CHAPTER TWELVE ACCOUNTING FOR PURCHASES AND CASH PAYMENTS
CHAPTER TWELVE
Jan 03, 2016
CHAPTER TWELVE. ACCOUNTING FOR PURCHASES AND CASH PAYMENTS. 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. - PowerPoint PPT Presentation
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CHAPTER TWELVE
ACCOUNTING FOR PURCHASES AND CASH
PAYMENTS
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
PURCHASE REQUISITION
A form used to request the purchase of merchandise or other property
Can be prepared by any authorized person One copy to the Purchasing department One copy to the Accounting department One copy kept by the department
preparing the requisition
PURCHASING PROCESS DOCUMENTS
PURCHASE REQUISITION
PURCHASE ORDER
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.
PURCHASING PROCESS DOCUMENTS
PURCHASE ORDER
RECEIVING REPORT
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.
PURCHASING PROCESS DOCUMENTS
RECEIVING REPORT
PURCHASE INVOICE
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.
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).
MERCHANDISE PURCHASES ACCOUNTS
PURCHASES PURCHASES DISCOUNTS
PURCHASES RETURNS & ALLOWANCES FREIGHT-IN
PURCHASES ACCOUNT
PURCHASESDR. CR.
+
Used to record the cost of merchandise purchased
The account is debited whenmerchandise is purchased.
PURCHASES ACCOUNT
PURCHASESDR. CR.
+
Used to record the cost of merchandise purchased
The account is only credited during the closing process.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
Purchases1
2
3
4
5
6
7
8
9
10
11
Example:Made $100 purchase for cash
100 00
Cash 100 00
Made cash purchase
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
Purchases1
2
3
4
5
6
7
8
9
10
11
What if the purchase hadbeen made on account?
100 00
Accts. Payable/Vendor 100 00
Made purchase on account
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
Purchases1
2
3
4
5
6
7
8
9
10
11
100 00
100 00
Made purchase on account
We would credit the Accounts Payable
account instead of cash.
Accts. Payable/Vendor
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
Purchases1
2
3
4
5
6
7
8
9
10
11
100 00
100 00
Made purchase on account
The specific supplieris identified.
Accts. Payable/Vendor
PURCHASE RETURNS AND ALLOWANCES
PURCHASES RETURNS & ALLOWANCES
DR. CR.
+
CONTRA-PURCHASES account used to record purchase returns and purchase allowances.
The account is credited for the amountof returns and allowances.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Example:Merchandise purchased on account
for $200 is defective and is returned to the supplier.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accounts Payable is debited.The specific vendor is identified.
Accts. Payable/Vendor 200 00
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Purchases Returns & Allowances is credited.This account will be shown as a deduction
from the Purchases account on the Income Statement.
200 00
Pur. Returns & Allow. 200 00Accts. Payable/Vendor
Returned merchandise
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Example:If the same merchandise is retained
but the supplier grants a price reduction of $45 because of the defects
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accounts Payable is debited to reflect the price reduction.
Accts. Payable/Vendor 45 00
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Purchases Returns & Allowances is credited.Same as the entry for Returns!
45 00
Pur. Returns & Allow. 45 00Accts. Payable/Vendor
Allowance for defective
merchandise
PURCHASES DISCOUNTS
PURCHASES DISCOUNTSDR. CR.
CONTRA-PURCHASES account used to record cash discounts allowed on purchases.
The account is credited for the discount grantedby the vendor for prompt payment.
+
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
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 DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accounts Payable is debitedfor the entire amount
of the purchase.
Accts. Payable/Vendor 100 00
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash is credited for the actual amount paid, $98
($100 - $2 discount).
Accts. Payable/Vendor 100 00
Cash 98 00
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Purchase Discounts is creditedfor the discount amount, $2
($100 x 2%).
Accts. Payable/Vendor 100 00
Cash 98 00
Purchases Discounts 2 00Made payment on account
FREIGHT-IN
FREIGHT-INDR. CR.
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:
o Buyer pays for transportation.
o Freight charges are either listed on invoice or sent as a separate bill.
• FOB Destination:o Seller pays for transportation.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Example:Merchandise was purchased
on account for $400 plus freight charges of $38.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Purchases is debited only for the cost of the merchandise.
Purchases 400 00
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Freight-In is debited for the transportation costs.
Purchases 400 00
Freight-In 38 00
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accounts Payable is credited for the entire purchase price (merchandise + freight).
Purchases 400 00
Freight-In 38 00
Accts. Payable/Vendor 438 00Made purchase on account
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 DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Purchases is again debited for the cost of the merchandise.
Purchases 400 00
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accounts Payable is credited for the amount due to the supplier.
Purchases 400 00
Accts. Payable/Vendor 400 00Made purchase on account
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
A separate journal entry is madeto record the freight charges.
Purchases 400 00
Accts. Payable/Vendor 400 00Made purchase on account
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Purchases 400 00
Accts. Payable/Vendor 400 00Made purchase on account
Freight-In 38 00
38 00Accts. Payable/VendorFreight charges on purchase
Accounts Payable is credited,but the vendor is the
transportation company.
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
FORMULA:
NET SALES
COST OF GOODS SOLD
GROSS PROFIT
Let’s look at an example.
EXAMPLEDuring the month, 20 hats are sold for $10 each. The hats were originally purchased for $7.50 each.
20 hats @ $10 each = $200 in SalesThere were no Sales Returns & Allowancesor Sales Discounts, so NET SALES = $200.
NET SALES
COST OF GOODS SOLD
GROSS PROFIT
$200
EXAMPLEDuring the month, 20 hats are sold for $10 each. The hats were originally purchased for $7.50 each.
NET SALES
$200
COST OF GOODS SOLD
20 hats @$7.50each = $150
$150
GROSS PROFIT
EXAMPLEDuring the month, 20 hats are sold for $10 each. The hats were originally purchased for $7.50 each.
NET SALES
$200
COST OF GOODS SOLD
The Gross Profit on these 20 hats was $50.This $50 is used to cover expenses.
$150
GROSS PROFIT
$50
COMPUTATION OF GROSS PROFIT
NORTHERN MICRO
Sales
Sales Returns & Allowances
$200,500
1,200
Purchases 105,000
Purchases Returns & Allowances 800Purchases Discounts 1,000
Freight-In 300
Merchandise Inventory, 1/1/--Merchandise Inventory, 12/31/--
26,00018,000
Let’s computethe Gross Profit.
COMPUTATION OF GROSS PROFIT
STEP #1: COMPUTE NET SALES.
FORMULA:
SALES SALES RETURNS & ALLOWANCES
SalesLess: Sales returns & allowNet Sales
$200,500$1,200
$199,300
This is the price we charged our customers for the merchandise.
COMPUTATION OF GROSS PROFIT
STEP #2: COMPUTE GOODS AVAILABLE FOR SALE.
FORMULA:
BEGINNING INVENTORY
COST OF GOODS PURCHASED+
SalesLess: Sales returns & allow.Net Sales
$200,500$1,200
$199,300Cost of Goods Sold:
Merchandise Inv., Jan 1 $26,000Purchases $105,000Less:Purch. ret. & allow. $ 800
Purchases discounts 1,000Net purchases
1,800$103,200
Cost of goods purchasedAdd freight-in 300
103,500Goods available for sale $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 AVAILABLEFOR SALE
ENDING INVENTORY
SalesLess: Sales returns & allow.Net Sales
$200,500$1,200
$199,300Cost of Goods Sold:
Merchandise Inv., Jan 1 $26,000Purchases $105,000Less:Purchases ret. & allow. $ 800
Purchases discounts 1,000Net purchases
1,800$103,200
Cost of goods purchasedAdd freight-in 300
103,500Goods available for sale $129,500Less Merch. Inv, Dec. 31 18,000
Out of the $129,500 of merchandise available to sell, $18,000 was not sold.
SalesLess: Sales returns & allow.Net Sales
$200,500$1,200
$199,300Cost of Goods Sold:
Merchandise Inv., Jan 1 $26,000Purchases $105,000Less:Purchases ret. & allow. $ 800
Purchases discounts 1,000Net purchases
1,800$103,200
Cost of goods purchasedAdd freight-in 300
103,500Goods available for sale $129,500Less Merch. Inv., Dec. 31 18,000Cost of Goods Sold 111,500
From that we can determinethat $111,500 of merchandise was sold.
COMPUTATION OF GROSS PROFIT
STEP #4: COMPUTE GROSS PROFIT.
FORMULA:
NET SALES
COST OF GOODS SOLD
SalesLess: Sales returns & allow.Net Sales
$200,500$1,200
$199,300Cost of Goods Sold:
Merchandise Inv., Jan 1 $26,000Purchases $105,000Less:Purchases ret. & allow. $ 800
Purchases discounts 1,000Net purchases
1,800$103,200
Cost of goods purchasedAdd freight-in 300
103,500Goods available for sale $129,500Less Merch. Inv., Dec. 31 18,000Cost of Goods Sold 111,500
The merchandise was soldfor $87,800 more than its cost.
Gross Profit 87,800
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 Receivable 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.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Let’s review the posting for this transaction.
Purchases 3,300 00
Accts. Pay/Compucraft 3,300 00
Invoice No. 631
April 4
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
A $3,300 debit is postedto the Purchases account
in the usual manner.
Purchases 3,300 00
Accts. Pay./Compucraft 3,300 00
Invoice No. 631
April 4 501
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
The credit is posted to thecontrolling account inthe General Ledger.
Purchases 3,300 00
Accts. Pay./Compucraft 3,300 00
Invoice No. 631
April 4 501
FOUR-COLUMN ACCOUNT
Account: Account No.
DATE ITEM PR DR. CR.BALANCE
DR. CR.
ACCOUNTS PAYABLE 202
20--Apr. 1
3,300
4,800
4
Balance
8,100
This entry is posted in the same manneras all other general ledger postings.
J6
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
The Accounts Payable account number is placed in the PR column.
Purchases 3,300 00
Accts. Pay./Compucraft 3,300 00
Invoice No. 631
April 4 501
202
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Purchases 3,300 00
Accts. Pay./Compucraft 3,300 00
Invoice No. 631
April 4 501
202
Now we need to post to theindividual supplier’s account.
ACCOUNTS PAYABLE LEDGER
Name:
DATE ITEM PR DEBIT CREDITBALANCE
Compucraft, Inc.
20--Apr. 3,3004
Date is entered, Amount is recorded,Balance is updated, and
Journal page number is referenced.
Address: 2100 West Main Street, Muncie, IN 47304-8139
3,300J6
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Purchases 3,300 00
Accts. Pay./Compucraft 3,300 00
Invoice No. 631
April 4 501
202/ /
A slash (/) is entered along with a check mark ( /), which indicates the entry has been posted to the subsidiary ledger.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accts. Payable/Televax 200 00
Purchases Ret. & Allow. 200 00
Returned Merchandise
May 4
Now let’s look at the postingfor a Purchase Return entry.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accts. Payable/Televax 200 00
Purchases Ret. & Allow. 200 00
Returned Merchandise -
May 4
The $200 debit is posted to theAccounts Payable controlling accountand to the Subsidiary ledger account
for Televax.
202/ /
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accts. Payable/Televax 200 00
Purchases Ret. & Allow. 200 00
Returned Merchandise -
May 4 202/ /
Purchases Returns and Allowances is posted in the normal manner.
Its account number isrecorded in the PR column.
501.1
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accts. Payable/B.B. Small 4,800 00
Cash
Made payment on account
April 10
Cash Payment transactionsare posted in a similar manner.
4,800 00
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accts. Payable/B.B. Small 4,800 00
Cash
Made payment on account
April 10
4,800 00
The debit is posted to theAccounts Payable controlling accountand to the Subsidiary ledger account
for B.B. Small.
202/ /
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Accts. Payable/B.B. Small 4,800 00
Cash
Made payment on account
April 10
4,800 00
Cash is posted as usual.
101
202/
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.
Northern MicroSchedule of Accounts Payable
April 30, 20--
$3,300Compucraft, Inc.DatasoftPrintpro Corp.Televax, Inc.
2,500800
5,300$11,900
This should be the balance in the Accounts Payable controlling account.
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