1. College Accounting, by Heintz and Parry Chapter 12: Accounting for Purchases and Cash Payments

2. Eddie found out after working at the store for two weeks that Nick had a pile of unpaid purchase invoices on his desk from when he bought the store’s inventory of CDs. Eddie had to discuss with him the procedures that should take place related to the purchasing function (writing up purchase orders, preparing a receiving report to make sure that everything was received before invoices get paid, etc.). Eddie told Nick that they needed a purchases account just for merchandise bought. Eddie also set up a purchases journal to be used for any purchase of merchandise on account. Question: What accounts should always get debited and credited in the purchases journal?

3. Answer: Purchases gets the debit and Accounts Payable gets credited. Below is the Purchases Journal for March. Notice there is one column for the debit and credit, since they are the same number. The total is posted to both accounts, as shown by the two posting references in parentheses. The P.R. column checkmarks show that items were posted to another subsidiary ledger, the Accounts Payable Ledger. Purchases Journal Page 1 Date Invoice From Whom Purchased P. R. Purchases Debit Number Acc. Pay. Credit 2000 Mar. 1 129 Missing Records 1,754.00 2 386 Round Flat Records 2,876.00 4 492 Guinness Book of Records 2,265.00 6,895.00 (511) (211)

4. The Accounts Payable Ledger is very similar to the Accounts Receivable Ledger, except that the balance column should be a credit (or zero). Note the posting reference from The Purchases Journal page 1. Name Missing Records, 345 Bobby Lane, Detroit, MI 43587 Date Item P.R. Debit Credit Balance 2000 Mar. 1 P1 1,754.00 1,754.00

5. On March 10, right before the grand opening, Eddie saw that all six copies of the Surfer Duds’ hot new CD, “Wave Good-Bye,” were missing covers or liner notes in the jewel case (maybe that’s why the company was called “Missing Records”). This meant they all had to be returned. This entry to a new account, Purchases Returns and Allowances (a contra acoount to Purchases), had to go into the General Journal like this: Date Description P. R. Debit Credit 2000 Mar. 10 Accounts Payable-Missing Record 48.00 Purchases Returns and Allow. 48.00 nDetails about this topicnSupporting information and examplesnHow it relates to your audiencenDetails about this topicnSupporting information and examplesnHow it relates to your audience

6. The other special journal used at the store is a Cash Payments Journal, used whenever you are spending (crediting) cash. The monthly rent payment went into the journal like this: Cash Payments Journal Page 1 Date Check Account Debited P. R. General Debit Number 2000 Mar. 2 100 Rent Expense 450.00 Accts. Pay. Purchases Pur. Disct. Cash Debit Debit Credit Credit 450.00

7. The next cash payment in March was for the CDs purchased from Missing Records ($1,754 - $48 for the returned CDs = $1,706 owed). However, Eddie had noticed the following line on the invoice: Terms: 2/10, n/30 Eddie knew from accounting class what this meant: the store could get a 2% cash discount if they paid within 10 days (or they could pay the net or full amount in 30 days). A cash discount is different from a trade discount. Missing Records also gave the store a 10% trade discount for buying in large quantities. However, that discount was subtracted before Eddie journalized the original purchase, because trade discounts are certain while cash discounts might not be taken. Question: Is it a good deal for them to pay in 10 days and take the cash discount?

8. Answer: Yes! This works out to be the equivalent of putting money in a bank account and drawing 37% interest! Thus, Eddie convinced Nick to pay on March 11 (10 days after the March 1 invoice date), so that they would get a $34.12 discount ($1706 purchase price X 2%) and only have to pay $1671.88 ($1706 - $34.12 discount). Since the full $1706 needs to come out of accounts payable (to zero out that liability), but only $1671.88 will come out of cash, a new account called Purchases Discounts is used. Like Purchases Returns and Allowances, it is a contra account to Purchases. nDetails about this topicnSupporting information and examplesnHow it relates to your audiencenDetails about this topicnSupporting information and examplesnHow it relates to your audience

9. Here is the entry for the payment to Missing Records: Cash Payments Journal Page 1 Date Check Account Debited P. R. General Debit Number 2000 Mar. 2 100 Rent Expense 450.00 11 101 Missing Records Accts. Pay. Purchases Purch. Disct. Cash Debit Debit Credit Credit 450.00 1,706.00 34.12 1,671.88

10. There was one other item of interest on the invoice from Missing Records. Eddie had noticed that it read: Freight terms: FOB Shipping Point Eddie also knew from his accounting class what Free On Board Shipping Point meant: that the store would have to pay the freight charges for shipping the merchandise from Missing Records to the store. When the terms are FOB Destination, it means that the seller pays the freight charges. Sure enough, a $65 invoice arrived from Ball Carriers on March 16th. When he paid it, Eddie debited the new account Freight-In, which accumulates such charges (the account is added to Purchases when an Income Statement is done).

11. The entry for the payment to Ball Carriers was the last one in March, so columns were totaled, proved, ruled, and posted. The P.R. column is used for the account numbers of general credits and the checkmarks for items posted to the Accounts Payable Ledger. Cash Payments Journal Page 1 Date Check Account Debited P. R. General Debit Number 2000 Mar. 2 100 Rent Expense 545 450.00 11 101 Missing Records 16 102 Freight-In 523 65.00 515.00 Accts. Pay. Purchases Purch. Disct. Cash Debit Debit Credit Credit 450.00 1,706.00 34.12 1,671.88 65.00 1,706.00 34.12 2,186.88 (211) (521) (521.1) (111)

12. The Accounts Payable Ledger for Missing Records would look like this after all entries were posted. Note the posting reference from the Cash Receipts Journal page 1. Name Missing Records, 345 Bobby Lane, Detroit, MI 43587 Date Item P.R. Debit Credit Balance 2000 Mar. 1 P1 1,754.00 1,754.00 10 J1 48.00 1,706.00 11 CR1 1,706.00 -----------

13. At this point, Eddie did a Schedule of Accounts Payable (a listing of all balances in the accounts payable ledger) to see if the accounts payable account in the general ledger agreed with this total. It did! The CD Side of Town Schedule of Accounts Payable March 31, 2000 Round Flat Records $2,876 Guinness Book of Records 2,265 $5,141