Heintz & Parry 20 th Edition College Accounting 10-1
Chapter 11 Accounting for Purchases and Cash Payments
1 Define merchandise purchases transactions.
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
PURCHASE REQUISITION
A form used to request the purchase of merchandise or other property Can be prepared by any authorized person One copy is sent to the purchasing department One copy is sent to the accounting department One copy is kept by the department that prepared the requisition
PURCHASE REQUISITION PURCHASE ORDER
A written order to buy goods from a specific vendor (supplier) The purchasing department reviews and approves the purchase requisition and prepares a purchase order One copy is sent to the vendor to order the goods One copy is sent to the accounting department One copy is kept in the purchasing department Copies may also be sent to the receiving area and to the department initiating the purchase requisition
PURCHASE ORDER RECEIVING REPORT
Indicates what has been received Can be a separate form or created from the vendor s purchase invoice
RECEIVING REPORT PURCHASE INVOICE
Prepared by the seller as a bill for the merchandise shipped The seller calls it a sales invoice The buyer calls it a purchase invoice Before payment is made, the accounting department compares the purchase invoice with the: Purchase requisition Purchase order Receiving report
Available if the bill is paid within the discount period The buyer calls it a purchase discount The seller calls it a sales discount
Often offered by manufacturers and wholesalers A reduction from the list or catalog price offered to different classes of customers The buyer and seller both record the transaction at the NET amount (after the discount)
2 Describe and use merchandise purchases accounts and compute gross profit.
PURCHASES PURCHASES DISCOUNTS PURCHASES RETURNS AND ALLOWANCES FREIGHT-IN
Used to record the cost of merchandise purchased. PURCHASES DR. CR. + The account is debited when merchandise is purchased.
Used to record the cost of merchandise purchased. PURCHASES DR. CR. + The account is only credited during the closing process.
11 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 2 3 4 5 6 7 DATE DESCRIPTION PR DEBIT CREDIT Purchases 100 00 Cash 100 00 Made cash purchase Example: Made $100 purchase for cash. 8 9 10
11 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 2 3 4 DATE DESCRIPTION PR DEBIT CREDIT Purchases 100 00 Accounts Payable/Vendor 100 00 Made purchase on account 5 6 7 What if the purchase had been made on account? 8 9 10
1 2 3 4 DATE DESCRIPTION PR DEBIT CREDIT Purchases 100 00 Accounts Payable/Vendor 100 00 Made purchase on account 5 6 7 8 9 10 11 We would credit Accounts Payable instead of Cash. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 2 3 4 5 6 DATE DESCRIPTION PR DEBIT CREDIT Purchases 100 00 Accounts Payable/Vendor 100 00 Made purchase on account The specific supplier is identified. 7 8 9 10
A CONTRA-PURCHASES account used to record purchases returns and purchases allowances. PURCHASES RETURNS AND ALLOWANCES DR. CR. + The account is credited for the amount of returns and allowances. The account is debited during the closing process.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Example: Merchandise purchased on account for $200 is defective and is returned to the supplier. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Accounts Payable/Vendor 200 00 Accounts Payable is debited. The specific vendor is identified. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Accounts Payable/Vendor 200 00 Pur. Returns and Allow. 200 00 Returned merchandise Purchases Returns and Allowances is credited. This account will be shown as a deduction from the purchases account on the income statement. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Example: Now assume the same merchandise is retained but the supplier grants a price reduction of $45 because of the defects. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Accounts Payable/Vendor 45 00 Accounts Payable is debited to reflect the price reduction. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Accounts Payable/Vendor 45 00 Pur. Returns and Allow. 45 00 Allowance for defective merchandise Purchases Returns and Allowances is credited. It is the same as the entry for returns! 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
A CONTRA-PURCHASES account used to record cash discounts allowed on purchases. PURCHASES DISCOUNTS DR. CR. + The account is credited for the discount granted by the vendor for prompt payment. The account is debited during the closing process.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Example: Merchandise is purchased for $100 on account with credit terms 2/10, n/30, and payment is made within the discount period. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Accounts Payable/Vendor 100 00 Accounts Payable is debited for the entire amount of the purchase. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Accounts Payable/Vendor 100 00 Cash 98 00 Cash is credited for the actual amount paid, $98 ($100 $2 discount). 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Accounts Payable/Vendor 100 00 Cash 98 00 Purchases Discounts 2 00 Made payment on account Purchase Discounts is credited for the discount amount, $2 ($100 2%). 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
An ADJUNCT-PURCHASES account used to record transportation charges on merchandise purchases. FREIGHT-IN DR. CR. + The account is debited for transportation charges. The account is credited during the closing process.
Expressed in FOB (free on board) terms FOB shipping point The buyer pays for the transportation charges Freight charges are either listed on the purchase invoice or sent as a separate freight bill FOB destination The seller pays for transportation charges
1 2 3 4 5 6 7 DATE DESCRIPTION PR DEBIT CREDIT Example: Merchandise was purchased on account for $400 plus freight charges of $38. 8 9 10 11 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Purchases 400 00 Purchases is debited only for the cost of the merchandise. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Purchases 400 00 Freight-In 38 00 Freight-In is debited for the transportation costs. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 2 3 4 5 6 7 8 9 DATE DESCRIPTION PR DEBIT CREDIT Purchases 400 00 Freight-In 38 00 Accounts Payable/Vendor 438 00 Made purchase on account Accounts Payable is credited for the entire purchase price (merchandise + freight). 10
1 2 3 4 5 6 7 DATE DESCRIPTION PR DEBIT CREDIT What if the freight charges were on a separate bill from the transportation company? 8 9 10 11 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 2 3 4 5 6 DATE DESCRIPTION PR DEBIT CREDIT Purchases 400 00 Purchases is again debited for the cost of the merchandise. 7 8 9 10
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT Purchases 400 00 Accounts Payable/Vendor 400 00 Made purchase on account Accounts Payable is credited for the amount due to the supplier. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 2 3 4 5 6 DATE DESCRIPTION PR DEBIT CREDIT Purchases 400 00 Accounts Payable/Vendor 400 00 Made purchase on account A separate journal entry is made to record the freight charges. 7 8 9 10
1 2 3 4 DATE DESCRIPTION PR DEBIT CREDIT Purchases 400 00 Accounts Payable/Vendor 400 00 Made purchase on account 5 6 7 8 9 10 11 Freight-In 38 00 Accounts Payable/Vendor Freight charges on purchase Accounts Payable is credited, but the vendor is the transportation company. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 00
Also called gross margin Is the 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
FORMULA: NET SALES COST OF GOODS SOLD = GROSS PROFIT Let s look at an example.
During 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 = GROSS PROFIT 20 hats @ $10 each = $200 in sales There were no sales returns and allowances or sales discounts, so NET SALES = $200.
During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7.50 each. NET SALES COST OF GOODS SOLD = GROSS PROFIT $200 $150 20 hats @ $7.50 each = $150
During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7.50 each. NET SALES COST OF GOODS SOLD = GROSS PROFIT $200 $150 = $50 The gross profit on these 20 hats was $50. This $50 is used to cover expenses.
Sales Let s compute the gross profit. Sales Returns and Allowances $200,500 1,200 Purchases 105,000 Purchases Returns and Allowances 800 Purchases Discounts 1,000 Freight-In 300 Merchandise Inventory, 1/1/-- Merchandise Inventory, 12/31/-- 26,000 18,000
STEP #1: Compute net sales. FORMULA: SALES SALES RETURNS AND ALLOWANCES
Sales Less sales ret. and allow. Net 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
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sales Less sales returns and allow. Net sales $200,500 1,200 Cost of goods sold: Merchandise inv., Jan 1 $ 26,000 Purchases $105,000 Less: Purch. ret. and allow. $ 800 Purchases discounts 1,000 Net purchases 1,800 $103,200 Add freight-in 300 Cost of goods purchased 103,500 Goods available for sale $129,500 $199,300 This is the cost of ALL the goods that were offered for sale.
STEP #3: Compute cost of goods sold. FORMULA: GOODS AVAILABLE FOR SALE ENDING INVENTORY
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sales Less sales returns and allow. Net sales $200,500 1,200 Cost of goods sold: Merchandise inv., Jan 1 $ 26,000 Purchases $105,000 Less: Purch. ret. and allow. $ 800 Purchases discounts 1,000 Net purchases 1,800 $103,200 Add freight-in 300 Cost of goods purchased 103,500 Goods available for sale $129,500 Less merch. inv, Dec. 31 18,000 $199,300 Out of the $129,500 of merchandise available to sell, $18,000 was not sold.
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sales Less sales returns and allow. Net sales $200,500 1,200 Cost of goods sold: Merchandise inv., Jan 1 $ 26,000 Purchases $105,000 Less: Purch. ret. and allow. $ 800 Purchases discounts 1,000 Net purchases $199,300 1,800 $103,200 Add freight-in 300 Cost of goods purchased 103,500 Goods available for sale $129,500 Less merch. inv., Dec. 31 18,000 Cost of goods sold 111,500 From that we can determine that $111,500 of merchandise was sold.
STEP #4: Compute gross profit. FORMULA: NET SALES COST OF GOODS SOLD
Sales Less sales returns and allow. Net sales $200,500 1,200 Cost of goods sold: Merchandise inv., Jan 1 $ 26,000 Purchases $105,000 Less: Purch. ret. and allow. $ 800 Purchases discounts 1,000 Net purchases 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. $199,300 1,800 $103,200 Add freight-in 300 Cost of goods purchased 103,500 Goods available for sale $129,500 Less merch. inv., Dec. 31 18,000 Cost of goods sold 111,500 Gross profit $87,800 The merchandise was sold for $87,800 more than its cost.
3 Describe and use the accounts payable ledger.
In the ledger account: Step 1: Enter the date. Step 2: Enter the amount of the transaction. Step 3: Enter the new balance. Step 4: Enter the journal page number. In the journal: Step 5: Enter the ledger account number in the PR column.
A separate subsidiary ledger Contains an individual account payable for each supplier Often numbered Filed either alphabetically or numerically A summary accounts payable account maintained in the general ledger is the controlling account
In the accounts payable ledger account: Step 1: Enter the date. Step 2: Enter the amount of the transaction. 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.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- Apr. 4 Purchases 3,300 00 Accts. Payable/Compucraft 3,300 00 Invoice No. 631 Let s review the posting for this transaction. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- Apr. 4 Purchases 501 3,300 00 Accts. Payable/Compucraft 3,300 00 Invoice No. 631 A $3,300 debit is posted to the purchases account in the usual manner. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- Apr. 4 Purchases 501 3,300 00 Accts. Payable/Compucraft 3,300 00 Invoice No. 631 The credit is posted to the controlling account in the general ledger. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Account: ACCOUNTS PAYABLE Account No. 202 BALANCE DATE ITEM PR DR. CR. DR. CR. 20-- Apr. 1 4 Balance J6 3,300 4,800 8,100 This entry is posted in the same manner as all other general ledger postings.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- Apr. 4 Purchases 501 3,300 00 Accts. Payable/Compucraft 202 3,300 00 Invoice No. 631 The accounts payable account number is placed in the PR column. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- Apr. 4 Purchases 501 3,300 00 Accts. Payable/Compucraft 202 3,300 00 Invoice No. 631 Now we need to post to the individual supplier s account. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Name: Compucraft, Inc. Address: 2100 West Main Street, Muncie, IN 47304-8139 DATE ITEM PR DEBIT CREDIT BALANCE 20-- 4 Apr. J6 3,300 3,300 The date is entered, the amount is recorded, the balance is updated, and the journal page number is referenced.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- Apr. 4 Purchases 501 3,300 00 Accts. Payable/Compucraft 202/ 3,300 00 Invoice No. 631 A slash (/) is entered along with a check mark ( ), which indicates the entry has been posted to the subsidiary ledger. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- May 4 Accounts Payable/Televax 200 00 Purchases Ret. and Allow. 200 00 Returned merchandise Now let s look at the posting for a purchase return entry. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- May 4 Accounts Payable/Televax 202/ 200 00 Purchases Ret. and Allow. 200 00 Returned merchandise The $200 debit is posted to the accounts payable controlling account and to the subsidiary ledger account for Televax. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- May 4 Accounts Payable/Televax 202/ 200 00 Purchases Ret. and Allow. 501.1 200 00 Returned merchandise Purchases Returns and Allowances is posted in the normal manner. Its account number is recorded in the PR column. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- Apr. 10 Accounts Payable/B. B. Small 4,800 00 Cash Made payment on account Cash payment transactions are posted in a similar manner. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4,800 00
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- Apr. 10 Accounts Payable/B. B. Small 202/ 4,800 00 Cash Made payment on account The debit is posted to the accounts payable controlling account and to the subsidiary ledger account for B. B. Small. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4,800 00
1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT 20-- Apr. 10 Accounts Payable/B. B. Small 202/ 4,800 00 Cash 101 4,800 00 Made payment on account Cash is posted as usual. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4 Prepare a schedule of accounts payable.
Prepared to verify that the sum of the accounts payable ledger balances equals the Accounts Payable balance Is an alphabetical or numerical listing of supplier accounts and their balances Usually prepared at the end of the month The total calculated in the schedule is compared with the balance in Accounts Payable in the general ledger
Northern Micro Schedule of Accounts Payable April 30, 20-- 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Compucraft, Inc. Datasoft Printpro Corp. Televax, Inc. $ 3,300 2,500 800 5,300 $11,900 This should be the balance in the accounts payable controlling account.