Chapter 11: Accounting for Purchases and Cash Payments

Objective 1 – Merchandise Purchases Transactions

• Merchandise Purchases
  • 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

Purchasing Process Documents

• Purchase Requisition
  • A form used to request the purchase of merchandise or other property
  • Can be prepared by any authorized person
  • Copies:
    • One to the Purchasing department
    • One to the Accounting department
    • One kept by the department preparing the requisition
• Purchase Order
  • A written order to buy goods from a specific vendor
  • Purchasing department reviews and approves the purchase requisition and prepares a purchase order:
    • One to vendor
    • One to the Accounting department
    • One kept in the Purchasing department
    • Copies may also be sent to the receiving area and to the department initiating the purchase.
• Receiving Report
  • Prepared by the receiving clerk
  • Indicates what has been received:
    • Including date of receipt, and
    • condition of the goods
  • 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.
• Purchase Invoice
  • Prepared by the seller
  • As a bill for the merchandise shipped:
    • Seller calls it a sales invoice.
    • Buyer calls it a purchase invoice.
  • Before payment is made, Accounting department compares the purchase invoices with:
    • Purchase Requisition
    • Purchase Order
    • Receiving Report
• Cash Discounts
  • Available if the bill is paid within the discount period
  • Buyer calls it a Purchase Discount.
  • Seller calls it a Sales Discount (Chapter #10).
• Trade Discounts
  • Often offered by manufacturers and wholesalers
  • Reduction from the list or catalog price:
    • Discounts offered to different classes of customers
  • Buyer and Seller both record the transaction at the NET amount (after the discount).
  • Trade Discounts are never recorded

Objective 2 – Merchandise Purchases Accounts

• Merchandise Purchases Accounts

  • Purchases
  • Purchases Discounts
  • Purchases Returns & Allowances
  • Freight-In

• Purchases Account

  • Used to record the cost of merchandise purchased

  • The account is debited when merchandise is purchased.

  • The account is only credited during the closing process.

  • Example: Made $100$ purchase for cash

    • Debit Purchases $100.00$
    • Credit Cash $100.00$

  • What if the purchase had been made on account?

    • Debit Purchases $100.00$
    • Credit Accts. Payable/Vendor $100.00$
    • The specific supplier is identified.

• Purchase Returns and Allowances

  • CONTRA-PURCHASES account used to record purchase returns and purchase allowances.

  • The account is credited for the amount of returns and allowances.

  • Example: Merchandise purchased on account for $200$ is defective and is returned to the supplier.

    • Debit Accounts Payable (identifying the specific vendor) $200.00$
    • Credit Purchases Returns & Allowances $200.00$
    • This account will be shown as a deduction from the Purchases account on the Income Statement.

  • Example: If the same merchandise is retained but the supplier grants a price reduction of $45$ because of the defects

    • Debit Accounts Payable $45.00$
    • Credit Purchases Returns & Allowances $45.00$
    • Same as the entry for Returns!

• Purchases Discounts

  • 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.

  • Example: Merchandise is purchased for $100$ on account with credit terms 2/10, n/30 and payment is made within the discount period.

    • Debit Accounts Payable $100.00$
    • Credit Cash for the actual amount paid, $98$ (100 - $2 discount).
    • Credit Purchase Discounts for the discount amount, $2$ ($100$ x 2%).

• Freight-In

  • ADJUNCT-PURCHASES account used to record transportation charges on merchandise purchases.
  • The account is debited for transportation charges.

• Transportation Charges

  • Expressed as FOB (Free on Board)

    • FOB Shipping Point:
      • Buyer pays for transportation.
      • Freight charges are either listed on invoice or sent as a separate bill.
      • Buyer owns item as soon as it is shipped.
    • FOB Destination:
      • Seller pays for transportation.
      • Seller owns item until it is delivered.
      • Freight charges do not appear on purchase invoice.

  • Example: Merchandise was purchased on account for $400$ plus freight charges of $38$.

    • Debit Purchases $400.00$
    • Debit Freight-In $38.00$
    • Credit Accounts Payable (for the entire purchase price, merchandise + freight) $438.00$

  • What if the freight charges were on a separate bill from the transportation company?

    • Debit Purchases $400.00$
    • Credit Accounts Payable (amount due to the supplier) $400.00$
    • A separate journal entry is made to record the freight charges.
    • Debit Freight-In $38.00$
    • Credit Accounts Payable (the vendor is the transportation company) $38.00$

• Gross Profit

  • Also called Gross Margin
  • 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
  • $Gross Profit = Net Sales - Cost of Goods Sold$
  • 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 Sales
    • There were no Sales Returns & Allowances or Sales Discounts, so NET SALES = $200$.
    • Cost of Goods Sold: 20 hats @ $7.50$ each = $150$
    • Gross Profit = $50$
    • This $50$ is used to cover expenses.

• Computation of Gross Profit

  • Step #1: Compute Net Sales.

    • Net Sales = Sales - Sales Returns & Allowances
      • Example:
        • Sales = $200,500$
        • Sales Returns & Allowances = $1,200$
        • Net Sales = $199,300$

  • Step #2: Compute Goods Available For Sale.

    • $Goods Available for Sale = Beginning Inventory + Cost of Goods Purchased$
      • Example:
        • Merchandise Inventory, January 1 = $26,000$
        • Purchases = $105,000$
        • Less: Purchases Returns & Allowances = $800$
        • Less: Purchases Discounts = $1,000$
        • Net Purchases = $103,200$
        • Add freight-in = $300$
        • Goods available for sale = $129,500$

  • Step #3: Compute Cost of Goods Sold.

    • $Cost of Goods Sold = Goods Available for Sale - Ending Inventory$
      • Example:
        • Goods available for sale = $129,500$
        • Less Merch. Inv., Dec. 31 = $18,000$
        • Cost of Goods Sold = $111,500$

  • Step #4: Compute Gross Profit.

    • $Gross Profit = Net Sales - Cost of Goods Sold$
      • Example:
        • Net Sales = $199,300$
        • Cost of Goods Sold = $111,500$
        • Gross Profit = $87,800$

Objective 3 -Journalizing and Posting Purchases and Cash Payments

• Posting Purchases Transactions in the General Ledger
  • In the ledger account:
    • Step 1: Enter the date.
    • Step 2: Enter the amount of the transaction.
    • Step 3: Update the balance.
    • Step 4: Enter the journal page number.
  • In the journal:
    • Step 5: Enter the ledger account number.
• Accounts Payable Ledger
  • A separate “subsidiary” ledger
  • Individual accounts for each supplier
  • Often numbered
  • Filed either alphabetically or numerically
  • Accounts Payable account in the general ledger is the “controlling account.”
• Posting to the Accounts Payable Ledger
  • In the Accounts Payable ledger:
    • Step 1: Enter the date.
    • Step 2: Enter the amount.
    • 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.
• Let’s review the posting for this transaction.
  • Debit Purchases $3,300.00$
  • Credit Accts. Pay/Compucraft $3,300.00$
  • A $3,300$ debit is posted to the Purchases account in the usual manner.
  • The credit is posted to the controlling account in the General Ledger.
  • The Accounts Payable account number is placed in the PR column.

Objective 4 – Schedule of Accounts Payable

• Schedule of Accounts Payable
  • Prepared to verify that the sum of the accounts payable ledger balances equals the Accounts Payable balance
  • Listing of suppliers and their balances
  • Usually prepared at the end of the month
  • Total of the balances listed is compared with the balance in the Accounts Payable account.
• Example:
  • Compucraft, Inc. $3,300$
  • Datasoft $2,500$
  • Printpro Corp. $800$
  • Televax, Inc. $5,300$
  • Total $11,900$
  • This should be the balance in the Accounts Payable controlling account.