Accounting: The Language of Business (Part 25)

Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings.

Diane Garnick

Accounting Systems and Internal Controls

(Part F)

by

Charles Lamson

Manual Accounting System: The Purchase and Payment Cycle

The purchase and payment cycle for NetSolutions consists of purchases on account and payments of cash to suppliers. To make purchases of supplies and other items on account requires establishing a supplier account payable. These transactions will be recorded in a purchases journal. The payments of suppliers accounts payable will be recorded in the cash payments journal.

Internal control is enhanced by separating the function of recording purchases in the purchases journal from recording cash payments in the cash payments journal. Separating duties in this way prevents an individual from establishing a fictitious supplier and then collecting payments for fictitious purchases from this supplier.

Purchases Journal

The purchases journal is designed for recording all purchases on account. Cash purchases would be recorded in the cash payments journal. The purchases journal has a column entitled Accounts Payable Cr. The purchases journal also has special columns for recording debits to the accounts most often affected. Since NetSolutions makes frequent debits to its supplies account, a Supplies Dr. column is included for these transactions. For example, as shown in Exhibit 8, NetSolutions recorded the purchase of supplies on March 3 by entering 600 in the Supplies Dr. column, 600 in the Accounts Payable Cr. column, and Howard Supplies in the Account Credited column.

EXHIBIT 8 Purchases Journal and Postings

The Other Accounts Dr. column in Exhibit 8 is used to record purchases, on account, of any item for which there is no special debit column. The title of the account to be debited is entered in the Other Accounts column and the amount is entered in the Amount column. For example, NetSolutions recorded the purchase of office equipment on account on March 12 by entering Office Equipment in the Other Accounts Dr. column, 2,800 in the amount column, 2,800 in the Accounts Payable Cr. column, and Jewett Business Systems in the Account Credited Column.

Postings from the purchases journal to the ledgers of NetSolutions are also shown in Exhibit 8. The principles used in posting the purchases journal are similar to those used in posting the revenue and cash receipts journals. The source of the entries posted to the subsidiary and general ledgers is indicated in the Posting Reference column of each account by inserting the letter P (for purchases journal) and the page number of the purchases journal. A check mark (✓) is inserted in the Posting Reference column of the purchases journal after each credit is posted to a creditor's account in the accounts payable subsidiary ledger.

At regular intervals the amounts in the Other Accounts Dr. column are posted to the accounts in the general ledger. As each amount is posted, the related general ledger account number is inserted in the Posting Reference column of the other account section.

At the end of each month, the Amount columns in the purchases journal are totaled. The sum of the two debit column totals should equal the sum of the credit column.

The totals of the Accounts Payable Cr. and Supplies Dr. columns are posted to the appropriate general ledger accounts in the usual manner, with the related account numbers inserted below the column totals. Because each amount in the Other Accounts Dr. column was posted individually, a check mark is placed below the $2,800 total to show that no further action is needed.

Cash Payments Journal

The special columns for the cash payments journal are determined in the same manner as for the revenue, cash receipts, and purchases journals. The determining factors are the kinds of transactions to be recorded and how often they occur.

The cash payments journal has a Cash Cr. column, as shown in Exhibit 9. All transactions recorded in the cash payments journal will involve an entry in this column. Payments to creditors on account happen often enough to require an Accounts Payable Dr. column. Debits to creditor accounts for invoices paid are recorded in the Accounts Payable Dr. column. For example, on March 15 NetSolutions paid $1,250 on its account with Grayco Supplies. NetSolutions recorded this transaction by entering 1,230 in the Accounts Payable Dr. column, 1,230 in the Cash Cr. column, and Grayco Supplies in the Account Debited column.

EXHIBIT 9 Cash Payments Journal and Postings

NetSolutions makes all payments by check. As each transaction is recorded in the cash payments journal, the related check number is entered in the column at the right of the Date column. The check numbers are helpful in controlling cash payments, and they provide a useful cross reference.

The Other Accounts Dr. column is used for recording debits to any account for which there is no special column. For example, NetSolutions paid $1,000 on March 2 for rent. The transaction was recorded by entering Rent Expense in the space provided and 1,600 in the Other Accounts Dr. And Cash Cr. columns.

Postings from the cash payments journal to the ledgers of NetSolutions are also shown in Exhibit 9. The amounts entered in the Accounts Payable Dr. column are posted to the individual creditor accounts in the accounts payable subsidiary ledger. These postings should be made frequently. After each posting, CP (for cash payments journal) and the page number of the journal are inserted in the posting reference column of the account. A check mark is placed in the Posting Reference column of the cash payments journal to indicate that each amount has been posted.

At regular intervals, each item in the Other Accounts Dr. column is also posted individually to an account in the general ledger. The posting is indicated by writing the account number in the Posting Reference column of the cash payments journal.

At the end of the month, each of the amount columns in the cash payments journal is totaled. The sum of the two debit totals is compared with the credit total to determine their equality. A check mark is placed below the total of the Other Accounts Dr. column to indicate that no further action is needed. When each of the totals of the other two columns is posted to the general ledger, an account number is inserted below each column total.

Accounts Payable Control and Subsidiary Ledger

After all posting has been completed for the month, the sum of the balances in the accounts payable subsidiary ledger should be compared with the balance of the accounts payable controlling account and the general ledger. If the controlling account and the subsidiary ledger do not agree, the error or errors must be located and corrected. The balances of the individual supplier accounts may be summarized in a schedule of accounts payable. The total of NetSolutions schedule of accounts payable, $2,410, agrees with the balance of the accounts payable controlling account on March 31, 2023, as shown below.

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 196-200*

end