Section 2Analyzing and Recording Purchases on Account What You’ll Learn  How the accounts payable subsidiary ledger is used.  How to record the purchase of merchandise on account.  How to record the purchase of other assets on account.  How to record purchases returns and allowances transactions.  How to post to creditor accounts in the accounts payable subsidiary ledger. What You’ll Learn  How the accounts payable subsidiary ledger is used.  How to record the purchase of merchandise on account.  How to record the purchase of other assets on account.  How to record purchases returns and allowances transactions.  How to post to creditor accounts in the accounts payable subsidiary ledger.

Why It’s Important Purchasing is a critical, ongoing process in a merchandising business; therefore, it is essential that you learn how to record the different kinds of purchases transactions. Why It’s Important Purchasing is a critical, ongoing process in a merchandising business; therefore, it is essential that you learn how to record the different kinds of purchases transactions. Section 2Analyzing and Recording Purchases on Account (cont'd.) Key Terms  accounts payable subsidiary ledger  tickler file  due dates  purchases returns  purchases allowances  debit memorandum Key Terms  accounts payable subsidiary ledger  tickler file  due dates  purchases returns  purchases allowances  debit memorandum

The Accounts Payable Subsidiary Ledger The individual accounts in the accounts payable subsidiary ledger are summarized in the general ledger controlling account, Accounts Payable. The Accounts Payable Subsidiary Ledger The individual accounts in the accounts payable subsidiary ledger are summarized in the general ledger controlling account, Accounts Payable. Section 2Analyzing and Recording Purchases on Account (cont'd.) General Ledger Accounts Receivable—controlling account$4,500 Accounts Receivable Subsidiary Ledger Individual Accounts Within Ledger: Sandals Etc. $ 900 Shoe Warehouse2,100 Shoe Wholesale Inc.1,000 Store Supply Shop500 Total$4,500 General Ledger Accounts Receivable—controlling account$4,500 Accounts Receivable Subsidiary Ledger Individual Accounts Within Ledger: Sandals Etc. $ 900 Shoe Warehouse2,100 Shoe Wholesale Inc.1,000 Store Supply Shop500 Total$4,500 Controlling account balance equals total of accounts in subsidiary ledger.

The Accounts Payable Subsidiary Ledger Form  Has lines at the top for the creditor’s name and address.  Has three amount columns.  Has lines at the top for the creditor’s name and address.  Has three amount columns. Section 2Analyzing and Recording Purchases on Account (cont'd.)

Business Transaction ANALYSIS Identify1.The accounts affected are Purchases, Accounts Payable (controlling), and Accounts Payable—Pro Runner Warehouse (subsidiary). On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice Recording the Purchase of Merchandise on Account Section 2Analyzing and Recording Purchases on Account (cont'd.)

Business Transaction (cont'd.) ANALYSIS Classify2.Purchases is a cost of merchandise account. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are liability accounts. Recording the Purchase of Merchandise on Account (cont'd.) Section 2Analyzing and Recording Purchases on Account (cont'd.) On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

Business Transaction (cont'd.) ANALYSIS + / –3.Purchases is increased by $2,300. This is the cost of merchandise purchased. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are increased by $2,300. Recording the Purchase of Merchandise on Account (cont'd.) Section 2Analyzing and Recording Purchases on Account (cont'd.) On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

Business Transaction (cont'd.) DEBIT-CREDIT RULE 4.Increases to cost of merchandise accounts are recorded as debits. Debit Purchases for $2, Increases to liability accounts are recorded as credits. Credit Accounts Payable (controlling) for $2,300. Also credit Accounts Payable—Pro Runner Warehouse (subsidiary) for $2,300. Recording the Purchase of Merchandise on Account (cont'd.) Section 2Analyzing and Recording Purchases on Account (cont'd.) On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

T ACCOUNTS 6. Accounts PurchasesPayable Business Transaction (cont'd.) Debit + 2,300 Credit – Accounts Receivable Subsidiary Ledger Pro Runner Warehouse Debit – Credit + 2,300 Debit – Recording the Purchase of Merchandise on Account (cont'd.) Section 2Analyzing and Recording Purchases on Account (cont'd.) On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice Credit + 2,300

Business Transaction (cont'd.) JOURNAL ENTRY 7. Recording the Purchase of Merchandise on Account (cont'd.) Section 2Analyzing and Recording Purchases on Account (cont'd.) On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

Purchases Returns and Allowances  A purchases return occurs when a business returns merchandise to the supplier for full credit.  A purchases allowance occurs when a business keeps less than satisfactory merchandise and pays a reduced price.  A purchases return occurs when a business returns merchandise to the supplier for full credit.  A purchases allowance occurs when a business keeps less than satisfactory merchandise and pays a reduced price. Section 2Analyzing and Recording Purchases on Account (cont'd.)

Purchases Returns and Allowances (cont'd.)  A debit memorandum, or debit memo, is used to notify suppliers (creditors) of a return or to request an allowance. Section 2Analyzing and Recording Purchases on Account (cont'd.) Credit + Increase Side Normal Balance Debit – Decrease Side Purchases Returns and Allowances

Business Transaction ANALYSIS Identify1.The accounts affected are Accounts Payable (controlling), Accounts Payable— FastLane Athletics (subsidiary), and Purchases Returns and Allowances. On December 16, On Your Mark issued Debit Memo- randum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics. Section 2Analyzing and Recording Purchases on Account (cont'd.) Recording a Purchases Returns and Allowances Transaction

Business Transaction (cont'd.) ANALYSIS Classify2.Accounts Payable (controlling) and Accounts Payable— FastLane Athletics (subsidiary) are liability accounts. Purchases Returns and Allowances is a contra cost of merchandising account. Section 2Analyzing and Recording Purchases on Account (cont'd.) Recording a Purchases Returns and Allowances Transaction (cont'd.) On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.

Business Transaction (cont'd.) ANALYSIS + / –3.Accounts Payable (controlling) and Accounts Payable— FasLane Athletics (subsidiary) are decreased by $200. Purchases Returns and Allowances is increased by $200. Section 2Analyzing and Recording Purchases on Account (cont'd.) On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics. Recording a Purchases Returns and Allowances Transaction (cont'd.)

Business Transaction (cont'd.) DEBIT-CREDIT RULE 4.Decreases to liability accounts are recorded as debits. Debit Accounts Payable (controlling) for $200. Also debit Accounts Payable—FastLane Athletics (subsidiary) for $ Increases to contra cost of merchandise accounts are recorded as credits. Credit Purchases Returns and Allowances for $200. Section 2Analyzing and Recording Purchases on Account (cont'd.) On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics. Recording a Purchases Returns and Allowances Transaction (cont'd.)

T ACCOUNTS 6. Accounts Purchases Returns Payable and Allowances Business Transaction (cont'd.) Debit – 200 Credit + Accounts Receivable Subsidiary Ledger FastLane Athletics Debit – 200 Credit + Debit – Section 2Analyzing and Recording Purchases on Account (cont'd.) Credit On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics. Recording a Purchases Returns and Allowances Transaction (cont'd.)

Business Transaction (cont'd.) JOURNAL ENTRY 7. Section 2Analyzing and Recording Purchases on Account (cont'd.) On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics. Recording a Purchases Returns and Allowances Transaction (cont'd.)

Check Your Understanding When merchandise purchased by a business is unacceptable, what can the business do to recover the cost of the merchandise? Section 2Analyzing and Recording Purchases on Account (cont'd.)