Special Journals and Subsidiary Ledgers: Purchases and Cash Payments Journals (Chapter 7 Study Notes)

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Special Journals and Subsidiary Ledgers

Introduction

This chapter covers the use of special journals and subsidiary ledgers in financial accounting, focusing on purchases and cash payments. These tools help businesses efficiently record, classify, and summarize transactions related to purchasing inventory and making payments to vendors.

Purchasing Cycle

Steps in the Purchasing Cycle

The purchasing cycle consists of several steps that ensure proper authorization and documentation of purchases:

Purchase Requisition: Internal document requesting the purchase of goods or services.
Purchase Order: Formal order sent to a vendor specifying items, quantities, and agreed prices.
Purchase Invoice: Bill received from the vendor detailing the goods supplied and the amount due.
Receiving Report: Document confirming receipt of goods and their condition.
Invoice Approval Form: Authorization to pay the invoice after verifying accuracy and receipt.

Example: Art's Clothing Company issues a purchase order for 100 jackets, receives an invoice, and completes the cycle by approving the invoice for payment.

Freight Terms and Charges

F.O.B. Destination vs. F.O.B. Shipping Point

Freight terms determine who pays shipping charges and when legal title passes:

F.O.B. Destination: Seller pays shipping; title passes to buyer when goods reach their destination.
F.O.B. Shipping Point: Buyer pays shipping; title passes to buyer when goods are shipped.

Freight Charges: If the vendor pays for shipping, the cost is added to inventory as a debit.

Special Journals

Purchases Journal

The purchases journal is used to record all purchases of merchandise made on account (credit):

Records purchases on account only.
Each entry updates the vendor's account in the accounts payable subsidiary ledger.
At month-end, totals are posted to the general ledger accounts.

Definition: A purchases journal is a special journal for recording credit purchases of inventory.

Cash Payments Journal

The cash payments journal records all cash payments made by the business, including payments to vendors:

Used for all cash outflows, such as paying suppliers, expenses, or other obligations.
Entries may include cash discounts taken for early payment.

Definition: A cash payments journal is a special journal for recording all cash disbursements.

Subsidiary Ledgers

Accounts Payable Subsidiary Ledger

This ledger contains individual accounts for each vendor to whom the business owes money:

Shows names of creditors and amounts owed from purchases on account.
Has a normal credit balance.
Accounts Payable in the general ledger is the controlling account.
At month-end, the total of all vendor balances should equal the general ledger balance for Accounts Payable.

Debit Memorandum and Inventory Returns

Debit Memorandum

A debit memorandum is issued by the purchaser to the vendor to indicate a return or allowance:

Debits Accounts Payable, reducing the amount owed to the vendor.
Used when goods are returned or a price reduction is granted.

Example: Art's Clothing Company returns defective merchandise worth $200 to Thorpe Co., issuing a debit memorandum and recording the following:

Debit Accounts Payable $200
Credit Inventory $200

Journal Entry:

Date	Account Titles and Description	PR	Dr.	Cr.
April 9	Accounts Payable, Thorpe Company	211/√	200
	Inventory			200
	Debit memo No. 1

Schedule of Accounts Payable

Purpose and Preparation

A schedule of accounts payable lists all vendors with outstanding balances as of a specific date:

Ensures the total matches the Accounts Payable balance in the general ledger.
Used for internal control and financial reporting.

Vendor	Amount
Abdi Blake Co.	$5,650.00
John Sullivan Co.	$1,480.00
Total Accounts Payable	$7,130.00

Trade Discounts and Purchase Discounts

Trade Discounts

Trade discounts are reductions from the list price offered by vendors:

Not recorded separately in the accounts; purchases are recorded at the discounted price.
Purchase discounts (for early payment) are calculated on the purchase price after trade discounts.

Item	List Price	Trade Discount	Purchase Price
Computers	$800.00	30%	$560.00

Example Calculation:

List Price: $4,000
Trade Discount: 30% ($4,000 × 0.30 = $1,200)
Purchase Price: $4,000 - $1,200 = $2,800
Cash Discount: 3% ($2,800 × 0.03 = $84)
Net Cost if paid within credit term: $2,800 - $84 = $2,716

Formula:

Trade Discount Amount:
Purchase Price:
Cash Discount Amount:
Net Cost:

Perpetual Inventory System

Inventory Updates

In a perpetual inventory system, inventory records are updated continuously:

Receiving a purchase discount: Credit Inventory
Returning merchandise: Credit Inventory

This ensures that inventory balances are always current and reflect all transactions.

Activities Affecting Inventory and Cost of Goods Sold

Inventory and Cost of Goods Sold Accounts

Various activities impact the balances of inventory and cost of goods sold (COGS):

Inventory	Cost of Goods Sold
Beginning balance	Beginning balance
Purchase of merchandise	Cost of sales transactions
Transportation costs (freight-in)	Sales return transactions
Returns to inventory from sales returns
Purchase discounts
Purchase returns & allowances
Cost of sales transactions
Ending balance	Ending balance

Additional Practice

Resources for Mastery

Students are encouraged to use practice resources such as self-review videos, tutorials, dynamic study modules, flashcards, and practice tests to reinforce learning. End-of-chapter exercises and problems provide further opportunities for application.

Summary

Special journals and subsidiary ledgers streamline the recording and management of purchases and payments, ensuring accuracy and efficiency in financial accounting. Understanding these tools is essential for effective internal control and financial reporting in merchandising operations.