CHAPTER THIRTEEN ACCOUNTING FOR PURCHASES

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Record the entries for the purchase of merchandise for cash and on credit. 2. Record the entries for the purchase of supplies and other assets. 3. Record purchases discounts 4. Record the entries for freight in. 5. Record the entries for purchases returns and allowances. ACCOUNTING FOR PURCHASES Objectives:

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording Purchases of Merchandise The purchase of merchandise for resale is recorded in an account called Merchandise Purchases. This account is usually referred to as a cost account and is a temporary account.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording Purchases of Merchandise (continued) Like the expense accounts, the Purchases account decreases owner’s equity.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Transaction $880 worth of merchandise was purchased for cash.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Transaction Analysis Merchandise purchases is debited for $880. Cash is credited for $880.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Transaction $1150 worth of merchandise was purchased on credit.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Transaction Analysis Merchandise purchases is debited for $1150. Accounts payable is credited for $1150.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording Other Purchases Be careful to record only purchases of merchandise for resale in the Merchandise Purchases account. Purchases of permanent assets, such as computers, copiers, and delivery equipment should be debited to the appropriate asset account and credited to Cash or Accounts Payable.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording Amounts Paid for Purchases of Merchandise on Credit Accounts Payable is debited and Cash is credited.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Transaction If the business takes advantage of a 2% discount on purchases of $1150, how would the transaction be recorded?

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Transaction Analysis 2% of $1150 is $23. Accounts payable is debited for $1150. Cash is credited for $1127. Purchases discount is credited for $23.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Transaction Analysis (continued)

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording Transportation Charges on Merchandise Purchases Freight in, another cost account, is debited for the transportation charges on all incoming merchandise purchases.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording Transportation Charges on Merchandise Purchases (continued) If the purchaser pays the transportation company directly, Freight In is debited and Cash is credited.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording Transportation Charges on Merchandise Purchases (continued) If the seller lists the transportation charges on the invoice, then the purchaser owes the seller for both the merchandise and the transportation charges, resulting in a compound entry.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording Purchases Returns and Allowances When a business returns goods or receives an allowance, there is a decrease in the cost of its merchandise purchases. This decrease is recorded in a cost account called Purchases Returns and Allowances.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Accounting Terminology Freight in Merchandise purchases Purchases discount Purchases returns and allowances

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Summary Purchases of merchandise for resale are debited to a cost account called Merchandise Purchases. Purchases of permanent assets, such as equipment, are debited to an appropriate asset account.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Summary (continued) For a cash discount, the buyer credits the amount of the discount to a cost account called Purchases Discount. The purchaser may be required to pay transportation charges on merchandise. These charges are debited to the Freight In account.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Summary (continued) The Purchases Returns and Allowances account is used to record the decrease in the cost of merchandise purchases that results when a business returns goods or receives allowances.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Summary (continued) Purchases Returns and Allowances is credited for all returns and allowances. If the business is given a cash refund, the Cash account is debited. If the amount is deducted from a balance that the business owes, Accounts Payable is debited.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Purchases Returns and Allowances is debited for all returns and allowances. 2. For a cash discount, the buyer credits the amount of the discount to a cost account called Purchases Discount. 3. If the business is given a cash refund, the Cash account is credited. Topic Quiz Answer the following true/false questions: TRUE FALSE

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Investigating on the Internet Sources of information about purchases can be accessed at various corporate websites. As a research assignment, access a business website and report those sources of information that might concern purchases of merchandise.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved (Return to Topic Quiz) 1. Purchases Returns and Allowances is debited for all returns and allowances. FALSE Purchases Returns and Allowances is credited for all returns and allowances.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved (Return to Topic Quiz) 3. If the business is given a cash refund, the Cash account is credited. FALSE If the business is given a cash refund, the Cash account is debited.