Chapter 3. Processing Transactions

Chapter 3 PROCESSING TRANSACTIONS INTRODUCTION Transactions may be entered into the system for processing by using the General Journal Method, described in Chapter 2. Certain transactions may also be entered into the system using Special Journals. The following MENU lists the various alternative Journals typically available in an Accounting Information System. ================================================================= THE TRANSACTION ENTRY MENU 1. 2. 3. 4. 5. 6. 7, 8. General Journal Cash Receipts Journal Cash Payments Journal Purchases Journal Sales Journal Payroll Journal List or Print Journals Exit Enter Selection >> 2 ================================================================= THE NEED FOR SPECIAL JOURNALS A general journal entry system permits all transactions to be recorded in one journal. As you have observed, there are some transactions that occur more often than others. This repetition can make the recording process much more burdensome than necessary. The use of special journals can help this problem in addition to offering some other advantages. The following special journals will allow you to record the most often repeated transactions: CASH PAYMENTS JOURNAL -- Record all transactions in which cash is paid, except payroll payments. CASH RECEIPTS JOURNAL -- Record all transactions in which cash is received, including cash sales. PURCHASES JOURNAL -- CREDIT purchases of inventory only. (no other assets) SALES JOURNAL -- CREDIT sales transactions only. (not cash sales ) PAYROLL JOURNAL -- record all payroll entries. All other transactions and journal entries which cannot be made in one of these journals are recorded in the GENERAL JOURNAL. The most common examples are: Adjusting entries Returns & allowances for credit Credit purchases of all assets except inventory Services received from suppliers on credit There are several advantages in using special journals, the first one having already been mentioned. 1. Elimination of repeatedly recording the same journal entry account numbers and explanations. 2. Easier to enter common transactions. 3. Similar types of transactions are contained in the same journal rather than mixed with different type of transactions. 4. Permits a division of labor (each journal can be maintained by a different person responsible for those type of transactions). In the pages that follow, each of the special journals is illustrated and its use described. THE CASH RECEIPTS JOURNAL ------------------------Sample transaction: Dec. 3 We received a check for $4800 from STOUT STORES (customer #1) in full payment of their account. How do we enter this transaction into the Cash Receipts Journal? Assume that the customer did not pay within the discount period. ================================================================= CASH RECEIPTS JOURNAL ENTRY Enter date as X to EXIT, or C to CANCEL CASH ln# Date Debit SALES DISCOUNTS Debit A/R Credit A/R SUBS. SALES Ref. Credit Sundry ________________ Ref. Amount --- ----- ------ --------- ------- ----- -------1 12/3 4800 4800 D/C --- ------- -- 1 ================================================================= Think about how you would enter this entry in the General Journal form. Is it easier to enter this transaction into the Cash Receipts Journal? These explanations relate to the columns above: Ln# - The line number that the entry is being recorded on. This is used to identify a line which you wish to change in case of an error. Date - The following will appear at the bottom of the screen: ENTER DAY (1-31), OR PRESS ENTER FOR NO CHANGE, OR ENTER C TO CANCEL___ The last date entered will be displayed. If the date is correct, press the ENTER KEY. If the day has changed, enter only the new day. The computer automatically changes the month for you when a new month is started. Therefore, it is not necessary for you to reenter the month. Enter an X for the date to end the transactions and then to exit. Enter a C to Cancel all of the entries that appear on the screen and then to return to the transaction Entry Menu. Cash Debit - Each line should contain an entry to cash. Sales Discounts Debit - Used if a payment is received from a customer within the discount period. A/R Credit - Used if payment is from a customer in satisfaction of an account receivable. A/R Subs. Ref. - Used to identify the customer whose subsidiary ledger account receivable is being satisfied. After entering the customer's account number, the customer's name will appear on the monitor for verification. Sales Credit - Used to record cash sales. Sundry Used for all other accounts not listed in one of the columns. If an entry has more than one sundry account, use a separate line for each. Ref. - Account number. Amount- Enter amount D/C debit or Credit. - If nothing is to be entered in a column, press the ENTER KEY to advance to the next column. This is also true when correcting a line and a column is not to be changed. CASH DISCOUNTS -------------As an incentive to the buyer for early payment, a seller can offer a reduction in the amount due if payment is made within a specified time period. The following list may be used in some business. These codes are used in the Purchases Journal. CODE ____ 0 1 TERMS ________________ no terms n/30 2 n/60 3 n/10,EOM 4 1/10,n/30 5 1/15,n/30 The invoice price is due within 30 days of the invoice date. (no discount) The invoice price is due within 60 days of the invoice date. (no discount) The invoice price is due within 10 day after the end of the month. (no discount) 1% discount if payment is made within 10 days of the invoice date, otherwise the invoice price (or unpaid balance) is due within 30 days of the invoice date. 1% discount if payment is made within 15 days of the invoice date, otherwise the invoice price (or unpaid balance) is due within 30 days of the invoice date. 6 2/10,n/30 2% discount if payment is made within 10 days of the invoice date, otherwise the invoice price (or unpaid balance) is due within 30 days of the invoice date. 7 2/15,n/30 2% discount if payment is made within 15 days of the invoice date, otherwise the invoice price (or unpaid balance) is due within 30 days of the invoice date. 8 1/10,n/EOM 1% discount if payment is made within 10 days of the invoice date, otherwise the invoice price (or unpaid balance is due by the end of the month. 9 2/20,n/30 EOM 2% discount if payment is made with 10 days of the invoice date, otherwise the invoice price (or unpaid balance) is due within 30 days after the end of the month. When a discount is taken, the seller debits SALES DISCOUNTS and the buyer credits PURCHASE DISCOUNTS. These accounts are used with the GROSS METHOD for recording discounts, But not for the NET METHOD. Under the gross method, which is used in out simulation, purchases and sales are recorded at the full invoice price; whereas, under the net method, purchases and sales are recorded net of the discount (less the discount). EARN 36% INTEREST? -----------------The terms 2/10,n/30 represents a rate of return of 36% if the payment is made with 10 days. The rate of interest can be calculated as follows: 360 (number of day in year) ___ 20 X .02 = 36% WHY DID WE DIVIDE BY 20? ASK YOURSELF WHERE CAN YOU EARN 36% WITH ZERO RISK. Good management suggests that a buyer should always take the discount unless they are unable to do so because of financial stress. RETURNS AND ALLOWANCES ---------------------When merchandise is defective, damaged, or not the items ordered, it can either be returned for a refund or not returned and an allowance granted which will reduce the price of the merchandise. In either case, the same account is used -RETURNS & ALLOWANCES. The source document prepared by the buyer to record the PURCHASE RETURNS & ALLOWANCES is a DEBIT MEMO (authorization to debit Accounts Payable or Cash). The source document prepared by the seller to record the SALES RETURNS & ALLOWANCES is a CREDIT MEMO (authorization to credit Accounts Receivable or Cash). CASH PAYMENTS JOURNAL --------------------Sample transaction: Dec. 18 We issued Check No. 120 for $2800 to Elite Computers (supplier #2) in full payment of Invoice No. 3907. The payment was not within the discount period. ================================================================= CASH PAYMENTS JOURNAL Enter Date as X to Exit, or C to Cancel Ln# Date ___ ____ 1 12/18 Purchase A/P CASH DISCOUNT A/P Subs. Check# Credit Credit Debit Ref. ______ ______ _______ ______ ____ 120 2800 2800 2 Sundry _______________ Ref. Amount D/C ___ _______ ___ ================================================================ Cash Credit - Each line should contain an entry to cash. Purchase Discounts Credit - Used if a payment is made to a supplier within the discount period. A/P Debit - Used if payment is to a supplier in satisfaction of an account payable. A/P Subs. Ref. - Used to identify the supplier whose subsidiary ledger account payable is being satisfied. After entering the supplier's account number, the supplier's name will appear on the monitor (screen ) for verification. Sundry - Used for all other accounts not listed in one of the columns. If an entry has more than one sundry account, use a separate line for each. Ref. - Account number. Amount - Enter amount. D/C -Debit or Credit. If nothing is to be entered in a column, press the ENTER KEY to advance to the next column. This is also true when correcting a line and a column is not to be changed. PURCHASES JOURNAL ----------------Sample transaction: Dec 2 We purchased and received twelve Oviatt Laser Alarms (Purchase Order No. 0041) from Oviatt Alarm Manufacturers (supplier #6 ) The purchase price is $18000. Invoice No. 2045A is dated December 2 and contains terms 2/15,n/30 (code 7), FOB destination. This shipment was received December 5. ================================================================ PURCHASE JOURNAL Enter Date as X to EXIT, or C to CANCEL ln# --1 Date ---12/5 Ref. --6 Supplier P.O.# ------------- ----Oviatt Alarm 0041 Invoice# -------2045A Terms Amount ------- ------2/10,n30 18000 =============================================================== A/P Subs. Ref. & Supplier - Used to identify the supplier whose subsidiary ledger account payable is being satisfied. After enter the supplier's account number, the supplier's name will appear. P.O.# - Used to record your company's purchase order number. Invoice# - Used to record the sales invoice number on invoices received from suppliers. Terms - Enter the correct code for the cash discount listed on the previous pages in this chapter and the terms will be displayed. If nothing is to be entered in a column, press the ENTER KEY to advance to the next column. This is also true when correcting a line and a column is not to be changed. SALES JOURNAL ENTRY ------------------Sample transaction: Dec. 9 We sold four Oviatt Laser Alarms and eight electronic eyes to SUNNY COUNTRY CLUB (customer # 4) for $12500 which includes sales tax of $600. Terms are 2/10,n/30 FOB destination. Sales Invoice # 3900. ================================================================ SALES JOURNAL Enter Date as X to EXIT,or C to CANCEL A/R Subs. A/R Ln# Date Ref. Customer Invoice # Debit --- ---- ---- ----------------- -------- -----1 12/9 4 Sunny Country Club 3900 12500 Sales Tax Sales Payable Credit Credit ------ ----11900 600 ================================================================ A/R Subs. Ref. & Customer - Used to identify the customer whose subsidiary ledger account receivable is being satisfied. After entering the customer's account number, the customer's name will appear. A/R Debit - Enter the total amount due from the customer. Sales Credit - Enter the sales price, but not the sales tax. Sales Tax Payable Credit - Enter the sales tax. This is not sales revenue even though paid by the customer. As a retailer, you merely act as a collection agency for the taxing authority. Therefore, it is a liability until your company pays the taxing authority. Only the sale of merchandise at retail is taxed, not services. PAYROLL JOURNAL --------------Sample transaction: Dec.15 We wrote a check #12 for $763, the net pay for a week of our sales manager, who is single. The Gross salary was $1000. Federal Income Tax (FIT) was $218. The State Income tax (SIT) was $62. Social Security taxes (FICA) were $76.50. State Disability Insurance (SDI) was $12.25. The sales salary expense account is 615. There also was a deduction for health insurance of $60. ================================================================= = PAYROL JOURNAL ON GUARD INC. DATE NET GROSS PAY EARNINGS CH# ACCT# CHECK DEBIT FIT 12/15 12 615 SIT FICA SDI SUNDRY ------------REF. AMT.(D/C) 571.25 1000.00 218.00 62.00 76.50 12.25 235 60.00 C The Sundry section is used to enter items that do not fit into the regular columns. In this case the Health Insurance, Account # 235 is entered into the Sundry column. Actually the employer is withholding $60 from the employee's salary for health insurance and thus the employer has a liability to remit this amount to the health insurance company. Thus the health insurance withheld from an employee is entered into a liability account (Health Insurance Payable) as a credit. The FICA tax is imposed on both employers and employees on wages paid by the employer to the employee up a certain maximum wage base limitations. The 6.2 % old age and survivors disability insurance portion ("OASDI") of the tax will be levied on the first $55,500 of wages paid to the employee in 1992. The 1.45% Medicare hospital insurance portion ("Medicare") will be levied on the first $130,200 of wages paid to the employee in 1992. In effect the FICA tax will be 7.65% on the first $55,500 of wages and 1.45% on wages exceeding $55,500 up to $130,200 , for a maximum tax of $5,329.90 on both the employer and employee. The employer will also have to pay (7.65% x 1000 =) $76.50 in employer taxes. State Unemployment and State Disability Insurance varies between states. For example, in California the employer made a maximum contribution rate of 5.4% in 1991. In California most employers also are required to make an additional contribution to the Employment and Training Fund at the rate of .1%. Thus in California the employer must pay 5.5% on all wages up to $7000 per employee. In regard to the above example, the employer will also have to pay unemployment and disability taxes of 1000 X 5.5% = $55.00. All employers are subject to the Federal Unemployment Insurance (FUTA). The FUTA tax rate for the calendar year 1992 is 6.2%. But employers are allowed a credit for payments made for state unemployment insurance, up to an maximum of 5.4%. Since California has a State Unemployment Insurance of 5.4%, an employer in California must pay .8% FUTA tax on each employee's salary up to $7000 per year. In this example, the FUTA tax of the employer would be (.8% x 1000 =) $8.00. In the above example, the employee pays taxes of $368.75 (218 +62 +76.50 + 12.50) or approximate 37%. The employer pays payroll taxes of $139.50 (76.50+55.00+8,80) or approximately 14%. California State Disability Insurance (SDI) for employees is 1.25% of taxable wages up to an annual limit of $31,767 of taxable wages for 1992. Thus the SDI in the example above is 1.25 X 1100 = $12.50 This is a good example to help you understand the tax consequences of a employer, and employee who is single and earns $1000 per week, or $52,000 per year.