Chapter 10 Purchases and Cash Payments

Learning Objectives Explain and Journalize Purchases Transactions, Including Freight Journalize and Record Transactions to the Accounts Payable Subsidiary Ledger and Post to the General Ledger Along with a Debit Memorandum Journalize, Record, and Post Cash Payments Transactions and Prepare a Schedule of Accounts Payable Explain and Journalize Transactions for a Perpetual Inventory System

Learning Objective 1 Explain and Journalize Purchases Transactions, Including Freight

Purchases The account that records the cost of merchandise bought for resale Has a debit balance Is classified as a cost Represents all costs directly related to bringing merchandise into the store for resale to customers

Purchase $4,000 worth of Barbie dolls on account from Mattel Manufacturing on July 6 Figure 10.1 Purchased Merchandise on Account

Purchases Returns and Allowances Chou received several defective dolls and Mattel issued a credit memorandum for $500 reduction from invoice

Purchases Returns and Allowances The account that records a decrease to a buyer’s cost The opposite is a sales return and allowance Is a contra-cost account Figure 10.2 Credit Memorandum Received

Purchases Discount Mattel offers a 2% cash discount if the invoice is paid within 10 days.

Purchases Discount A cash discount if the invoice is paid within a certain number of days The opposite is a sales discount Is a contra-cost account Figure 10.3 Purchase Discount Journalized

Net Purchases After the journal entry is posted and recorded to Mattel, the result will show that Chou saved $70 and reduced what he owed to Mattel. The actual—or net—cost of his purchase is $3,430, calculated as follows:

Purchases discounts are not taken on freight F.O.B. shipping point Buyer pays shipping charges Legal title passes to buyer when goods are shipped Purchases discounts are not taken on freight

Freight F.O.B. destination Seller pays shipping charges Legal title passes to buyer when goods reach their destination

Learning Objective 2 Journalize and Record Transactions to the Accounts Payable Subsidiary Ledger and Post to the General Ledger Along with a Debit Memorandum

Recording and Posting Purchases Transactions Step 1: Prepare a multi-part Purchase Requisition Copy sent to purchasing Copy sent to accounting Copy kept in the department making the request

Recording and Posting Purchases Transactions Step 2: Purchasing Department Prepares a Purchase Order Figure 10.4 Purchase Order

Recording and Posting Purchases Transactions Step 3: Sales Invoice Prepared by seller Figure 10.5 Sales Invoice

Recording and Posting Purchases Transactions Step 4: Receiving the Goods and completing a receiving report Receiving report verifies the exact merchandise was received in good condition A company does not record this purchase until the invoice is approved for recording and payment

Recording and Posting Purchases Transactions Step 5: Verifying the Numbers Before the invoice is approved for recording and payment Figure 10.6 Invoice Approval Form

Introduction to Subsidiary Ledgers and Debit Memorandum Let’s look closer at some transactions

April 3 Purchased merchandise on account $5,000 and freight $50 from Abby Blake Co.; terms 2/10, n/60. Figure 10.7 Merchandise Purchase, Plus Freight Cost

Accounts Payable Subsidiary Ledger It listed vendors owed money from purchases on account The normal balance is a credit Accounts Payable is the controlling account The sum of the individual amount owed should equal the balance in Accounts Payable

Partial General Ledger Figure 10.8 Partial General Ledger of Art’s Wholesale Clothing Company and Accounts Payable Subsidiary Ledger

General and Subsidiary Ledger

April 3 Transaction Post and Record Figure 10.10 Posting and Recording the April 3 Transaction

Debit Memorandum A piece of paper issued by a customer to a seller Figure 10.11 Debit Memorandum

Debit Memorandum Figure 10.12 Debit Memorandum Journalized and Posted

Journalizing and Posting the Debit Memo

Learning Objective 3 Journalize, Record, and Post Cash Payments Transactions and Prepare a Schedule of Accounts Payable

The Following Cash Payment Transactions Occur in April

A Closer Look at how the April 12 Transaction Would be Journalized Figure 10.13 Journalizing the April 12 Transaction

The Complete Set of Cash Payments Transactions Journalized for the Month Figure 10.14 Cash Payments Transactions Journalized for the Month and Posting to the General Journal

Figure 10.14 Cash Payments Transactions Journalized for the Month and Posting to the General Journal (cont.)

The Partial Set of Cash Payments Transactions Posted for the Month

Schedule of Accounts Payable Proof that the sum of the accounts payable subsidiary ledger is equal to the controlling account Only creditors owed a balance appear in the schedule If it doesn’t, the journalizing, posting, and recording must be checked

Schedule of Accounts Payable At the end of the month, the total owed ($7,130) in Accounts Payable, should equal the sum owed the individual creditors that are listed on the schedule of accounts payable. Figure 10.15 Schedule of Accounts Payable

Explain and Journalize Transactions for a Perpetual Inventory System Learning Objective 4 Explain and Journalize Transactions for a Perpetual Inventory System

Perpetual Inventory System An inventory system that continually monitors its levels of inventory Merchandise inventory comes from suppliers to sell to the customer Cost of goods sold is the total cost of merchandise inventory brought into the store and sold

Gross Profit on Sales Profit before operating expenses Is calculated Sales Revenue - Cost of Goods Sold Gross Profit on Sales Figure 10.16 Calculating Gross Profit on Sales

Net Income or Net Loss Figure 10.17 Introduction to Perpetual Inventory for a Merchandise Company

Perpetual Inventory System Matches revenues and costs Tracks what it costs to make the sale (cost of goods sold) Helps control stocks of inventory as well as lost or stolen goods Figure 10.18 Matching Revenues and Costs

Recording Merchandise Transactions From the Buyer’s Position Merchandise Inventory account is increased when merchandise inventory comes into the stores from suppliers Each order is documented by an invoice This is the cost of bringing the merchandise into the store It is not the price at which the merchandise will be sold to customers

Recording Merchandise Transactions From the Buyer’s Position On July 9, Wal-Mart bought flat-screen TVs from Sony Corp. for $7,000 with terms 2/10, n/30 Figure 10.19 Purchase of Inventory on Account

Recording Merchandise Transactions From the Buyer’s Position Not all purchases will go to Merchandise Inventory Supplies, equipment, and so forth that are not for resale These amounts will be debited to the specific account

Recording Merchandise Transactions From the Buyer’s Position For example, if Wal-Mart bought $5,000 of shelving equipment on account for its store Figure 10.20 Purchase of Equipment on Account

Recording Purchases, Returns, and Allowances Wal-Mart noticed a damaged TV and issues a debit memorandum This document notifies Sony that Wal-Mart is reducing what is owed Figure 10.21 Recording a Debit Memorandum

Recording Purchase Discounts Wal-Mart pays Sony within the first 10 days The purchase discount will be recorded as a reduction to the cost of merchandise inventory Figure 10.22 Recording a Purchase Discount

Recording Cost of Freight The cost of freight ($300) is to be paid by Wal-Mart Figure 10.23 Recording Cost of Freight

Recording Merchandise Transactions From the Seller’s Position Sales revenues are earned when the goods are transferred to the buyer Earned revenue can be for cash and/or credit Example of the sale of a TV for $950 on credit

Record Sales Returns and Allowances We will have two entries, one to record the sale and one to show a new cost and less inventory on hand Figure 10.24 Recording Sales and Cost of Goods Sold

Record Sales Returns and Allowances A customer returned a $950 TV Two entries: The first entry records the return at the original selling price using the contra-revenue account Sales Returns and Allowances The second entry records putting the inventory back in Wal-Mart’s books at cost and reducing its Cost of Goods Sold

Record Sales Returns and Allowances Figure 10.25 Return of Goods

Record Sales Discounts A customer gets a 2% discount for paying early Figure 10.26 Recording Sales Discount

Now let’s summarize all the entries for both the buyer and the seller The Buyer The Seller Figure 10.27 Entries for Both the Buyer and the Seller

Summary of the chapter Purchases are merchandise for resale. It is a cost. Purchases Returns and Allowances and Purchases Discount are contra-costs. F.O.B. shipping point means that the purchaser of the goods is responsible for covering the shipping costs. If the terms were F.O.B. destination, the seller would be responsible for covering the shipping costs until the goods reached the purchaser’s destination. Purchases discounts are not taken on freight.

Summary of the chapter The steps for buying merchandise from a company may include the following: The requesting department prepares a purchase requisition. The purchasing department prepares a purchase order. Seller receives the order and prepares a sales invoice (a purchase invoice from the buyer). Buyer receives the goods and prepares a receiving report. Accounting department verifies and approves the invoice for payment. The general journal records the buying of merchandise or other items on account.

Summary of the chapter The accounts payable subsidiary ledger, organized in alphabetical order, is not in the same book as Accounts Payable, the controlling account in the general ledger. At the end of the month the total of all creditors’ ending balances in the accounts payable subsidiary ledger should equal the ending balance in Accounts Payable, the controlling account in the general ledger.

Summary of the chapter A debit memorandum (issued by the buyer) indicates that the amount owed from a previous purchase is being reduced because some goods were defective or not up to a specific standard and thus were returned or an allowance requested. On receiving the debit memorandum, the seller will issue a credit memorandum. All payments of cash (check) are recorded in the general journal.

Summary of the chapter At the end of the month, the schedule of accounts payable, a list of ending amounts owed individual creditors, should equal the ending balance in Accounts Payable, the controlling account in the general ledger. In a perpetual inventory system, when a sale is recognized, the cost of goods sold and merchandise inventory must be updated. Purchases discounts on returns are reflected in the Merchandise Inventory account for a perpetual inventory system.

Questions?

Figure 10.9 General Journal Before Posting and Recording

Figure 10.28 Comparison of Perpetual and Periodic Systems

Figure 10. 29 General Journal Showing Purchases from Cortland Figure 10.29 General Journal Showing Purchases from Cortland.com, Harold.com, and Nickel.com

Figure 10. 30 General Journal Showing Purchases from Eve. com, Jack Figure 10.30 General Journal Showing Purchases from Eve.com, Jack.com, and Noel.com