© Paradigm Publishing, Inc.1 Chapter 7 Accounting for a Merchandising Business: Purchases and Cash Payments

1.Describe the procedures and forms used in purchasing merchandise. Describe the procedures and forms used in purchasing merchandise.Describe the procedures and forms used in purchasing merchandise. 2.Record credit purchases in a general journal and a purchases journal, and post to the accounts payable ledger and the general ledger. Record credit purchases in a general journal and a purchases journal, and post to the accounts payable ledger and the general ledger.Record credit purchases in a general journal and a purchases journal, and post to the accounts payable ledger and the general ledger. © Paradigm Publishing, Inc.2 Learning Objectives

3.Record purchases returns and allowances. Record purchases returns and allowances.Record purchases returns and allowances. 4.Record purchases discounts. Record purchases discounts.Record purchases discounts. 5.Record cash payments in a cash payments journal and post to the accounts payable ledger and the general ledger. Record cash payments in a cash payments journal and post to the accounts payable ledger and the general ledger.Record cash payments in a cash payments journal and post to the accounts payable ledger and the general ledger. © Paradigm Publishing, Inc.3 Learning Objectives

6.Prepare a schedule of accounts payable. Prepare a schedule of accounts payable.Prepare a schedule of accounts payable. 7.Record freight charges on incoming merchandise. Record freight charges on incoming merchandise.Record freight charges on incoming merchandise. © Paradigm Publishing, Inc.4 Learning Objectives

A merchandising business earns its revenue by buying goods and then reselling the goods to customers. Goods that are to be sold to customers are called merchandise. © Paradigm Publishing, Inc.5

Merchandising can take place at two levels--retail and wholesale.  A retail business sells directly to consumers.  A wholesale business purchases goods in bulk from manufacturers and then sells the goods to Retailers Retailers Other wholesalers Other wholesalers Schools and other nonprofit institutions Schools and other nonprofit institutions Directly to consumers Directly to consumers © Paradigm Publishing, Inc.6

7 Learning Objective 1 Describe the procedures and forms used in purchasing merchandise

Steps in Purchasing Procedures Step 1: Managers identify goods needed and request them by preparing a purchase requisition, which is sent to the purchasing department. Step 2: The purchasing department chooses the seller (vendor) and sends an order. © Paradigm Publishing, Inc.8

Steps in Purchasing Procedures Step 3: The seller receives the order and prepares an invoice (bill), which is shipped with the goods or a few days after the goods. Step 4: When the merchandise is received by the buyer, it is checked against the invoice and payment is approved. © Paradigm Publishing, Inc.9

A written request for goods to be purchased © Paradigm Publishing, Inc.10

A written or online form sent from a buyer of goods to the seller that specifies the quantity and description of goods to be purchased. © Paradigm Publishing, Inc.11

© Paradigm Publishing, Inc.12

A business document that shows  Names and address of the buyer and the seller  Date and terms of the sale  Description of the goods  Price of the goods and total owed  Mode of transportation for delivery © Paradigm Publishing, Inc.13

The same invoice serves as both a sales invoice and a purchase invoice  Sales invoice to the seller  Purchase invoice to the buyer © Paradigm Publishing, Inc.14

© Paradigm Publishing, Inc.15

Percentage reductions from the list or catalog price of merchandise. Not recorded in the accounting records of the buyer or the seller.  The buyer always records goods at their actual cost.  The seller records items sold at their actual selling price. © Paradigm Publishing, Inc.16

© Paradigm Publishing, Inc.17 a.$550. b.$ c.$ d.$ e.$ Quick Check A seller offers merchandise with a list price of $550, subject to a trade discount of 25%. The purchaser will record the cost of merchandise purchased at

A discount offered to encourage prompt and early payment by a buyer. Recorded in the accounting records of both the seller and the buyer (unlike trade discounts).  The seller refers to as sales discounts.  The buyer refers to as purchase discounts. © Paradigm Publishing, Inc.18

A common expression of a cash discount is 2/10, n/30. This means that a 2% discount can be taken from the invoice price of the merchandise if the invoice is paid within 10 days of the date of the invoice. © Paradigm Publishing, Inc.19

© Paradigm Publishing, Inc.20 a.$650. b.$ c.$ d.$455. e.$845. Quick Check A seller offers merchandise with a price of $650, subject to a cash discount of 3/10, n30. Assuming payment is received within the discount period, the purchaser will remit a check for

Review Quiz 7-1 What is the net amount due on this invoice? © Paradigm Publishing, Inc.21 Answer: $1,372 Invoice Price Date of Invoice Terms Date Paid $1,400 June 10 2/10, n30 June 19

Review Quiz 7-1 What is the net amount due on this invoice? © Paradigm Publishing, Inc.22 Answer: $ Invoice Price Date of Invoice Terms Date Paid $980 December 2 3/10, 2/20, n30 December 18

Review Quiz 7-1 What is the net amount due on this invoice? © Paradigm Publishing, Inc.23 Answer: $400 Invoice Price Date of Invoice Terms Date Paid $400 July 8 n30 August 7

© Paradigm Publishing, Inc.24 Learning Objective 2 Record credit purchases in a general journal and a purchases journal, and post to the accounts payable ledger and the general ledger

The sole purpose is to keep a record of the cost of merchandise purchased for resale during an accounting period Debited for the cost of merchandise purchased for resale Falls under the category of cost accounts  Cost accounts are like expense accounts  Both are presented on the income statement and enter into the calculation of net income © Paradigm Publishing, Inc.25

Assume a company purchases $575 of merchandise from Key Suppliers on Nov. 2. The entry would be recorded as follows: © Paradigm Publishing, Inc.26 +cost +liability

Review Quiz 7-2 Record the following transactions in a general journal. © Paradigm Publishing, Inc.27 Mar. 1 Mar. 1 Purchased supplies for cash, $400.

Review Quiz 7-2 Record the following transactions in a general journal. © Paradigm Publishing, Inc.28 Mar. 5 Mar. 5 Purchased equipment on account from E & H Co., $900.

Review Quiz 7-2 Record the following transactions in a general journal. © Paradigm Publishing, Inc.29 Mar. 8 Mar. 8 Purchased merchandise on account from C. Medlin Co., $1,200

Review Quiz 7-2 Record the following transactions in a general journal. © Paradigm Publishing, Inc.30 Mar. 18 Mar. 18 Purchased merchandise for cash, $300.

Used to record transactions that are similar in nature Save time in recording specialized transactions Allow for a delegation of work because individual accountants can be assigned to specific journals Examples  Purchase Journal  Cash Payments Journal © Paradigm Publishing, Inc.31

A journal used to record only credit purchases © Paradigm Publishing, Inc.32

Review Quiz 7-3 © Paradigm Publishing, Inc.33 The one-column purchases journal

Review Quiz 7-3 © Paradigm Publishing, Inc.34 The two-column general journal

A separate ledger containing only one type of account is called a A subsidiary ledger containing only creditors’ accounts is called an © Paradigm Publishing, Inc.35 subsidiary ledger. accounts payable ledger.

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An account in the general ledger that summarizes accounts in a related subsidiary ledger. The Accounts Payable account in the general ledger is said to control the accounts payable ledger. © Paradigm Publishing, Inc.37

© Paradigm Publishing, Inc

The purchases journal must be posted to both the subsidiary ledger and the general ledger. Individual credits must be posted to the creditor’s accounts in the accounts payable ledger. Posting is usually done on a daily basis, to keep the ledger current. © Paradigm Publishing, Inc.39

The total of the money column must be posted to the general ledger as a  Debit to the Purchases account  Credit to the Accounts Payable account Since this total represents total credit purchases for the month, it is posted at the end of the month. © Paradigm Publishing, Inc.40

© Paradigm Publishing, Inc.41 a.selling merchandise on account. b.selling merchandise for cash. c.purchasing merchandise for cash. d.purchasing merchandise on account. e.purchasing office supplies and equipment on account. Quick Check The purchases journal is used for

Step 1. Enter the journal entry’s date. Step 2. Enter the amount of the journal entry in the Credit column. Step 3. Calculate the balance of the account and enter it in the Balance column. © Paradigm Publishing, Inc.42

Step 4. Enter the purchase journal page in the P.R. column. Step 5. Enter a check mark in the P.R. column of the purchases journal. © Paradigm Publishing, Inc.43

© Paradigm Publishing, Inc.44

Step 1. Enter the last day of the month. Step 2. Enter the total of the money column. Step 3. Calculate the new balances. Step 4. Enter the posting references. Step 5. Enter the account numbers in the purchases journal. © Paradigm Publishing, Inc.45

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© Paradigm Publishing, Inc.47 a.debiting the creditor’s account in the accounts payable ledger. b.crediting the creditor’s account in the accounts payable ledger. c.debiting the Cash account in the general ledger. d.crediting the Cash account in the general ledger. e.debiting the Purchases Returns and Allowances account in the general ledger. Quick Check Posting an entry from the purchases journal involves

In merchandising, a return occurs when a customer returns to the seller part or all of the items purchased. An allowance occurs when the seller grants a customer a price reduction on items due to some factor, such as damaged or defective goods. © Paradigm Publishing, Inc.48

The seller refers to merchandise returns or allowances as sales returns and allowances. The purchaser refers to merchandise returns or allowances as purchase returns and allowances. © Paradigm Publishing, Inc.49

© Paradigm Publishing, Inc.50 An account in which the amount of returns and allowances is usually recorded Contra to the Purchases account Has a credit balance, which is opposite the debit balance of the Purchases account

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© Paradigm Publishing, Inc.52 Learning Objective 3 Record purchases returns and allowances

© Paradigm Publishing, Inc.53 A debit memorandum is the buyer’s written request to the seller for credit for a merchandise return or allowance. When a return or allowance is made, part or all of the balance in the creditor’s account will not be paid. The buyer debits (decreases) the creditor’s account for the amount of the return or allowance.

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Review Quiz 7-4 © Paradigm Publishing, Inc.56 The general journal, showing the recorded transactions

© Paradigm Publishing, Inc.57 Learning Objective 4 Record purchase discounts

© Paradigm Publishing, Inc.58 A contra purchases account used to record discounts received for prompt payment of merchandise invoices.

Example © Paradigm Publishing, Inc.59 -liability +contra purchases -asset Assume an invoice for $575, subject to a cash discount of 2/10, n/30, is paid within the discount period on Nov. 12. The following entry would be prepared.

© Paradigm Publishing, Inc.60 Learning Objective 5 Record cash payments in a cash payments journal and post to the accounts payable ledger and the general ledger

A special journal used for recording all disbursements of cash Designed to meet the needs of the business using it Common money columns include  Cash Cr. column  Purchases Discounts Cr. column  Account Payable Dr. column  General Dr. column © Paradigm Publishing, Inc.61

© Paradigm Publishing, Inc.62

Follows some of the same procedures used for posting the purchases journal Three different types of postings made  Posting of individual debits to creditors’ accounts in the accounts payable ledger. Usually done on a daily basis. © Paradigm Publishing, Inc.63

 Posting of individual debits to appropriate general ledger accounts from the General Debit column. Can be posted on a daily, weekly, or monthly basis.  Posting of special columns totals to the appropriate general ledger accounts. Summary posting is done at the end of the month. © Paradigm Publishing, Inc.64

© Paradigm Publishing, Inc.65 Amounts in the Accounts Payable Debit column are posted separately to the creditors’ accounts in the accounts payable ledger. A check mark is entered in the P.R. column of the cash payments journal to indicate an individual posting.

© Paradigm Publishing, Inc.66 Amounts in the General Debit column are posted individually to the general ledger accounts identified in the Account Debited column. Account numbers of those accounts are entered in the P.R. column of the cash payments journal. The check mark at the bottom of the General Debit column indicates that the column total is not posted.

© Paradigm Publishing, Inc.67 The totals of special columns are posted to the general ledger accounts identified in the headings of the columns. Account numbers are entered under the column totals to indicate that a summary posting has been made.

© Paradigm Publishing, Inc.68 a.debiting the creditor’s account in the accounts payable ledger. b.crediting the creditor’s account in the accounts payable ledger. c.debiting the Cash account in the accounts payable ledger. d.crediting the Cash account in the accounts payable ledger. e.crediting the creditor’s accounts in the general ledger. Quick Check Posting an entry from the cash payments journal involves

© Paradigm Publishing, Inc.69 Learning Objective 6 Prepare a schedule of accounts payable

A schedule of accounts payable is a listing of the balances in the accounts payable ledger. The total of this schedule should agree with the accounts payable account in the general ledger, the controlling account. © Paradigm Publishing, Inc.70

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© Paradigm Publishing, Inc.72 Only accounts with open balances are included on the schedule of account payable.

© Paradigm Publishing, Inc.73 Learning Objective 7 Record freight charges on incoming merchandise

FOB Shipping Point — the buyer is responsible for all freight costs while the goods are in transit. FOB Destination — the seller is responsible for all freight costs while the goods are in transit. If the terms are FOB shipping point, the purchaser debits the cost of freight to the Freight In account. © Paradigm Publishing, Inc.74

Example The following journal entry indicates the $30 freight charge incurred by the purchaser under the freight terms of FOB shipping point. Merchandise costing $700 was purchased from Pantech Corp. on account on Dec. 2. © Paradigm Publishing, Inc.75 General Journal DateAccount TitleP.R.DebitCredit Dec.2Purchases700 Freight In30 Accounts Payable-Pantech Corp. 730

Notice how the Freight In, Purchases Returns and Allowances, and Purchases Discounts accounts affect the Purchases account: © Paradigm Publishing, Inc.76Purchases- Purchases Discount - Purchases Returns and Allowances + Freight In Net Purchases

© Paradigm Publishing, Inc.77 How could top management have prevented this type of inventory fraud? Focus on Ethics Refer to the Focus on Ethics box on page 307 in your text.

© Paradigm Publishing, Inc.78 Joining the Pieces Procedures for Posting the Purchases Journal

© Paradigm Publishing, Inc.79 Joining the Pieces Procedures for Posting the Cash Payments Journal