1. Chapter 10 Purchases and Cash Payments

2. Learning Objectives
Explain and Journalize Purchases Transactions, Including Freight
Journalize and Record Transactions to the Accounts Payable Subsidiary Ledger and Post to the General Ledger Along with a Debit Memorandum
Journalize, Record, and Post Cash Payments Transactions and Prepare a Schedule of Accounts Payable
Explain and Journalize Transactions for a Perpetual Inventory System

3. Learning Objective 1
Explain and Journalize Purchases Transactions, Including Freight

4. Purchases
The account that records the cost of merchandise bought for resale
Has a debit balance
Is classified as a cost
Represents all costs directly related to bringing merchandise into the store for resale to customers

5. Purchase $4,000 worth of Barbie dolls on account from Mattel Manufacturing on July 6
Figure 10.1 Purchased Merchandise on Account

6. Purchases Returns and Allowances
Chou received several defective dolls and Mattel issued a credit memorandum for $500 reduction from invoice

7. Purchases Returns and Allowances
The account that records a decrease to a buyer’s cost
The opposite is a sales return and allowance
Is a contra-cost account
Figure 10.2 Credit Memorandum Received

8. Purchases Discount
Mattel offers a 2% cash discount if the invoice is paid within 10 days.

9. Purchases Discount
A cash discount if the invoice is paid within a certain number of days
The opposite is a sales discount
Is a contra-cost account
Figure 10.3 Purchase Discount Journalized

10. Net Purchases
After the journal entry is posted and recorded to Mattel, the result will show that Chou saved $70 and reduced what he owed to Mattel. The actual—or net—cost of his purchase is $3,430, calculated as follows:

11. Purchases discounts are not taken on freight
F.O.B. shipping point
Buyer pays shipping charges
Legal title passes to buyer when goods are shipped
Purchases discounts are not taken on freight

12. Freight F.O.B. destination Seller pays shipping charges
Legal title passes to buyer when goods reach their destination

13. Learning Objective 2
Journalize and Record Transactions to the Accounts Payable Subsidiary Ledger and Post to the General Ledger Along with a Debit Memorandum

14. Recording and Posting Purchases Transactions
Step 1: Prepare a multi-part Purchase Requisition
Copy sent to purchasing
Copy sent to accounting
Copy kept in the department making the request

15. Recording and Posting Purchases Transactions
Step 2: Purchasing Department Prepares a Purchase Order
Figure 10.4 Purchase Order

16. Recording and Posting Purchases Transactions
Step 3: Sales Invoice Prepared by seller
Figure 10.5 Sales Invoice

17. Recording and Posting Purchases Transactions
Step 4: Receiving the Goods and completing a receiving report
Receiving report verifies the exact merchandise was received in good condition
A company does not record this purchase until the invoice is approved for recording and payment

18. Recording and Posting Purchases Transactions
Step 5: Verifying the Numbers Before the invoice is approved for recording and payment
Figure 10.6 Invoice Approval Form

19. Introduction to Subsidiary Ledgers and Debit Memorandum
Let’s look closer at some transactions

20. April 3 Purchased merchandise on account $5,000 and freight $50 from Abby Blake Co.; terms 2/10, n/60.
Figure 10.7 Merchandise Purchase, Plus Freight Cost

21. Accounts Payable Subsidiary Ledger
It listed vendors owed money from purchases on account
The normal balance is a credit
Accounts Payable is the controlling account
The sum of the individual amount owed should equal the balance in Accounts Payable

22. Partial General Ledger
Figure 10.8 Partial General Ledger of Art’s Wholesale Clothing Company and Accounts Payable Subsidiary Ledger

23. General and Subsidiary Ledger

24. April 3 Transaction Post and Record
Figure Posting and Recording the April 3 Transaction

25. Debit Memorandum A piece of paper issued by a customer to a seller
Figure Debit Memorandum

26. Debit Memorandum
Figure Debit Memorandum Journalized and Posted

27. Journalizing and Posting the Debit Memo

28. Learning Objective 3
Journalize, Record, and Post Cash Payments Transactions and Prepare a Schedule of Accounts Payable

29. The Following Cash Payment Transactions Occur in April

30. A Closer Look at how the April 12 Transaction Would be Journalized
Figure Journalizing the April 12 Transaction

31. The Complete Set of Cash Payments Transactions Journalized for the Month
Figure Cash Payments Transactions Journalized for the Month and Posting to the General Journal

32. Figure Cash Payments Transactions Journalized for the Month and Posting to the General Journal (cont.)

33. The Partial Set of Cash Payments Transactions Posted for the Month

34. Schedule of Accounts Payable
Proof that the sum of the accounts payable subsidiary ledger is equal to the controlling account
Only creditors owed a balance appear in the schedule
If it doesn’t, the journalizing, posting, and recording must be checked

35. Schedule of Accounts Payable
At the end of the month, the total owed ($7,130) in Accounts Payable, should equal the sum owed the individual creditors that are listed on the schedule of accounts payable.
Figure Schedule of Accounts Payable

36. Explain and Journalize Transactions for a Perpetual Inventory System
Learning Objective 4
Explain and Journalize Transactions for a Perpetual Inventory System

37. Perpetual Inventory System
An inventory system that continually monitors its levels of inventory
Merchandise inventory comes from suppliers to sell to the customer
Cost of goods sold is the total cost of merchandise inventory brought into the store and sold

38. Gross Profit on Sales Profit before operating expenses Is calculated
Sales Revenue
- Cost of Goods Sold
Gross Profit on Sales
Figure Calculating Gross Profit on Sales

39. Net Income or Net Loss
Figure Introduction to Perpetual Inventory for a Merchandise Company

40. Perpetual Inventory System
Matches revenues and costs
Tracks what it costs to make the sale (cost of goods sold)
Helps control stocks of inventory as well as lost or stolen goods
Figure Matching Revenues and Costs

41. Recording Merchandise Transactions From the Buyer’s Position
Merchandise Inventory account is increased when merchandise inventory comes into the stores from suppliers
Each order is documented by an invoice
This is the cost of bringing the merchandise into the store
It is not the price at which the merchandise will be sold to customers

42. Recording Merchandise Transactions From the Buyer’s Position
On July 9, Wal-Mart bought flat-screen TVs from Sony Corp. for $7,000 with terms 2/10, n/30
Figure Purchase of Inventory on Account

43. Recording Merchandise Transactions From the Buyer’s Position
Not all purchases will go to Merchandise Inventory
Supplies, equipment, and so forth that are not for resale
These amounts will be debited to the specific account

44. Recording Merchandise Transactions From the Buyer’s Position
For example, if Wal-Mart bought $5,000 of shelving equipment on account for its store
Figure Purchase of Equipment on Account

45. Recording Purchases, Returns, and Allowances
Wal-Mart noticed a damaged TV and issues a debit memorandum
This document notifies Sony that Wal-Mart is reducing what is owed
Figure Recording a Debit Memorandum

46. Recording Purchase Discounts
Wal-Mart pays Sony within the first 10 days
The purchase discount will be recorded as a reduction to the cost of merchandise inventory
Figure Recording a Purchase Discount

47. Recording Cost of Freight
The cost of freight ($300) is to be paid by Wal-Mart
Figure Recording Cost of Freight

48. Recording Merchandise Transactions From the Seller’s Position
Sales revenues are earned when the goods are transferred to the buyer
Earned revenue can be for cash and/or credit
Example of the sale of a TV for $950 on credit

49. Record Sales Returns and Allowances
We will have two entries, one to record the sale and one to show a new cost and less inventory on hand
Figure 10.24
Recording Sales and Cost of Goods Sold

50. Record Sales Returns and Allowances
A customer returned a $950 TV
Two entries:
The first entry records the return at the original selling price using the contra-revenue account Sales Returns and Allowances
The second entry records putting the inventory back in Wal-Mart’s books at cost and reducing its Cost of Goods Sold

51. Record Sales Returns and Allowances
Figure Return of Goods

52. Record Sales Discounts
A customer gets a 2% discount for paying early
Figure Recording Sales Discount

53. Now let’s summarize all the entries for both the buyer and the seller
The Buyer The Seller
Figure Entries for Both the Buyer and the Seller

54. Summary of the chapter
Purchases are merchandise for resale. It is a cost.
Purchases Returns and Allowances and Purchases Discount are contra-costs.
F.O.B. shipping point means that the purchaser of the goods is responsible for covering the shipping costs.
If the terms were F.O.B. destination, the seller would be responsible for covering the shipping costs until the goods reached the purchaser’s destination.
Purchases discounts are not taken on freight.

55. Summary of the chapter
The steps for buying merchandise from a company may include the following:
The requesting department prepares a purchase requisition.
The purchasing department prepares a purchase order.
Seller receives the order and prepares a sales invoice (a purchase invoice from the buyer).
Buyer receives the goods and prepares a receiving report.
Accounting department verifies and approves the invoice for payment.
The general journal records the buying of merchandise or other items on account.

56. Summary of the chapter
The accounts payable subsidiary ledger, organized in alphabetical order, is not in the same book as Accounts Payable, the controlling account in the general ledger.
At the end of the month the total of all creditors’ ending balances in the accounts payable subsidiary ledger should equal the ending balance in Accounts Payable, the controlling account in the general ledger.

57. Summary of the chapter
A debit memorandum (issued by the buyer) indicates that the amount owed from a previous purchase is being reduced because some goods were defective or not up to a specific standard and thus were returned or an allowance requested.
On receiving the debit memorandum, the seller will issue a credit memorandum.
All payments of cash (check) are recorded in the general journal.

58. Summary of the chapter
At the end of the month, the schedule of accounts payable, a list of ending amounts owed individual creditors, should equal the ending balance in Accounts Payable, the controlling account in the general ledger.
In a perpetual inventory system, when a sale is recognized, the cost of goods sold and merchandise inventory must be updated.
Purchases discounts on returns are reflected in the Merchandise Inventory account for a perpetual inventory system.

59. Questions?

60. Figure 10.9 General Journal Before Posting and Recording

61. Figure 10.28 Comparison of Perpetual and Periodic Systems

62. Figure 10. 29 General Journal Showing Purchases from Cortland
Figure General Journal Showing Purchases from Cortland.com, Harold.com, and Nickel.com

63. Figure 10. 30 General Journal Showing Purchases from Eve. com, Jack
Figure General Journal Showing Purchases from Eve.com, Jack.com, and Noel.com