So, you want to learn
Bookkeeping!
Special Journals
by Bean Counter's Dave Marshall

Lesson 3
Cash Disbursements & Purchases Journals


Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
Bean Counter
Lesson 1 in this tutorial provided a pretty good introduction to Special Journals and their related other records. In this and some of the following lessons, we're going to review some of the information previously presented and attempt to enhance our understanding of Special Journals by providing additional examples and explanations on how and when they're used. Unfortunately, repetition is one of the best tools for learning. Few of us are lucky enough to grasp a new task or subject the first time that we're exposed. I know, for a moment you thought you were on one of those X rated sites. Sorry, no such luck.

Purchases Journal

Definition & Purpose

The Purchases Journal is a special journal that is used to record all purchases and various expenses and other charges from suppliers that a business has an open account with (supplier allows the business to charge purchases).

The entries recorded in this journal are a debit to expense accounts or the purchases account and a credit to the accounts payable control account (a credit is also posted to the supplier's Accounts Payable Subsidiary Account).

Do you know the name of the record or ledger that works in conjunction with the purchases journal to maintain the detailed supplier information ? Accounts Payable Subsidiary Ledger is the answer I was hoping for.

Purchase Journal Page 1
Entry No. Date Supplier Account/Name Invoice Number Post Ref. Accounts Payable
Credit
Acct-200
Purchases
Debit
Acct-510
Adv
Debit
Acct-502
Utilities
Debit
Acct-506
Other
Accounts
Debit
Post Ref Amount
Debit
1 Jan 11, xxxx Broken Furniture Shop 10050 X 1000       Office Equip 175 (X) 1000
2 Jan 13,xxxx Acme Computers & Supplies A-1435 X 15000 15000          
3 Jan 18, xxxx Keep The Lights On 9876-1 X 5000     5000      
4 Jan 25, xxxx Make You Known 1006 X 3000   3000        
5 Jan 30, xxxx Sputter Fuel 15095 X 1000       Vehicle Exp 512 (X) 1000
                       
PJ-1 Jan 31, xxxx Monthly Control Postings     25000 15000 3000 5000     2000
          (X) (X) (X) (X)      

Clicking on the yellow highlighted X illustrates that supplier invoice number 10050 was posted in the Purchase Journal and also posted to the Accounts Payable Subsidiary Ledger for Broken Furniture Shop. To return click on the yellow highlighted PJ-1-1.

The Posting Reference Column and the X in it is our way of telling that we have posted the invoice to our Accounts Payable Subsidiary Ledger.

Clicking on the yellow highlighted PJ-1 illustrates that the monthly total for January was posted to the General Ledger Accounts Payable Control Account-200. To return click on the yellow highlighted PJ-1.

The (X)'s are our way of telling that we have posted the totals to our General Ledger Accounts.

It should be obvious, but I'll state it anyway. All supplier invoices are recorded (posted) in the Purchase Journal and the Supplier's Account Payable Subsidiary Ledger. At the end of a period (month), the totals from the Purchase Journal are also recorded (posted) in the General Ledger Accounts.

The Purchases/Accounts Payable Journal lists all invoices and documents for purchases and expenses incurred during the month. All invoices are Debited to our Purchase and Expense Accounts and Credited to our Accounts Payable Control Account.

Since we've been recently using Shabby Computer Systems that sells services and products, our journal has provided a special column (Purchases) to keep up with the products that we purchase to resell to our customers. In most retail businesses this is normally one of their largest expenditures and more frequent type of transaction.

The Purchase Journal has these basic features:

  • Header with the Name of the Journal and Page
  • Entry Number used as a reference to a specific transaction on the journal's page
  • Date Column to record the date of the transaction
  • Description Column to record the name of the payee/supplier (who written to), and any other explanation or additional information about the transaction
  • Invoice Number Reference Column to record our supplier's invoice number
  • Posting Reference to provide information when a Subsidiary Ledger also needs to be updated. This tells us whether the Subsidiary Accounts Payable Ledger has also been posted (updated).
  • Debit Columns for all regularly occurring types of expenses or expenditures and a Credit Column for our Accounts Payable Control Account
  • Special Other Debits Column with its related Posting Reference Column
    We use these three columns to record debits for any transactions that don't have their own debit account special column.

Cash Disbursements/Payments Journal

Definition & Purpose

The Cash Payments Journal is a special journal that is used to record all cash that is paid out by a business except for payroll. Businesses with just a few employees could also use this journal to record their payroll checks; however, I recommend that you use a special payroll journal in order to have all your payroll information in one place.

The entries recorded in this journal are a debit to expense accounts, the purchases account, or the accounts payable control account (a debit is also posted to the supplier's Accounts Payable Subsidiary Account) and a credit to the cash account.

Cash Disbursements Journal Page 1
Entry No. Date Supplier Account
Name/Description
Post Ref. A/P
Debit
Acct-200
Purchases
Debit
Acct-510
Other GL Accounts Debit Post Ref. Amount
Debit
Cash
Credit
Acct-100
Check Number
1 Jan xxxx All Other Suppliers X 9000         9000 Various
2 Jan 25, xxxx Broken Furniture Shop X 1000         1000 7050
                     
CD-1 Jan 31, xxxx Totals For Month   10000         10000  
        (X)         (X)  

Clicking on the yellow highlighted X illustrates that check number 7050 was posted in the Cash Disbursements Journal and also posted to the Accounts Payable Subsidiary Ledger for Broken Furniture Shop. To return click on the yellow highlighted CD-1-2.

The Posting Reference Column and the X in it is our way of telling that we have posted our invoices to our Accounts Payable Subsidiary Ledger.

Clicking on the yellow highlighted CD-1 illustrates that the monthly total for January was posted to the General Ledger Accounts Payable Control Account-200. To return click on the yellow highlighted CD-1.

The (X)'s are our way of telling that we have posted the totals to our General Ledger Accounts

It should be obvious, but I'll state it anyway. All our checks written to suppliers are recorded (posted) in the Cash Disbursements Journal and the Supplier's Account Payable Subsidiary Ledger. At the end of a period (month), the totals from the Cash Disbursements Journal are also recorded (posted) in the General Ledger Accounts.

The Cash Disbursements Journal lists all checks, in check number order, paid during the month. It posts total checks written as a credit entry to the Cash Account. All payments to suppliers that have an Accounts Payable Subsidiary Ledger Account are Debited to the Accounts Payable Control Account and Credited to our Cash Account.

The cash disbursements journal has these basic features:

  • Header with the Name of the Journal and Page
  • Debit and Credit Columns to record the amount of the transaction
  • Check Number (Reference) Column to record the check number of all checks issued
  • Date Column to record the date of the transaction
  • Description Column to record the name of the payee/supplier (who written to), and any other explanation or additional information about the transaction
  • Entry Number used as a reference to a specific transaction on the journal's page
  • Posting Reference to provide information when a Subsidiary Ledger also needs to be updated. This tells us whether the Subsidiary ledger has also been posted (updated).
  • Columns for each regularly occurring types of payment, expense, or expenditures and a section for other expenditures/payments.

The Cash Disbursements Journal has a related related Subsidiary Ledger. Can you tell me what it is ? Yep ! It's the Accounts Payable Subsidiary Ledger, the same ledger related to our Purchases Journal. Both the purchases journal and the cash disbursements journal provide information needed for maintaining our Accounts Payable Subsidiary Ledger.

Special General Ledger Accounts-Control Accounts

A Control Account is a general ledger account that provides a summarized balance of the detailed balances of the individual records maintained in a subsidiary ledger. Subsidiary Ledgers provide the detail information about what makes up the balance in the control account. Two of the most common Control Accounts are Accounts Receivable and Accounts Payable. After posting all transactions the balance of the Control Account and the sum of the detailed records in the Subsidiary Ledger should always be the same. In other words, a control account deals with summarized information while a subsidiary ledger deals with detailed information.

Sample of the General Ledger Control Account- Accounts Payable Control

Account Name:Accounts Payable Control Account Number:200
Date Description Post Ref. Debit Credit Balance
Jan 1 Beg Bal.       30000
Jan 31   CD-1 10000   20000
Jan 31   PJ-1   25000 45000
Feb 28   CD-2 15000   30000
Feb 28   PJ-2   18000 48000
Mar 31   CD-3 20000   28000
Mar 31   PJ-3   15000 43000

Take a good look at our sample General Ledger Account Accounts Payable Control. Only two entries one a debit and the other a credit have been recorded for the months of January, February, and March. One entry recorded the increase and had a PJ posting reference and the other recorded the decrease in the account and had a CD posting reference. What do you think the abbreviations-PJ and CD- stand for ? Of course, PJ stands for Purchase Journal and CD stands for Cash Disbursements Journal. The amounts posted were calculated by summing the amounts of all the entries made in the Purchase Journal and Cash Disbursements Journal for each month and posting one total amount.

Let's take a look at our two yellow highlighted Posting References. What do they tell us ? Where we got the information from. The CD-1 means the information came from the Cash Disbursements Journal and the number 1 means the months Summary Totals. The 1 stands for January. If we were posting February the reference number would be CD-2. Click on the yellow highlighted CD-1 above to see where the entry came from ? To return click on the yellow highlighted CD-1 again.

What about the yellow highlighted PJ-1 ? The same logic applies. The PJ means the Purchases Journal and the 1 stands for the months Summary Totals. In this case, January. Click on the yellow highlighted PJ-1 above to see where the entry came from ? To return click on the yellow highlighted PJ-1 again.

Subsidiary Accounts Payable Ledger

In earlier lessons,we were introduced to some new tools to aid us in maintaining the type of information we need to properly run our business. Besides the General Ledger there are some other records that we use to provide additional information about some of our "Special Accounts" that are normally called Control Accounts in the General Ledger. These special records are called Subsidiary Ledgers. The Subsidiary Ledger's purpose is to provide detail information about transactions that are summarized in a General Ledger Control Account. The Subsidiary Ledger that relates to our Cash Disbursements and Purchases Journals is our Accounts Payable Subsidiary Ledger.

This "book" contains a detailed record for each of your suppliers. What information do you think you might want to keep up with about each of your suppliers ? Let's make a list of some information that you would include.

  • General Information
    • Supplier's Name and/or Account Number
    • Phone Number
    • Address
    • Contact Person
    • Credit Limit
    • Credit Terms
  • Supplier Financial Information
    • Each Invoice Billed By The Supplier
    • Each Payment (Check) Sent To The Supplier
    • Total Balance Owed To Supplier
    • Posting Reference-what journal the information was posted from
      Normally all the information posted will come from the Purchases and Cash Disbursements Journals. The abbreviations PJ stands for Purchase Journal and CD stands for Cash Disbursements Journal.

Let's look at the Posting Reference for Shabby Computer Systems and explain exactly what PJ-1-1 means. Of course you now know the PJ stands for the Purchase Journal but what about those numbers. Do they mean something too ? You bet ya ! The first number 1 references the Page Number of the Purchase Journal and the second number 1 references the Entry Number (line number) on the page of the Purchase Journal for the entry.

What do you think the CD-1-2 stands for ? Of course the CD stands for the Cash Disbursements Journal, the first number 1 stands for the Page Number and the second number 2 stands for the Entry Number (line number).

It's really simple, all the Posting Reference does is tells us where we got our information from.

Our Accounts Payable Subsidiary Ledger

Name:Broken Furniture Shop
Address:1555 Anywhere St, Anywhere City, Anywhere State
Date Item Post Ref. Debit Credit Balance
Jan 11, xxxx Invoice # 10050 PJ-1-1   1000 1000
Jan 25, xxxx Check # 7050 CD-1-2 1000   0
Name:Acme Computers & Supplies
Address:1522 Anywhere St, Anywhere City, Anywhere State
Date Item Post Ref. Debit Credit Balance
Jan 13, xxxx Invoice # A-1435 PJ-1-2   15000 15000
Name:Keep The Lights On
Address:1503 Anywhere St, Anywhere City, Anywhere State
Date Item Post Ref. Debit Credit Balance
Jan 18, xxxx Invoice # 9876-1 PJ-1-3   5000 5000
Name:Make You Known
Address:1504 Anywhere St, Anywhere City, Anywhere State
Date Item Post Ref. Debit Credit Balance
Jan 25, xxxx Invoice # 1006 PJ-1-4   3000 3000
Name:Sputter Fuel
Address:1505 Anywhere St, Anywhere City, Anywhere State
Date Item Post Ref. Debit Credit Balance
Jan 30, xxxx Invoice # 15095 PJ-1-5   1000 1000
Name:All Our Other Suppliers
Address:xxx Anywhere St, Anywhere City, Anywhere State
Date Item Post Ref. Debit Credit Balance
Jan 1, xxxx Beginning Balances       30000
Jan 31, xxxx Our Various Check Numbers CD-Various 9000   21000

Clicking on the yellow highlighted PJ-1-1 takes you to the Purchase Journal and illustrates that the transaction has also been recorded there. Click on the yellow highlighted X to return.

Clicking on the yellow highlighted CD-1-2 takes you to the Cash Disbursements Journal and illustrates that the transaction has also been recorded in the Cash Disbursements Journal. Click on the yellow highlighted X to return.

Rules for Our Cash Disbursements and Purchase Journal:

  • Normally, all supplier invoices and documents are initially recorded in our Purchases/Accounts Payable Journal and an account is set up and maintained for all of our suppliers in our Accounts Payable Subsidiary Ledger.
  • All checks recorded in our Cash Disbursements Journal are normally issued for payment of supplier invoices that have originally been recorded in our Purchases Journal.

Payment Terms

In many of our lessons, we've discussed open accounts and how suppliers allow a business to charge their purchases and pay later. What we haven't discussed is what are some of the credit terms commonly granted.

Let's first formally define what credit terms are. Credit Terms are an agreement and understanding between a buyer and seller as to when payment will be made and any discounts that will be allowed. The terms of payment are normally included on the supplier's invoice. Some terms even try to encourage early payment by providing cash discounts.

Common Terms Used and How They're Stated (Abbreviated):

  • Payment At The Time Of Sale
    Cash or Net Cash
  • Payment at The Time Of Delivery
    COD-Cash On Delivery
  • Payment is Due Upon Receiving the Invoice
    Due Upon Receipt
  • Number of Days Due From the Invoice Date
    Net 30 days-payment is due 30 days from the invoice date
    Net 60 days-payment is due 60 days from the invoice date
  • End Of Month Terms
    n10/EOM-all purchases made in a given month are due by the 10Th of the following month
  • Terms with Discounts
    2/10, Net 30-2% discount allowed if paid within 10 days from the date of the invoice; otherwise full amount due within 30 days from the date of the invoice.

Did you notice, I try to sneak in a tid bit of useful information here and there.

Food for thought. We could if we wanted to combine our Cash Disbursements and Purchases Journals into one Special Journal. Your Journals can be "customized" to meet your specific business needs and ways of doing business. I use the term hybrid to refer to these customized journals. The journals I present and other tutorials and text books present are guides that you can use as is or modify to meet your own bookkeeping needs.

Combined Cash Disbursement & Purchases Journal- "Hybrid Journal"

Combined Cash Disbursements & Purchases Journal      Page 1
Entry No Cash Credit Ck. No. Date Description Post Ref A/P Debit A/P Credit Purchases Debit Other Post Ref Debit Credit
                         
                         
                         
                         
                         

Ok, I've loaded you gun and it's now time to take you to the firing range and see how well you shoot.

Bean Counter's seven simple steps (RUDUUDD) to analyze and record our transactions:

  1. Recognize that a transaction (event) has occurred and what source documents such as sales invoices (tickets), invoices from suppliers, contracts, checks written or checks received , provide documentation (proof) that a transaction has occurred.
  2. Understand how the transaction (event) affects the business-the type of transaction and whether it needs to be recorded in the formal bookkeeping records.
  3. Determine what accounts are affected and whether the transaction increases or decreases the account balance.
  4. Use the business's Chart of Accounts when necessary to determine the account numbers that represent these accounts.
  5. Use the debit and credit rules to determine if the accounts are debited or credited.
  6. Determine what Journal should be used to record the transaction.
  7. Do It-Record the transaction.

Transactions and Events used for the following exercise:

We'll continue using Shabby Computer Systems as our example business. Remember, they provide computers and accessories (products) and services such as training.

  1. Big Shot, the owner, had us write him check number 5000 dated Dec 1, xxxx for $2500 to cover his personal expenses for the month.
  2. Prepared and sent our Purchase Order Number 9000 dated Dec 1, xxxx for 10 computers @ $500 each for a total of $5,000 to be delivered in 7 days from Wholesale Computers.
  3. We received invoice number 765 dated Dec 1,xxxx in the amount of $1000 from Our Local Daily for an advertisement to run for 4 weeks. Stated payment terms are Net 10.
  4. Prepared and sent our invoice number 1000 dated Dec 2, xxxx in the amount of $2000 for 2 computers delivered to Mom & Pop Shop. Stated payment terms are due upon receipt.
  5. Our owner Big Shot gave us his personal check number 235 dated Dec 5, xxxx in the amount of $20000 that was required in order to get a loan from Our Friendly Bank.
  6. Dec 6, xxxxx we received a notice from Our Friendly Bank that our company loan for $50000 to help expand our business was approved and had been deposited into our business checking account. Monthly payments to pay back the loan are $500 a month.
  7. Received invoice number 897 dated Dec 7, xxxx for $5000 from Wholesale Computers for our order of 10 computers @ $500. Stated payment terms are net 30. The computers have been received in good condition and checked in by our receiving department.
  8. Prepared and mailed our check number 5002 dated Dec 7, xxxx to Horrible Landlord Company for our monthly shop rental of $2000.
  9. Dec 7, xxx our Customer Needing Computers stopped by our shop and bought one of our computers. We prepared our invoice number 1001 dated Dec 7, xxxx in the amount of $1000 for 1 computer and gave him his copy. Stated payment terms are net 10.
  10. Received our monthly utility bill from Shock U Utilities dated Dec 8, xxxx for $1500. Stated payment terms are due upon receipt. Prepared and mailed our check number 5003 dated Dec 8, xxxx for $1500.
  11. Received invoice number 5432 dated Dec 9, xxxx for the amount of $500 from Speedy Office Supplies for office supplies delivered. Stated payment terms are net 30.
  12. Received invoice number 555 dated Dec 9, xxxx for $500 billed by our friendly, smart, helpful, handsome, debonair, accountant Dave Marshall from Bean Counter. Stated payment terms are due upon receipt. Prepared and mailed our check number 5004 dated Dec 9, xxxx for $500.
  13. Received monthly telephone bill for $300 dated Dec 9, xxxx from Reach Out & Touch. Stated payment terms are due upon receipt. Prepared and mailed our check number 5005 dated Dec 9, xxxx for $300.
  14. Prepared and mailed check number 5006 dated Dec 11, xxxx for $5000 paying invoice number 897 for the 10 computers received from Wholesale Computers. I know, don't tell, me we paid early- the stated payment terms were net 30 or due in 30 days.
  15. December 13, xxxx received our customer's check number 555 dated Dec 12, xxxx for $2000 from Mom & Pop Shop paying our invoice number 1000 for computers sold.
  16. Prepared and mailed our check number 5007 dated Dec 14, xxxx to Speedy Office Supply for $500 paying invoice number 5432.
  17. Dec 17, xxxx received check number 700 dated Dec 16, xxxx from our customer Needing Computers paying our invoice number 1001 for $1000.
  18. Billed our customer Newbie Needinghelp on our invoice number 1002 dated Dec 17, xxxx for $500 for training services we provided at their business. Terms granted were net 10.
  19. Dec 19, xxxx bought $50 worth of stamps while at the Post Office and wrote check number 5008 made out to the Postmaster.
  20. Dec 22, xxxx we picked up and bought 10 used computers for $1000 to sell to our customers from Not Junk Yet Computers. Not Junk presented us their invoice number 123111 dated Dec 22, xxxxx which we immediately paid with our check number 5009 dated Dec 22, xxxx since their terms are COD.
  21. Billed our customer Bean Counter on our invoice number 1003 dated Dec 22, xxxx $700 for our Advanced Computer Course. Terms granted were net 30.
  22. Dec 26,xxxx received check number 8532 for $250 dated Dec 20, xxxx from our customer Newbie Needinghelp making a partial payment on our invoice number 1002.
  23. After receiving a friendly reminder to pay call from Our Local Daily, prepared and mailed our check number 5010 dated Dec 27, xxxx for $1000 paying Our Local Daily for their invoice number 765 dated Dec 1, xxxx for advertising. Shame on us. We slipped up. The stated payment terms were net 10 which means if we had been on the ball we would have mailed a check on Dec 11, xxxxx.
  24. Billed our customer Know Itall on our invoice number 1004 dated Dec 26, xxxx $2700 for 2- computers @ $1000 each and our Advanced Computer Course @ $700. Terms granted were net 30.
  25. Dec 26, xxxx a walk in customer purchased 3 computers @ $700 ea. and gave us his check number 321 dated Dec 26, xxxx for $2100. We prepared and gave him his copy of our invoice number 1005 dated Dec 26, xxxx and prepared and gave him his copy of our receipt number 5080 for his proof of payment.
  26. Dec 29, xxxx we received a purchase order for 5 computers @ 800 each totalling $4000 from our customer Needing Computers to be delivered in 7 days.
  27. Dec 30, xxxx purchased and wrote check number 5011 for $15000 to Honest Bob's Carlot for a new delivery truck.
  28. Prepared and mailed our check number 5012 dated Dec 31, xxxx to Our Friendly Bank for $500 for the first payment due for our business loan. Note:Interest was 350 and principal was 150.
  29. Prepared and mailed our invoice number 1005 dated Dec 31, xxxx in the amount of $1200 for the sale of two computers to Fix It Daddy Repair Shop. In all our previous examples we've been ignoring sales or use tax. Not this time. Sales tax on the sale of the computers is at the rate of 10%. So our total invoice is 2-Computers @ $600=$1200 and sales tax of 120 (1200 x .10) for a total of $1320.

Since this lesson concentrates on the cash disbursement and purchases journals, our task for now is to identify the above transactions that are recorded in either of these two journals.

Get you a piece of paper (scratch paper is fine) and a pen or pencil and make a list of the numbers of the above transactions that should be recorded in the Purchases or Cash Disbursements Journals and the reason why. I'll even give you a tool to help. Remember that chart in Lesson 1 ? Well here it is.

1.Did You Receive Cash ?
YES Record transaction in Cash Receipts Journal
  NO Answer question 2
2.Did you write a check ?
YES-a check was written Answer Question 2.(a)
    2.(a) Did you pay an employee for salary or wages earned ?  
    YES Record transaction in Payroll Journal
      NO Record transaction in Cash Disbursements Journal
  NO-a check was not written Answer Question 3.
3.Did you bill a product or service to a customer and grant credit (on account) ?
YES Record transaction in Sales / Accounts Receivable Journal
  NO Answer question 4
4.Did you incur an expense or purchase supplies, inventory, or an asset and the supplier granted you credit (on account) ?
YES Record transaction in Purchases / Accounts Payable Journal
  NO Looks Like the you need to record the entry in the General Journal

What questions in the table above apply to the Purchases and Cash Disbursements Journals ?
Question 2- Did you write a check ?
and
Question 4-Did you incur an expense or purchase supplies, inventory, or an asset and the supplier granted you credit (on account) ?

For this exercise make three columns on your sheet of paper. The first column will contain the transaction number, the second the reason, and the third the journal to use to record the transaction. Since I'm such a nice guy, I did the first two transactions for you.

Transaction Number Reason Journal To Use
1 Wrote a check Cash Disbursements Journal
3 Incurred an expense or purchased supplies, inventory, or an asset and the supplier granted credit Purchases Journal
When finished click on How Did You Do ?

That exercise wasn't too difficult was it ? I hope you said NO, but we're not done yet.

Get some paper and a pencil again. Now it's time for you to prepare the Purchases and Cash Disbursements Journals. If your ambitious try to also prepare the Accounts Payable Subsidiary Ledgers for the suppliers assuming that all their beginning balances were zero as of Dec 1, xxxx. After your done, see if yours looks similar to mine. Click on My Journals

In this lesson, Cash Disbursements & Purchase Journals, we spent all our money. Let's go to the next lesson where we receive money instead of spending it.

Since we had an exercise in this lesson, you can breathe a sigh of relief-no quiz. Boy I used to hate quizzes.

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