College Accountinghorowitk/documents/Chapter11_002.pdf · Chapter 11 Accounting for Purchases and Cash Payments. 1 Define merchandise purchases transactions. •Merchandise acquired

10-1

College

Accounting

Heintz & Parry20th Edition

Chapter 11

Accounting for Purchases and Cash

Payments

1

Define merchandise

purchases transactions.

• Merchandise acquired for resale

– Must be items for RESALE

• Procedures and documents vary,

depending on the size of the business

• Can be made “on account” or for cash

PURCHASE

REQUISITION

• A form used to request the purchase of

merchandise or other property

• Can be prepared by any authorized

person

• One copy is sent to the purchasing

department

• One copy is sent to the accounting

department

• One copy is kept by the department that

prepared the requisition

PURCHASE

REQUISITION

PURCHASE

ORDER

• A written order to buy goods from a specific vendor (supplier)

• The purchasing department reviews and approves the purchase requisition and prepares a purchase order

– One copy is sent to the vendor to order the goods

– One copy is sent to the accounting department

– One copy is kept in the purchasing department

– Copies may also be sent to the receiving area and to the department initiating the purchase requisition

PURCHASE

ORDER

RECEIVING

REPORT

• Indicates what has been received

• Can be a separate form or created from

the vendor’s purchase invoice

RECEIVING

REPORT

PURCHASE

INVOICE

• Prepared by the seller as a bill for the merchandise shipped

– The seller calls it a sales invoice

– The buyer calls it a purchase invoice

• Before payment is made, the accounting department compares the purchase invoice with the:

– Purchase requisition

– Purchase order

– Receiving report

• Available if the bill is paid within the

discount period

– The buyer calls it a purchase discount

– The seller calls it a sales discount

• Often offered by manufacturers and

wholesalers

• A reduction from the list or catalog price

offered to different classes of customers

• The buyer and seller both record the

transaction at the NET amount (after the

discount)

2

Describe and use

merchandise purchases

accounts and compute

gross profit.

PURCHASES PURCHASES DISCOUNTS

PURCHASES RETURNS

AND ALLOWANCES FREIGHT-IN

PURCHASESDR. CR.

+

Used to record the cost of merchandise purchased.

The account is debited whenmerchandise is purchased.

–

PURCHASESDR. CR.

+

Used to record the cost of merchandise purchased.

–

The account is only creditedduring the closing process.

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DATE DESCRIPTION PR DEBIT CREDIT

Purchases1

2

3

4

5

6

7

8

9

10

11

Example:Made $100 purchase for cash.

100 00

Cash 100 00

Made cash purchase



Purchases1

2

3

4

5

6

7

8

9

10

11

What if the purchase hadbeen made on account?

100 00

Accounts Payable/Vendor 100 00

Made purchase on account



Purchases1

2

3

4

5

6

7

8

9

10

11

100 00

100 00


We would credit Accounts Payable instead of Cash.

Accounts Payable/Vendor



Purchases1

2

3

4

5

6

7

8

9

10

11

100 00

100 00


The specific supplier is identified.


PURCHASES RETURNS

AND ALLOWANCES

DR. CR.

+

A CONTRA-PURCHASES account used to record purchases returns and purchases allowances.

The account is credited for the amountof returns and allowances. The account is

debited during the closing process.

–



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Example:Merchandise purchased on account

for $200 is defective and is returned to the supplier.



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9

10

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Accounts Payable is debited.The specific vendor is identified.




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Purchases Returns and Allowances is credited.This account will be shown as a deduction

from the purchases account on the income statement.

200 00

Pur. Returns and Allow. 200 00


Returned merchandise



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Example:Now assume the same merchandise is retained

but the supplier grants a price reductionof $45 because of the defects.



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Accounts Payable is debited to reflect the price reduction.




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Purchases Returns and Allowances is credited.It is the same as the entry for returns!

45 00

Pur. Returns and Allow. 45 00


Allowance for defective

merchandise

PURCHASES DISCOUNTS

DR. CR.

A CONTRA-PURCHASES account used to record cash discounts allowed on purchases.

The account is credited for the discount granted by the vendor for prompt payment. Theaccount is debited during the closing process.

+–



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Example:Merchandise is purchased for $100 on

account with credit terms 2/10, n/30, and payment is made within the discount period.



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9

10

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Accounts Payable is debitedfor the entire amount

of the purchase.




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5

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9

10

11

Cash is credited forthe actual amount paid, $98

($100 – $2 discount).


Cash 98 00



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9

10

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Purchase Discounts is creditedfor the discount amount, $2

($100 × 2%).


Cash 98 00

Purchases Discounts 2 00

Made payment on account

FREIGHT-IN

DR. CR.

An ADJUNCT-PURCHASES account used to record transportation charges on merchandise

purchases.

The account is debited for transportation charges. The

account is credited during theclosing process.

+ –

• Expressed in FOB (free on board) terms

– FOB shipping point

• The buyer pays for the transportation

charges

• Freight charges are either listed on the

purchase invoice or sent as a separate

freight bill

– FOB destination

• The seller pays for transportation charges



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Example:Merchandise was purchasedon account for $400 plus freight charges of $38.



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Purchases is debited only for the cost of the merchandise.

Purchases 400 00



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Freight-In is debitedfor the transportation costs.

Purchases 400 00

Freight-In 38 00



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Accounts Payable is credited forthe entire purchase price(merchandise + freight).

Purchases 400 00

Freight-In 38 00





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What if the freight charges wereon a separate bill from the transportation company?



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Purchases is again debited for the cost of the merchandise.

Purchases 400 00



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Accounts Payable is credited forthe amount due to the supplier.

Purchases 400 00





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A separate journal entry is madeto record the freight charges.

Purchases 400 00




purchase


1

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8

9

10

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Purchases 400 00



Freight-In 38 00

38 00Accounts Payable/Vendor

Freight charges on

Accounts Payable is credited,but the vendor is the

transportation company.

• Also called gross margin

• Is the difference between net sales and

cost of goods sold

• Tells management the amount of sales

dollars available to cover expenses, after

covering the cost of the goods sold

FORMULA:

NET

SALES

COST OF

GOODS SOLD

GROSS

PROFIT

Let’s look at an example.

– =

During the month, 20 hats are sold for $10 each. The hats were originally purchased for

$7.50 each.

20 hats @ $10 each = $200 in salesThere were no sales returns and allowancesor sales discounts, so NET SALES = $200.

NET

SALES

COST OF GOODS

SOLD

GROSS

PROFIT

$200

– =


$7.50 each.

NET

SALES

$200

COST OF

GOODS SOLD

20 hats @ $7.50 each = $150

$150

GROSS

PROFIT–

–

=


$7.50 each.

NET

SALES

$200

COST OF

GOODS SOLD

The gross profit on these 20 hats was $50. This $50 is used to cover expenses.

$150

GROSS

PROFIT

$50

–

–

=

=

Sales

Sales Returns and Allowances

$200,500

1,200

Purchases 105,000

Purchases Returns and Allowances 800

Purchases Discounts 1,000

Freight-In 300

Merchandise Inventory, 1/1/--

Merchandise Inventory, 12/31/--

26,000

18,000

Let’s computethe gross profit.

STEP #1: Compute net sales.

FORMULA:

SALESSALES RETURNS

AND ALLOWANCES–

Sales

Less sales ret. and allow.

Net sales

$200,500

1,200

$199,300

This is the price we charged ourcustomers for the merchandise.

STEP #2: Compute goods available for sale.

FORMULA:

BEGINNING

INVENTORY

COST OF GOODS

PURCHASED+


Sales

Less sales returns and allow.

Net sales

$200,500

1,200

$199,300

Cost of goods sold:

Merchandise inv., Jan 1 $ 26,000

Purchases $105,000

Less: Purch. ret. and allow. $ 800

Purchases discounts 1,000

Net purchases

1,800

$103,200

Cost of goods purchased

Add freight-in 300

103,500

Goods available for sale $129,500

This is the cost of ALL the goods that were offered for sale.

STEP #3: Compute cost of goods sold.

FORMULA:

GOODS

AVAILABLE

FOR SALE

ENDING

INVENTORY–


Sales


Net sales

$200,500

1,200

$199,300

Cost of goods sold:


Purchases $105,000



Net purchases

1,800

$103,200


Add freight-in 300

103,500


Less merch. inv, Dec. 31 18,000

Out of the $129,500 of merchandiseavailable to sell, $18,000 was not sold.


Sales


Net sales

$200,500

1,200

$199,300

Cost of goods sold:


Purchases $105,000



Net purchases

1,800

$103,200


Add freight-in 300

103,500


Less merch. inv., Dec. 31 18,000

Cost of goods sold 111,500

From that we can determinethat $111,500 of merchandise was sold.

STEP #4: Compute gross profit.

FORMULA:

NET

SALES

COST OF

GOODS SOLD–


Sales


Net sales

$200,500

1,200

$199,300

Cost of goods sold:


Purchases $105,000



Net purchases

1,800

$103,200


Add freight-in 300

103,500


Less merch. inv., Dec. 31 18,000

Cost of goods sold 111,500

The merchandise was soldfor $87,800 more than its cost.

Gross profit $87,800

3

Describe and use the

accounts payable ledger.

• In the ledger account:

– Step 1: Enter the date.

– Step 2: Enter the amount of the

transaction.

– Step 3: Enter the new balance.

– Step 4: Enter the journal page number.

• In the journal:

– Step 5: Enter the ledger account

number in the PR column.

• A separate “subsidiary” ledger

• Contains an individual account payable for

each supplier

• Often numbered

• Filed either alphabetically or numerically

• A summary accounts payable account

maintained in the general ledger is the

controlling account

• In the accounts payable ledger account:

– Step 1: Enter the date.

– Step 2: Enter the amount of the

transaction.

– Step 3: Enter the new balance.

– Step 4: Enter the journal page number.

• In the journal:

– Step 5: Enter a slash (/) followed by a

check mark () in the PR column.



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Let’s review the postingfor this transaction.

Purchases 3,300 00

Accts. Payable/Compucraft 3,300 00

Invoice No. 631

Apr. 420--



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A $3,300 debit is postedto the purchases account

in the usual manner.

Purchases 3,300 00


Invoice No. 631

Apr. 4 50120--



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The credit is posted to thecontrolling account in the general ledger.

Purchases 3,300 00


Invoice No. 631

Apr. 4 50120--


Account: Account No.

DATE ITEM PR DR. CR.BALANCE

DR. CR.

ACCOUNTS PAYABLE 202

20--

Apr. 1

3,300

4,800

4

Balance

8,100

This entry is posted in the same manneras all other general ledger postings.

J6



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The accounts payable accountnumber is placed in the PR column.

Purchases 3,300 00


Invoice No. 631

Apr. 4 501

202

20--



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5

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Purchases 3,300 00


Invoice No. 631

Apr. 4 501

202

Now we need to post to theindividual supplier’s account.

20--


Name:

DATE ITEM PR DEBIT CREDIT BALANCE

Compucraft, Inc.

20--

Apr. 3,3004

The date is entered, the amount is recorded, the balance is updated, andthe journal page number is referenced.

Address: 2100 West Main Street, Muncie, IN 47304-8139

3,300J6



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Purchases 3,300 00


Invoice No. 631

Apr. 4 501

202/

A slash (/) is entered along with acheck mark (), which indicates the entry

has been posted to the subsidiary ledger.

20--



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2

3

4

5

6

7

8

9

10

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Accounts Payable/Televax 200 00

Purchases Ret. and Allow. 200 00


May 4

Now let’s look at the postingfor a purchase return entry.

20--



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3

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5

6

7

8

9

10

11




May 4

The $200 debit is posted to the accounts payable controlling account and to

the subsidiary ledger account for Televax.

202/20--



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2

3

4

5

6

7

8

9

10

11




May 4 202/

Purchases Returns and Allowances is posted in the normal manner. Its account

number is recorded in the PR column.

501.1

20--



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3

4

5

6

7

8

9

10

11

Accounts Payable/B. B. Small 4,800 00

Cash


Apr. 10

Cash payment transactionsare posted in a similar manner.

4,800 00

20--



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2

3

4

5

6

7

8

9

10

11


Cash


Apr. 10

4,800 00

The debit is posted to the accounts payable controlling account and to the

subsidiary ledger account for B. B. Small.

202/20--



1

2

3

4

5

6

7

8

9

10

11


Cash


Apr. 10

4,800 00

Cash is posted as usual.

101

202/20--

4

Prepare a schedule of

accounts payable.

• Prepared to verify that the sum of the

accounts payable ledger balances equals

the Accounts Payable balance

• Is an alphabetical or numerical listing of

supplier accounts and their balances

• Usually prepared at the end of the month

• The total calculated in the schedule is

compared with the balance in Accounts

Payable in the general ledger


Northern Micro

Schedule of Accounts Payable

April 30, 20--

$ 3,300Compucraft, Inc.

Datasoft

Printpro Corp.

Televax, Inc.

2,500

800

5,300

$11,900

This should be the balance in the accounts payable controlling account.

Documents

College Accountinghorowitk/documents/Chapter11_002.pdf · Chapter 11 Accounting for Purchases and Cash Payments. 1 Define merchandise purchases transactions. •Merchandise acquired