CHAPTER THIRTEEN ACCOUNTING FOR PURCHASES McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

CHAPTER THIRTEEN

ACCOUNTING FOR PURCHASES

13-3

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

1. Record the entries for the purchase of merchandise for cash and on credit.

2. Record the entries for the purchase of supplies and other assets.

3. Record purchases discounts

4. Record the entries for freight in.

5. Record the entries for purchases returns and allowances.

ACCOUNTING FOR PURCHASES

Objectives:

13-4

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Recording Purchases of Merchandise

The purchase of merchandise for resale is recorded in an account called Merchandise Purchases.

This account is usually referred to as a cost account and is a temporary account.

13-5

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Recording Purchases of Merchandise (continued)

Like the expense accounts, the Purchases account decreases owner’s equity.

13-6

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Transaction

• $880 worth of merchandise was purchased for cash.

13-7

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Transaction Analysis

• Merchandise purchases is debited for $880.

• Cash is credited for $880. Post Ref Debit Credit

20 xx

Mar 2 880880

Purchased merchandise.

Merchandise Purchases Cash

Date Description

13-8

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Transaction

•$1150 worth of merchandise was purchased on credit.

13-9

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Transaction Analysis

• Merchandise purchases is debited for $1150.

• Accounts payable is credited for $1150.

Mar 4 Merchandise Purchases 1150 Accounts Payable 1150 Purchased merchandise on credit from

American Electric, Invoice J7632,

dated 3/1/xx, terms 2/10, n/30.

13-10

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Recording Other Purchases

• Be careful to record only purchases of merchandise for resale in the Merchandise Purchases account.

• Purchases of permanent assets, such as computers, copiers, and delivery equipment should be debited to the appropriate asset account and credited to Cash or Accounts Payable.

13-11

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Recording Amounts Paid for Purchases of Merchandise on Credit

• Accounts Payable is debited and Cash is credited.

13-12

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Transaction

• If the business takes advantage of a 2% discount on purchases of $1150, how would the transaction be recorded?

13-13

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Transaction Analysis

•2% of $1150 is $23.

•Accounts payable is debited for $1150.

•Cash is credited for $1127.

•Purchases discount is credited for $23.

13-14

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Transaction Analysis (continued)

Post Ref Debit Credit

20 xx

Mar 10 Accounts Payable 1150 Cash 1127 Purchases Discount 23 Paid American Electric for Invoice J7632

less discount.

Date Description

13-15

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Recording Transportation Charges on Merchandise Purchases

• Freight in, another cost account, is debited for the transportation charges on all incoming merchandise purchases.

13-16

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Recording Transportation Charges on Merchandise Purchases (continued)

• If the purchaser pays the transportation company directly, Freight In is debited and Cash is credited.

13-17

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Recording Transportation Charges on Merchandise Purchases (continued)

• If the seller lists the transportation charges on the invoice, then the purchaser owes the seller for both the merchandise and the transportation charges, resulting in a compound entry.

13-18

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Recording Purchases Returns and Allowances

• When a business returns goods or receives an allowance, there is a decrease in the cost of its merchandise purchases.

• This decrease is recorded in a cost account called Purchases Returns and Allowances.

13-19

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Accounting Terminology

•Freight in

•Merchandise purchases

•Purchases discount

•Purchases returns and allowances

13-20

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Chapter Summary

• Purchases of merchandise for resale are debited to a cost account called Merchandise Purchases.

• Purchases of permanent assets, such as equipment, are debited to an appropriate asset account.

13-21

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Chapter Summary (continued)

• For a cash discount, the buyer credits the amount of the discount to a cost account called Purchases Discount.

• The purchaser may be required to pay transportation charges on merchandise. These charges are debited to the Freight In account.

13-22

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Chapter Summary (continued)

• The Purchases Returns and Allowances account is used to record the decrease in the cost of merchandise purchases that results when a business returns goods or receives allowances.

13-23

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Chapter Summary (continued)

• Purchases Returns and Allowances is credited for all returns and allowances.

• If the business is given a cash refund, the Cash account is debited.

• If the amount is deducted from a balance that the business owes, Accounts Payable is debited.

13-24

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

1. Purchases Returns and Allowances is debited for all returns and allowances.

2. For a cash discount, the buyer credits the amount of the discount to a cost account called Purchases Discount.

3. If the business is given a cash refund, the Cash account is credited.

Topic QuizAnswer the following true/false questions:

TRUE

FALSE

FALSE

13-25

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Investigating on the Internet

Sources of information about purchases can be accessed at various corporate websites.

As a research assignment, access a business website and report those sources of information that might concern purchases of merchandise.

13-26

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

(Return to Topic Quiz)

1. Purchases Returns and Allowances is debited for all returns and allowances.

FALSE Purchases Returns and Allowances is credited for all returns and allowances.

13-27

McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights

Reserved.

(Return to Topic Quiz)

3. If the business is given a cash refund, the Cash account is credited.

FALSE If the business is given a cash refund,

the Cash account is debited.