Chapter 8 Skyline College 1 Accounting for Purchases

Chapter 8 Skyline College 1

Accounting for Purchases l Most merchandising businesses purchase goods on credit under open-account arrangements. l Large firms usually have a centralized purchasing department. 2

Purchasing Procedures The Sales Department sends an authorized purchase requisition to the Purchasing Department. The Purchasing Department issues an authorized purchase order and sends to the selected supplier. A receiving report is prepared when the merchandise is received. The Accounting Department receives the invoice and copies of the purchase order and receiving report. 3

A purchase requisition is a list sent to the purchasing department showing the items to be ordered. A purchase order is an order to the supplier of goods specifying items needed, quantity, price, and credit terms. A receiving report is a form showing quantity and condition of goods received. 4

A purchase invoice is a bill received for goods purchased. You Owe: $1, 000 DUE IN: 30 days A sales invoice is a supplier’s billing document. 5

International Apparel Shop January 23, 20— The Style Shop 9001 2007 Trendsetter Lane Metroplex Express Dallas, TX 75268 January 23, 20 -- n/30 Metroplex 4760 10 360 5, 120 This is a purchase invoice for the customer. This is a sales invoice for the seller. 6

Wow! I need to order more inventory! The Purchases account is an account used to record cost of goods bought for resale during a period. 7

Account Classifications Recall the major account classifications from earlier chapters: Assets l Liabilities l Owner’s Equity l Revenue l Expenses l The Purchases account is part of the expenses: l Cost of Goods Sold 8

Cost of Goods Sold Cost of goods sold is the actual cost to the business of the merchandise sold to customers (inventory expense). 9

Freight Charges for Purchases The Freight In account is the cost of transportation charges for items purchased. 10

There are two ways to handle freight charges paid by the buyer: l The buyer is billed directly by the transportation company for the freight charge. The buyer issues a check directly to the freight company. l The seller pays the freight charge and includes it on the invoice. The invoice includes the price of the goods and the freight charge. 11

Cost of Goods Sold Price of goods (debit Purchases) $4, 760 Freight charge (debit Freight In) Total invoice Purchases - + 4, 760 360 (credit Accounts Payable) Freight In + + - 360 = $5, 120 Accounts Payable - + 5, 120 The cost of goods sold accounts have normal debit balances. 12

Journal Flow Chart Does the transaction involve cash? YES NO Was cash RECEIVED? YES Record the transaction in the CASH RECEIPTS (CRs) Journal Was inventory PURCHASED? NO YES Record the transaction in the CASH DISBURSEMENTS (CDs) Journal Record the purchase in the PURCHASES Journal (PJ) Use the CRs and CDs Journals to prepare the monthly Bank Reconcilation 13 NO Was it a credit SALE? YES NO Record the Transaction in the SALES Journal (SJ) Record the Transaction In the GENERAL Journal (GJ)

The Purchases Journal A purchases journal is a special journal used to record the purchase of goods on credit. makes it possible to record each purchase on a single line. In addition, there is no need to enter account names and descriptions. 14

GENERAL JOURNAL DATE 20– Jan. DESCRIPTION 3 5 6 7 POST. REF. Purchases Freight In Accounts Payable Purchased merchandise from Fashion Design Inc. , Invoice 5879, dated Dec. 29, terms 2/10, n/30 Purchases Freight In Accounts Payable Purchased merchandise from The Trend Center, Invoice 633, dated Dec. 30, terms n/30 Purchases Freight In Accounts Payable Purchased merchandise from The Modern Woman, Invoice 8011, dated Dec. 31, terms n/30 Purchases Freight In Accounts Payable Purchased merchandise from World of Fashions, Invoice 4321, dated Dec. 31, terms 2/10, n/30 15 PAGE DEBIT 501 502 205/ ü 2, 675 190 501 502 205/ ü 3880 175 501 502 205/ ü 1 CREDIT 2, 865 3, 620 These four general journal entries require twelve separate postings to 2700 general ledger 220 2, 920 accounts. It takes a great deal of time and 3, 850 effort to post them. 450 3, 935

PURCHASES JOURNAL DATE CREDITOR’S ACCOUNT CREDITED 20 -Jan. 3 Fashion Designs 5 The Trend Center 6 Modern Woman 7 World of Fashions 18 Fashion Warehouse 22 Inter’l Apparel Shop 31 INVOICE NUMBER 8434 336 9080 4321 9789 7985 INV. DATE TERMS 12/29/-12/30/-12/31/-01/03/-01/15/-01/22/-- 2/10, n/30 2/10, n/30 PAGE 1 POST. ACCOUNTS PURCHASES FREIGHT IN REF. PAYABLE DEBIT CREDIT 2, 865 4, 055 3, 140 3, 935 4, 200 5, 120 23, 315 (205) 2, 675 3, 880 2, 900 3, 675 3, 860 4, 760 21, 750 (501) 190 175 240 260 340 360 1, 565 (502) 1. In the Accounts Payable Credit column, enter the total owed to the supplier. 2. In the Purchases Debit column, enter the price of the goods purchased. 16 3. In the Freight In Debit column, enter the freight amount.

Examples of Credit Terms l Net 30 days or n/30: Payment in full is due 30 days after the date of the invoice. l Net 10 days EOM, or n/10 EOM: Payment in full is due 10 days after the end of the month in which the invoice was issued. l 2% 10 days, net 30 days; or 2/10, n/30: If payment is made within 10 days of the invoice date, the customer can take a 2 percent discount. Otherwise, payment in full is due in 30 days. 17

A purchase discount is a discount offered by suppliers for payment received within a specified period of time. 18 Because I paid the bill early, I saved lots of money!

Posting to the General Ledger l The purchases journal simplifies the posting process. l Summary amounts are posted at the end of the month. 19

Before posting, prove the equality of the debits and credits recorded in the purchases journal. Proof of Purchases Journal Debits Purchases Debit column $21, 750 Freight In Debit column 1, 565 $23, 315 Credits Accounts Payable Credit column 20 $23, 315

Post a column total to the general ledger in six steps. 1. Locate the general ledger account. 2. Enter the date. 3. Enter the posting reference. 4. Enter the amount from the purchases journal column. 5. Enter the new balance in the Debit Balance or Credit Balance column. 6. Go back to the purchases journal. Enter the general ledger account number under the column total. 21

PURCHASES JOURNAL DATE CREDITOR’S ACCOUNT CREDITED INVOICE NUMBER 20 -Jan. 3 Fashion Designs 5 The Trend Center 6 Modern Woman 7 World of Fashions 18 Fashion Warehouse 22 Inter’l Apparel Shop 31 8434 336 9080 4321 9789 7985 INV. DATE TERMS 12/29/-12/30/-12/31/-01/03/-01/15/-01/22/-- 2/10, n/30 2/10, n/30 PAGE POST. ACCOUNTS PURCHASES FREIGHT IN REF. PAYABLE DEBIT CREDIT 2, 865 4, 055 3, 140 3, 935 4, 200 5, 120 23, 315 (205) ACCOUNT DATE 20 -Jan. 1 31 Accounts Payable DESCRIPTION Balance POST. REF. ü P 1 ACCOUNT NO. 205 DEBIT CREDIT 23, 315 22 1 BALANCE DEBIT CREDIT 10, 800 23, 315 2, 675 3, 880 2, 900 3, 675 3, 860 4, 760 21, 750 (501) 190 175 240 260 340 360 1, 565 (502)

PURCHASES JOURNAL DATE CREDITOR’S ACCOUNT CREDITED INVOICE NUMBER 20 -Jan. 3 Fashion Designs 5 The Trend Center 6 Modern Woman 7 World of Fashions 18 Fashion Warehouse 22 Inter’l Apparel Shop 31 8434 336 9080 4321 9789 7985 INV. DATE TERMS 12/29/-12/30/-12/31/-01/03/-01/15/-01/22/-- 2/10, n/30 2/10, n/30 PAGE POST. ACCOUNTS PURCHASES FREIGHT IN REF. PAYABLE DEBIT CREDIT 2, 865 4, 055 3, 140 3, 935 4, 200 5, 120 23, 315 (205) ACCOUNT DATE Purchases DESCRIPTION ACCOUNT NO. 501 POST. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 20 -31 P 1 21, 750 23 1 2, 675 3, 880 2, 900 3, 675 3, 860 4, 760 21, 750 (501) 190 175 240 260 340 360 1, 565 (502)

PURCHASES JOURNAL DATE CREDITOR’S ACCOUNT CREDITED INVOICE NUMBER 20 -Jan. 3 Fashion Designs 5 The Trend Center 6 Modern Woman 7 World of Fashions 18 Fashion Warehouse 22 Inter’l Apparel Shop 31 8434 336 9080 4321 9789 7985 INV. DATE TERMS 12/29/-12/30/-12/31/-01/03/-01/15/-01/22/-- PAGE POST. ACCOUNTS PURCHASES FREIGHT IN REF. PAYABLE DEBIT CREDIT 2/10, n/30 2/10, n/30 2, 865 4, 055 3, 140 3, 935 4, 200 5, 120 23, 315 (205) ACCOUNT DATE Freight In DESCRIPTION DEBIT CREDIT (501) BALANCE DEBIT CREDIT 20 -31 2, 675 3, 880 2, 900 3, 675 3, 860 4, 760 21, 750 ACCOUNT NO. 502 POST. REF. P 1 1, 565 24 1 190 175 240 260 340 360 1, 565 (502)

Advantages of a Purchases Journal l Allows for the division of accounting work among different employees l Strengthens the audit trail l Records all credit purchases in one place 25

The Accounts Payable Ledger An accounts payable ledger is a subsidiary ledger that contains a separate account for each creditor. 26

The Accounts Payable Ledger NAME International Apparel Shop TERMS n/30 ADDRESS 1718 Sherry Lane, Dallas, Texas 75267 -6205 DATE DESCRIPTION POST. REF. DEBIT CREDIT BALANCE 20 -JAN. 1 23 Balance Invoice 7985, 01/23/-- P 1 5, 120 1, 600 6, 720 l The accounts payable ledger has three money columns. l The Balance column is presumed to contain credit amounts. 27

Posting a Credit Purchase To keep the accounting records up to date, invoices are posted to the accounts payable subsidiary ledger every day. 28

Steps to post to the accounts payable ledger Locate the accounts payable ledger account for the creditor International Apparel Shop. NAME International Apparel Shop TERMS n/30 ADDRESS 1718 Sherry Lane, Dallas, Texas 75267 -6205 DATE DESCRIPTION POST. REF. DEBIT CREDIT BALANCE 5, 120 1, 600 6, 720 20 -JAN. 1 23 Balance Invoice 7985, 01/23/-- P 1 29

Enter the date, invoice number and date, and the page number from the purchases journal. PURCHASES JOURNAL DATE CREDITOR’S ACCOUNT CREDITED INVOICE NUMBER 20 -Jan. 3 Fashion Designs 18 Designer’s Fashion 23 Intern’l Apparel Shop 5879 9789 7985 INV. DATE TERMS PAGE 1 POST. ACCOUNTS PURCHASES FREIGHT IN REF. PAYABLE DEBIT CREDIT 12/29/-- 2/10, n/30 01/15/-- 2/10, n/30 01/23/-- n/30 ü ü 2, 865 2, 100 5, 120 2, 675 1, 930 4, 760 3 NAME International Apparel Shop TERMS n/30 ADDRESS 1718 Sherry Lane, Dallas, Texas 75267 -6205 2 1 DATE DESCRIPTION POST. REF. DEBIT CREDIT BALANCE 20 -JAN. 1 23 Balance Invoice 7985, 01/22/-- P 1 5, 120 30 1, 600 6, 720 190 170 360

Enter the amount from the Accounts Payable Credit column in the purchases journal in the Credit column of the accounts payable subsidiary ledger. PURCHASES JOURNAL DATE CREDITOR’S ACCOUNT CREDITED INVOICE NUMBER 20 -Fashion Designs 18 Designer’s Fashion 23 Intern’l Apparel Shop 5879 9789 7985 INV. DATE TERMS PAGE 1 POST. ACCOUNTS PURCHASES FREIGHT IN REF. PAYABLE DEBIT CREDIT 12/29/-- 2/10, n/30 01/15/-- 2/10, n/30 01/23/-- n/30 ü ü 2, 865 2, 100 5, 120 2, 675 1, 930 4, 760 3 NAME International Apparel Shop TERMS n/30 ADDRESS 1718 Sherry Lane, Dallas, Texas 75267 -6205 2 1 DATE DESCRIPTION POST. REF. DEBIT 4 CREDIT BALANCE 20 -JAN. 1 23 Balance Invoice 7985, 01/22/-- P 1 5, 120 31 1, 600 6, 720 190 170 360

Compute and enter the new balance in the Balance column. PURCHASES JOURNAL DATE CREDITOR’S ACCOUNT CREDITED INVOICE NUMBER 20 -Jan. 3 Fashion Designs 18 Designer’s Fashion 23 Intern’l Apparel Shop 5879 9789 7985 INV. DATE TERMS PAGE 1 POST. ACCOUNTS PURCHASES FREIGHT IN REF. PAYABLE DEBIT CREDIT 12/29/-- 2/10, n/30 01/15/-- 2/10, n/30 01/23/-- n/30 ü ü 2, 865 2, 100 5, 120 2, 675 1, 930 4, 760 3 NAME International Apparel Shop TERMS n/30 ADDRESS 1718 Sherry Lane, Dallas, Texas 75267 -6205 2 1 DATE DESCRIPTION POST. REF. DEBIT 4 CREDIT BALANCE 20 -JAN. 1 23 Balance Invoice 7985, 01/22/-- 5 P 1 5, 120 32 1, 600 6, 720 190 170 360

In the purchases journal, enter the check mark in the Posting Reference column. This indicates that the transaction is posted in the accounts payable subsidiary ledger. PURCHASES JOURNAL DATE CREDITOR’S ACCOUNT CREDITED INVOICE NUMBER 20 -Jan. 3 Fashion Designs 18 Designer’s Fashion 23 Intern’l Apparel Shop 5879 9789 7985 INV. DATE TERMS PAGE 1 POST. ACCOUNTS PURCHASES FREIGHT IN REF. PAYABLE DEBIT CREDIT 12/29/-- 2/10, n/30 01/15/-- 2/10, 6 n/30 01/23/-- n/30 ü ü 2, 865 2, 100 5, 120 2, 675 1, 930 4, 760 3 NAME International Apparel Shop TERMS n/30 ADDRESS 1718 Sherry Lane, Dallas, Texas 75267 -6205 2 1 DATE DESCRIPTION POST. REF. DEBIT 4 CREDIT BALANCE 20 -JAN. 1 23 Balance Invoice 7985, 01/22/-- 5 P 1 5, 120 33 1, 600 6, 720 190 170 360

Sorry, I didn’t like the color. A purchase return is a return of unsatisfactory goods. A purchase allowance is a price reduction from the amount originally billed. 34

A credit to the Purchase Returns and Allowances account is preferred to making a direct credit to Purchases Returns and Allowances + Returns and Allowances A contra cost of goods sold account 35

Recording Purchases Returns & Allowances On January 30 The Style Shop received a credit memorandum for $476 from International Apparel Shop as an allowance for damaged merchandise. International Apparel Shop 1718 Sherry Lane Dallas, TX 75267 The Style Shop 2007 Trendsetter Lane Dallas, TX 75268 $476 36

Purchase Allowance Accounts Payable Purchases Returns and Allowances 476 + 476 37

Posting a Purchases Return or Allowance it is important to promptly post returns and allowances to the creditor’s account in the accounts payable ledger. 38

Posting from the General Journal GENERAL JOURNAL DATE DESCRIPTION POST. REF. 205/ ü Jan. 30 Accounts Payable/ PAGE DEBIT 476 1 CREDIT International Apparel Shop Purchases Returns and Allowances 503 476 Received Credit Memo 103 for an allowance for damaged merchandise; original Invoice 7985, Jan. 23, 20 -NAME International Apparel Shop TERMS n/30 ADDRESS 1718 Sherry Lane, Dallas, Texas 75267 -6205 DATE 20 -JAN. 1 23 27 30 DESCRIPTION Balance Invoice 7985, 01/23/-CM 103 POST. REF. ü P 1 CP 1 J 1 DEBIT CREDIT 5, 120 2, 400 476 BALANCE 1, 600 6, 720 4, 320 3, 844

Schedule of Accounts Payable is a list of all balances owed to creditors. l subsidiary ledger must equal the balance of the Accounts Payable control account. l To prove that the control account and the subsidiary ledger are equal, businesses prepare a schedule of accounts payable. 40

The Style Shop Schedule of Accounts Payable January 31, 20 -- the total of the schedule of accounts payable and the general ledger A/P account shows that the two figures are the same Fashion Designs 1065 Fashion Warehouse 4, 200 International Apparel Shop 3, 844 Modern Woman 4, 740 The Trend Center 2, 205 World Of Fashions 6, 935 Total ACCOUNT DATE 22, 989 Accounts Payable ACCOUNT NO. 205 DESCRIPTION POST. REF. Balance ü J 1 P 1 CP 1 DEBIT CREDIT BALANCE DEBIT CREDIT 20 -Jan. 1 30 31 31 476 23, 315 12, 710 41 10, 800 10, 324 33, 639 22, 989

Determining the Cost of Purchases The net delivered cost of purchases for The Style Shop for January is calculated as follows. Purchases $ 23, 315 Freight In Delivered Cost of Purchases 1, 565 $ 24, 880 Less Purchases Returns and Allowances Net Delivered Cost of Purchases <476> $24, 404 Note: there were no purchase discounts 42