Ch.7 Accounting for a Merchandising Business: Purchases and Cash Payments

Transcription

1 Ch.7 Accounting for a Merchandising Business: Purchases and Cash Payments 1 Procedures and forms used in purchasing merchandise Record credit purchases in a general journal and a purchases journal, and post to the accounts payable ledger and the general ledger Purchases returns and allowances Purchases discounts Cash Payments Journal and posting to the accounts payable ledger and the general ledger Prepare a schedule of accounts payable Record freight charges on incoming merchandise

2 Merchandising Activity A merchandising business earns its revenue by buying goods and then reselling the goods to customers. Goods that are to be sold to customers are called merchandise. 2 Merchandising can take place at two levels--retail and wholesale. A retail business sells directly to consumers. A wholesale business purchases goods in bulk from manufacturers and then sells the goods to Retailers Other wholesalers Schools and other nonprofit institutions Directly to consumers

3 Purchasing Procedures 3 Steps in Purchasing Procedures Step 1: Managers identify goods needed and request them by preparing a purchase requisition, which is sent to the purchasing department. Step 2: The purchasing department chooses the seller (vendor) and sends an order. Step 3: The seller receives the order and prepares an invoice (bill), which is shipped with the goods or a few days after the goods. Step 4: When the merchandise is received by the buyer, it is checked against the invoice and payment is approved.

4 Purchase Requisition A written request for goods to be purchased 4

5 Purchase Order A written or online form sent from a buyer of goods to the seller that specifies the quantity and description of goods to be purchased. 5

6 Invoice A business document that shows Names and address of the buyer and the seller Date and terms of the sale Description of the goods Price of the goods and total owed Mode of transportation for delivery The same invoice serves as both a sales invoice and a purchase invoice Sales invoice to the seller Purchase invoice to the buyer 6

7 Invoice 7

8 Trade Discounts Percentage reductions from the list or catalog price of merchandise. Not recorded in the accounting records of the buyer or the seller. The buyer always records goods at their actual cost. The seller records items sold at their actual selling price. Cash Discounts 8 A discount offered to encourage prompt and early payment by a buyer. Recorded in the accounting records of both the seller and the buyer (unlike trade discounts). The seller refers to as sales discounts. The buyer refers to as purchase discounts. A common expression of a cash discount is 2/10, n/30. This means that a 2% discount can be taken from the invoice price of the merchandise if the invoice is paid within 10 days of the date of the invoice.

9 The Purchases Account The sole purpose is to keep a record of the cost of merchandise purchased for resale during an accounting period Debited for the cost of merchandise purchased for resale Falls under the category of cost accounts Cost accounts are like expense accounts Both are presented on the income statement and enter into the calculation of net income 9

10 Recording Purchases on Account in the General Journal Assume a company purchases $575 of merchandise from Key Suppliers on Nov. 2. The entry would be recorded as follows: +cost +liability 10

11 Special Journals Used to record transactions that are similar in nature Save time in recording specialized transactions Allow for a delegation of work because individual accountants can be assigned to specific journals Examples Purchase Journal Cash Payments Journal 11

12 The Purchases Journal A journal used to record only credit purchases 12

13 The Accounts Payable Subsidiary Ledger A separate ledger containing only one type of account is called a subsidiary ledger. A subsidiary ledger containing only creditors accounts is called an accounts payable ledger. 13

14 Controlling Account An account in the general ledger that summarizes accounts in a related subsidiary ledger. The Accounts Payable account in the general ledger is said to control the accounts payable ledger. 14

15 Relationship Between the Accounts Payable Ledger and the Controlling Account in the General Ledger

16 Posting the Purchases Journal The purchases journal must be posted to both the subsidiary ledger and the general ledger. Individual credits must be posted to the creditor s accounts in the accounts payable ledger. Posting is usually done on a daily basis, to keep the ledger current. The total of the money column must be posted to the general ledger as a Debit to the Purchases account Credit to the Accounts Payable account 16 Since this total represents total credit purchases for

17 Posting to the Accounts Payable Ledger Step 1. Enter the journal entry s date. Step 2. Enter the amount of the journal entry in the Credit column. Step 3. Calculate the balance of the account and enter it in the Balance column. Step 4. Enter the purchase journal page in the P.R. column. Step 5. Enter a check mark in the P.R. column of the purchases journal. 17

18 18 Posting to the Accounts Payable Ledger

19 Posting to the General Ledger Step 1. Enter the last day of the month. Step 2. Enter the total of the money column. Step 3. Calculate the new balances. Step 4. Enter the posting references. Step 5. Enter the account numbers in the purchases journal. 19

20 20 Posting to the General Ledger

21 Merchandise Returns and Allowances In merchandising, a return occurs when a customer returns to the seller part or all of the items purchased. An allowance occurs when the seller grants a customer a price reduction on items due to some factor, such as damaged or defective goods. The seller refers to merchandise returns or allowances as sales returns and allowances. The purchaser refers to merchandise returns or allowances as purchase returns and allowances. 21

22 Purchases Returns and Allowances Account An account in which the amount of returns and allowances is usually recorded Contra to the Purchases account Has a credit balance, which is opposite to the debit balance of the Purchases account 22

23 23 Purchases Returns and Allowances Account

24 Recording Purchases Returns and Allowances A debit memorandum is the buyer s written request to the seller for credit for a merchandise return or allowance. When a return or allowance is made, part or all of the balance in the creditor s account will not be paid. The buyer debits (decreases) the creditor s account for the amount of the return or allowance. 24

25 Recording Purchases Returns and Allowances 25

26 Purchase Return Journal Entry and Dual Posting 26

27 The Purchases Discounts Account A contra purchases account used to record discounts received for prompt payment of merchandise invoices. 27

28 Example Recording a Cash Payment Within the Discount Period Assume an invoice for $575, subject to a cash discount of 2/10, n/30, is paid within the discount period on Nov. 12. The following entry would be prepared. -liability +contra purchases -asset 28

29 Cash Payments Journal A special journal used for recording all disbursements of cash Designed to meet the needs of the business using it Common money columns include Cash Cr. column Purchases Discounts Cr. column Account Payable Dr. column General Dr. column 29

30 Cash Payments Journal 30

31 Posting the Cash Payments Journal Follows some of the same procedures used for posting the purchases journal 31 Three different types of postings made Posting of individual debits to creditors accounts in the accounts payable ledger. Usually done on a daily basis. Posting of individual debits to appropriate general ledger accounts from the General Debit column. Can be posted on a daily, weekly, or monthly basis. Posting of special columns totals to the appropriate general ledger accounts. Summary posting is done at the end of the month.

32 Posting the Cash Payments Journal 32 Amounts in the Accounts Payable Debit column are posted separately to the creditors accounts in the accounts payable ledger. A check mark is entered in the P.R. column of the cash payments journal to indicate an individual posting.

33 Posting the Cash Payments Journal 33 Amounts in the General Debit column are posted individually to the general ledger accounts identified in the Account Debited column. Account numbers of those accounts are entered in the P.R. column of the cash payments journal. The check mark at the bottom of the General Debit column indicates that the column total is not posted.

34 Posting the Cash Payments Journal 34 The totals of special columns are posted to the general ledger accounts identified in the headings of the columns. Account numbers are entered under the column totals to indicate that a summary posting has been made.

35 Proving the Accounts Payable Ledger A schedule of accounts payable is a listing of the balances in the accounts payable ledger. The total of this schedule should agree with the accounts payable account in the general ledger, the controlling account. 35

36 Proving the Accounts Payable Ledger 36

37 Proving the Accounts Payable Ledger 37 Only accounts with open balances are included on the schedule of account payable.

38 Freight Charges on Incoming Merchandise FOB Shipping Point the buyer is responsible for all freight costs while the goods are in transit. FOB Destination the seller is responsible for all freight costs while the goods are in transit. If the terms are FOB shipping point, the purchaser debits the cost of freight to the Freight In account. 38

39 Example The following journal entry indicates the $30 freight charge incurred by the purchaser under the freight terms of FOB shipping point. Merchandise costing $700 was purchased from Pantech Corp. on account on Dec. 2. General Journal Date Account Title P.R. Debit Credit Dec. 2 Purchases 700 Freight In 30 Accounts Payable-Pantech Corp

40 Summing Up Notice how the Freight In, Purchases Returns and Allowances, and Purchases Discounts accounts affect the Purchases account: Purchases - Purchases Discount - Purchases Returns and Allowances + Freight In = Net Purchases 40