1. Chapter 15, Section 1 Accounting for Purchases and Cash Payments

2. Purchasing Items Needed by a Business The Purchasing Process the purchase of supplies, equipment, and merchandise is divided into 4 stages: 1. Requesting Needed Items (multi-copy form, carbon copy) 2. Ordering From a Supplier (multi-copy form, carbon copy) 3. Verifying Items Received 4. Processing the Suppliers Invoice

3. The Purchasing Process 1.Requesting Needed Items Figure 15-1, p. 389 Purchase Requisition a written request that a certain item(s) be purchased

4. The Purchasing Process 2.Ordering from a supplier Figure 15-2, Page 389 Purchase order a written offer to a supplier to buy certain items and contains the following: quantity description unit price total cost supplier’s name and address date needed shipping method (optional)

5. The Purchasing Process 3.Verifying items received Packing slip a form that lists the items included in the shipment. The slip is sent to the accounting department to be checked against both the purchase order and the supplier’s bill

6. The Purchasing Process 4.Processing The Suppliers Invoice When the items are shipped to the buyer, the supplier prepares an invoice. Invoice: lists the credit terms, quantity, description, unit price, and total costs of the items shipped, the buyer’s purchase order number, and the method of shipment. Once verified the invoice is the source document for a journal entry.

7. The Purchasing Process 4.Processing Suppliers Invoices (cont.) Processing Stamp: stamp placed on a creditor’s invoice that outlines the steps followed in processing the invoice for payment. It includes 4 lines containing: Figure 15-3, Page 391 1. The date the invoice is to be paid 2. The discount amount (if any) 3. The amount to be paid 4. The check number (when the check is issued)

8. Purchase Discounts Term used by a buyer to refer to a cash discount offered for early payment. Suppliers offer buyer: a cash discount. For the buyer, it is a purchase discount. Both purchases and cash discounts are calculated the same way. Discount period: the time within which an invoice must be paid if the discount is taken.

9. Purchase Discounts Example 2/10 2% discount if paid in full within 10 days from date on invoice. n/30 if they don’t take advantage of the discount they have to pay in full in 30 days from the date of the invoice 1. Invoice Amount X Discount Rate = Discount $ 2,300.02 $46 2. Invoice Amount - Discount = Amount to be Paid $ 2,300 $46 $2, 254

10. Purchases Account the account used to record the cost of merchandise purchased during the fiscal period. Temporary Account: classified as the cost of merchandise account Purchases follow Dr and Cr rules for expenses. Purchases DR + Bal. CR -

11. Chapter 15, Section 2 Analyzing and Recording Purchases on Account

12. AP Subsidiary Ledger Figure 15-4, Page 394 (notice 3 columns) Purchases on accounts are recorded here. It contains an account for each supplier or creditor. Accounts payable subsidiary ledger form contains lines on the top for creditor’s name and address. In manual accounting Accounts are arranged in alphabetical order and contain no account numbers. In computerized accounting Accounts are arranged by account number

13. Recording the Purchase of Merchandise On Account Example on Page 394 Tickler File: has a folder for each of the month. Invoices are placed according to their due dates. Due Date: Date invoices are to be paid by

14. Recording Other Purchases On Account Example on Page 396 Same steps as the purchase of merchandise. Now you are buying equipment

15. Purchases Returns and Allowances Purchases Returns when a business buys merchandise that upon inspection is unacceptable Purchases Allowance when a business keeps less than satisfactory merchandise and pays a reduced price Debit Memo: Figure 15-5, Page 397 is used to notify suppliers (creditors) of a return or to request an allowance. “Debit” indicates the creditors account will be debited, or decreased.

16. The Accounts Purchases Purchases Returns & Allowances (Contra Account) Figure 15-5, Page 397 Business Transaction p. 398 DR + Bal. CR - DR - CR + Bal.

17. Posting to the Subsidiary Ledger Figure 15-6, Page 399 2 DR, 1 CR 3 places the one entry needs to be posted

18. Chapter 15, Section 3 Analyzing and Recording Cash Payments

19. Controls Over Cash Authorize all cash payments: each payment is supported by a source doc. Write checks for all payments Use prenumbered checks Retain and account for spoiled checks: (mark them “void”) and file

20. Recording Cash Purchase of Insurance & Merchandise Business Transaction, Page 403 Premiums: the cost or insurance protection. It is paid in advance at the beginning of the covered period. It is recorded as in an asset account, Prepaid Insurance.

21. Recording Cash Purchases of Merchandise Business Transaction, Page 403 Not in the example above but you should know… Usually purchased On Account

22. Recording Cash Payments for Items Purchases on Account Business Transaction Page 405 Accounts affected include: Accounts Payable (controlling)Cash AP “Company” (subsidiary) Purchases Discounts DR - CR + Bal. DR + Bal. CR - DR - CR + Bal. DR - CR + Bal.

23. Other Cash Payments “FOB” - Free on Board FOB Destination the supplier pays the shipping FOB Shipping Point the buyer pays the shipping Transportation In (shipping charge) DR + Bal. CR -

24. Recording Bankcard Fees Bank card fee % of the total of the amounts recorded on the bankcard sales slips processed. Figure 15-7 p.407 shows all journal entries for the transactions discussed in chapter 15