McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 8Chapter 8

Purchasing/ Human Resources/ Payment Process: Recording and Evaluating Expenditure Process Activities

8-2

What are the 4 Primary Expenditure Process Activities?What are the 4 Primary Expenditure Process Activities?

• Determine the need for goods/services

• Select suppliers and order goods/services

• Receive goods/services

• Pay suppliers of goods/services

8-3

Which of the Expenditure Process Activities are Accounting Events?Which of the Expenditure Process Activities are Accounting Events?

• Receive goods/services Increase inventory Increase accounts payable

• Pay suppliers of goods/services Decrease accounts payable Decrease cash

8-4

What is the Basic Flow of Information as Described in the Flowchart?What is the Basic Flow of Information as Described in the Flowchart?

• Inventory control determines the need for inventory and notifies purchasing

• Purchasing places an order with a vendor• Receiving notifies accounts payable that

goods have been received• Accounts payable compares the purchase

order, receiving report, and vendor’s invoice and notifies the cashier

• Cashier pays the vendor• General ledger updated

8-5

What are Special Journals and Subsidiary LedgersWhat are Special Journals and Subsidiary Ledgers

• Special journals Recurring, frequent transactions (events) Replaces the general journal for these events Purchases on account, sales on account, cash

receipts, cash payments

• Subsidiary ledger Details regarding specific general ledger

accounts Supports, but does not replace, general ledger Accounts payable, accounts receivable,

inventory

8-6

What is the Difference between Merchandising and Manufacturing Inventories?What is the Difference between Merchandising and Manufacturing Inventories?

• Merchandising Inventory purchased to be resold Merchandise Inventory account

• Manufacturing Inventory purchased to be used to make

products Raw Materials Inventory account

8-7

What is the Difference between Periodic and Perpetual Inventory Systems?What is the Difference between Periodic and Perpetual Inventory Systems?

• Periodic Determine ending inventory and cost of goods

sold (Chapter 10) at the end of the period

• Perpetual Determine cost of goods sold (Chapter 10) and

ending inventory on a continuous basis

8-8

How are Inventory Activities Recorded in a Periodic System?How are Inventory Activities Recorded in a Periodic System?

• Purchase Debit Purchases Credit Accounts Payable

• Return or allowance Debit Accounts Payable Credit Purchase Returns and Allowances

• Freight or insurance on purchases Debit Freight-in (Insurance-in) Credit Accounts Payable (Cash)

8-9

How are Inventory Activities Recorded in a Perpetual System?How are Inventory Activities Recorded in a Perpetual System?

• Purchase Debit Inventory Credit Accounts Payable

• Return or allowance Debit Accounts Payable Credit Inventory

• Freight or insurance on purchases Debit Inventory Credit Accounts Payable (Cash)

8-10

What is the Difference between the Net Price and Gross Price Methods?What is the Difference between the Net Price and Gross Price Methods?

• Net price Purchases and purchase returns/allowances

are recorded net of the available discount Discounts lost are recorded separately

• Gross price Purchases and purchase returns/allowances

are recorded at the gross price Discounts taken are recorded separately

8-11

ExampleExample

• A company purchases $1,000 (gross) of inventory (terms: 2/10, n/30), subsequently returns $200 (gross) of the inventory, and pays for the inventory within the discount period.

8-12

Net Price Method/Perpetual Net Price Method/Perpetual

• Purchase Increase (debit) inventory by $980 ($1,000 * 0.98) Increase (credit) accounts payable by $980

• Return Decrease (debit) accounts payable by $196 ($200 *

0.98) Decrease (credit) inventory by $196

• Payment within discount period Decrease (debit) accounts payable by $784 ($980 -

$196) Decrease (credit) cash by $784

8-13

Gross Price/PerpetualGross Price/Perpetual

• Purchase Increase (debit) inventory by $1,000 Increase (credit) accounts payable by $1,000

• Return Decrease (debit) accounts payable by $200 Decrease (credit) inventory by $200

• Payment within discount period Decrease (debit) accounts payable by $800 ($1,000 -

$200) Decrease (credit) cash by $784 ($800 * 0.98) Recognize discount taken (credit inventory) for $16

8-14

What is the Balance in Inventory under Each Pricing Method?What is the Balance in Inventory under Each Pricing Method?

• Net price Inventory = $980 - $196 = $784

• Gross price Inventory = $1,000 - $200 - $16 = $784

8-15

What if the Payment is Made After the Discount Period has Expired?What if the Payment is Made After the Discount Period has Expired?

• Net price Decrease (debit) accounts payable by $784

($980 - $196) Recognize discount lost (debit Discounts Lost)

for $16 Decrease (credit) cash by $800 ($784/0.98)

• Gross price Decrease (debit) accounts payable by $800

($1,000 - $200) Decrease (credit) cash by $800

8-16

Now What is the Balance of Inventory under Each Pricing Method?Now What is the Balance of Inventory under Each Pricing Method?

• Net price Inventory = $980 - $196 = $784

• Gross price Inventory = $1,000 - $200 = $800

• Does this mean that the inventory under the gross price method is worth more?

8-17

What is the Basic Flow of Information in the Payroll Process?What is the Basic Flow of Information in the Payroll Process?

• Employees record time worked on time cards and factory records time worked on time tickets

• Timekeeping compares time cards and time tickets

• Payroll records time worked, deductions, etc.

• Accounts payable approves payroll and notifies cashier

• Cashier pays employees

8-18

What is the Difference between Gross Pay and Net Pay from the Employer’s Point of View?

What is the Difference between Gross Pay and Net Pay from the Employer’s Point of View?

• Gross pay—salary and wage expense (amount incurred in an attempt to generate revenue)

• Net pay—cash outflow to employees

• Withholdings—liabilities to pay the entity to which the funds belong

8-19

What is the Difference between Salary/Wage Expense and Payroll Tax Expense?What is the Difference between Salary/Wage Expense and Payroll Tax Expense?

• Salary/wage expense—expense incurred from using employees in an attempt to generate revenue

• Payroll tax expense—expense incurred due to having employees (matching FICA and unemployment taxes)

8-20

When are Expenses Recognized?When are Expenses Recognized?

• When incurred, regardless of when cash is paid. Assume December 31 year for examples that follow. Example #1—receive a utility bill in December, pay the

bill in January, expense is recognized in December Example #2—pay insurance for 6 months in November,

recognize 2 months of insurance expense in December Example #3—pay the local newspaper in December for

an ad to be run in December, recognize expense in December

8-21

Inventory ExampleInventory Example

• Inventory is an asset when purchased

• When inventory is sold, we recognize the expense, called Cost of Goods Sold (Chapter 10)

8-22

How are Expenditure Process Activities Communicated to Users?How are Expenditure Process Activities Communicated to Users?

• Income statement Discounts lost, Loss on Inventory, other

expenses Cost of goods sold (Chapter 10)

• Balance sheet Ending balance of inventory, other assets, and

liabilities

• Statement of cash flows Cash paid for inventory and other expenditure

process items

8-23

How can we Estimate the Cash Paid for Inventory?How can we Estimate the Cash Paid for Inventory?

• Beginning inventory (balance sheet)

• + Net purchases (calculated)

• = Maximum inventory available

• Cost of goods sold (income statement)

• = Ending inventory (balance sheet)

• Then,

8-24

Estimating Cash Paid for Inventory, ContinuedEstimating Cash Paid for Inventory, Continued

• Beginning accounts payable (balance sheet)

• + Net purchases (from inventory account)

• = Maximum amount owed to suppliers

• Cash paid for inventory (calculated)

• = Ending accounts payable (balance sheet)