1. CHAPTER TWELVE ACCOUNTING FOR PURCHASES AND CASH PAYMENTS

2. PURCHASES 4Merchandise acquired for resale: éMust be items for RESALE 4Procedures and documents vary depending on the size of the business. 4Can be made “on account” or for cash

3. PURCHASING PROCESS DOCUMENTS PURCHASE REQUISITION

4. PURCHASE REQUISITION 4A form used to request the purchase of merchandise or other property 4Can be prepared by any authorized person 4One copy to the Purchasing department 4One copy to the Accounting department 4One copy kept by the department preparing the requisition

5. PURCHASING PROCESS DOCUMENTS PURCHASE REQUISITION PURCHASE ORDER

6. PURCHASE ORDER 4A written order to buy goods from a specific vendor 4Purchasing department reviews and approves the purchase requisition and prepares a purchase order: éOne to vendor éOne to the Accounting department éOne kept in the Purchasing department éCopies may also be sent to the receiving area and to the department initiating the purchase.

7. PURCHASING PROCESS DOCUMENTS PURCHASE ORDER RECEIVING REPORT

8. 4Prepared by the receiving clerk 4Indicates what has been received: éIncluding date of receipt, and écondition of the goods 4This report will be compared with the purchase order and requisition to determine if items ordered were received in good condition before payment is approved.

9. PURCHASING PROCESS DOCUMENTS RECEIVING REPORT PURCHASE INVOICE

10. PURCHASE INVOICE 4Prepared by the seller 4As a bill for the merchandise shipped: éSeller calls it a sales invoice. éBuyer calls it a purchase invoice. 4Before payment is made, Accounting department compares the purchase invoices with: éPurchase Requisition éPurchase Order éReceiving Report

11. CASH DISCOUNTS 4Available if the bill is paid within the discount period 4Buyer calls it a Purchase Discount. 4Seller calls it a Sales Discount.

12. TRADE DISCOUNTS 4Often offered by manufacturers and wholesalers 4Reduction from the list or catalog price: éDiscounts offered to different classes of customers 4Buyer and Seller both record the transaction at the NET amount (after the discount).

13. MERCHANDISE PURCHASES ACCOUNTS PURCHASESPURCHASES DISCOUNTS PURCHASES RETURNS & ALLOWANCES FREIGHT-IN

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

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

16. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases 1 2 3 4 5 6 7 8 9 10 11 Example: Made $100 purchase for cash 100 00 Cash 100 00 Made cash purchase

17. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases 1 2 3 4 5 6 7 8 9 10 11 What if the purchase had been made on account? 100 00 Accts. Payable/Vendor 100 00 Made purchase on account

18. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases 1 2 3 4 5 6 7 8 9 10 11 100 00 Made purchase on account We would credit the Accounts Payable account instead of cash. Accts. Payable/Vendor

19. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases 1 2 3 4 5 6 7 8 9 10 11 100 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: Merchandise purchased on account for $200 is defective and is returned to the supplier.

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 merchandise

24. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Example: If the same merchandise is retained but the supplier grants a price reduction of $45 because of the defects

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/Vendor45 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! 45 00 Pur. Returns & Allow. 45 00 Accts. Payable/Vendor Allowance for defective merchandise

27. 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: Merchandise is purchase for $100 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 for the entire amount of the purchase. Accts. Payable/Vendor100 00

30. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 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 Made payment on account

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 4Expressed as FOB (Free on Board) éFOB Shipping Point: Buyer pays for transportation. Freight charges are either listed on invoice or sent as a separate bill. éFOB Destination: Seller 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 4Also called Gross Margin 4Difference between Net Sales and Cost of Goods Sold 4Tells 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.

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. NORTHERN MICRO 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 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.

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 300 103,500 Goods available for sale $129,500 Less Merch. Inv, Dec. 3118,000 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. 3118,000 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

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. 3118,000 Cost of Goods Sold111,500 The merchandise was sold for $87,800 more than its cost. Gross Profit87,800

59. POSTING PURCHASES TRANSACTIONS IN THE GENERAL LEDGER 4In the ledger account: éStep 1: Enter the date. éStep 2: Enter the amount of the transaction. éStep 3: Update the balance. éStep 4: Enter the journal page number. 4 In the journal: éStep 5: Enter the ledger account number.

60. ACCOUNTS PAYABLE LEDGER 4A separate “subsidiary” ledger 4Individual accounts for each supplier 4Often numbered 4Filed either alphabetically or numerically 4Accounts Payable account in the general ledger is the “controlling account.”

61. POSTING TO THE ACCOUNTS PAYABLE LEDGER 4In the Accounts Receivable ledger: éStep 1: Enter the date. éStep 2: Enter the amount. éStep 3: Enter the new balance. éStep 4: Enter the journal page number. 4In the journal: éStep 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 Let’s review the posting for this transaction. Purchases3,300 00 Accts. Pay/Compucraft 3,300 00 Invoice No. 631 April 4

63. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 A $3,300 debit is posted to the Purchases account in the usual manner. Purchases3,300 00 Accts. Pay./Compucraft 3,300 00 Invoice No. 631 April 4 501

64. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 The credit is posted to the controlling account in the General Ledger. Purchases3,300 00 Accts. Pay./Compucraft 3,300 00 Invoice No. 631 April 4 501

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

66. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 The Accounts Payable account number is placed in the PR column. Purchases3,300 00 Accts. Pay./Compucraft 3,300 00 Invoice No. 631 April 4 501 202

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

68. ACCOUNTS PAYABLE LEDGER Name: DATEITEMPRDEBITCREDIT BALANCE Compucraft, 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, Muncie, 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./Compucraft 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.

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 4Prepared to verify that the sum of the accounts payable ledger balances equals the Accounts Payable balance 4Listing of suppliers and their balances 4Usually prepared at the end of the month 4Total of the balances listed is compared with the balance in the Accounts Payable account.

77. Northern Micro Schedule of Accounts Payable April 30, 20-- $3,300Compucraft, Inc. Datasoft Printpro Corp. Televax, Inc. 2,500 800 5,300 $11,900 This should be the balance in the Accounts Payable controlling account.