Types of Purchase Journal.—For recording purchases of stock-in-trade, a separate special journal called “Purchase Journal” is used. Sometimes this special journal takes the form of what is called an “Invoice Book,” explanation of which is given in a later chapter. The purchase journal is sometimes used to record all sorts of purchases, as for example, purchases of store and office supplies, of advertising and printing, and even of services such as labor, and of uses, such as the use of a building. Such use of the journal is more commonly made by manufacturing concerns than by mercantile houses and the journal is then known as a “Voucher” or “Accounts Payable Register,” which is explained in Volume II. The present discussion is limited to the purchase journal as a record of purchases of stock-in-trade by a mercantile firm.
Analysis of the Purchase Transaction.—The debit and credit analysis of a transaction covering a purchase of stock-in-trade may result in either one of two groups of entries: (1) if the transaction is on credit, a debit to Purchases and a credit to either a personal account payable or to Notes Payable account; or (2) if the transaction is for cash, a debit to Purchases and a credit to Cash. Whether the purchase is on open account, on a note, or for cash, it is often desirable to keep the accounts in such a way as not only to indicate the vendor in each instance, but also to show the volume of business done with each creditor. This is accomplished when the purchase is for cash or for a note, by opening an account with the creditor in much the same way as when it is on open account.
Thus every purchase transaction is first recorded as follows:
If the purchase is a cash purchase, the liability to the vendor is immediately canceled by the entry:
The vendor’s account is canceled by being credited and then immediately debited with the same amount. This leaves on the books as the net result of these two entries a debit to Purchases and a credit to Cash. This record of the transaction is seen therefore to agree with the analysis of the cash purchase transaction as previously explained.
Instead of opening individual accounts with each vendor, in the case of cash purchases, the same result is sometimes accomplished by the use of one account called “Sundry Cash Creditors.” To it all such cash purchase transactions are posted both from purchase journal and cash book. This method records the combined liability to all vendors in one account. It does not, however, show the volume of business done with each creditor.
If the purchase is on a note, the liability to the vendor as set up in entry (1) is immediately canceled by the entry:
The net result of these entries, (1) and (3), is seen to be a debit to Purchases and a credit to Notes Payable—a record which corresponds with the original analysis of the transaction.
Since a purchase on open account also results in a debit to Purchases and a credit to Vendor, it is seen that all types of purchase transactions may be recorded as a debit to Purchases and a credit to Vendor. Accordingly, in making the current record in the purchase journal, the debit element may be omitted, since it is always the same, and only the credit element, which differs in each case, may be set up. Periodically, usually at the close of each month, the debit element is formally set up for the total amount of purchases for the period. (See Form 7, a typical purchase journal.) Thus the one formal debit is made to offset the numerous credits set up during the month. The purchase journal is thus seen to be as fully a debit and credit journal as the general journal, even though in making its day-to-day record the debit element is, for the sake of economy in labor, omitted.
Other methods of handling the cash and note purchase transaction are explained on page 152.
Form and Method of Using the Purchase Journal.—The simplest form of purchase journal is the same as that of the standard journal. It provides space for date, classification, explanation, ledger index, and two money columns. In the purchase journal the money columns do not have “debit” and “credit” significance, but the first may be used for the detailed extensions and the other column for the total of each purchase. Assume, for the sake of illustration, that the following purchases have been made:
| January 10, 19—, | from S. C. Bontell, terms 2/10, n/30: | |
| 5 tons hay | @ | $12.00 |
| 100 bu. corn | @ | .90 |
| 1,000 bu. wheat | @ | 1.10 |
| 30 tons coal | @ | 4.50 |
| January 18, 19—, | from P. V. Stewart, terms 2/10, n/30: | |
| 50 tons hay | @ | $12.00 |
| 130 tons coal | @ | 5.00 |
| January 22, 19—, | from I. S. Van Doren, terms n/30: | |
| 100 tons coal | @ | $ 4.50 |
| 600 bu. wheat | @ | 1.00 |
| January 28, 19—, | from S. M. Sax, terms 2/10, n/60: | |
| 510 bu. wheat | @ | $ 1.10 |
The purchase journal record, using the simple form of the standard journal, would be as follows:
Form 7. Purchase Journal
Usually, however, a form of purchase journal is used which is better adapted to its purpose. In this, instead of giving the detailed explanation, the file number of the original invoice is written as part of the explanatory matter, which usually comprises only this file reference and the terms of the purchase. This modern type of journal is illustrated below.
Form 8. Modern Type of Purchase Journal
Posting the Purchase Journal.—In posting the purchase journal, it is customary to post daily the credits to the various vendor accounts as they are entered from day-to-day in the journal. In this way the true status of the amounts due these creditors may be known at any time by reference to their ledger accounts. The offsetting debit to Purchases account is posted only at the end of the month when the purchase journal is summarized. In the meantime the ledger is out of equilibrium because only the credit side of all purchase transactions has been entered in the ledger. This equilibrium is restored, however, by the monthly posting of the debit to Purchases account which must always be made before the trial balance is taken.
An essential part of posting is the cross-indexing of the two records, the journal and the ledger. The cross-reference column in the ledger account must show the initial and page of the journal from which each item is posted. For example, “P. 10” in the ledger would refer to purchase journal, page 10. Likewise the ledger folio (L.F. or Folio) column in the journal must show the ledger page of the account to which the item has been posted. Thus, in the illustration, Stewart’s account is on page 125 of the ledger, where he is credited with $1,250. At the end of the month the purchase journal is footed and the summary entry, “Purchases, Dr.,” is made and posted to the debit of Purchases account on page 10 of the ledger. This one debit item in the ledger brings about the equilibrium with the individual credits posted to the various personal accounts payable. The purchase journal is then ruled off and thus made ready for new entries for the next month immediately below the rulings.
Departmental Analysis of Purchases.—When it is desirable to separate various classes of purchases so as to determine the profit from each class, particularly in a business which is departmentized, a purchase journal similar to the one shown in Form 9, which has an additional money column for each class of purchases, may be used. If there are three classes or departments, at least four money columns are required. The entry in the first column is for the total amount of the purchases; and the entries in the other three columns, which are headed each with the name of a class or department, are for the total purchases of the respective departments. It is evident that the totals of these three columns, added together, must at all times be equal to the total of the first column. This affords a check on the accuracy of the distribution. At posting time a separate account is opened in the ledger corresponding to each of these classes of purchases. The summary entry in a purchase journal of this kind appears as follows:
Form 9. Departmental Purchase Journal
Purchases are classified under separate titles, usually because it is desirable to make a corresponding classification of sales and so secure departmental results of operation.
The Sales Journal—Analysis of the Sales Transaction and Method of Record.—For recording sales of stock-in-trade, a record called the “Sales Journal” is used, which is limited to sales of merchandise. A sales journal practically identical in form with the purchase journal serves this purpose. Its columns are ruled and current entries are made in it just as in the purchase journal.
The analysis of a sales transaction shows a credit to Sales and a debit either to Customer, Cash, or Notes Receivable, according as the sale is “on time,” for cash, or against a note given by the customer. In handling cash sales and sales against the customer’s note, the same procedure is followed as with purchases, i.e., accounts with customers are opened for all sales, and are immediately closed off if cash or a note is received at the time of the sale.
The current entry in the sales journal shows only the debit item, i.e., the charge to the customer’s account, the credit to Sales account being omitted. At the end of the month, however, the total of all sales is indicated by the summary entry and is posted to the credit side of the Sales account in the ledger. In order to keep the customers’ accounts up to date, the current entries in the sales book, giving the names of the customers and the amounts, are transferred to the customers’ accounts in the ledger at the close of each day.
Summarization of the Sales Journal.—At the end of the month or other posting time, the sales journal is totaled and the summary entry is made and posted, thus bringing the ledger into equilibrium by one credit to Sales account for the sum of all the debits to customers accounts made day by day. The closing rulings are then made. The treatment is exactly similar to the work in the purchase journal, the only difference being in the summary entry, where “Sales, Cr.” takes the place of “Purchases, Dr.” If it is desired to keep the sales record by departments or classes of commodities, analysis columns will effect the distribution. In this type of sales record the closing summary indicates the various departmental or other sales accounts to which postings are to be made, instead of the one general account, Sales, precisely as the departmental purchase journal (Form 9) indicates the departmental or other purchases accounts to which purchase entries are to be posted.
Goods Sold to the Owner.—The treatment of goods sold to the owner of the business requires brief consideration. The proprietor usually withdraws goods at cost price. There is thus no element of profit in the transaction as there is in other sales. A strict analysis of the transaction shows that it brings about only a decrease of the asset unmixed with any element of income. Theoretically, then, such transactions should not be recorded with the regular sales, but should be shown as a credit to Purchases account. In practice, however, entering them in the sales journal is the easiest method of recording them, and since they are not usually large in volume, this method does not vitiate the total sales figure as a basis for estimating percentages of profit. This matter is discussed in detail on page 273.