2. CHAPTER ELEVEN ACCOUNTING FOR PURCHASES AND CASH PAYMENTS

3. PURCHASES Merchandise acquired for resale: Inventory items to sell to customers Procedures and documents vary depending on the size of the business. Can be made “on account” or for cash

4. PURCHASING PROCESS DOCUMENTS PURCHASE REQUISITION Oh no! I am all out of 1 pound bags of M&M’s. I better call the inventory manager!

5. 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

6. PURCHASING PROCESS DOCUMENTS PURCHASE REQUISITION PURCHASE ORDER Let’s see, I’ll order 40,000 cases of Plain & Peanut M&M’s from our supplier right away. Plain is the teacher’s favorite candy!

7. 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.

8. PURCHASING PROCESS DOCUMENTS PURCHASE ORDER RECEIVING REPORT I’m not going to sign anything until I fill out this receiving report so hold your horses!

9.  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.

10. PURCHASING PROCESS DOCUMENTS RECEIVING REPORT PURCHASE INVOICE Looks like we got all the M&Ms we ordered. We better pay the invoice. I wonder if I put on enough deodorant today..

11. 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

12. Cash Discounts  Available if the bill is paid within the discount period  Seller calls it a Sales Discount.  Buyer calls it a Purchase Discount. In this chapter, we are the BUYER so we call them purchase discounts.

13. 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).

14. Merchandise Purchases Accounts PURCHASESPURCHASES DISCOUNTS PURCHASES RETURNS & ALLOWANCES FREIGHT-IN All Income Statement Accounts

15. PURCHASES ACCOUNT PURCHASES DR. CR. + Used to record the cost of merchandise purchased The account is debited when merchandise is purchased.

16. PURCHASES ACCOUNT PURCHASES DR. CR. + Used to record the cost of merchandise purchased The account is only credited during the closing process.

17. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases 1 2 3 4 5 6 7 8 9 10 11 Example: Purchased $1,000 of M&M candies for cash 1000 00 Cash 1000 00 ( cash purchase of M&M’s)_

18. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases 1 2 3 4 5 6 7 8 9 10 11 1000 00 Accts. Payable/Vendor 1,000 00 (Purchase 40,000 cases of M&Ms on account) What if the purchase had been made on account? We would credit the Accounts Payable account instead of cash.

19. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases 1 2 3 4 5 6 7 8 9 10 11 1,000 00 Made purchase on account The specific supplier is identified. Accts. Payable/Vendor

20. 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 amount of returns and allowances.

21. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Example: $200 of the M&Ms purchased on account, were crushed and returned to the supplier. Crushed M&M’s!! Your killing me!

22. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accounts Payable is debited. The specific vendor is identified. Accts. Payable/Vendor200 00

23. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 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 00 Accts. Payable/Vendor (Returned M&Ms due to defect)

24. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Example: If our supplier told us to keep the crushed M&Ms and he would give us a price reduction of $145 because of the defects, we would...

25. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accounts Payable is debited to reflect the price reduction. Accts. Payable/Vendor145 00

26. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchases Returns & Allowances is credited. Same as the entry for Returns! 145 00 Purchase Returns & Allow. 145 00 Accts. Payable/Vendor (Allowance for crushed M&Ms)

27. Purchases Discounts PURCHASES DISCOUNTS DR. CR. CONTRA-PURCHASES account used to record cash discounts allowed on purchases. The account is credited for the discount granted by the vendor for prompt payment. +

28. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Example: We purchased $100 of pink toilet paper on account with credit terms 2/10, n/30 and payment is made within the discount period.

29. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accounts Payable is debited And Purchases is credited for the entire amount of the purchase. Accts. Payable/Vendor100 00 Purchases 100 00

30. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 If payment is made within 10 days then Cash is credited for the actual amount paid, $98. ($100 - $2 discount) Accts. Payable/Vendor100 00 Cash 98 00

31. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchase Discounts is credited for the discount amount, $2 ($100 x 2%). Accts. Payable/Vendor100 00 Cash 98 00 Purchases Discounts 2 00 Paid for toilet paper w/2% disc

32. FREIGHT-IN DR. CR. ADJUNCT-PURCHASES account used to record transportation charges on merchandise purchases. The account is debited for transportation charges. +

33. TRANSPORTATION CHARGES  Expressed as FOB (Free on Board) FOB Shipping Point: oBuyer pays for transportation. oFreight charges are either listed on invoice or sent as a separate bill. FOB Destination: oSeller pays for transportation.

34. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Example: Merchandise was purchased on account for $400 plus freight charges of $38.

35. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchases is debited only for the cost of the merchandise. Purchases400 00

36. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Freight-In is debited for the transportation costs. Purchases400 00 Freight-In 38 00

37. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accounts Payable is credited for the entire purchase price (merchandise + freight). Purchases400 00 Freight-In 38 00 Accts. Payable/Vendor438 00 Made purchase on account

38. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 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?

39. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchases is again debited for the cost of the merchandise. Purchases400 00

40. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accounts Payable is credited for the amount due to the supplier. Purchases400 00 Accts. Payable/Vendor 400 00 Made purchase on account

41. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 A separate journal entry is made to record the freight charges. Purchases400 00 Accts. Payable/Vendor 400 00 Made purchase on account

42. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchases400 00 Accts. Payable/Vendor 400 00 Made purchase on account Freight-In 38 00 Accts. Payable/Vendor Freight charges on purchase Accounts Payable is credited, but the vendor is the transportation company.

43. GROSS PROFIT  Also called Gross Margin  =Net Sales - Cost of Goods Sold  Tells management the amount of sales dollars available to cover expenses, after covering the cost of the goods sold.

44. GROSS PROFIT FORMULA: NET SALES COST OF GOODS SOLD GROSS PROFIT Let’s look at an example. Oh goodie, I love samples! Oops, I mean examples!

45. EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7.50 each. 20 hats @ $10 each = $200 in Sales There were no Sales Returns & Allowances or Sales Discounts, so NET SALES = $200. NET SALES COST OF GOODS SOLD GROSS PROFIT $200

46. 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 20 hats @$7.50each = $150 $150 GROSS PROFIT

47. 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 The Gross Profit on these 20 hats was $50. This $50 is used to cover expenses. $150 GROSS PROFIT $50

48. COMPUTATION OF GROSS PROFIT

49. Here is another example of figuring Gross Profit. This is for: The Fat Candy Store Sales Sales Returns & Allowances $200,500 1,200 Purchases105,000 Purchases Returns & Allowances 800 Purchases Discounts1,000 Freight-In300 Merchandise Inventory, 1/1/-- Merchandise Inventory, 12/31/-- 26,000 18,000 Let’s compute the Gross Profit!

50. Computation Of Gross Profit STEP #1: COMPUTE NET SALES. FORMULA: SALES SALES RETURNS & ALLOWANCES

51. Sales Less: Sales returns & allow Net Sales $200,500 $1,200 $199,300 This is the final price we charged our customers for the merchandise.

52. Computation Of Gross Profit STEP #2: COMPUTE GOODS AVAILABLE FOR SALE. FORMULA: BEGINNING INVENTORY COST OF GOODS PURCHASED +

53. Sales Less: Sales returns & allow. Net Sales $200,500 -$1,200 $199,300 Cost of Goods Sold: Merchandise Inv., Jan 1 $26,000 Purchases $105,000 Less:Purch. ret. & allow.$ 800 Purchases discounts 1,000 Net purchases - 1,800 $103,200 Cost of goods purchased Add freight-in +300 +103,500 Goods available for sale $129,500 This is the cost of ALL the goods that were offered for sale during the entire period.

54. Computation Of Gross Profit STEP #3: COMPUTE COST OF GOODS SOLD. FORMULA: GOODS AVAILABLE FOR SALE ENDING INVENTORY

55. Sales Less: Sales returns & allow. Net Sales $200,500 -$1,200 $199,300 Cost of Goods Sold: Merchandise Inv., Jan 1 $26,000 Purchases $105,000 Less:Purchases ret. & allow.$ 800 Purchases discounts 1,000 Net purchases -1,800 $103,200 Cost of goods purchased Add freight-in +300 +103,50 0 Goods available for sale $129,500 Less Merch. Inv, Dec. 31-18,000 Out of the $129,500 of merchandise available to sell, $18,000 was not sold.

56. Sales Less: Sales returns & allow. Net Sales $200,500 -$1,200 $199,300 Cost of Goods Sold: Merchandise Inv., Jan 1 $26,000 Purchases $105,000 Less:Purchases ret. & allow.$ 800 Purchases discounts 1,000 Net purchases -1,800 $103,200 Cost of goods purchased Add freight-in +300 +103,500 Goods available for sale $129,500 Less Merch. Inv., Dec. 31-18,000 Cost of Goods Sold111,500 From that we can determine that $111,500 of merchandise was sold.

57. Computation Of Gross Profit STEP #4: COMPUTE GROSS PROFIT. FORMULA: NET SALES COST OF GOODS SOLD Finally, I get to figure how much PROFIT I made!

58. Sales Less: Sales returns & allow. Net Sales $200,500 -$1,200 $199,300 Cost of Goods Sold: Merchandise Inv., Jan 1 $26,000 Purchases $105,000 Less:Purchases ret. & allow.$ 800 Purchases discounts 1,000 Net purchases -1,800 $103,200 Cost of goods purchased Add freight-in +300 +103,500 Goods available for sale $129,500 Less Merch. Inv., Dec. 31-18,000 Cost of Goods Sold -111,500 The merchandise was sold for $87,800 more than its cost! Gross Profit87,800 Youza! I’m rich!

59. Posting Purchase 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. (Are exactly the same as we have studied in previous chapters!)

60. 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.”

61. 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.

62. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchases3,300 00 Accts. Pay/Choc. Supply 3,300 00 Invoice No. 631 April 4 Let’s review the posting for this transaction. Okay.. I’m ready when you are!

63. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchases3,300 00 Accts. Pay./Choc. Supply 3,300 00 Invoice No. 631 April 4 501 A $3,300 debit is posted to the Purchases account in the usual manner. Okay. Nothing new so far...

64. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchases3,300 00 Accts. Pay./Choc. Supply 3,300 00 Invoice No. 631 April 4 501 The credit is posted to the Accounts Payable controlling account in the General Ledger. In the General Ledger? Well show me, please...

65. FOUR-COLUMN ACCOUNT Account: Account No. DATEITEMPRDR.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 manner as all other general ledger postings. J6 Easy Squeasy..

66. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchases3,300 00 Accts. Pay./Choc. Supply 3,300 00 Invoice No. 631 April 4 501 202 The Accounts Payable account number is placed in the PR column. This no. came from the General Ledger ? Right!

67. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchases3,300 00 Accts. Pay./Choc. Supply 3,300 00 Invoice No. 631 April 4 501 202 Now we need to post to the individual supplier’s account. Finally!

68. ACCOUNTS PAYABLE LEDGER Name: DATEITEMPRDEBITCREDIT BALANCE Chocolate Supply, 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, Hershey, IN 47304-8139 3,300J6

69. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Purchases3,300 00 Accts. Pay./Choc. Supply 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. I live for making those marks!

70. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accts. Payable/Televax200 00 Purchases Ret. & Allow. 200 00 (Returned Merchandise) May 4 Now let’s look at the posting for a Purchase Return entry.

71. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accts. Payable/Televax200 00 Purchases Ret. & Allow. 200 00 (Returned Merchandise) May 4 The $200 debit is posted to the Accounts Payable controlling account and to the Subsidiary ledger account for Televax. 202 /

72. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accts. Payable/Televax200 00 Purchases Ret. & Allow. 200 00 (Returned Merchandise) May 4 202 / Purchases Returns and Allowances is posted in the normal manner. Its account number is recorded in the PR column. 501.1

73. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accts. Payable/B.B. Small4,800 00 Cash (Made payment on account) April 10 Cash payment transactions are posted in a similar manner. 4,800 00

74. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accts. Payable/B.B. Small4,800 00 Cash (Made payment on account) April 10 4,800 00 The debit is posted to the Accounts Payable controlling account and to the Subsidiary ledger account for B.B. Small. 202 /

75. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Accts. Payable/B.B. Small4,800 00 Cash (Made payment on account) April 10 4,800 00 Cash is posted as usual. 101 202 //

76. Schedule Of Accounts Payable  Listing of suppliers and their balances  Prepared to verify that the sum of the Accounts Payable Ledger balances equals the Accounts Payable balance in the General Ledger.  Usually prepared at the end of the month

77. Northern Micro Schedule of Accounts Payable April 30, 20-- $3,300Chocolate Supply, Inc. Datasoft BB. Small. Televax, Inc. 2,500 800 5,300 $11,900 This should be the balance in the Accounts Payable controlling account in the General Ledger.