Source documents and journalizing process in a merchandising business
Chapter 11 Partnerships, Merchandising Businesses, and Journalizing Purchases.
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Transcript of Chapter 11 Partnerships, Merchandising Businesses, and Journalizing Purchases.
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Chapter 11Partnerships, Merchandising Businesses, and Journalizing Purchases
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ParternshipAccounting I – sole proprietorship = business owned by one person; personal liabilityPartnership – business owned by 2 or more people; they combine skills and assets. Each owner is called a “partner.” Personal liability
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Third type of ownership:Corporation – (p. 472) can be owned by many people. It is a separate legal entity, and has the legal rights of a person (e.g. tax return).
Each unit of ownership is a share of stock.
Corporations – liability is limited to the assets of the corporation.
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Merchandising BusinessAccounting I - Service Business – provides / sells a service; (e.g., dry cleaner)Manufacturing Business – Makes (i.e., manufactures) things that it sells (e.g., Ford, GM)Merchandising Business – a business that buys and sells things (e.g., Shorian Shop)
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Expanded Journal
In Accounting I, we used a Journal that had 3 special columns (5 total):
Sales Credit:
Cash Debit; and
Cash Credit
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11-Column JournalSix new special columns:1. Accounts Receivable Debit2. Accounts Receivable Credit3. Sales Tax Payable Credit4. Accounts Payable Debit5. Accounts Payable Credit6. Purchases Debit
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Merchandise
•Merchandise – things that a merchandising business sells
•What is the Shorian Shop’s merchandise?
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Merchandise (continued)
Cost of Merchandise – The price a business pays for goods it purchases to sell
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Merchandise (continued)
Markup – The amount added to the cost of merchandise to establish the selling price.
Selling price = cost of merchandise + markup
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Merchandise (continued)
The markup may be a percentage or a dollar amount.
On clothing, the Shorian Shop uses a 30% markup. If the cost of merchandise is $10, what is the selling price with a 30% markup?
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Merchandise (continued)
$10 (cost)
+ $3 (3% of 10$) (markup)
= $13 (price)
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Merchandise (continued)
Vendor – The business from which merchandise is bought
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Purchasing
The account used to record the cost of merchandise that a business buys to sell, is called Purchases.
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Purchases (continued)
The Purchases account is a temporary account – it functions as an expense account. Therefore, it’s normal balance is:
debit
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Purchases (continued)
The Purchases account is used only to record the cost of merchandise the business purchases to sell. (Not supplies, for example.)
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Purchase for CashWhen a business buys merchandise for cash, the transaction affects the following accounts (suppose a purchase of $500):
Purchases Cash $500 $500
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Purchase on AccountWhen a business buys merchandise on account, the following accounts are affected (suppose a purchase of $500):
Purchases Account Payable $500 $500
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Purchases on Account (con’d)If a business only uses a few vendors, they may have a separate account for each vendor. If there are many, they use a single account calledAccount Payable.
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Invoice•An invoice is a form that describes the goods sold, the quantity, and the price.•An invoice used as the source document for recording a purchase on account is a purchase invoice.
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Invoice Number
•The invoice will have an invoice number assigned by the vendor. •Do not use the vendor’s number; assign a new (sequential number)
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Terms of Sale
The buyer and seller agree on when payment is due for the merchandise. The invoice will usually specify the terms.
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Journalizing Cash PaymentsWhen a business pays the money it owes to the vendor for the purchase of merchandise, it decreases the liability (i.e., the amount owed) and decreases cash (asset).
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Journalizing Cash Payments
Accounts Payable Cash
$500 $500
Journalizing a payment of $500 for merchandise previously purchased on account.
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Cash Payment to Replenish Petty Cash
Remember Chapter 7? Petty cash is an imprest fund; it is fixed and the amount STAYS THE SAME – so you only debit petty cash when you ESTABLISH the petty cash fund.
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Cash Payment to Replenish Petty Cash
To replenish petty cash, debit whatever you spent petty cash on, and credit cash. For example, if you spent $50 of petty cash on supplies, and $30 on postage, which accounts would you debit?
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Cash Payments to Replenish Petty Cash
Supplies Postage Expense
$50 $30 Cash
$80
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Withdrawals by Partners
Withdrawals in a partnership are the same as withdrawals in a sole proprietorship, except that each partner has his/her own Drawing account.
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Withdrawals by Partners
Drawing accounts are DEAD accounts; when draws are made, the drawing account increases on the debit side.
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Withdrawals by PartnersIf a partner made a withdrawal of $400, the following accounts would be affected:
Mary Smith, Drawing Cash $400 $400
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Withdrawing Merchandise
Partners can withdraw Merchandise as well as cash. The source document would usually be a memo. Purchases would be credited, and Drawing would be debited.
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Withdrawing MerchandiseIf a partner withdraws merchandise worth $400, the following accounts would be affected:
Mary Smith, Drawing Purchases $400 $400
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Correcting Entries
Entries made to correct a previous entry (e.g., incorrect account) are called correcting entries.