Chapter 11Partnerships, Merchandising Businesses, and Journalizing Purchases

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

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.

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)

Expanded Journal

In Accounting I, we used a Journal that had 3 special columns (5 total):

Sales Credit:

Cash Debit; and

Cash Credit

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

Merchandise

•Merchandise – things that a merchandising business sells

•What is the Shorian Shop’s merchandise?

Merchandise (continued)

Cost of Merchandise – The price a business pays for goods it purchases to sell

Merchandise (continued)

Markup – The amount added to the cost of merchandise to establish the selling price.

Selling price = cost of merchandise + markup

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?

Merchandise (continued)

$10 (cost)

+ $3 (3% of 10$) (markup)

= $13 (price)

Merchandise (continued)

Vendor – The business from which merchandise is bought

Purchasing

The account used to record the cost of merchandise that a business buys to sell, is called Purchases.

Purchases (continued)

The Purchases account is a temporary account – it functions as an expense account. Therefore, it’s normal balance is:

debit

Purchases (continued)

The Purchases account is used only to record the cost of merchandise the business purchases to sell. (Not supplies, for example.)

Purchase for CashWhen a business buys merchandise for cash, the transaction affects the following accounts (suppose a purchase of $500):

Purchases Cash $500 $500

Purchase on AccountWhen a business buys merchandise on account, the following accounts are affected (suppose a purchase of $500):

Purchases Account Payable $500 $500

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.

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.

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)

Terms of Sale

The buyer and seller agree on when payment is due for the merchandise. The invoice will usually specify the terms.

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).

Journalizing Cash Payments

Accounts Payable Cash

$500 $500

Journalizing a payment of $500 for merchandise previously purchased on account.

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.

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?

Cash Payments to Replenish Petty Cash

Supplies Postage Expense

$50 $30 Cash

$80

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.

Withdrawals by Partners

Drawing accounts are DEAD accounts; when draws are made, the drawing account increases on the debit side.

Withdrawals by PartnersIf a partner made a withdrawal of $400, the following accounts would be affected:

Mary Smith, Drawing Cash $400 $400

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.

Withdrawing MerchandiseIf a partner withdraws merchandise worth $400, the following accounts would be affected:

Mary Smith, Drawing Purchases $400 $400

Correcting Entries

Entries made to correct a previous entry (e.g., incorrect account) are called correcting entries.