Acct chapter 15 class presentation

Welcome to…

The Accounting Cycle for a Merchandising Corporation!!!

Chapter 15: Accounting for Purchases and Cash

Payments

Essential Outcomes

15. Understands relationship between purchases, other assets, and returns, allowances and discounts by being able to:

a. Read, calculate & record credit terms for suppliers

b. Explain the procedures for processing a purchase on account

c. Describe the accounts used in the purchasing process.

d. Record a variety of purchases and cash payment transactions

e. Post to the accounts payable subsidiary ledger

f. Define the accounting terms used in this chapter.

First step for business is #1

1. Purchase merchandise for

resale

2. Sale of goods for cash or on

account

3. Collect cash from accounts

4. Pay expenses: rent, utilities, salaries, etc.

5. Profit

All items bought/purchased from Wal-Mart are purchased from wholesalers and

suppliers.

The Purchasing Process

Four Stages of buying:

1. Requesting needed items2. Ordering from a supplier3. Verifying items received4. Processing the supplier’s

invoice

Requesting Needed Items

o Small business: owner does all buying of merchandise

o Large business: purchasing department buys items for entire company equipment supplies inventory

Requesting Needed ItemsPurchase requisition: departments make

written request to managers to purchase items for department thru this requisition form

Once approved, original copy sent to purchasing department & person making requests receives copy

Ordering from Supplier

Purchase Order <PO>: after requisition form is approved, fill out order form

Information for purchase order comes off purchase requisition form

On PO form:1. Quantity

2. Description

3. Unit price

4. Total cost

5. Supplier’s name & address

6. Date needed

7. Shipping method

Verifying Items ReceivedWhen order is shipped to buyer, packing slip

included with orderPacking Slip: form that lists items included in

shipmentUse packing slip to make sure all items have been

includedBuyer does not pay for items that were missing or

damaged or unordered

Processing Supplier’s Invoice

Supplier prepares “invoice” for buyer

Invoice sent; accounting clerk checks for accuracy

Invoice is source document for journal entry for buyer

Before invoice is journalized, processing stamp placed on invoice: date to be paid, discount amount, amount to be paid & check #

Purchases Discount

Purchases Discount: supplier offers customer (or buyer) cash discount for early payment

Purchases Discount and Sales <Cash> discount figured same way

Credit terms: 2/10, n/30Discount period: first 10 days of billAfter 10 days, pay full amount

Purchases Discount

Credit terms:

Merchandised Purchase x Discount Rate = Discount

$2,300 x .02 (2%) = $46

$2,300 - $46 = $2,254 amount buyer owes

The Purchases Account

Purchases Account: when business buys merchandise to sell to customers, cost of merchandise is recorded to this account

Purchases Account:1. Temporary account

2. Classified as a cost of merchandise account

3. Cost of merchandise accounts: contain actual cost to business of merchandise sold to customers

The Purchases Account

Merchandise purchased for resale is cost of doing business

Purchases Account: normal balance: debit

Used whenever merchandise is sold for resale

Analyzing & Recording Purchases on Account

Accounts Payable & Accounts Payable Subsidiary Ledger

When business purchases from many suppliers on account, hard to keep track of debts by using only Accounts Payable account in General Ledger

Accounts Payable: controlling account

Controlling account: where balance of all accounts are set up

Accounts Payable & Accounts Payable Subsidiary Ledger

Accounts Payable Subsidiary Ledger: listing of suppliers that company purchases from on continuous bases on account

The total of all of suppliers listed in Accounts Payable Subsidiary ledger should equal balance in Accounts Payable in General Ledger

Recording the Purchase of Merchandise on account

Purchases A/R or Cash

$2,300 $2,300

Recording Merchandise Purchased for Resale

On Dec. 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Inv. #7894

P

Purchased $900 in merchandise on account from Sunrise Novelty

Supply. Invoice SN 110.

Purchases A/P – Sunrise Novelty

$900 $900

Posting

Posting to Accounts Payable & Accounts Payable Subsidiary

Ledger

1. First: Post to General Ledger—Accounts Payable (controlling account)—return to General Journal & put account # on top of diagonal line

2. Second: Post to individual account in Subsidiary ledger—return to General Journal & put check mark below diagonal line in Post. Ref.

A Comparison

Accounts Receivable• Controlling Account• Used for merchandise

sold on account• Normal Balance: Debit• Accounts Receivable

Subsidiary Ledger• Double Post• Sales Returns &

Allowances• Sales Discount\• Credit Memo

Accounts Payable• Controlling Account• Used for merchandise

purchased on account• Normal Balance: Credit• Accounts Payable

Subsidiary Ledger• Double Post• Purchases Returns &

Allowances• Purchases Discount• Debit Memo

Recording Other Purchases on Account

Recording other Purchases on Account

Purchase/buy supplies, equipment, land, etc. for cash or on account

The Purchases account is ONLY used for buying of “merchandise”.

Accounts used for buying other assets will be debited to that particular asset account.

Purchases Returns & Allowances

Purchases Returns and Allowances

Contra account : to Purchases, meaning it has opposite balance

Normal balance: credit Purchase Returns: business returns

purchased merchandise to creditor for full credit

Purchases allowance: business keeps less than satisfactory merchandise and pays reduction in price

Source document: Debit Memorandum

Debit Memorandum

Our business want to return $900 of merchandise purchased on account due to damage. Entry would be as follows

A/P Sunrise Novelty

Purchases Returns & Allowances

$900 $900

A Comparison

Sales Returns & Allowances

• Contra account to Sales• Source document: Credit

Memorandum• Used for sales customers

who return merchandise due to wrong size, wrong color, defective, etc.

• Normal Balance: Debit

Purchases Returns & Allowances

• Contra acct to Purchases• Source document: Debit

Memorandum• Used by business who

purchased merchandise due to wrong size, wrong color, defective, etc.

• Normal Balance: Credit

Analyzing Cash Payment Transactions

Analyzing Cash Payments

Usually all payments by business are paid by check

Internal control measures to safe guard money

Three types of cash payments that occur frequently:

1.Purchases Discounts2.Purchase of Insurance3.Purchase of Items

bought on account

Purchases Discounts

Purchases Discount: used whenever company pays early on merchandise bought/purchased on account

Purchases Discount: contra asset account to Purchases account (has opposite normal balance)

Normal Balance: credit

1. Purchases Discounts

Purchase Invoice has credit terms of 2/10, n/30. Invoice purchase costs $1,150.

Company pays bill within 10, must figure purchases discount

$1,150 x .02 = $23.00

$1,150 - $23 (discount) = $1,127

1. Purchases Discounts

Journal Entry:

Accounts Payable $1,150

Purchases Discount $ 23

Cash in Bank 1,127

Check #115

A Comparison

Sales Discount Customer pays

early within credit terms

Control account: Sales

Normal Balance: Debit

Accounts affected: Cash in Bank (dr); Sales Discount (dr) & A/R credit

Purchases Discount

• Business (buyer of merchandise) pays early within credit terms

• Control account: Purchases

• Normal Balance: Credit

• Accounts affected: A/P (dr) & Purchases Discount (cr); Cash in Bank (cr)

2. Analyzing Insurance Payments

Businesses usually buy insurance to protect company against fire, flood, etc.

Usually company pays 6-month premium in advance for protection of its company every two years

Premium: cost of insurance protection

Premiums charged to account called, “Prepaid Insurance.”

Analyzing Insurance Payments

At end of year, used amount of insurance or the “expired amount” becomes an adjusting entry (more on this later).

Prepaid Insurance: asset account Normal Balance: debit

Journalizing Insurance Payments

On December 17, pay $1,500 to Keystone Insurance Company for premium on six-month insurance policy, check #1001

Journal Entry:

Prepaid Insurance $1,500

Cash in Bank $1,500

Check #1001

3. Other Cash Payments: Shipping cost of merchandise

Buy merchandise from supplier, someone must pay for shipping (moving) merchandise from warehouse to place of sale

Shipping terms determine who pays shipping charges: either buyer or supplier

FOB: Means Free on Board

3. Shipping cost of merchandise

FOB destination: supplier pays shipping costs from supplier to buyer’s business.

FOB Shipping point: buyer pays the shipping charge from supplier’s shipping point to buyer’s business.

FOB Shipping Point: additional cost to merchandise purchased.

Transportation In Journal Entry

FOB Shipping Point: additional cost to merchandise purchased.

Account used: Transportation In Transportation In: NB: Debit Journal Entry:

Transportation In Debit

Cash in Bank Credit

3. Bankcard Fees

o Fee that banks charge for handling bankcard sales slips

o Usually percentage of total amount on bankcard sales slips.

o Bankcard Fees: expense & has NB-debito Journal Entry:

Bankcard Fees Expense $75

Cash in Bank $75

That’s all folks!!!

Now, on to some class activities!!!