Accounting for Purchases and Cash Payments

Buy goods from supplier Sell merchandise to consumer

Things to buy: Selling Supplies – shopping bags – cash register tapes – sales slips Office Supplies Equipment merchandise – Debit Purchases

Four Stages of Purchasing: 1.request: – needed item (purchase requisition) 2.order : – from supplier (purchase order) 3.verify – items received (packing slip) 4.journalize – transaction (invoice)

10 Steps of Purchasing

Requesting Department: 1. fills out purchase requisition – with manager approval – sends form to Purchasing department

Purchasing Department 2. writes purchase order – sends this written offer to buy certain items to the supplier – copy to accounting and requesting department

Receiving Department 3. receives goods – verifies quantity (and quality) of against packing slip

4. sends copy of packing slip to accounting department – noting any missing, damaged or returned items

Accounting Department 5. receives invoice from supplier (date stamp) 6. Invoice is verified against P.O. and packing slip 7. Processing stamp is completed* on invoice (pay date, discount, pay amount, check number*) 8. Transaction is journalized 9. Transaction is posted 10. Invoice is filed in tickler file by due date.

Purchases Discounts cash discount offered by suppliers to encourage early payment

credit terms of 3/15 n/45 if paid within 15 days then receive 3% discount, otherwise full payment within 45 days

discount period: time within which payment must be made in order to take discount Disc. Amt = Purchases x Disc. Rate

The Purchases Account account in which the cost of merchandise bought is recorded

Purchases: temporary account classified as Cost of Merchandise normal debit balance cost of merchandise sold will offset revenue generated from sale (decrease owners equity)

Accounts Payable Subsidiary Ledger used when business has many credit suppliers contains an account for each creditor individual accounts are summarized in controlling account called Accounts Payable balance in controlling account must equal total of all accounts in subsidiary ledger after posting A/P subsidiary ledger form is same as A/R form Name and Address Debit and Credit columns One balance column

Bought Merchandise on account: Debit Purchases Credit Accounts Payable (control and subsidiary)

Bought Equipment on account: Debit Equipment Credit Accounts Payable (control and subsidiary)

Tickler File Accordion file with section for each day of month. Invoices are filed by due date.

Purchases Returns and Allowances purchase return return merchandise for full credit purchase allowance price reduction for less than satisfactory merchandise

debit memorandum used to notify suppliers of a return or request for allowance (debit A/P) Return Merchandise previously purchases on account: Debit Accounts Payable (control and subsidiary) Credit Purchases

Returns and Allowances Return Equipment previously purchases on account: Debit Accounts Payable (control and subsidiary) Credit Equipment

Cash Payments on account purchase (merchandise or other asset) payroll expense

Cash Purchase of Insurance: pay for insurance before you use it insurance has value to protect against losses that you cannot afford Prepaid Insurance is an Asset (normal debit balance)

Purchase 12 mo. of insurance for $1200 Prepaid Insurance 1200 Cash in Bank 1200 Each month we use 1/12 of the insurance. Insurance is used as times passes by (not when you have a loss). expense what we use (this will lower the balance in Prepaid Insurance the unused portion still has value and remains an asset in Prepaid Insurance Insurance Expense 100 Prepaid Insurance 100

Shipping and Handling: FOB = Free on Board FOB Destination = Supplier pays shipping (part of the cost of product) FOB Shipping Point = Buyer pays shipping (extra cost of getting product into our building Debit to account called Transportation In

Bank Card Fee Expense Fee charged by bank for processing business’ bankcard transactions Expense account (normal debit balance)