be posted.
The column TOTALS from the general debit and credit columns are NOT posted. What account would you use anyway? The individual amounts in the general debit and credit columns must be posted to the account identified in the Account Title column.