CHAPTER TWELVE ACCOUNTING FOR PURCHASES AND CASH PAYMENTS

CHAPTER TWELVE ACCOUNTING FOR PURCHASES AND CASH PAYMENTS

PURCHASES 4 Merchandise acquired for resale: éMust be items for RESALE 4 Procedures and documents vary depending on the size of the business. 4 Can be made “on account” or for cash

PURCHASING PROCESS DOCUMENTS PURCHASE REQUISITION

PURCHASE REQUISITION 4 A form used to request the purchase of merchandise or other property 4 Can be prepared by any authorized person 4 One copy to the Purchasing department 4 One copy to the Accounting department 4 One copy kept by the department preparing the requisition

PURCHASING PROCESS DOCUMENTS PURCHASE REQUISITION PURCHASE ORDER

PURCHASE ORDER 4 A written order to buy goods from a specific vendor 4 Purchasing department reviews and approves the purchase requisition and prepares a purchase order: éOne to vendor éOne to the Accounting department éOne kept in the Purchasing department éCopies may also be sent to the receiving area and to the department initiating the purchase.

PURCHASING PROCESS DOCUMENTS PURCHASE ORDER RECEIVING REPORT

RECEIVING REPORT 4 Prepared by the receiving clerk 4 Indicates what has been received: éIncluding date of receipt, and écondition of the goods 4 This report will be compared with the purchase order and requisition to determine if items ordered were received in good condition before payment is approved.

PURCHASING PROCESS DOCUMENTS RECEIVING REPORT PURCHASE INVOICE

PURCHASE INVOICE 4 Prepared by the seller 4 As a bill for the merchandise shipped: éSeller calls it a sales invoice. éBuyer calls it a purchase invoice. 4 Before payment is made, Accounting department compares the purchase invoices with: éPurchase Requisition éPurchase Order éReceiving Report

CASH DISCOUNTS 4 Available if the bill is paid within the discount period 4 Buyer calls it a Purchase Discount. 4 Seller calls it a Sales Discount.

TRADE DISCOUNTS 4 Often offered by manufacturers and wholesalers 4 Reduction from the list or catalog price: éDiscounts offered to different classes of customers 4 Buyer and Seller both record the transaction at the NET amount (after the discount).

MERCHANDISE PURCHASES ACCOUNTS PURCHASES DISCOUNTS PURCHASES RETURNS & ALLOWANCES FREIGHT-IN

PURCHASES ACCOUNT Used to record the cost of merchandise purchased PURCHASES DR. CR. The account is debited when merchandise is purchased.

PURCHASES ACCOUNT Used to record the cost of merchandise purchased PURCHASES DR. CR. The account is only credited during the closing process.

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Purchases Cash PR DEBIT CREDIT 100 00 Made cash purchase 5 6 7 8 9 10 11 Example: Made $100 purchase for cash 100 00

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Purchases Accts. Payable/Vendor PR DEBIT CREDIT 100 00 Made purchase on account 5 6 7 8 9 10 11 What if the purchase had been made on account? 100 00

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Purchases Accts. Payable/Vendor PR DEBIT CREDIT 100 00 Made purchase on account 5 6 7 8 9 10 11 We would credit the Accounts Payable account instead of cash. 100 00

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases Accts. Payable/Vendor PR DEBIT CREDIT 100 00 Made purchase on account The specific supplier is identified. 100 00

PURCHASE RETURNS AND ALLOWANCES CONTRA-PURCHASES account used to record purchase returns and purchase allowances. PURCHASES RETURNS & ALLOWANCES DR. CR. The account is credited for the amount of returns and allowances.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Example: Merchandise purchased on account for $200 is defective and is returned to the supplier.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Accts. Payable/Vendor PR DEBIT CREDIT 200 00 Accounts Payable is debited. The specific vendor is identified.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Accts. Payable/Vendor Pur. Returns & Allow. PR DEBIT CREDIT 200 00 Returned merchandise Purchases Returns & Allowances is credited. This account will be shown as a deduction from the Purchases account on the Income Statement.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Example: If the same merchandise is retained but the supplier grants a price reduction of $45 because of the defects

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Accts. Payable/Vendor PR DEBIT CREDIT 45 00 Accounts Payable is debited to reflect the price reduction.

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Accts. Payable/Vendor Pur. Returns & Allow. PR DEBIT CREDIT 45 00 Allowance for defective merchandise 5 6 7 8 9 10 11 Purchases Returns & Allowances is credited. Same as the entry for Returns!

PURCHASES DISCOUNTS CONTRA-PURCHASES account used to record cash discounts allowed on purchases. PURCHASES DISCOUNTS DR. CR. The account is credited for the discount granted by the vendor for prompt payment.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Example: Merchandise is purchase for $100 on account with credit terms 2/10, n/30 and payment is made within the discount period.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Accts. Payable/Vendor PR DEBIT CREDIT 100 00 Accounts Payable is debited for the entire amount of the purchase.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Accts. Payable/Vendor Cash PR DEBIT CREDIT 100 00 Cash is credited for the actual amount paid, $98 ($100 - $2 discount). 98 00

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Accts. Payable/Vendor Cash Purchases Discounts PR DEBIT CREDIT 100 00 Made payment on account 5 6 7 8 9 10 11 Purchase Discounts is credited for the discount amount, $2 ($100 x 2%). 98 00 2 00

FREIGHT-IN ADJUNCT-PURCHASES account used to record transportation charges on merchandise purchases. FREIGHT-IN DR. CR. The account is debited for transportation charges.

TRANSPORTATION CHARGES 4 Expressed as FOB (Free on Board) éFOB Shipping Point: • Buyer pays for transportation. • Freight charges are either listed on invoice or sent as a separate bill. éFOB Destination: • Seller pays for transportation.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Example: Merchandise was purchased on account for $400 plus freight charges of $38.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases PR DEBIT CREDIT 400 00 Purchases is debited only for the cost of the merchandise.

GENERAL JOURNAL DATE DESCRIPTION PR DEBIT CREDIT 1 2 3 4 Purchases Freight-In 5 Freight-In is debited for the transportation costs. 6 7 8 9 10 11 400 00 38 00

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases Freight-In Accts. Payable/Vendor PR DEBIT CREDIT 400 00 38 00 Made purchase on account Accounts Payable is credited for the entire purchase price (merchandise + freight). 438 00

GENERAL JOURNAL DATE DESCRIPTION PR DEBIT CREDIT 1 2 3 4 5 6 7 8 9 10 11 What if the freight charges were on a separate bill from the transportation company?

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases PR DEBIT CREDIT 400 00 Purchases is again debited for the cost of the merchandise.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases Accts. Payable/Vendor PR DEBIT CREDIT 400 00 Made purchase on account Accounts Payable is credited for the amount due to the supplier. 400 00

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases Accts. Payable/Vendor PR DEBIT CREDIT 400 00 Made purchase on account A separate journal entry is made to record the freight charges. 400 00

GENERAL JOURNAL DATE DESCRIPTION 1 2 3 4 Purchases Accts. Payable/Vendor 5 Freight-In Accts. Payable/Vendor 6 7 8 9 10 11 PR DEBIT CREDIT 400 00 Made purchase on account 38 00 Freight charges on purchase Accounts Payable is credited, but the vendor is the transportation company. 38 00

GROSS PROFIT 4 Also called Gross Margin 4 Difference between Net Sales and Cost of Goods Sold 4 Tells management the amount of sales dollars available to cover expenses, after covering the cost of the goods sold

GROSS PROFIT FORMULA: NET SALES COST OF GOODS SOLD Let’s look at an example. GROSS PROFIT

EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7. 50 each. NET SALES COST OF GOODS SOLD GROSS PROFIT $200 20 hats @ $10 each = $200 in Sales There were no Sales Returns & Allowances or Sales Discounts, so NET SALES = $200.

EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7. 50 each. NET SALES COST OF GOODS SOLD $200 $150 20 hats @$7. 50 each = $150 GROSS PROFIT

EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7. 50 each. NET SALES COST OF GOODS SOLD GROSS PROFIT $200 $150 $50 The Gross Profit on these 20 hats was $50. This $50 is used to cover expenses.

COMPUTATION OF GROSS PROFIT

NORTHERN MICRO Sales $200, 500 1, 200 Sales Returns & Allowances Purchases 105, 000 Let’s compute 800 Purchases Returns & Allowances the Gross Profit. Purchases Discounts 1, 000 Freight-In 300 26, 000 Merchandise Inventory, 1/1/-Merchandise Inventory, 12/31/-- 18, 000

COMPUTATION OF GROSS PROFIT STEP #1: COMPUTE NET SALES. FORMULA: SALES RETURNS & ALLOWANCES

Sales Less: Sales returns & allow Net Sales $200, 500 $1, 200 This is the price we charged our customers for the merchandise. $199, 300

COMPUTATION OF GROSS PROFIT STEP #2: COMPUTE GOODS AVAILABLE FOR SALE. FORMULA: BEGINNING INVENTORY COST OF GOODS PURCHASED

Sales Less: Sales returns & allow. Net Sales Cost of Goods Sold: Merchandise Inv. , Jan 1 Purchases Less: Purch. ret. & allow. Purchases discounts Net purchases Add freight-in Cost of goods purchased Goods available for sale $200, 500 $1, 200 $199, 300 $26, 000 $105, 000 $ 800 1, 000 1, 800 $103, 200 300 103, 500 $129, 500 This is the cost of ALL the goods that were offered for sale.

COMPUTATION OF GROSS PROFIT STEP #3: COMPUTE COST OF GOODS SOLD. FORMULA: GOODS AVAILABLE FOR SALE ENDING INVENTORY

Sales Less: Sales returns & allow. Net Sales Cost of Goods Sold: Merchandise Inv. , Jan 1 Purchases Less: Purchases ret. & allow. Purchases discounts Net purchases Add freight-in Cost of goods purchased Goods available for sale Less Merch. Inv, Dec. 31 $200, 500 $1, 200 $199, 300 $26, 000 $105, 000 $ 800 1, 000 1, 800 $103, 200 300 103, 500 $129, 500 18, 000 Out of the $129, 500 of merchandise available to sell, $18, 000 was not sold.

Sales Less: Sales returns & allow. Net Sales Cost of Goods Sold: Merchandise Inv. , Jan 1 Purchases Less: Purchases ret. & allow. Purchases discounts Net purchases Add freight-in Cost of goods purchased Goods available for sale Less Merch. Inv. , Dec. 31 Cost of Goods Sold $200, 500 $1, 200 $199, 300 $26, 000 $105, 000 $ 800 1, 000 1, 800 $103, 200 300 103, 500 $129, 500 18, 000 From that we can determine that $111, 500 of merchandise was sold. 111, 500

COMPUTATION OF GROSS PROFIT STEP #4: COMPUTE GROSS PROFIT. FORMULA: NET SALES COST OF GOODS SOLD

Sales Less: Sales returns & allow. Net Sales Cost of Goods Sold: Merchandise Inv. , Jan 1 Purchases Less: Purchases ret. & allow. Purchases discounts Net purchases Add freight-in Cost of goods purchased Goods available for sale Less Merch. Inv. , Dec. 31 Cost of Goods Sold Gross Profit $200, 500 $1, 200 $199, 300 $26, 000 $105, 000 $ 800 1, 000 1, 800 $103, 200 300 103, 500 $129, 500 18, 000 The merchandise was sold for $87, 800 more than its cost. 111, 500 87, 800

POSTING PURCHASES TRANSACTIONS IN THE GENERAL LEDGER 4 In the ledger account: éStep 1: Enter the date. éStep 2: Enter the amount of the transaction. éStep 3: Update the balance. éStep 4: Enter the journal page number. 4 In the journal: éStep 5: Enter the ledger account number.

ACCOUNTS PAYABLE LEDGER 4 A separate “subsidiary” ledger 4 Individual accounts for each supplier 4 Often numbered 4 Filed either alphabetically or numerically 4 Accounts Payable account in the general ledger is the “controlling account. ”

POSTING TO THE ACCOUNTS PAYABLE LEDGER 4 In the Accounts Receivable ledger: éStep 1: Enter the date. éStep 2: Enter the amount. éStep 3: Enter the new balance. éStep 4: Enter the journal page number. 4 In the journal: éStep 5: Enter a slash (/) followed by a check mark ( ) in the PR column.

GENERAL JOURNAL 1 2 3 4 DATE DESCRIPTION April 4 Purchases PR DEBIT CREDIT 3, 300 00 Accts. Pay/Compucraft Invoice No. 631 5 6 7 8 9 10 11 Let’s review the posting for this transaction. 3, 300 00

GENERAL JOURNAL 1 2 3 4 DATE DESCRIPTION April 4 Purchases PR DEBIT CREDIT 501 3, 300 00 Accts. Pay. /Compucraft Invoice No. 631 5 6 7 8 9 10 11 A $3, 300 debit is posted to the Purchases account in the usual manner. 3, 300 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 4 Purchases PR DEBIT CREDIT 501 3, 300 00 Accts. Pay. /Compucraft Invoice No. 631 The credit is posted to the controlling account in the General Ledger. 3, 300 00

FOUR-COLUMN ACCOUNT Account: ACCOUNTS PAYABLE DATE ITEM 20 -Apr. 1 Balance 4 PR DR. Account No. 202 BALANCE CR. DR. CR. 4, 800 J 6 3, 300 This entry is posted in the same manner as all other general ledger postings. 8, 100

GENERAL JOURNAL 1 2 3 4 DATE DESCRIPTION April 4 Purchases PR DEBIT CREDIT 501 3, 300 00 Accts. Pay. /Compucraft 202 Invoice No. 631 5 6 7 8 9 10 11 The Accounts Payable account number is placed in the PR column. 3, 300 00

GENERAL JOURNAL 1 2 3 4 DATE DESCRIPTION April 4 Purchases PR DEBIT CREDIT 501 3, 300 00 Accts. Pay. /Compucraft 202 Invoice No. 631 5 6 7 8 9 10 11 Now we need to post to the individual supplier’s account. 3, 300 00

Name: ACCOUNTS PAYABLE LEDGER Compucraft, Inc. Address: 2100 West Main Street, Muncie, IN 47304 -8139 DATE 20 -Apr. 4 ITEM PR DEBIT J 6 CREDIT 3, 300 Date is entered, Amount is recorded, Balance is updated, and Journal page number is referenced. BALANCE 3, 300

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 4 Purchases PR DEBIT CREDIT 501 3, 300 00 Accts. Pay. /Compucraft 202/ 3, 300 00 Invoice No. 631 A slash (/) is entered along with a check mark ( ), which indicates the entry has been posted to the subsidiary ledger.

GENERAL JOURNAL 1 2 3 4 DATE DESCRIPTION May 4 Accts. Payable/Televax PR DEBIT CREDIT 200 00 Purchases Ret. & Allow. Returned Merchandise 5 6 7 8 9 10 11 Now let’s look at the posting for a Purchase Return entry. 200 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION May 4 Accts. Payable/Televax PR DEBIT CREDIT 202 / 200 00 Purchases Ret. & Allow. Returned Merchandise - The $200 debit is posted to the Accounts Payable controlling account and to the Subsidiary ledger account for Televax. 200 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION May 4 Accts. Payable/Televax PR DEBIT CREDIT 202 / 200 00 Purchases Ret. & Allow. 501. 1 Returned Merchandise - Purchases Returns and Allowances is posted in the normal manner. Its account number is recorded in the PR column. 200 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT April 10 Accts. Payable/B. B. Small 4, 800 00 Cash Made payment on account Cash Payment transactions are posted in a similar manner. 4, 800 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT April 10 Accts. Payable/B. B. Small 202 / 4, 800 00 Cash 4, 800 00 Made payment on account The debit is posted to the Accounts Payable controlling account and to the Subsidiary ledger account for B. B. Small.

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT April 10 Accts. Payable/B. B. Small 202 / 4, 800 00 Cash 101 Made payment on account Cash is posted as usual. 4, 800 00

SCHEDULE OF ACCOUNTS PAYABLE 4 Prepared to verify that the sum of the accounts payable ledger balances equals the Accounts Payable balance 4 Listing of suppliers and their balances 4 Usually prepared at the end of the month 4 Total of the balances listed is compared with the balance in the Accounts Payable account.

Northern Micro Schedule of Accounts Payable April 30, 20 -Compucraft, Inc. Datasoft Printpro Corp. Televax, Inc. $3, 300 2, 500 800 5, 300 $11, 900 This should be the balance in the Accounts Payable controlling account.