ACCT 652 Accounting. Review of last week. Should you always take discounts? 5/17/15. ACCT652 Week 4 1

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1 ACCT 652 Accounting Week 4 Special Journals, Cash, and Internal Controls Some slides Times Mirror Higher Education Division, Inc. Used by permission Michael D. Kinsman, Ph.D. Review of last week Some highlights of what we did last week are: Handling terms and what terms means for accounts receivable. Two methods of recording discounts. Cost of goods sold is a bathtub. Calculating cost of goods sold. ACCT 652 Week 4 2 Should you always take discounts? The interest rate you earn on your money by taking the discount is given by the formula Rate = [(Discount %)/(100 - discount %)] * [365 / (net days - discount days)] Using a 1/10 net 100 example, we d have: Rate = [1 / (100-1)] * [365 /(100-10)] = [1/99] * 365/90 = 4.096% per year Don t take the discount if money costs you more than 4%! ACCT 652 Week 4 3 ACCT652 Week 4 1

2 Recording discounts Method A: Show opportunities lost If you normally expect to take a discount, and want your statements to show when you goofed by not taking one, record as follows: GENERAL JOURNAL Page Date Description Ref. Debit Credit M M DD Purchases Accounts payable Record purchase MM DD+ Accounts payable Cash Record payment on day 10 *********OR********* MM DD+ Accounts payable Discounts lost 2.00 Cash Record payment after day 10 ACCT 652 Week 4 4 Recording discounts Method B: Show opportunities taken Suppose, instead, that you do not expect to take the discount. Then you would enter: GENERAL JOURNAL Page Date Description Ref. Debit Credit M M DD Purchases Accounts payable Record purchase MM DD+ Accounts payable Cash Discounts taken 2.00 Record payment on day 10 *********OR********* MM DD+ Accounts payable Cash Record payment after day 10 ACCT 652 Week 4 5 Cost of goods sold Cost of goods sold is like a bathtub: Where 1 is beginning inventory, 2 is purchases, 3 is cost of goods, 4 is ending inventory, and 5 is evaporation. 3 ACCT 652 Week 4 6 ACCT652 Week 4 2

3 Calculating cost of goods sold So now we have to calculate CGS and Evaporation: Cost of Goods Sold + Evaporation = Beginning inventory + Purchases - Ending inventory How much is CGS and how much is evaporation does matter, because evaporation is stuff we lost. ACCT 652 Week 4 7 Worksheet for a merchandiser Unadjusted Income Balance Account Trial Balance Adjustments Statement Sheet No. Name Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. 101 Cash 8,200 8, Accounts receivable 11,200 11, Inventory 19,000 19,000 21,000 21, Office supplies 2,350 1, Store supplies 1,450 1, Prepaid insurance Office equipment 4,200 4, Accumulated deprec. OE , Store equipment 30,000 30, Accumulated deprec. SE 3,000 3,000 6, Accounts payable 16,000 16, Salaries payable Meg capital 34,000 34, Meg withdrawals 4,000 4, Sales 321, , Sales returns and allow 2,000 2, Sales discounts 4,300 4, Purchases 235, , Purchase R&A 1,500 1, Purchase discounts 4,200 4, Transportation in 2,300 2, Depreciation exp, SE 3,000 3, Depreciation exp, OE Office salaries expense 25, , Sales salaries expense 18, , Insurance expense Rent expense Office Rent expense. Selling 8,100 8, Office supplies expense 1,800 1, Store supplies expense 1,200 1, Advertising expense 2,700 2, , , , ,700 79,700 8,100 8,100 ACCT 652 Week 4 58, ,500 21, , ,700 79,700 79,700 Adjusting entry method Unadjusted Income Balance Account Trial Balance Adjustments Statement Sheet No. Name Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. 101 Cash 8,200 8, Accounts receivable 11,200 11, Inventory 19,000 21,000 19,000 21, Office supplies 2,350 1, Store supplies 1,450 1, Prepaid insurance Office equipment 4,200 4, Accumulated deprec. OE , Store equipment 30,000 30, Accumulated deprec. SE 3,000 3,000 6, Accounts payable 16,000 16, Salaries payable Meg capital 34,000 34, Meg withdrawals 4,000 4, Sales 321, , Sales returns and allow 2,000 2, Sales discounts 4,300 4, Purchases 235,800 2, , Purchase R&A 1,500 1, Purchase discounts 4,200 4, Transportation in 2,300 2, Depreciation exp, SE 3,000 3, Depreciation exp, OE Office salaries expense 25, , Sales salaries expense 18, , Insurance expense Rent expense Office Rent expense. Selling 8,100 8, Office supplies expense 1,800 1, Store supplies expense 1,200 1, Advertising expense 2,700 2, , , , ,700 79,700 29,100 29,100 ACCT 652 Week 4 58, ,500 21, , ,700 79,700 79,700 ACCT652 Week 4 3

4 Internal Control The purpose of internal control is to assure that you are not stolen from and that your business runs as efficiently as possible. A properly designed internal control system Encourages adherence to managerial policies. Promotes efficient operations. Protects assets from waste, fraud and theft. Ensures accurate and reliable accounting data. ACCT 652 Week 4 10 Internal control example One example of internal control occurred in what we did last week. Our method of handling the recording of discounts on accounts payable lets the manager look at the statements and see in an instant whether the policies of the business are being adhered to. If we have either a discount lost or a discount taken, an error was made. ACCT 652 Week 4 11 Obvious methods of internal control Use checks to pay bills. Have a voucher system, where multiple approvals are required to approve payment. Separate duties, so that no one person is in a position to rip you off. Reconcile bank accounts regularly. Have a responsible person receive the mail. Cross check. ACCT 652 Week 4 12 ACCT652 Week 4 4

5 Internal Control Broad Principles ➊ Clearly establish responsibilities. ➋ Maintain adequate records. ➌ Insure assets and bond employees. ➍ Separate record-keeping and custody over assets. ➎ Divide responsibility for related transactions. ➏ Use mechanical devices whenever feasible. ➐ Perform regular and independent reviews. ACCT 652 Week 4 13 What industry has the best internal control? Casinos. Think about what you see: Virtually all bets are made with chips. Chips arrive carried by a BIG casino guard. Chips are counted by the cashier, the pit boss, the dealer, and the guy upstairs. All bets are monitored from upstairs. At shift end, each table s winning percentage is calculated. Losing tables are monitored. ACCT 652 Week 4 14 Reconciling the Bank Balance A bank reconciliation is prepared periodically to... Explain the difference between cash reported on the bank statement and the cash balance on the company s books. Provide information for reconciling journal entries. An employee who does not handle cash receipts, process checks, or maintain cash records should prepare the bank reconciliation. ACCT 652 Week 4 15 ACCT652 Week 4 5

6 Reconciling the Bank Balance Items that may cause the bank statement balance to differ from the company s book balance include... Outstanding checks. Unrecorded deposits (deposits in transit). Bank service charges. Bank collections and interest earned. Company and/or bank errors. ACCT 652 Week 4 16 Reconciling the Bank Balance Two sections Reconcile bank statement balance to the reconciled (correct) balance. Reconcile book balance to the reconciled (correct) balance. The reconciled bank balance must be equal to the reconciled book balance. All reconciling items in the book balance section require journal entries. ACCT 652 Week 4 17 Reconciling the Bank Balance Bank Statement Section Start with bank statement balance. Add deposits not yet recorded by the bank (deposits in transit). Deduct outstanding checks. Add or deduct bank errors as appropriate. ACCT 652 Week 4 18 ACCT652 Week 4 6

7 Reconciling the Bank Balance Book Balance Section Start with the book balance. Add deposits credited by bank, but not yet recorded in company s books. Deduct bank service charges and Nonsufficient Funds (NSF) checks. Add or deduct book errors as appropriate. Changes require journal entries. ACCT 652 Week 4 19 How many of you reconcile your bank balance monthly? Surprisingly, only about half of students at your level typically reconcile. The reasons given as to why they don t: I don t have time. I don t really want to know how little money I have. And the ever popular, The bank never makes a mistake. ACCT 652 Week 4 20 Reconciling the Bank Balance Balance per bank: $9,610. Balance per books: $7,430. Outstanding checks totaled $2,417. A $500 check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer s NSF check for $225 received as payment of an account receivable. The bank statement showed $30 interest earned on the bank balance for the month of July. Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240. A $486 deposit by Acme Company was erroneously deposited in our account by the bank. ACCT 652 Week 4 21 ACCT652 Week 4 7

8 Bank Reconciliation Bank Balance, July 31 $ 9,610 Add: Deposit in Transit 500 Less: Bank Error $ 486 Outstanding Checks 2,417 (2,903) Adjusted Balance, July 31 $ 7,207 Book Balance, July 31 $ 7,430 Add: Interest 30 Less: Recording Error $ 28 NSF Check 225 (253) Adjusted Balance, July 31 $ 7,207 ACCT 652 Week 4 22 Bank Reconciliation Journal Entry Date Description GENERAL JOURNAL Page 7 Ref. Debit Credit July 31 Supplies Inventory 28 Cash 28 To record reconciling item decreasing cash July 31 Accounts Receivable 225 Cash 225 To record reconciling item decreasing cash ACCT 652 Week 4 23 Petty Cash Funds Petty Cash funds are used to make small amounts of cash available for immediate payment of miscellaneous expenditures. Disbursements from the Petty Cash fund are exceptions to the rule that all cash disbursements must be made by check. Why? Because it s more expensive to do it right than to lose the internal control. ACCT 652 Week 4 24 ACCT652 Week 4 8

9 Petty Cash Funds Establish the fund with a debit to Petty Cash and a credit to Cash for the amount of the fund. Additional entries to Petty Cash are required only when the fund balance is changed. At end of period, or when the balance is low, a check is written and cashed to transfer cash to Petty Cash from the checking account. Debit assets, expenses, or liabilities, depending on the expenditures shown on Petty Cash vouchers, and credit the Cash account. ACCT 652 Week 4 25 Petty Cash Funds Cash Over and short is the difference between the amount needed to replenish the fund ($262.20) and the total of the Petty Cash vouchers ($260.20). Date Description GENERAL JOURNAL Page 7 Ref. Debit Credit July 31 Travel Expense Entertainment Expense Postage Expense Office Supplies Expense Cash Over and Short 2.00 Cash To replenish Petty Cash Fund. ACCT 652 Week 4 26 Special Journals Special journals save time in journalizing and posting by providing special columns for accumulating the debits and credits of similar transactions. This allows you to post column totals rather than having to post individual amounts. ACCT 652 Week 4 27 ACCT652 Week 4 9

10 Sales Journal The Sales Journal is used to record credit sales. Date SALES JOURNAL Page 17 Invoice Account Debited Number Ref. Amount ACCT 652 Week 4 28 Sales Journal after posting Date SALES JOURNAL Page 17 Invoice Account Debited Number Ref. Amount Jan. 2 Clothing Inc ,500 9 Adams Clothing 126 2, Calton Clothing 127 1, Total -Accts. Rec., Dr; Sales, Cr. 5,200 (106) (413) GENERAL LEDGER Account Accounts Receivable No. 106 Date Explanation Ref. Debit Credit Balance Jan. 1 Beginning Balance 4, S17 5,200 9,200 GENERAL LEDGER Account Sales No. 413 Date Explanation Ref. Debit Credit Balance Jan. 1 Beginning Balance 0 31 S17 5,200 5,200 ACCT 652 Week 4 29 Keeping a Separate Account for Each Credit Customer A separate record is established for each credit customer in the Accounts Receivable Ledger. This is a subsidiary ledger that contains the detail for each credit customer. The General Ledger contains the Accounts Receivable account that we posted to in the previous example. The Accounts Receivable account is also referred to as a controlling account. ACCT 652 Week 4 30 ACCT652 Week 4 10

11 Keeping a Separate Account for Each Credit Customer SALES JOURNAL Page 17 Invoice Date Account Debited Number Ref. Amount Jan. 2 Clothing Inc ,500 9 Adams Clothing 126 2, Calton Clothing 127 1, Total -Accts. Rec., Dr; Sales, Cr. 5,200 (106) (413) ACCOUNTS RECEIVABLE LEDGER Account Clothing Inc. Date Item Ref. Debit Credit Balance Jan. 1 Balance 1,000 2 S17 1,500 2,500 ACCT 652 Week 4 31 Keeping a Separate Account for Each Credit Customer SALES JOURNAL Page 17 Invoice Date Account Debited Number Ref. Amount Jan. 2 Clothing Inc ,500 9 Adams Clothing 126 2, Calton Clothing 127 1, Total -Accts. Rec., Dr; Sales, Cr. 5,200 (106) / (413) Clothes-R-Us would post each of the other entries daily to the individual credit customers accounts in a similar manner. ACCT 652 Week 4 32 Keeping a Separate Account for Each Credit Customer After all items are posted, the balance in the Accounts Receivable account in the General Ledger should equal the sum of the balances in the customers accounts in the Accounts Receivable Ledger. CLOTHES-R-US Schedule of Accounts Receivable GENERAL LEDGER January 31, 19XXAccount Accounts Receivable No. 106 Adams Clothing $ 1,500 Calton Clothing Date 2,200 Explanation Ref. Debit Credit Balance Clothing Inc. Jan. 1 2,500 Beginning Balance 4,000 DD's Enterprises 31 3,000 S17 5,200 9,200 Total accounts receivable $ 9,200 ACCT 652 Week 4 33 ACCT652 Week 4 11

12 Cash Receipts Journal The Cash Receipts Journal is used anytime cash is received. Examples include: cash from credit customers, cash from cash sales, cash from other sources. Special columns are used in the journal for the accounts that are commonly used in these transactions. ACCT 652 Week 4 34 Cash from Credit Customers CASH RECEIPTS JOURNAL Page 18 Other Accts. Sales Accts. Rec. Sales Disc. Cash Debit Date Account Credited Explanation Ref. Credit Credit Credit Debit Jan. 5 DD's Enterprises Invoice 643 2, ,960 ACCOUNTS RECEIVABLE LEDGER Account DD's Enterprises Date Item Ref. Debit Credit Balance Jan. 1 Balance 2,500 5 R18 2, ACCT 652 Week 4 35 Cash Sales CASH RECEIPTS JOURNAL Page 18 Other Accts. Sales Accts. Rec. Sales Disc. Cash Debit Date Account Credited Explanation Ref. Credit Credit Credit Debit Jan. 5 DD's Enterprises Invoice 643 2, , Carl's Discount Store Cash sales 1,000 1,000 Place either a or a in the posting reference column when the entry is made to indicate that an individual posting is not necessary. ACCT 652 Week 4 36 ACCT652 Week 4 12

13 Miscellaneous Receipts of Cash CASH RECEIPTS JOURNAL Page 18 Other Accts. Sales Accts. Rec. Sales Disc. Cash Debit Date Account Credited Explanation Ref. Credit Credit Credit Debit Jan. 5 DD's Enterprises Invoice 643 2, , Carl's Discount Store Cash sales 1,000 1, Notes Payable Note to bank 245 5,000 5,000 GENERAL LEDGER Account Notes Payable No. 245 Date Explanation Ref. Debit Credit Balance Jan. 1 Beginning Balance 0 22 R18 5,000 5,000 ACCT 652 Week 4 37 Month-End Postings CASH RECEIPTS JOURNAL Page 18 Other Accts. Sales Accts. Rec. Sales Disc. Cash Debit Date Account Credited Explanation Ref. Credit Credit Credit Debit Jan. 5 DD's Enterprises Invoice 643 2, , Carl's Discount Store Cash sales 1,000 1, Notes Payable Note to bank 245 5,000 5, Totals 6,200 36,530 8,500 22, (106) GENERAL LEDGER Account Accounts Receivable No. 106 Date Explanation Ref. Debit Credit Balance Jan. 1 Beginning Balance 4, S17 5,200 9, R18 ACCT 652 Week 4 8, Month-End Postings Since the amount in the Other Accounts Credit column is not posted, a is placed under the amount to indicate that the total is not posted. CASH RECEIPTS JOURNAL Page 18 Other Accts. Sales Accts. Rec. Sales Disc. Cash Debit Date Account Credited Explanation Ref. Credit Credit Credit Debit Jan. 5 DD's Enterprises Invoice 643 2, , Carl's Discount Store Cash sales 1,000 1, Notes Payable Note to bank 245 5,000 5, Totals 6,200 36,530 8,500 22, ( ) (106) (413) (415) (101) ACCT 652 Week 4 39 ACCT652 Week 4 13

14 Purchases Journal A in the posting reference column indicates that the entries have been posted daily to the Accounts Payable Subsidiary Ledger accounts. PURCHASES JOURNAL Page 22 Office Other Accts. Invoice Purchases Supplies Accounts Payable Date Account Date Terms Ref. Debit Debit Debit Credit Jan. 2 Franklin Company 1/1 2/10,n/30 10,000 10,000 7 Office Supplies, Inc. 1/6 2/10,n/ Smith Supplies 1/8 n/30 125/ ACCT 652 Week 4 40 Purchases Journal The 125 in the posting reference column for the third entry is required because the entry is also posted to the Store Supplies account in the General Ledger. PURCHASES JOURNAL Page 22 Office Other Accts. Invoice Purchases Supplies Accounts Payable Date Account Date Terms Ref. Debit Debit Debit Credit Jan. 2 Franklin Company 1/1 2/10,n/30 10,000 10,000 7 Office Supplies, Inc. 1/6 2/10,n/ Smith Supplies 1/8 n/30 125/ ACCT 652 Week 4 41 Purchases Journal At the end of the month, the totals in the Purchases Debit, Office Supplies Debit, and Accounts Payable Credit columns are posted. PURCHASES JOURNAL Page 22 Office Other Accts. Invoice Purchases Supplies Accounts Payable Date Account Date Terms Ref. Debit Debit Debit Credit Jan. 2 Franklin Company 1/1 2/10,n/30 10,000 10,000 7 Office Supplies, Inc. 1/6 2/10,n/ Smith Supplies 1/8 n/30 125/ Totals 22, ,375 (505) (124) (201) ACCT 652 Week 4 42 ACCT652 Week 4 14

15 Purchases Journal The total of the Other Accounts Debit column is not posted. PURCHASES JOURNAL Page 22 Office Other Accts. Invoice Purchases Supplies Accounts Payable Date Account Date Terms Ref. Debit Debit Debit Credit Jan. 2 Franklin Company 1/1 2/10,n/30 10,000 10,000 7 Office Supplies, Inc. 1/6 2/10,n/ Smith Supplies 1/8 n/30 125/ Totals 22, ,375 (505) (124) ( ) (201) ACCT 652 Week 4 43 Cash Disbursements Journal or Check Register The Cash Disbursements Journal is used anytime cash is paid. Examples include: payments to suppliers, payments for transportation-in, and payments for salaries. ACCT 652 Week 4 44 Cash Disbursements Journal or Check Register CASH DISBURSEMENTS JOURNAL Page 25 Other Accts. Pur. Ch. Accts. Pay. Disc. Cash Date No. Payee Account Debited Ref. Debit Debit Credit Credit Jan R&R Trucking Transportation-in Franklin Company Franklin Company Sally Jones Salaries Expense Office Supplies, Ofc. Supplies, Inc. 245 Inc A in the posting reference column indicates that the entries have been posted to the Accounts Payable Subsidiary Ledger accounts. ACCT 652 Week 4 45 ACCT652 Week 4 15

16 Cash Disbursements Journal or Check Register Date CASH DISBURSEMENTS JOURNAL Page 25 Other Accts. Pur. Ch. Accts. Pay. Disc. Cash No. Payee Account Debited Ref. Debit Debit Credit Credit Jan R&R Trucking Transportation-in Franklin Company Franklin Company Sally Jones Salaries Expense Office Supplies, Inc. Ofc. Supplies, Inc An account number in the posting reference column indicates that the entries have been posted to the account in the General Ledger. ACCT 652 Week 4 46 Cash Disbursements Journal or Check Register CASH DISBURSEMENTS JOURNAL Page 25 Other Accts. Pur. Ch. Accts. Pay. Disc. Cash Date No. Payee Account Debited Ref. Debit Debit Credit Credit Jan R&R Trucking Transportation-in Franklin Company Franklin Company Sally Jones Salaries Expense Office Supplies, Ofc. Supplies, Inc. 245 Inc Totals ,100 (201) (507) (101) At the end of the month, the totals in the Accounts Payable Debit, Purchases Discounts Credit, and Cash Credit columns are posted. ACCT 652 Week 4 47 Cash Disbursements Journal or Check Register CASH DISBURSEMENTS JOURNAL Page 25 Other Accts. Pur. Ch. Accts. Pay. Disc. Cash Date No. Payee Account Debited Ref. Debit Debit Credit Credit Jan R&R Trucking Transportation-in Franklin Company Franklin Company Sally Jones Salaries Expense Office Supplies, Ofc. Supplies, Inc. 245 Inc Totals ,100 ( ) (201) (507) (101) The total of the Other Accounts Debit column is not posted. ACCT 652 Week 4 48 ACCT652 Week 4 16

17 Schedule of Accounts Payable At the end of the month, a schedule of accounts payable is prepared in the same way as a schedule of accounts receivable. The sum of the individual accounts payable in the Accounts Payable Subsidiary Ledger should equal the balance in the Accounts Payable account in the General Ledger. ACCT 652 Week 4 49 To review We now have not only the General Journal, but also several special journals that make bookkeeping easier. These include: Cash Receipts Journal for receipts of cash (Ref is CR). Cash Disbursements Journal for payments of cash (CD). Purchases Journal for purchases of merchandise on credit. (P) Sales Journal for normal sales made on credit. (S) ACCT 652 Week 4 50 The accounting process Ledger Journals Main records 8 column worksheet and statements Dotted lines are posted daily Cash payments* Posted monthly Trial Balance Accounts payable Purchases* General Ledger Adjustments Accounts receivable Sales* General Journal Income statement Cash receipts* Closing Balance sheet * Transactions may first go to any of these records ACCT 652 Week 4 51 ACCT652 Week 4 17

18 OK, it s time To ask questions. Remember that I am not a resource to you after I pass out the exams. The exam will be open book, open notes, calculators allowed. The exam must be done alone. Did I mention that the exam has to be done alone? ACCT 652 Week 4 52 The exam The exam will be open book, open notes, calculators allowed. The exam must be done alone. You have 1-3/4 hours (105 minutes) to do the first part of the exam. As much time as you want for the last problem. Mail it back on time ordinary first class mail. Post mark will determine on time. Keep a copy for yourself. If you are paranoid, mail two copies. You know plenty to do well on this exam. ACCT 652 Week 4 53 End of Week 4 See you in two weeks! ACCT 652 Week 4 54 ACCT652 Week 4 18