CHAPTER ELEVEN ACCOUNTING FOR PURCHASES AND CASH PAYMENTS

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

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!

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

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!

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.

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!

 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.

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..

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

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.

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).

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

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

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

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases Example: Purchased $1,000 of M&M candies for cash Cash ( cash purchase of M&M’s)_

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases Accts. Payable/Vendor 1, (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.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases , Made purchase on account The specific supplier is identified. Accts. Payable/Vendor

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.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Example: $200 of the M&Ms purchased on account, were crushed and returned to the supplier. Crushed M&M’s!! Your killing me!

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accounts Payable is debited. The specific vendor is identified. Accts. Payable/Vendor200 00

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases Returns & Allowances is credited. This account will be shown as a deduction from the Purchases account on the Income Statement Pur. Returns & Allow Accts. Payable/Vendor (Returned M&Ms due to defect)

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 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...

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accounts Payable is debited to reflect the price reduction. Accts. Payable/Vendor145 00

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases Returns & Allowances is credited. Same as the entry for Returns! Purchase Returns & Allow Accts. Payable/Vendor (Allowance for crushed M&Ms)

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. +

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 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.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accounts Payable is debited And Purchases is credited for the entire amount of the purchase. Accts. Payable/Vendor Purchases

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT If payment is made within 10 days then Cash is credited for the actual amount paid, $98. ($100 - $2 discount) Accts. Payable/Vendor Cash 98 00

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchase Discounts is credited for the discount amount, $2 ($100 x 2%). Accts. Payable/Vendor Cash Purchases Discounts 2 00 Paid for toilet paper w/2% disc

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

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.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Example: Merchandise was purchased on account for $400 plus freight charges of $38.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases is debited only for the cost of the merchandise. Purchases400 00

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Freight-In is debited for the transportation costs. Purchases Freight-In 38 00

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accounts Payable is credited for the entire purchase price (merchandise + freight). Purchases Freight-In Accts. Payable/Vendor Made purchase on account

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT What if the freight charges were on a separate bill from the transportation company?

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases is again debited for the cost of the merchandise. Purchases400 00

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accounts Payable is credited for the amount due to the supplier. Purchases Accts. Payable/Vendor Made purchase on account

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT A separate journal entry is made to record the freight charges. Purchases Accts. Payable/Vendor Made purchase on account

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases Accts. Payable/Vendor Made purchase on account Freight-In Accts. Payable/Vendor Freight charges on purchase Accounts Payable is credited, but the vendor is the transportation company.

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.

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!

EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7.50 each. 20 $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

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 = $150 $150 GROSS PROFIT

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

COMPUTATION OF GROSS PROFIT

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!

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

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.

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

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 ,500 Goods available for sale $129,500 This is the cost of ALL the goods that were offered for sale during the entire period.

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

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 ,50 0 Goods available for sale $129,500 Less Merch. Inv, Dec ,000 Out of the $129,500 of merchandise available to sell, $18,000 was not sold.

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 ,500 Goods available for sale $129,500 Less Merch. Inv., Dec ,000 Cost of Goods Sold111,500 From that we can determine that $111,500 of merchandise was sold.

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!

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 ,500 Goods available for sale $129,500 Less Merch. Inv., Dec ,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!

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!)

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.”

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.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases3, Accts. Pay/Choc. Supply 3, Invoice No. 631 April 4 Let’s review the posting for this transaction. Okay.. I’m ready when you are!

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases3, Accts. Pay./Choc. Supply 3, Invoice No. 631 April A $3,300 debit is posted to the Purchases account in the usual manner. Okay. Nothing new so far...

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases3, Accts. Pay./Choc. Supply 3, Invoice No. 631 April The credit is posted to the Accounts Payable controlling account in the General Ledger. In the General Ledger? Well show me, please...

FOUR-COLUMN ACCOUNT Account: Account No. DATEITEMPRDR.CR. BALANCE DR.CR. ACCOUNTS PAYABLE 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..

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases3, Accts. Pay./Choc. Supply 3, Invoice No. 631 April The Accounts Payable account number is placed in the PR column. This no. came from the General Ledger ? Right!

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases3, Accts. Pay./Choc. Supply 3, Invoice No. 631 April Now we need to post to the individual supplier’s account. Finally!

ACCOUNTS PAYABLE LEDGER Name: DATEITEMPRDEBITCREDIT BALANCE Chocolate Supply, Inc 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 ,300J6

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Purchases3, Accts. Pay./Choc. Supply 3, (Invoice No. 631) April / 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!

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accts. Payable/Televax Purchases Ret. & Allow (Returned Merchandise) May 4 Now let’s look at the posting for a Purchase Return entry.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accts. Payable/Televax Purchases Ret. & Allow (Returned Merchandise) May 4 The $200 debit is posted to the Accounts Payable controlling account and to the Subsidiary ledger account for Televax. 202 /

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accts. Payable/Televax Purchases Ret. & Allow (Returned Merchandise) May / Purchases Returns and Allowances is posted in the normal manner. Its account number is recorded in the PR column

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accts. Payable/B.B. Small4, Cash (Made payment on account) April 10 Cash payment transactions are posted in a similar manner. 4,800 00

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accts. Payable/B.B. Small4, Cash (Made payment on account) April 10 4, The debit is posted to the Accounts Payable controlling account and to the Subsidiary ledger account for B.B. Small. 202 /

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Accts. Payable/B.B. Small4, Cash (Made payment on account) April 10 4, Cash is posted as usual //

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

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