Accounting for a Merchandising Business: Purchases and Cash Payments Chapter 7 © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Learning Objectives Describe the procedures and forms used in purchasing merchandise. Record credit purchases in a general journal and a purchases journal, and post to the accounts payable ledger and the general ledger. Learning objectives appear in the text margins at the start of the section where the corresponding content is taught. Also, the chapter summary is organized by learning objective to aid student mastery of these objectives. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Learning Objectives Record purchases returns and allowances. Record purchases discounts. Record cash payments in a cash payments journal and post to the accounts payable ledger and the general ledger. Learning objectives appear in the text margins at the start of the section where the corresponding content is taught. Also, the chapter summary is organized by learning objective to aid student mastery of these objectives. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Learning Objectives Prepare a schedule of accounts payable. Record freight charges on incoming merchandise. Learning objectives appear in the text margins at the start of the section where the corresponding content is taught. Also, the chapter summary is organized by learning objective to aid student mastery of these objectives. © Paradigm Publishing, Inc.

Merchandising Activity A merchandising business earns its revenue by buying goods and then reselling the goods to customers. Goods that are to be sold to customers are called merchandise. Another name for a merchandising business is a trading business. Wholesale buss © Paradigm Publishing, Inc.

Merchandising Activity Merchandising can take place at two levels--retail and wholesale. A retail business sells directly to consumers. A wholesale business purchases goods in bulk from manufacturers and then sells the goods to Retailers Other wholesalers Schools and other nonprofit institutions Directly to consumers Another name for a merchandising business is a trading business. © Paradigm Publishing, Inc.

Describe the procedures and forms used in purchasing merchandise Learning Objective 1 Describe the procedures and forms used in purchasing merchandise © Paradigm Publishing, Inc.

Purchasing Procedures Steps in Purchasing Procedures Step 1: Managers identify goods needed and request them by preparing a purchase requisition, which is sent to the purchasing department. Step 2: The purchasing department chooses the seller (vendor) and sends an order. © Paradigm Publishing, Inc.

Purchasing Procedures Steps in Purchasing Procedures Step 3: The seller receives the order and prepares an invoice (bill), which is shipped with the goods or a few days after the goods. Step 4: When the merchandise is received by the buyer, it is checked against the invoice and payment is approved. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Purchase Requisition A written request for goods to be purchased © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Purchase Order A written or online form sent from a buyer of goods to the seller that specifies the quantity and description of goods to be purchased. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Purchase Order © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Invoice A business document that shows Names and address of the buyer and the seller Date and terms of the sale Description of the goods Price of the goods and total owed Mode of transportation for delivery © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Invoice The same invoice serves as both a sales invoice and a purchase invoice Sales invoice to the seller Purchase invoice to the buyer © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Invoice © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Trade Discounts Percentage reductions from the list or catalog price of merchandise. Not recorded in the accounting records of the buyer or the seller. The buyer always records goods at their actual cost. The seller records items sold at their actual selling price. Sellers usually print catalogs that show the list price, or catalog price, of their merchandise. To permit for price changes without having to print new catalogs, many businesses offer trade discounts—percentage reductions from the list price of merchandise. Trade discounts are not recorded in the accounting records of the buyer or the seller. The buyer always records goods at their actual cost and the seller records items sold at their actual selling price. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Quick Check A seller offers merchandise with a list price of $550, subject to a trade discount of 25%. The purchaser will record the cost of merchandise purchased at $550. $563.75. $536.25. $412.50. $687.50. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Cash Discounts A discount offered to encourage prompt and early payment by a buyer. Recorded in the accounting records of both the seller and the buyer (unlike trade discounts). The seller refers to as sales discounts. The buyer refers to as purchase discounts. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Cash Discounts A common expression of a cash discount is 2/10, n/30. This means that a 2% discount can be taken from the invoice price of the merchandise if the invoice is paid within 10 days of the date of the invoice. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Quick Check A seller offers merchandise with a price of $650, subject to a cash discount of 3/10, n30. Assuming payment is received within the discount period, the purchaser will remit a check for $650. $669.50. $630.50. $455. $845. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Review Quiz 7-1 What is the net amount due on this invoice? Invoice Price Date of Invoice Terms Date Paid $1,400 June 10 2/10, n30 June 19 Answer: $1,372 Review Quiz 7-1 appears on page 286. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Review Quiz 7-1 What is the net amount due on this invoice? Invoice Price Date of Invoice Terms Date Paid $980 December 2 3/10, 2/20, n30 December 18 Answer: $960.40 Review Quiz 7-1 appears on page 286. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Review Quiz 7-1 What is the net amount due on this invoice? Invoice Price Date of Invoice Terms Date Paid $400 July 8 n30 August 7 Answer: $400 Review Quiz 7-1 appears on page 286. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Learning Objective 2 Record credit purchases in a general journal and a purchases journal, and post to the accounts payable ledger and the general ledger © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. The Purchases Account The sole purpose is to keep a record of the cost of merchandise purchased for resale during an accounting period Debited for the cost of merchandise purchased for resale Falls under the category of cost accounts Cost accounts are like expense accounts Both are presented on the income statement and enter into the calculation of net income © Paradigm Publishing, Inc.

Recording Purchases on Account in the General Journal Assume a company purchases $575 of merchandise from Key Suppliers on Nov. 2. The entry would be recorded as follows: +cost +liability © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Review Quiz 7-2 Record the following transactions in a general journal. Mar. 1 Purchased supplies for cash, $400. Review Quiz 7-2 appears on page 287. Mar. 1 Purchased supplies for cash, $400. Mar. 5 Purchased equipment on account from E & H Co., $900. Mar. 8 Purchased merchandise on account from C. Medlin Co., $1,200. Mar. 18 Purchased merchandise for cash, $300. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Review Quiz 7-2 Record the following transactions in a general journal. Mar. 5 Purchased equipment on account from E & H Co., $900. Review Quiz 7-2 appears on page 287. Mar. 1 Purchased supplies for cash, $400. Mar. 5 Purchased equipment on account from E & H Co., $900. Mar. 8 Purchased merchandise on account from C. Medlin Co., $1,200. Mar. 18 Purchased merchandise for cash, $300. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Review Quiz 7-2 Record the following transactions in a general journal. Mar. 8 Purchased merchandise on account from C. Medlin Co., $1,200 Review Quiz 7-2 appears on page 287. Mar. 1 Purchased supplies for cash, $400. Mar. 5 Purchased equipment on account from E & H Co., $900. Mar. 8 Purchased merchandise on account from C. Medlin Co., $1,200. Mar. 18 Purchased merchandise for cash, $300. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Review Quiz 7-2 Record the following transactions in a general journal. Mar. 18 Purchased merchandise for cash, $300. Review Quiz 7-2 appears on page 287. Mar. 1 Purchased supplies for cash, $400. Mar. 5 Purchased equipment on account from E & H Co., $900. Mar. 8 Purchased merchandise on account from C. Medlin Co., $1,200. Mar. 18 Purchased merchandise for cash, $300. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Special Journals Used to record transactions that are similar in nature Save time in recording specialized transactions Allow for a delegation of work because individual accountants can be assigned to specific journals Examples Purchase Journal Cash Payments Journal © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. The Purchases Journal A journal used to record only credit purchases Most purchases are made on credit and thus warrant a special journal. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Review Quiz 7-3 The one-column purchases journal Review Quiz 7-3 appears on pages 289-290. May 2 Purchased office supplies from Ace Suppliers, $200. May 8 Purchased office equipment from Ace Suppliers, $800. May 12 Purchased automobiles for resale from Tower Auction, $12,400. Invoice No. 48. May 18 Purchased a microcomputer for use in the office from King Co., $4,500. May 20 Purchased automobiles for resale from Tower Auction, $57,300. Invoice No. 49. May 28 Purchased automobiles for resale from Tower Auction, $60,000. Invoice No. 50. May 30 Purchased automobiles for resale from Burr Motors, $45,000. Invoice No. 51. May 30 Purchased a van for resale from Clyde Wright, $11,200. Invoice No. 52. Record these credit purchases using a one-column purchases journal and a two-column general journal. Total the purchases journal. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Review Quiz 7-3 The two-column general journal Review Quiz 7-3 appears on pages 289-290. May 2 Purchased office supplies from Ace Suppliers, $200. May 8 Purchased office equipment from Ace Suppliers, $800. May 12 Purchased automobiles for resale from Tower Auction, $12,400. Invoice No. 48. May 18 Purchased a microcomputer for use in the office from King Co., $4,500. May 20 Purchased automobiles for resale from Tower Auction, $57,300. Invoice No. 49. May 28 Purchased automobiles for resale from Tower Auction, $60,000. Invoice No. 50. May 30 Purchased automobiles for resale from Burr Motors, $45,000. Invoice No. 51. May 30 Purchased a van for resale from Clyde Wright, $11,200. Invoice No. 52. Record these credit purchases using a one-column purchases journal and a two-column general journal. Total the purchases journal. © Paradigm Publishing, Inc.

The Accounts Payable Subsidiary Ledger A separate ledger containing only one type of account is called a A subsidiary ledger containing only creditors’ accounts is called an subsidiary ledger. accounts payable ledger. © Paradigm Publishing, Inc.

The Accounts Payable Subsidiary Ledger © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Controlling Account An account in the general ledger that summarizes accounts in a related subsidiary ledger. The Accounts Payable account in the general ledger is said to control the accounts payable ledger. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Relationship Between the Accounts Payable Ledger and the Controlling Account in the General Ledger 1 2 3 5 4 © Paradigm Publishing, Inc.

Posting the Purchases Journal The purchases journal must be posted to both the subsidiary ledger and the general ledger. Individual credits must be posted to the creditor’s accounts in the accounts payable ledger. Posting is usually done on a daily basis, to keep the ledger current. © Paradigm Publishing, Inc.

Posting the Purchases Journal The total of the money column must be posted to the general ledger as a Debit to the Purchases account Credit to the Accounts Payable account Since this total represents total credit purchases for the month, it is posted at the end of the month. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Quick Check The purchases journal is used for selling merchandise on account. selling merchandise for cash. purchasing merchandise for cash. purchasing merchandise on account. purchasing office supplies and equipment on account. © Paradigm Publishing, Inc.

Posting to the Accounts Payable Ledger Step 1. Enter the journal entry’s date. Step 2. Enter the amount of the journal entry in the Credit column. Step 3. Calculate the balance of the account and enter it in the Balance column. © Paradigm Publishing, Inc.

Posting to the Accounts Payable Ledger Step 4. Enter the purchase journal page in the P.R. column. Step 5. Enter a check mark in the P.R. column of the purchases journal. © Paradigm Publishing, Inc.

Posting to the Accounts Payable Ledger Step 1:Enter the date of the journal entry in the Date column of Key Suppliers’ account. Step 2:Enter the amount of the journal entry, $575, in the Credit column of Key Suppliers’ account. Step 3:Calculate the balance of Key Suppliers’ account, and enter it in the Balance column of the account. Since there was no previous balance, the balance of Key Suppliers’ account is $575. Had there been a previous balance, the current posting of $575 would have been added to that balance to obtain a new balance. Step 4:Enter P1 (purchases journal, page 1) in the P.R. column of Key Suppliers’ account. Step 5:Enter a check mark in the P.R. column of the purchases journal. The check mark indicates that an individual posting has been made to the accounts payable ledger. A check mark is used because accounts in the subsidiary ledger are not assigned numbers. © Paradigm Publishing, Inc.

Posting to the General Ledger Step 1. Enter the last day of the month. Step 2. Enter the total of the money column. Step 3. Calculate the new balances. Step 4. Enter the posting references. Step 5. Enter the account numbers in the purchases journal. © Paradigm Publishing, Inc.

Posting to the General Ledger Step 1: Enter the last day of the month, November 30, in the Date columns of the Purchases and Accounts Payable accounts. Step 2: Enter the total of the money column, $17,190, on the debit side of the Purchases account and the credit side of the Accounts Payable account. Step 3: Calculate the new balance of the accounts by adding the current posting to the previous balance. Step 4: Enter P1 in the P.R. columns of the accounts. Step 5: Enter the numbers of the accounts, 211 and 511, directly below the column total in the purchases journal to indicate that the amounts have been posted. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Quick Check Posting an entry from the purchases journal involves debiting the creditor’s account in the accounts payable ledger. crediting the creditor’s account in the accounts payable ledger. debiting the Cash account in the general ledger. crediting the Cash account in the general ledger. debiting the Purchases Returns and Allowances account in the general ledger. © Paradigm Publishing, Inc.

Merchandise Returns and Allowances In merchandising, a return occurs when a customer returns to the seller part or all of the items purchased. An allowance occurs when the seller grants a customer a price reduction on items due to some factor, such as damaged or defective goods. © Paradigm Publishing, Inc.

Merchandise Returns and Allowances The seller refers to merchandise returns or allowances as sales returns and allowances. The purchaser refers to merchandise returns or allowances as purchase returns and allowances. © Paradigm Publishing, Inc.

Purchases Returns and Allowances Account An account in which the amount of returns and allowances is usually recorded Contra to the Purchases account Has a credit balance, which is opposite the debit balance of the Purchases account © Paradigm Publishing, Inc.

Purchases Returns and Allowances Account © Paradigm Publishing, Inc.

Record purchases returns and allowances Learning Objective 3 Record purchases returns and allowances © Paradigm Publishing, Inc.

Recording Purchases Returns and Allowances A debit memorandum is the buyer’s written request to the seller for credit for a merchandise return or allowance. When a return or allowance is made, part or all of the balance in the creditor’s account will not be paid. The buyer debits (decreases) the creditor’s account for the amount of the return or allowance. © Paradigm Publishing, Inc.

Recording Purchases Returns and Allowances © Paradigm Publishing, Inc.

Purchase Return Journal Entry and Dual Posting © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Review Quiz 7-4 The general journal, showing the recorded transactions Review Quiz 7-4 appears on page 297. The following selected transactions were completed by Scott Hayes, owner of the Hayes Company, during June 20X9. Record each transaction in a general journal. Jun. 5 Purchased office supplies on account from B. Spence Suppliers, $300. Jun. 9 Purchased merchandise for cash, $800. Jun. 15 Purchased merchandise on account from Wilks Co., $1,200. Jun. 16 Returned $30 of office supplies for credit to B. Spence Suppliers. Jun. 21 Returned $200 of merchandise for credit to Wilks Co. © Paradigm Publishing, Inc.

Record purchase discounts Learning Objective 4 Record purchase discounts © Paradigm Publishing, Inc.

The Purchases Discounts Account A contra purchases account used to record discounts received for prompt payment of merchandise invoices. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Example Recording a Cash Payment Within the Discount Period Assume an invoice for $575, subject to a cash discount of 2/10, n/30, is paid within the discount period on Nov. 12. The following entry would be prepared. -liability +contra purchases -asset © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Learning Objective 5 Record cash payments in a cash payments journal and post to the accounts payable ledger and the general ledger © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Cash Payments Journal A special journal used for recording all disbursements of cash Designed to meet the needs of the business using it Common money columns include Cash Cr. column Purchases Discounts Cr. column Account Payable Dr. column General Dr. column © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Cash Payments Journal © Paradigm Publishing, Inc.

Posting the Cash Payments Journal Follows some of the same procedures used for posting the purchases journal Three different types of postings made Posting of individual debits to creditors’ accounts in the accounts payable ledger. Usually done on a daily basis. © Paradigm Publishing, Inc.

Posting the Cash Payments Journal Posting of individual debits to appropriate general ledger accounts from the General Debit column. Can be posted on a daily, weekly, or monthly basis. Posting of special columns totals to the appropriate general ledger accounts. Summary posting is done at the end of the month. © Paradigm Publishing, Inc.

Posting the Cash Payments Journal Amounts in the Accounts Payable Debit column are posted separately to the creditors’ accounts in the accounts payable ledger. A check mark is entered in the P.R. column of the cash payments journal to indicate an individual posting. © Paradigm Publishing, Inc.

Posting the Cash Payments Journal Amounts in the General Debit column are posted individually to the general ledger accounts identified in the Account Debited column. Account numbers of those accounts are entered in the P.R. column of the cash payments journal. The check mark at the bottom of the General Debit column indicates that the column total is not posted. © Paradigm Publishing, Inc.

Posting the Cash Payments Journal The totals of special columns are posted to the general ledger accounts identified in the headings of the columns. Account numbers are entered under the column totals to indicate that a summary posting has been made. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Quick Check Posting an entry from the cash payments journal involves debiting the creditor’s account in the accounts payable ledger. crediting the creditor’s account in the accounts payable ledger. debiting the Cash account in the accounts payable ledger. crediting the Cash account in the accounts payable ledger. crediting the creditor’s accounts in the general ledger. © Paradigm Publishing, Inc.

Prepare a schedule of accounts payable Learning Objective 6 Prepare a schedule of accounts payable © Paradigm Publishing, Inc.

Proving the Accounts Payable Ledger A schedule of accounts payable is a listing of the balances in the accounts payable ledger. The total of this schedule should agree with the accounts payable account in the general ledger, the controlling account. © Paradigm Publishing, Inc.

Proving the Accounts Payable Ledger © Paradigm Publishing, Inc.

Proving the Accounts Payable Ledger Only accounts with open balances are included on the schedule of account payable. © Paradigm Publishing, Inc.

Record freight charges on incoming merchandise Learning Objective 7 Record freight charges on incoming merchandise © Paradigm Publishing, Inc.

Freight Charges on Incoming Merchandise FOB Shipping Point — the buyer is responsible for all freight costs while the goods are in transit. FOB Destination — the seller is responsible for all freight costs while the goods are in transit. If the terms are FOB shipping point, the purchaser debits the cost of freight to the Freight In account. © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Example The following journal entry indicates the $30 freight charge incurred by the purchaser under the freight terms of FOB shipping point. Merchandise costing $700 was purchased from Pantech Corp. on account on Dec. 2. General Journal Date Account Title P.R. Debit Credit Dec. 2 Purchases 700 Freight In 30 Accounts Payable-Pantech Corp. 730 © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Summing Up Notice how the Freight In, Purchases Returns and Allowances, and Purchases Discounts accounts affect the Purchases account: Purchases - Purchases Discount Purchases Returns and Allowances + Freight In Net Purchases © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Focus on Ethics Refer to the Focus on Ethics box on page 307 in your text. How could top management have prevented this type of inventory fraud? © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Joining the Pieces Procedures for Posting the Purchases Journal © Paradigm Publishing, Inc.

© Paradigm Publishing, Inc. Joining the Pieces Procedures for Posting the Cash Payments Journal © Paradigm Publishing, Inc.