Ch. 15, Sec. 2: Analyzing and Recording Purchases on Account Accounting II Ms. Alltucker

Learning Objectives What you will learn: Why it’s important: How the accounts payable subsidiary ledger is used How to record the purchase of merchandise on account How to record the purchase of other assets on account How to record purchases returns and allowances transactions How to post to creditor accounts in the accounts payable subsidiary ledger Why it’s important: Purchasing is a critical, ongoing process in a merchandising business; therefore, it is essential that you learn how to record the different kinds of purchases transactions

Analyzing Purchases of Assets on Account Accounts Payable Subsidiary Ledger General Ledger Accounts Receivable—controlling account $4,500 Accounts Receivable Subsidiary Ledger Individual Accounts Within Ledger: Sandals Etc. $ 900 Shoe Warehouse 2,100 Shoe Wholesale Inc. 1,000 Store Supply Shop 500 Total $4,500 Controlling account balance equals total of accounts in subsidiary ledger.

Recording the Purchase of Merchandise on Account Business Transaction ANALYSIS Identify 1. The accounts affected are Purchases, Accounts Payable (controlling), and Accounts Payable—Pro Runner Warehouse (subsidiary). On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

Recording the Purchase of Merchandise on Account Business Transaction (cont'd.) ANALYSIS Classify 2. Purchases is a cost of merchandise account. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are liability accounts. On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

Recording the Purchase of Merchandise on Account Business Transaction (cont'd.) ANALYSIS + / – 3. Purchases is increased by $2,300. This is the cost of merchandise purchased. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are increased by $2,300. On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

Recording the Purchase of Merchandise on Account Business Transaction (cont'd.) DEBIT-CREDIT RULE 4. Increases to cost of merchandise accounts are recorded as debits. Debit Purchases for $2,300. 5. Increases to liability accounts are recorded as credits. Credit Accounts Payable (controlling) for $2,300. Also credit Accounts Payable—Pro Runner Warehouse (subsidiary) for $2,300. On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

Recording the Purchase of Merchandise on Account T ACCOUNTS 6. Accounts Purchases Payable Business Transaction (cont'd.) Debit + 2,300 Credit – Accounts Receivable Subsidiary Ledger Pro Runner Warehouse On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

Recording the Purchase of Merchandise on Account Business Transaction (cont'd.) JOURNAL ENTRY 7. On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

Recording the Purchase of Merchandise on Account When the entry is recorded: Diagonal line is entered in the Posting Reference column to indicate that the credit amount is posted in two places 1st—Accounts Payable controlling account in the general ledger 2nd—post to accounts payable subsidiary ledger

Purchases Returns and Allowances Purchase return: business returns merchandise to the supplier for full credit Purchase allowance: occurs when a business keeps less than satisfactory merchandise and pay a reduced price Debit Memorandum: used to notify suppliers of a return or to request an allowance Always results in a decrease to Accounts Payable controlling account and subsidiary ledger

Purchases Returns and Allowances Contra cost of merchandise Reduces the balance of the related account, purchases Credit + Increase Side Normal Balance Debit – Decrease Side Purchases Returns and Allowances

Recording a Purchases Returns and Allowances Transactions Business Transaction ANALYSIS Identify 1. The accounts affected are Accounts Payable (controlling), Accounts Payable— FastLane Athletics (subsidiary), and Purchases Returns and Allowances. On December 16, On Your Mark issued Debit Memo-randum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.

Recording a Purchase Returns and Allowances Transactions Business Transaction (cont'd.) ANALYSIS Classify 2. Accounts Payable (controlling) and Accounts Payable— FastLane Athletics (subsidiary) are liability accounts. Purchases Returns and Allowances is a contra cost of merchandising account. On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.

Recording a Purchase Returns and Allowances Transaction Business Transaction (cont'd.) ANALYSIS + / – 3. Accounts Payable (controlling) and Accounts Payable— FasLane Athletics (subsidiary) are decreased by $200. Purchases Returns and Allowances is increased by $200. On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.

Recording a Purchase Returns and Allowances Transaction Business Transaction (cont'd.) DEBIT-CREDIT RULE 4. Decreases to liability accounts are recorded as debits. Debit Accounts Payable (controlling) for $200. Also debit Accounts Payable—FastLane Athletics (subsidiary) for $200. 5. Increases to contra cost of merchandise accounts are recorded as credits. Credit Purchases Returns and Allowances for $200. On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.

Recording a Purchase Returns and Allowances Transaction T ACCOUNTS 6. Accounts Purchases Returns Payable and Allowances Business Transaction (cont'd.) Debit – 200 Credit + Accounts Receivable Subsidiary Ledger FastLane Athletics On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.

Recording a Purchase Returns and Allowances Transaction Business Transaction (cont'd.) JOURNAL ENTRY 7. On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.

Posting to the Accounts Payable Subsidiary Ledger Refer to figure 15-6 on page 399 in your textbook Don’t forget about the diagonal line in the general journal and posting the check mark and the post reference in the general journal

Thinking Critically When and why would a business use an accounts payable subsidiary ledger? When merchandise purchased by a business is unacceptable, what can the business do to recover the cost of merchandise?