© Paradigm Publishing, Inc.1 Chapter 7 Accounting for a Merchandising Business: Purchases and Cash Payments

© Paradigm Publishing, Inc. 1

Chapter 7

Accounting for a Merchandising Business: Purchases and Cash Payments

1. Describe the procedures and forms used in purchasing merchandise.

2. Record credit purchases in a general journal and a purchases journal, and post to the accounts payable ledger and the general ledger.


Learning Objectives

3. Record purchases returns and allowances.

4. Record purchases discounts.

5. Record cash payments in a cash payments journal and post to the accounts payable ledger and the general ledger.


Learning Objectives

6. Prepare a schedule of accounts payable.

7. Record freight charges on incoming merchandise.


Learning Objectives

A A merchandising businessmerchandising business earns its revenue by earns its revenue by buying goods and then reselling the goods to buying goods and then reselling the goods to customers.customers.

Goods that are to be sold to customers are called Goods that are to be sold to customers are called merchandisemerchandise. .


Merchandising can take place at two levels--retail Merchandising can take place at two levels--retail and wholesale.and wholesale. A A retail businessretail business sells directly to consumers. sells directly to consumers. A A wholesale businesswholesale business purchases goods in bulk purchases goods in bulk

from manufacturers and then sells the goods tofrom manufacturers and then sells the goods to• RetailersRetailers• Other wholesalersOther wholesalers• Schools and other nonprofit institutionsSchools and other nonprofit institutions• Directly to consumersDirectly to consumers



Learning Objective 1

Describe the procedures and forms used in purchasing merchandise

Steps in Purchasing ProceduresSteps in Purchasing Procedures

Step 1:Step 1: Managers identify goods needed and Managers identify goods needed and request them by preparing a purchase request them by preparing a purchase requisition, which is sent to the purchasing requisition, which is sent to the purchasing department.department.

Step 2:Step 2: The purchasing department chooses the The purchasing department chooses the seller (vendor) and sends an order.seller (vendor) and sends an order.


Steps in Purchasing ProceduresSteps in Purchasing Procedures

Step 3:Step 3: The seller receives the order and prepares The seller receives the order and prepares an invoice (bill), which is shipped with the an invoice (bill), which is shipped with the goods or a few days after the goods.goods or a few days after the goods.

Step 4:Step 4: When the merchandise is received by the When the merchandise is received by the buyer, it is checked against the invoice and buyer, it is checked against the invoice and payment is approved.payment is approved.


A written request for goods to be purchased A written request for goods to be purchased


A written or online form sent from a buyer of goods to A written or online form sent from a buyer of goods to the seller that specifies the quantity and description of the seller that specifies the quantity and description of goods to be purchased.goods to be purchased.



A business document that showsA business document that shows

Names and address of the buyer and the sellerNames and address of the buyer and the seller

Date and terms of the saleDate and terms of the sale

Description of the goodsDescription of the goods

Price of the goods and total owedPrice of the goods and total owed

Mode of transportation for deliveryMode of transportation for delivery


The same invoice serves as both a sales invoice and The same invoice serves as both a sales invoice and a purchase invoicea purchase invoice

Sales invoiceSales invoice to the seller to the seller

Purchase invoicePurchase invoice to the buyer to the buyer



Percentage reductions from the list or catalog price Percentage reductions from the list or catalog price of merchandise.of merchandise.

Not recorded in the accounting records of the buyer Not recorded in the accounting records of the buyer or the seller.or the seller.

The buyer always records goods at their actual The buyer always records goods at their actual cost.cost.

The seller records items sold at their actual The seller records items sold at their actual selling price.selling price.



a.a. $550.$550.

b.b. $563.75.$563.75.

c.c. $536.25.$536.25.

d.d. $412.50.$412.50.

e.e. $687.50.$687.50.

Quick Check

A seller offers merchandise with a list price of $550, A seller offers merchandise with a list price of $550, subject to a trade discount of 25%. The purchaser subject to a trade discount of 25%. The purchaser will record the cost of merchandise purchased atwill record the cost of merchandise purchased at

A discount offered to encourage prompt and early A discount offered to encourage prompt and early payment by a buyer.payment by a buyer.

Recorded in the accounting records of both the seller Recorded in the accounting records of both the seller and the buyer (unlike trade discounts).and the buyer (unlike trade discounts).

The seller refers to as The seller refers to as sales discountssales discounts..

The buyer refers to as The buyer refers to as purchase discountspurchase discounts..


A common expression of a cash discount is 2/10, A common expression of a cash discount is 2/10, n/30.n/30.

This means that a This means that a 2% discount2% discount can be taken from can be taken from the invoice price of the merchandise if the invoice the invoice price of the merchandise if the invoice is paid within is paid within 10 days10 days of the date of the invoice.of the date of the invoice.



a.a. $650.$650.

b.b. $669.50.$669.50.

c.c. $630.50$630.50..

d.d. $455$455..

e.e. $845.$845.

Quick Check

A seller offers merchandise with a price of $650, A seller offers merchandise with a price of $650, subject to a cash discount of 3/10, n30. Assuming subject to a cash discount of 3/10, n30. Assuming payment is received within the discount period, the payment is received within the discount period, the purchaser will remit a check for purchaser will remit a check for

Review Quiz 7-1

What is the net amount due on this invoice?What is the net amount due on this invoice?


Answer: Answer: $1,372$1,372

Invoice PriceInvoice Price Date of InvoiceDate of Invoice TermsTerms Date PaidDate Paid

$1,400$1,400 June 10June 10 2/10, n302/10, n30 June 19June 19

Review Quiz 7-1



Answer: Answer: $960.40$960.40


$980$980 December 2December 2 3/10, 2/20, n303/10, 2/20, n30 December 18December 18

Review Quiz 7-1



Answer: Answer: $400$400


$400$400 July 8July 8 n30n30 August 7August 7



Record credit purchases in a general journal and a purchases journal, and post to the accounts

payable ledger and the general ledger

The sole purpose is to keep a record of the cost of The sole purpose is to keep a record of the cost of merchandise purchased for resale during an merchandise purchased for resale during an accounting periodaccounting period

Debited for the cost of merchandise purchased for Debited for the cost of merchandise purchased for resaleresale

Falls under the category of cost accountsFalls under the category of cost accounts

Cost accounts are like expense accountsCost accounts are like expense accounts

Both are presented on the income statement and Both are presented on the income statement and enter into the calculation of net incomeenter into the calculation of net income


Assume a company purchases $575 of merchandise Assume a company purchases $575 of merchandise from Key Suppliers on Nov. 2.from Key Suppliers on Nov. 2.

The entry would be recorded as follows:The entry would be recorded as follows:


+cost+cost

+liability+liability

Review Quiz 7-2

Record the following transactions in a general Record the following transactions in a general journal.journal.


Mar. 1Mar. 1 Purchased supplies for cash, $400.Purchased supplies for cash, $400.

Review Quiz 7-2



Mar. 5Mar. 5 Purchased equipment on account from Purchased equipment on account from E & H Co., $900.E & H Co., $900.

Review Quiz 7-2



Mar. 8Mar. 8 Purchased merchandise on account Purchased merchandise on account from C. Medlin Co., $1,200from C. Medlin Co., $1,200

Review Quiz 7-2



Mar. Mar. 1818

Purchased merchandise for cash, Purchased merchandise for cash, $300.$300.

Used to record transactions that are similar in natureUsed to record transactions that are similar in nature

Save time in recording specialized transactionsSave time in recording specialized transactions

Allow for a delegation of work because individual Allow for a delegation of work because individual accountants can be assigned to specific journalsaccountants can be assigned to specific journals

ExamplesExamples

Purchase JournalPurchase Journal Cash Payments JournalCash Payments Journal


A journal used to record only credit purchasesA journal used to record only credit purchases


Review Quiz 7-3


The one-column purchases journalThe one-column purchases journal

Review Quiz 7-3


The two-column general journalThe two-column general journal

A separate ledger containing only one type of A separate ledger containing only one type of account is called aaccount is called a

A subsidiary ledger containing only creditors’ A subsidiary ledger containing only creditors’ accounts is called an accounts is called an


subsidiary ledger.subsidiary ledger.

accounts payable accounts payable ledger.ledger.


An account in the general ledger that summarizes An account in the general ledger that summarizes accounts in a related subsidiary ledger. accounts in a related subsidiary ledger.

The Accounts Payable account in the general ledger The Accounts Payable account in the general ledger is said to control the accounts payable ledger.is said to control the accounts payable ledger.



1

2

3

4

5

The purchases journal must be posted to both the The purchases journal must be posted to both the subsidiary ledger and the general ledger. subsidiary ledger and the general ledger.

Individual credits must be posted to the creditor’s Individual credits must be posted to the creditor’s accounts in the accounts payable ledger.accounts in the accounts payable ledger.

Posting is usually done on a daily basis, to keep the Posting is usually done on a daily basis, to keep the ledger current.ledger current.


The total of the money column must be posted to The total of the money column must be posted to the general ledger as a the general ledger as a

Debit to the Purchases accountDebit to the Purchases account

Credit to the Accounts Payable accountCredit to the Accounts Payable account

Since this total represents total credit purchases for Since this total represents total credit purchases for the month, it is posted at the end of the month. the month, it is posted at the end of the month.



a.a. selling merchandise on account.selling merchandise on account.

b.b. selling merchandise for cash.selling merchandise for cash.

c.c. purchasing merchandise for cash.purchasing merchandise for cash.

d.d. purchasing merchandise on account.purchasing merchandise on account.

e.e. purchasing office supplies and equipment on purchasing office supplies and equipment on account.account.

Quick Check

The purchases journal is used forThe purchases journal is used for

Step 1.Step 1. Enter the journal entry’s date. Enter the journal entry’s date.

Step 2.Step 2. Enter the amount of the journal entry in the Enter the amount of the journal entry in the Credit column. Credit column.

Step 3.Step 3. Calculate the balance of the account and enter Calculate the balance of the account and enter it in the Balance column.it in the Balance column.


Step 4.Step 4. Enter the purchase journal page in the P.R. Enter the purchase journal page in the P.R. column.column.

Step 5.Step 5. Enter a check mark in the P.R. column of the Enter a check mark in the P.R. column of the purchases journal.purchases journal.



Step 1.Step 1. Enter the last day of the month. Enter the last day of the month.

Step 2.Step 2. Enter the total of the money column. Enter the total of the money column.

Step 3.Step 3. Calculate the new balances. Calculate the new balances.

Step 4.Step 4. Enter the posting references. Enter the posting references.

Step 5.Step 5. Enter the account numbers in the purchases Enter the account numbers in the purchases journal.journal.




a.a. debiting the creditor’s account in the accounts debiting the creditor’s account in the accounts payable ledger.payable ledger.

b.b. crediting the creditor’s account in the accounts crediting the creditor’s account in the accounts payable ledger.payable ledger.

c.c. debiting the Cash account in the general ledger.debiting the Cash account in the general ledger.

d.d. crediting the Cash account in the general ledger.crediting the Cash account in the general ledger.

e.e. debiting the Purchases Returns and Allowances debiting the Purchases Returns and Allowances account in the general ledger.account in the general ledger.

Quick Check

Posting an entry from the purchases journal Posting an entry from the purchases journal involves involves

In merchandising, a return occurs when a customer In merchandising, a return occurs when a customer returns to the seller part or all of the items returns to the seller part or all of the items purchased. purchased.

An allowance occurs when the seller grants a An allowance occurs when the seller grants a customer a price reduction on items due to some customer a price reduction on items due to some factor, such as damaged or defective goods.factor, such as damaged or defective goods.


The seller refers to merchandise returns or The seller refers to merchandise returns or allowances as sales returns and allowances.allowances as sales returns and allowances.

The purchaser refers to merchandise returns or The purchaser refers to merchandise returns or allowances as purchase returns and allowances.allowances as purchase returns and allowances.



An account in which the amount of returns and An account in which the amount of returns and allowances is usually recordedallowances is usually recorded

Contra to the Purchases accountContra to the Purchases account

Has a credit balance, which is opposite the debit Has a credit balance, which is opposite the debit balance of the Purchases accountbalance of the Purchases account




Record purchases returns and allowances


A A debit memorandumdebit memorandum is the buyer’s written is the buyer’s written request to the seller for credit for a merchandise request to the seller for credit for a merchandise return or allowance.return or allowance.

When a return or allowance is made, part or all of When a return or allowance is made, part or all of the balance in the creditor’s account will not be paid.the balance in the creditor’s account will not be paid.

The buyer debits (decreases) the creditor’s account The buyer debits (decreases) the creditor’s account for the amount of the return or allowance.for the amount of the return or allowance.



Review Quiz 7-4


The general journal, showing the recorded transactionsThe general journal, showing the recorded transactions



Record purchase discounts


A contra purchases account used to record discounts A contra purchases account used to record discounts received for prompt payment of merchandise invoices.received for prompt payment of merchandise invoices.

Example


-liability-liability

+contra purchases+contra purchases-asset-asset

Assume an invoice for $575, subject to a cash discount of 2/10, n/30, is paid within the discount period on Nov. 12.

The following entry would be prepared.



Record cash payments in a cash payments journal and post to the accounts payable

ledger and the general ledger

A special journal used for recording all A special journal used for recording all disbursements of cashdisbursements of cash

Designed to meet the needs of the business using itDesigned to meet the needs of the business using it

Common money columns include Common money columns include

Cash Cr. columnCash Cr. column

Purchases Discounts Cr. columnPurchases Discounts Cr. column

Account Payable Dr. columnAccount Payable Dr. column

General Dr. columnGeneral Dr. column



Follows some of the same procedures used for Follows some of the same procedures used for posting the purchases journalposting the purchases journal

Three different types of postings madeThree different types of postings made

Posting of individual debits to creditors’ accounts Posting of individual debits to creditors’ accounts in the accounts payable ledger. Usually done on a in the accounts payable ledger. Usually done on a daily basis.daily basis.


Posting of individual debits to appropriate general Posting of individual debits to appropriate general ledger accounts from the General Debit column. ledger accounts from the General Debit column. Can be posted on a daily, weekly, or monthly Can be posted on a daily, weekly, or monthly basis.basis.

Posting of special columns totals to the Posting of special columns totals to the appropriate general ledger accounts. Summary appropriate general ledger accounts. Summary posting is done at the end of the month.posting is done at the end of the month.



Amounts in the Accounts Payable Debit column are posted separately to the creditors’ accounts in the accounts payable ledger. A check mark is entered in the P.R. column of the cash payments journal to indicate an individual posting.

Amounts in the Accounts Payable Debit column are posted separately to the creditors’ accounts in the accounts payable ledger. A check mark is entered in the P.R. column of the cash payments journal to indicate an individual posting.


Amounts in the General Debit column are posted individually to the general ledger accounts identified in the Account Debited column. Account numbers of those accounts are entered in the P.R. column of the cash payments journal. The check mark at the bottom of the General Debit column indicates that the column total is not posted.

Amounts in the General Debit column are posted individually to the general ledger accounts identified in the Account Debited column. Account numbers of those accounts are entered in the P.R. column of the cash payments journal. The check mark at the bottom of the General Debit column indicates that the column total is not posted.


The totals of special columns are posted to the general ledger accounts identified in the headings of the columns. Account numbers are entered under the column totals to indicate that a summary posting has been made.

The totals of special columns are posted to the general ledger accounts identified in the headings of the columns. Account numbers are entered under the column totals to indicate that a summary posting has been made.


a.a. debiting the creditor’s account in the accounts payable ledger.debiting the creditor’s account in the accounts payable ledger.

b.b. crediting the creditor’s account in the accounts payable ledger.crediting the creditor’s account in the accounts payable ledger.

c.c. debiting the Cash account in the accounts payable ledger.debiting the Cash account in the accounts payable ledger.

d.d. crediting the Cash account in the accounts payable ledger.crediting the Cash account in the accounts payable ledger.

e.e. crediting the creditor’s accounts in the general ledger.crediting the creditor’s accounts in the general ledger.

Quick Check

Posting an entry from the cash payments journal Posting an entry from the cash payments journal involvesinvolves



Prepare a schedule of accounts payable

A schedule of accounts payable is a listing of the A schedule of accounts payable is a listing of the balances in the accounts payable ledger.balances in the accounts payable ledger.

The total of this schedule should agree with the The total of this schedule should agree with the accounts payable account in the general ledger, the accounts payable account in the general ledger, the controlling account.controlling account.




Only accounts with open balances are included on the schedule of account payable.



Record freight charges on incoming merchandise

FOB Shipping Point FOB Shipping Point — the buyer is responsible for all — the buyer is responsible for all freight costs while the goods are in transit.freight costs while the goods are in transit.

FOB Destination FOB Destination — the seller is responsible for all — the seller is responsible for all freight costs while the goods are in transit.freight costs while the goods are in transit.

If the terms are FOB shipping point, the purchaser If the terms are FOB shipping point, the purchaser debits the cost of freight to the Freight In account.debits the cost of freight to the Freight In account.


Example

The following journal entry indicates the $30 freight charge incurred by the purchaser under the freight terms of FOB shipping point. Merchandise costing $700 was purchased from Pantech Corp. on account on Dec. 2.


General Journal

Date Account Title P.R. Debit Credit

Dec. 2 Purchases 700

Freight In 30

Accounts Payable-Pantech Corp. 730

Notice how the Freight In, Purchases Returns and Notice how the Freight In, Purchases Returns and Allowances, and Purchases Discounts accounts affect Allowances, and Purchases Discounts accounts affect the Purchases account:the Purchases account:


PurchasesPurchases

-- Purchases DiscountPurchases Discount

--Purchases Returns Purchases Returns and Allowancesand Allowances

++ Freight InFreight In

Net PurchasesNet Purchases


How could top management have prevented this type of inventory fraud?

Focus on Ethics

Refer to the Focus on Ethics box on page 307 in Refer to the Focus on Ethics box on page 307 in your text.your text.


Joining the PiecesProcedures for Posting the Purchases JournalProcedures for Posting the Purchases Journal


Joining the PiecesProcedures for Posting the Cash Payments JournalProcedures for Posting the Cash Payments Journal

Documents

© Paradigm Publishing, Inc.1 Chapter 7 Accounting for a Merchandising Business: Purchases and Cash Payments