Accounting for Purchases and Cash Payments Making Accounting Relevant We participate in the purchasing of goods and services daily. Making Accounting Relevant We participate in the purchasing of goods and services daily. Have you ever wanted to buy something, but the store was out of that item? What effect does the out-of-stock situation have on business revenue?

Section 1Purchasing Items Needed by a Business What You’ll Learn  About the paperwork involved in the purchasing process.  The purpose of the Purchases Discounts account.  The purpose of the Purchases account and its rules of debit and credit. What You’ll Learn  About the paperwork involved in the purchasing process.  The purpose of the Purchases Discounts account.  The purpose of the Purchases account and its rules of debit and credit.

Why It’s Important It is essential that businesses establish controls and procedures for handling the purchase of assets in a systematic manner because the purchasing process results in a large outflow of cash. Why It’s Important It is essential that businesses establish controls and procedures for handling the purchase of assets in a systematic manner because the purchasing process results in a large outflow of cash. Section 1Purchasing Items Needed by a Business (cont'd.) Key Terms  purchase requisition  purchase order  packing slip  processing stamp Key Terms  purchase requisition  purchase order  packing slip  processing stamp  purchases discount  discount period  Purchases account  cost of merchandise  purchases discount  discount period  Purchases account  cost of merchandise

The Purchasing Process The purchase of supplies, equipment, and merchandise is divided into four stages: The Purchasing Process The purchase of supplies, equipment, and merchandise is divided into four stages:  requesting needed items  ordering from a supplier  verifying items received  processing the supplier’s invoice  requesting needed items  ordering from a supplier  verifying items received  processing the supplier’s invoice Section 1Purchasing Items Needed by a Business (cont'd.)

Requesting Needed Items  A purchase requisition is a written request that a certain item or items be purchased.  Pre-numbered, multicopy form.  Approved by the manager of the department requesting the purchase.  A purchase requisition is a written request that a certain item or items be purchased.  Pre-numbered, multicopy form.  Approved by the manager of the department requesting the purchase. Section 1Purchasing Items Needed by a Business (cont'd.)

Ordering from a Supplier  A purchase order is a written offer to a supplier to buy certain items.  The purchase order contains:  A purchase order is a written offer to a supplier to buy certain items.  The purchase order contains: Section 1Purchasing Items Needed by a Business (cont'd.) 1. quantity 2. description 3. unit price 4. total cost 1. quantity 2. description 3. unit price 4. total cost 5. supplier’s name and address 6. date needed 7. shipping method (optional) 5. supplier’s name and address 6. date needed 7. shipping method (optional)

Purchases Discounts Suppliers frequently offer charge customers a cash discount for early payment. Section 1Purchasing Items Needed by a Business (cont'd.) 1. MerchandiseDiscount PurchasedX Rate=Discount 1. MerchandiseDiscount PurchasedX Rate=Discount 2. Amount Paid Within InvoiceDiscountDiscount Amount – Amount = Period 2. Amount Paid Within InvoiceDiscountDiscount Amount – Amount = Period $2,300 X.02=$46 $2,300 X.02=$46 $2,300–$46=$2,254 $2,300–$46=$2,254

The Purchases Account When a business buys merchandise to sell to customers, the cost of the merchandise is recorded in the Purchases account. The Purchases account is a temporary account, classified as a cost of merchandise account. Section 1Purchasing Items Needed by a Business (cont'd.) Debit + Increase Side Normal Balance Credit – Decrease Side Purchases

Check Your Understanding Explain the steps in the purchasing process from the request for merchandise to the payment of the invoice. Section 1Purchasing Items Needed by a Business (cont'd.)