Recording Purchase of Merchandise

RECORDING PURCHASE OF MERCHANDISE FROM SELLER

• When a retailer purchases goods from a supplier:

  • The purchase is recorded in the Merchandise Inventory Account (Short-Term Asset).

  • Merchandise Inventory can be acquired by:

  1. Cash purchases

  2. Purchases on account (credit)

• Source Document: Records purchases of Merchandise Inventory:

  • Cash Sales Slip: For sales paid with cash.

  • Invoice: For sales on account.

  • A Purchase invoice and a Sales invoice can be the same document.

  • From the seller's perspective, it’s a Sales Invoice; from the buyer's perspective, it’s a Purchase Invoice.

• When journalizing, include Source Document and serial number.

Example Transactions:

• May 4, 2020: Purchased $3,800 of merchandise with cash (Cash Sales Slip #10).

• May 4, 2020: Purchased $3,800 of merchandise on account (Invoice #731, terms 2/10, n/30).

General Journal Entries:

• Cash Purchase:

  • Debit: Merchandise Inventory $3,800

  • Credit: Cash $3,800

  • To record goods purchased with cash per Cash Sales Slip #10

• Credit Purchase:

  • Debit: Merchandise Inventory $3,800

  • Credit: Accounts Payable $3,800

  • To record goods purchased on account per Invoice #731, terms 2/10, n/30

SUBSIDIARY INVENTORY RECORDS

• Subsidiary Ledger: A group of accounts providing details for a control account in the General Ledger, helps organize and track individual items to keep the General Ledger less cluttered.

Examples of Subsidiary Ledgers:

• Merchandise Inventory: Tracks inventory accounts, cost, and quantity of each item.

• Accounts Payable: Tracks creditor balances.

• Accounts Receivable: Tracks customer balances.

• Salaries Payable: Tracks employee pay.

CONTROL ACCOUNT

• Control Account: A general ledger account containing only summary amounts, with details in related subsidiary ledgers.

  • The balance equals the total of all individual balances in the Subsidiary Ledger.

SALES TAX

• Sales Tax: Money collected by the government from transactions.

  • Fund public services: schools, hospitals, roads, welfare programs, etc.

Sales Tax Types in Ontario (before 2010):

• PST (Provincial Sales Tax): 8%

• GST (Goods & Service Tax): 5%

  After 2010, replaced with HST (Harmonized Sales Tax):

• HST: Combined PST (8%) and GST (5%), total 13%.

• Principles of HST for Businesses:

  1. Tax collected by the SELLER, recorded as HST Payable.

  2. Tax charged to the BUYER, recorded as HST Recoverable.

  3. Tax remitted to the government periodically.

FREIGHT COSTS

• FOB (Free on Board): Shipping term determines:

  • Ownership (who is responsible for goods).

  • Payment of freight costs.

Types of Shipping Terms:

1. FOB Shipping Point:

   • Ownership transfers when goods are on the carrier.

   • Buyer pays freight costs.

   • Example Transaction: Paid $150 freight (record in Merchandise Inventory).

2. FOB Destination:

   • Ownership transfers upon delivery.

   • Seller pays freight costs (no journal entry recorded for the buyer).

PURCHASES RETURNS & PURCHASE ALLOWANCES

Purchase Returns:

• Occur when the buyer returns unsatisfactory goods.

  • Reasons: Damaged goods, poor quality, not meeting specifications.

• Example Transaction: Returned $300 of merchandise on May 9, 2020, due to damage.

General Journal Entry for Returns:

• Debit: Cash $300

• Credit: Merchandise Inventory $300

• To record return of goods to Highpoint Audio & TV Supply.

Purchase Allowances:

• Price reduction for unsatisfactory merchandise (buyer keeps it).

• Example Transaction: Received $100 purchase allowance from Highpoint Audio & TV Supply.

General Journal Entry for Allowances:

• Debit: Cash $100

• Credit: Merchandise Inventory $100

• To record purchase allowance from Highpoint Audio & TV Supply.

DISCOUNTS

Types of Discounts:

1. Quantity Discount:

   • Given for bulk purchases (no accounting entry).

2. Purchase Discount:

   • Given for early payment on account.

   • Benefits seller (quicker payments) and buyer (saves money).

Example of Purchase Discount:

• Terms of Sale: 2/10, n/30 means 2% discount if paid within 10 days.

• Example Transaction: Paid invoice #731 within the discount period:

  • Total $3,500

  • Discount = $3,500 x 0.02 = $70

  • General Journal Entry:

    • Debit: Accounts Payable $3,500

    • Credit: Merchandise Inventory $70

    • Credit: Cash $3,430

    • To record payment of invoice #731 within discount period.

• No Discount Taken Transaction: Paid invoice #50 of $3,500 without discount.

Journal Entry:

• Debit: Accounts Payable $3,500

• Credit: Cash $3,500

• To record payment of invoice #50 with no discount taken.