Expert: Arthur Naman - 11/26/2008

Question
QUESTION: I currently use a double entry bookeeping system, which is quite new for me. My question is...I noticed that the accounting manager prior to me used different types of entries to make payments (print checks). I was told to do purchase journals,then payment journals to print checks, however I noticed that some payments were made without a purchase journal by doing a misc payment and then designating the account for the payment. Does it make a different which way a payment is made? Doing a purchase journal then a payment journal Vs just doing a misc payment journal? Is it a mistake to be doing a purchase journal for all payments or check printed?

ANSWER: First, there is no "right" or "wrong" way to record payments. It just depends on what one is trying to accomplish. There is no "requirement" as to when purchase journals should or should not be used.

Purchase journals allow for tracking of purchases. Typically when something is purchased, the purchase journal is used to record that purchase and the corresponding accounts payable -- at the time of the purchase is made. That way the liability is recorded and purchases can be tracked.

When the liability is later paid, the payment is of the accounts payable -- typically the payment is matched to the invoice received from the vendor. It is therefore easy to be able to print out and track paid and unpaid invoices from a particular vendor.

Payments are typically recorded directly when there is no need to track the accounts payable.

The answers to your question dependent in part on the accounting software used, but my answer should be generally descriptive of the process.

If additional questions, please ask.



---------- FOLLOW-UP ----------

QUESTION: For example.......rent, comissions, and other payments that don't necessarily have invoices, is it ok to still do a purchase journal? I'm very new at accounting and not sure of the details. If i were to just do straight payments vs purchase journals wouldn't that change the total a/p for the company's financial reports. Should I only do PJ's for ONLY payments that have invoices and do straight payments without PJ's for things like rent, housekeeping, commissions, etc. ?

Answer
The first question is whether or not your company needs to track accounts payable, a/p. I am guessing the answer is generally yes. When a purchase journal is used, the expenses are recorded at the time of posting the purchase; the a/p is also recorded at that time. Then the expense is later paid by charging the a/p for the purchase. Thus the expense gets recorded in the correct period to which it belongs.

If you do a "straight" payment, the expense is recorded at that time. this works if the check is to be written at the same time the expense is recorded. This is often done for relatively minor expenses, rent, utilities, etc. By doing this, a/p is bypassed. The expense belongs in the same period in which the payment is made. This is kind of like recording the expense via an entry into the purchase journal and immediately writing out a check to pay that a/p amount.

The basic question is -- when a check is written out to pay for an expense, does that expense belong in the same period in which the check is written. If the answer is yes, then it is easier to bypass recording the a/p and just record a "straight" payment; otherwise a purchase recorded to a/p is required.

For further reading, I googled "explanation of recording accounts payable" and found http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P06_1440. You might searching other words and phrases to see what you can find.

You will need to do some work on you own understanding the process in order to be comfortable with the work you are doing. I have only provided a starting point to understanding what and why you are being asked to record the transactions in the manner you have indicated.

Given some ambiguity, you may have to ask the people you are working for for better instructions on how they want things done, given their being alternative treatment as no method is always right or wrong.

With that said, I am going to put myself on vacation with Allexperts for a few days during which time I will be in and out of my office. If you need to please keep asking.