chapter twelve

CHAPTER TWELVE

ACCOUNTING FOR PURCHASES AND CASH

PAYMENTS

PURCHASES

Merchandise acquired for resale:o 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 REQUISITIONA form used to request the purchase of

merchandise or other propertyCan be prepared by any authorized personOne copy to the Purchasing departmentOne copy to the Accounting departmentOne copy kept by the department preparing

the requisition


PURCHASE REQUISITION

PURCHASE ORDER

PURCHASE ORDERA written order to buy goods from a

specific vendorPurchasing department reviews and

approves the purchase requisition and prepares a purchase order:o One to vendoro One to the Accounting departmento One kept in the Purchasing departmento Copies may also be sent to the receiving area and

to the department initiating the purchase


PURCHASE ORDER

RECEIVING REPORT

RECEIVING REPORTPrepared by the receiving clerkIndicates what has been received:

o Including date of receipt and o 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.


RECEIVING REPORT

PURCHASE INVOICE

PURCHASE INVOICEPrepared by the sellerAs a bill for the merchandise shipped:

o Seller calls it a sales invoice.o Buyer calls it a purchase invoice.

Before payment is made, Accounting department compares the purchase invoices with:o Purchase Requisitiono Purchase Ordero 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: o Discounts offered to different classes of

customersBuyer 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 JOURNALDATE DESCRIPTION PR DEBIT CREDIT

Purchases1234

567

89

1011

Example:Made $100 purchase for cash

100 00Cash 100 00

Made cash purchase


Purchases1234

567

89

1011

What if the purchase hadbeen made on account?

100 00Accts. Payable/Vendor 100 00

Made purchase on account


Purchases1234

567

89

1011

100 00100 00


We would credit the Accounts Payable

account instead of cash.

Accts. Payable/Vendor


Purchases1234

567

89

1011

100 00100 00


The specific supplieris identified.


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.


1234

567

89

1011

Example:Merchandise purchased on account

for $200 is defective and is returned to the supplier.


1234

567

89

1011

Accounts Payable is debited.The specific vendor is identified.

Accts. Payable/Vendor 200 00


1234

567

89

1011

Purchases Returns & Allowances is credited.This account will be shown as a deduction

from the Purchases account on the Income Statement.

200 00Pur. Returns & Allow. 200 00


Returned merchandise


1234

567

89

1011

Example:If the same merchandise is retained

but the supplier grants a price reduction of $45 because of the defects


1234

567

89

1011

Accounts Payable is debited to reflect the price reduction.



1234

567

89

1011

Purchases Returns & Allowances is credited.Same as the entry for Returns!

45 00Pur. Returns & Allow. 45 00


Allowance for defectivemerchandise

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.

+


1234

567

89

1011

Example:Merchandise is purchased for $100

on account with credit terms 2/10, n/30 and payment is made within

the discount period.


1234

567

89

1011

Accounts Payable is debitedfor the entire amount

of the purchase.



1234

567

89

1011

Cash is credited for the actual amount paid, $98

($100 - $2 discount).

Accts. Payable/Vendor 100 00Cash 98 00


1234

567

89

1011

Purchase Discounts is creditedfor the discount amount, $2

($100 x 2%).

Accts. Payable/Vendor 100 00Cash 98 00Purchases Discounts 2 00

Made 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)o FOB Shipping Point:

• Buyer pays for transportation.• Freight charges are either listed on invoice or sent as

a separate bill.o FOB Destination:

• Seller pays for transportation.


1234

567

89

1011

Example:Merchandise was purchased

on account for $400 plus freight charges of $38.


1234

567

89

1011

Purchases is debited only for the cost of the merchandise.

Purchases 400 00


1234

567

89

1011

Freight-In is debited for the transportation costs.

Purchases 400 00Freight-In 38 00


1234

567

89

1011

Accounts Payable is credited for the entire purchase price (merchandise + freight).

Purchases 400 00Freight-In 38 00

Accts. Payable/Vendor 438 00Made purchase on account


1234

567

89

1011

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


1234

567

89

1011

Purchases is again debited for the cost of the merchandise.

Purchases 400 00


1234

567

89

1011

Accounts Payable is credited for the amount due to the supplier.

Purchases 400 00Accts. Payable/Vendor 400 00



1234

567

89

1011

A separate journal entry is madeto record the freight charges.




1234

567

89

1011



Freight-In 38 0038 00Accts. Payable/Vendor

Freight charges on purchase

Accounts Payable is credited,but the vendor is the

transportation company.

GROSS PROFIT

Also called Gross MarginDifference between Net Sales and Cost of

Goods SoldTells 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


NET SALES

$200

COST OF GOODS SOLD

20 hats @ $7.50each = $150

$150

GROSS PROFIT


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

SalesSales Returns & Allowances

$200,5001,200

Purchases 105,000Purchases Returns & Allowances 800Purchases Discounts 1,000Freight-In 300Merchandise Inventory, 1/1/--Merchandise Inventory, 12/31/--

26,00018,000

Let’s computethe 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.


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.


STEP #3: COMPUTE COST OF GOODS SOLD.FORMULA:

GOODS AVAILABLEFOR SALE

ENDING INVENTORY


$200,500$1,200


Merchandise Inv., Jan 1 $26,000Purchases $105,000Less:Purchases ret. & allow. $ 800


1,800$103,200


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.


$200,500$1,200




1,800$103,200


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.


STEP #4: COMPUTE GROSS PROFIT.

FORMULA:

NET SALES

COST OF GOODS SOLD


$200,500$1,200




1,800$103,200


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

PURCHASES JOURNALPurchases of MERCHANDISE for resaleOnly ON ACCOUNT

o Cash purchases would be recorded in the Cash Payments Journal.

Single column formato Purchases Debit/Accounts Payable Credit, OR

Three columno Purchases Debit, Freight-In Debit, Accounts

Payable Credit

PURCHASES JOURNALDate From Whom Purchased PR Purchases Debit/

Accounts Payable Credit1

234

567

89

1011

Invoice No.

For our example, we will use a single column Purchases Journal.

Page 8



234

567

89

1011

Invoice No.

Example: On April 4th, purchasedmerchandise from Compucraft, Inc. $3,300

Invoice no. 631, dated April 2, n/30.

Page 8

20--Apr 4 631 Compucraft, Inc. 3,300



234

567

89

1011

Invoice No.

All purchases transactions are journalized inthe same manner.

Page 8


8 927D Datasoft 2,50011 804 EZX Corp. 8,70017 611 Printpro Corp. 80023 1465 Televax, Inc. 5,300



234

567

89

1011

Invoice No.

At the end of the month,the column is totaled,

ruled, and posted to theGeneral Ledger accounts.

Page 8



20,600

FOUR-COLUMN ACCOUNT

Account: Account No.

DATE ITEM PR DR. CR.BALANCE

DR. CR.

PURCHASES 501

20--Apr. 1 17,400

30

Balance

“P” for Purchases Journal

20,600 38,000P8

( /)



234

567

89

1011

Invoice No.

Page 8



20,600(501) (202)

A check mark is placed in thePR column when posting

is completed.

( /)



234

567

89

1011

Invoice No.

Page 8



20,600(501) (202)

( /)

The remaining transactionsare posted in the same manner.

( /)( /)( /)( /)


1234

567

89

1011

Accts. Payable/Televax 200 00Purchases Ret. & Allow. 200 00

Returned Merchandise

May 4

Now let’s look at the postingfor a Purchase Return entry.


1234

567

89

1011


Returned Merchandise -

May 4

The $200 debit is posted to theAccounts Payable controlling accountand to the Subsidiary ledger account

for Televax.

202/( /)


1234

567

89

1011


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

CASH PAYMENTS JOURNAL

Used to record only cash payments transactions

Every transaction in the journal will involve a credit to the Cash account.

Columns are set up in the journal for the most commonly affected accounts in cash payments transactions.

CASH PAYMENTS JOURNALDate Account Debited PR General

Debit1

234

567

89

1011

Page 12

Example: Payment of rent, $2,400 on April 2

Check No.


Debit1

234

567

89

1011

Page 12

All cash payments (except thosefrom Petty Cash) should be made

by check for good internal control.

20--Apr. 2

Check No.

307


Debit1

234

567

89

1011

Page 12

This column is used for two purposes:1. To identify a supplier name for any payment on account2. To enter the appropriate account name whenever the “General Debit” column is used

20--Apr. 2

Check No.

307 2,400Rent Expense


1

234

567

89

1011

Page 12Cash

CreditPurch. Disc.

CreditPurchases

DebitAccts. Pay.

Debit General Debit

2,4002,400


Debit1

234

567

89

1011

Page 12

Example: On April 4 $1,400 of merchandise was purchased for cash.

20--Apr. 2

Check No.

307 2,400Rent Expense4 308


1

234

567

89

1011

Page 12Cash

CreditPurch. Disc.

CreditPurchases

DebitAccts. Pay.

Debit General Debit

2,4002,4001,400 1,400


Debit1

234

567

89

1011

Page 12

Example: On April 10 payment wasmade on account, $4,800.

20--Apr. 2

Check No.

307 2,400Rent Expense4 30810 309 B.B. Small


1

234

567

89

1011

Page 12Cash

CreditPurch. Disc.

CreditPurchases

DebitAccts. Pay.

Debit General Debit

2,4002,4001,400 1,400

4,800 4,800


Debit1

234

567

89

1011

Page 12

20--Apr. 2

Check No.

307 2,400Rent Expense4 30810 309 B.B. Small14 310 Notes Payable

Example: On April 14 payment wasmade on a note payable, $2,000.

2,000


1

234

567

89

1011

Page 12Cash

CreditPurch. Disc.

CreditPurchases

DebitAccts. Pay.

Debit General Debit

2,4002,4001,400 1,400

4,800 4,8002,0002,000


Debit1

234

567

89

1011

Page 12

20--Apr. 2

Check No.


Example: On April 22 owner withdrewcash for personal use, $1,600.

2,00022 311 Gary L. Fishel, Drawing 1,600


1

234

567

89

1011

Page 12Cash

CreditPurch. Disc.

CreditPurchases

DebitAccts. Pay.

Debit General Debit

2,4002,4001,400 1,400

4,800 4,8002,0002,0001,6001,600


Debit1

234

567

89

1011

Page 12

20--Apr. 2

Check No.


Example: On April 24 made paymenton account within the discount period.

2,00022 311 Gary L. Fishel, Drawing 1,60024 312 EZX Corp.


1

234

567

89

1011

Page 12Cash

CreditPurch. Disc.

CreditPurchases

DebitAccts. Pay.

Debit General Debit

2,4002,4001,400 1,400

4,800 4,8002,0002,0001,6001,600

8,700 87 8,613


Debit1

234

567

89

1011

Page 12

20--Apr. 2

Check No.


On a daily basis, the amounts in the “General Debit” column are posted.



Debit1

234

567

89

1011

Page 12

20--Apr. 2

Check No.


“CP” for Cash Payments journal is entered in the ledger account’s PR column,and the account number is entered

in the journal’s PR column.


521

201312


Debit1

234

567

89

1011

Page 12

20--Apr. 2

Check No.


At the end of the month, the columns aretotaled, equality of debits and credits

is verified, and totals are postedto the General Ledger.


521

201312

6,000


1

234

567

89

1011

Page 12Cash

CreditPurch. Disc.

CreditPurchases

DebitAccts. Pay.

Debit General Debit

2,4002,4001,400 1,400

4,800 4,8002,0002,0001,6001,600

8,700 87 8,6136,000 13,500 1,400 87 20,813

6,000 + 13,500 + 1,400

= 20,90087 + 20,813

= 20,900


1

234

56

789

1011

Page 12Cash

CreditPurch. Disc.

CreditPurchases

DebitAccts. Pay.

Debit General Debit

2,4002,4001,400 1,400

4,800 4,8002,0002,0001,6001,600

8,700 87 8,6136,000 13,500 1,400 87 20,813

( /)

Check mark indicates thecolumn should not be posted.


1

234

56

789

1011

Page 12Cash

CreditPurch. Disc.

CreditPurchases

DebitAccts. Pay.

Debit General Debit

2,4002,4001,400 1,400

4,800 4,8002,0002,0001,6001,600

8,700 87 8,6136,000 13,500 1,400 87 20,813

( /)

Account numbers indicatethe totals were posted.

(202) (501) (501.2) (101)


Debit1

234

567

89

1011

Page 12

20--Apr. 2

Check No.


Transactions affecting the Accounts Payable ledger are posted daily.


521

201312

6,000


Debit1

234

567

89

1011

Page 12

20--Apr. 2

Check No.


Check mark is entered to indicate the transaction has been posted.


521

201312

6,000

( /)

( /)


Debit1

234

567

89

1011

Page 12

20--Apr. 2

Check No.


Check mark is also entered for transactionsthat do not require individual postings.


521

201312

6,000

( /)

( /)

( /)

ACCOUNTS PAYABLE LEDGER

A separate “subsidiary” ledger Individual accounts for each supplierOften numberedFiled either alphabetically or numericallyAccounts Payable account in the general

ledger is the “controlling account”

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 balancesUsually prepared at the end of the monthTotal 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.

chapter twelve

Documents

purchase of merchandise

purchase discount

purchase invoices

purchase hadbeen

purchase allowances

contrapurchases account

cost of merchandise

purchasing departmentone