1 McGraw-Hill Ryerson College Accounting First Canadian Edition Price Haddock Brock Hahn Reed

ACCOUNTING FOR MERCHANDISE PURCHASES, ACCOUNTS PAYABLE AND CASH PAYMENTS CHAPTER 7 2

Type of Journal SalesTo record sales of merchandise on credit Purchases Cash receipts Cash payments General To record purchases of merchandise on credit To record cash received from all sources Purpose To record all disbursements of cash To record all transactions that are not recorded in another special journal and all adjusting and closing entries 3

Type of Ledger GeneralAssets, liabilities, owner’s equity, revenue, and expense accounts Accounts receivable Accounts payable Content Accounts for creditors Accounts for credit customers 4

ASSETSOWNER’S EQUITY 1001 Cash3001 Carolyn Wells, Capital 1005 Petty Cash Fund3002 Carolyn Wells, Drawing 1009 Notes Receivable3099 Income Summary 1011 Accounts ReceivableREVENUE 1012 Allowance for Doubtful Accounts4001 Sales 1016 Interest Receivable4051 Sales Returns and Allowances 1021 Merchandise Inventory4091 Interest Revenue 1023 Prepaid GST4093 Miscellaneous Revenue 1024 GST PayableEXPENSES 1026 Prepaid Insurance5001 Cost of Goods Sold 1027 Prepaid Interest5011 Sales Salaries Expense 1029 Supplies5014 Advertising Expense 1031 Store Equipment5017 Supplies Expense 1032 Accumulated Amortization-Store Equipment5020 Cash Over or Short 1041 Office Equipment5026 Amortization Expense - Store Equipment 1042 Accumulated Amortization-Office Equipment 5035 Rent Expense LIABILITIES 5036 Insurance Expense 2001 Notes Payable-Trade5038 Utilities Expense 2002 Notes Payable –Bank 5041 Office Sales Expense 2005 Accounts Payable5044 Payroll Taxes Expense 2016 Interest Payable5053 Telephone Expense 2021 Canada Pension Plan Payable5056 Uncollectible Accounts Exp Employee Benefits Payable5059 Amortization Exp. – Office Equipment 2023 Employee Income Taxes Payable5091 Interest Expense 2025 Employment Insurance Payable5093 Miscellaneous Expense 2029 Salaries Payable 2031 Sales Tax Payable FASHION WORLD Chart of Accounts 5

FASHION WORLD 5001 S. Portland Hamilton, ON PURCHASE REQUISITION QUANTITY DESCRIPTION 100 Designer beaded jeans No. FC-736 APPROVED BY REQUESTED BY FOR PURCHASING DEPT. USE ONLY PURCHASE ORDER NO ISSUED TO : LaShawn’s Fashion Design DATE JUNE 6, 20X N. Michigan Quebec, PQ DEPARTMENT Juniors DATE OF REQUEST June 4, 20X2 ADVISE ON DELIVERY Mr. Johnson DATE REQUIRED J uly 6, 20X2 6

FASHION WORLD 5001 S. Portland Hamilton, ON PURCHASE ORDER TO: LaShawn’s Fashion Designs DATE : June 6, 20X N. Michigan ORDER NO. : 8001 Quebec, PQ SHIPPED BY : 2/10, n/30 QUANTITY DESCRIPTION UNIT PRICE TOTAL 100 Designer beaded jeans 40004,

LaShawn’s Fashion Designs 1010 N. Michigan Montreal, PQ SOLD Fashion World DATE: June 30,20X2 TO: 5001 S. Portland ORDER NO.: 8001 Hamilton, ON SHIPPED BY: North Freight Line TERMS: 2/10, n/30 No YOUR ORDER NO. SALESPERSON TERMS /10, n/30 DATE SHIPPED SHIPPED BY FOB June 30, 20X2 North Freight Line Chicago QUANTITY DESCRIPTION UNIT PRICE TOTAL 100 Designer beaded jeans , Freight GST Total 4, INVOICE 8

The buyer can pay the freight charges directly to the freight company. The seller can bill the buyer and add the cost of transportation to the invoice. OR 9

Sales Department sends authorized Purchase Requisition to Purchasing Department. Purchasing Department issues authorized Purchase Order and sends to selected supplier. Receiving Report is prepared when merchandise is received; Purchasing Department audits the supplier’s Invoice, or bill. Purchasing Department contacts supplier if merchandise is defective. The Accounting Department is given a copy of Invoice, Purchase Order, and Receiving Report to recheck. They then issue a cheque to supplier and record payment. 10

GENERAL JOURNAL DATE DESCRIPTION POST. DEBIT CREDIT REF. PAGE 1 20X3 Jan Merchandise Inventory Prepaid GST Accounts Payable Purchased merchandise from Prestige Clothing Store, Invoice 43480, dated Dec. 28, terms 2/10, n/30 Merchandise Inventory Prepaid GST Accounts Payable Purchased merchandise from Wholesale Fashion Shop, Invoice 633, dated Dec. 30, terms n/30 1, , , Merchandise Inventory Prepaid GST Accounts Payable Purchased merchandise from Clothes-R-Us, Invoice 8090, dated Dec. 31, terms n/30 Merchandise Inventory Prepaid GST Accounts Payable Purchased merchandise from Quality Clothes, Invoice 1234, dated Dec. 31, terms 2/10, n/30 1, , , ,

ACCOUNT Accounts Payable ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 Jan. 1 Balance  2, J1 1, , J1 1, , J1 1, , J1 2, ,

ACCOUNT Prepaid GST ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 2 J J J J

OBJECTIVE 1 Record purchases of merchandise on credit in a four-column purchases journal. OBJECTIVE 1 Record purchases of merchandise on credit in a four-column purchases journal. 14

The purchases account is used only for the purchase of merchandise for resale. A purchases journal is used to record the purchase of merchandise on account. PURCHASES JOURNAL PAGE 1 15

PURCHASES JOURNAL PAGE 1 16 The invoice number column contains the number of the invoice sent to Fashion World by the vendor.

PURCHASES JOURNAL PAGE 1 17 Look at the terms for Prestige Clothing Store---2/10, n/30 means that if you want to receive a 2% discount you must pay within 10 days; otherwise, you must pay the full amount within 30 days.“N” stands for the net amount of the invoice.

OBJECTIVE 2 Post from the four-column purchases journal to the general ledger accounts. OBJECTIVE 2 Post from the four-column purchases journal to the general ledger accounts. 18

PURCHASES JOURNAL PAGE 1 19 ACCOUNT Merchandise Inventory ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 Jan. 31 P1 8, , (( 1021)

PURCHASES JOURNAL PAGE 1 20 ACCOUNT Freight In ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 Jan. 31 P

PURCHASES JOURNAL PAGE 1 21 ACCOUNT Prepaid GST ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 Jan. 31 P (1023)

PURCHASES JOURNAL PAGE 1 22 ACCOUNT Accounts Payable ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 Jan. 1Balance  2, Jan. 31 P1 10, , (2005)

Name Clothes-R-UsTerms n/30 Address 1002 Valley Street, Regina, Saskatchewan DATEEXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  Inv. 8090, 12/31/X2 P1 1, ,

OBJECTIVE 3 Post purchases on credit from the purchases journal to the accounts payable subsidiary ledger. OBJECTIVE 3 Post purchases on credit from the purchases journal to the accounts payable subsidiary ledger. 24

ACCOUNTS PAYABLE SUBSIDIARY LEDGER Name Clothes-R-Us Terms n/30 Address 1002 Valley Street, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  Inv. 8090, 12/31/X2 P1 1, CREDIT BALANCE 1,962.20

ACCOUNTS PAYABLE SUBSIDIARY LEDGER Name Clothes-R-Us Terms n/30 Address 1002 Valley Street, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  Inv. 8090, 12/31/X2 P1 1, CM 37 J

OBJECTIVE 4 Record purchases returns and allowances in the general journal. OBJECTIVE 4 Record purchases returns and allowances in the general journal. 27

28 Accounts Payable Subsidiary Account Name Clothes-R-UsTerms n/30 Address 1002 Valley Street, Regina, Saskatchewan DATEEXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  Inv. 8090, 12/31/X2 P1 1, , CM 37 J , CREDIT BALANCE

1. Fashion World received merchandise from Clothes-R-Us on January 5, 20X3. 3. Clothes-R-Us agrees to accept the return of damaged goods. 2. Fashion World finds some of the merchandise is damaged. 4. Clothes-R-Us issues Fashion World a credit memo

OBJECTIVE 5 Post purchases returns and allowances from the general journal to the accounts payable subsidiary ledger. OBJECTIVE 5 Post purchases returns and allowances from the general journal to the accounts payable subsidiary ledger. 30

GENERAL JOURNAL DATE DESCRIPTION POST. DEBIT CREDIT REF. PAGE 1 20X3 Jan. 17Accounts Pay./Clothes-R-Us Merchandise Inventory Prepaid GST Received Credit Memo 37 for damaged merchandise that was returned; original purchase made on Invoice 8090, Jan. 5, 20X3 2005/

OBJECTIVE 6 Record cash payments in a cash payments journal. OBJECTIVE 6 Record cash payments in a cash payments journal. 32

CASH PAYMENTS JOURNAL PAGE 1 33

CASH PAYMENTS JOURNAL, cont’d. PAGE 1 34

1. The total amount of the purchase (as a debit to Accounts Payable) The amount of the discount (as a credit to Merchandise Inventory). 3. The amount of GST avoided (as a credit to Prepaid GST). 4. The amount of cash paid out (as a credit to Cash). When there is a cash discount, four elements must be recorded.

GENERAL JOURNAL DATE DESCRIPTION POST. DEBIT CREDIT REF. PAGE 15 20X2 Aug 1Store Equipment Prepaid GST Notes Payable Issued a 6 month note to Allen new Equipment Company for purchase of store fixtures

The cash payment journal provides the same kind of benefits as other special journals. They are: 3. It improves the audit trail because all cash payments are grouped together in one record and are listed by cheque number. 1. It simplifies and speeds up both the journalizing and posting of cash payments. 2. It permits division of labour because several members of the accounting staff can record transactions in different special journals at the same time. 37

OBJECTIVE 7 Post from the cash payments journal to subsidiary and general ledgers. OBJECTIVE 7 Post from the cash payments journal to subsidiary and general ledgers. 38

Name Prestige Clothing StoreTerms 2/10,n/30 Address 1220 Valley Street, Regina, Saskatchewan DATEEXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  P1 1, , CP11, CP

CASH PAYMENTS JOURNAL PAGE 1 40 (2005)(1023) (1021)(1001)X ACCOUNT Prepaid GST ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 Jan. 31 P CP ACCOUNT Cash ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 Jan. 1 Balance  5, CR1 10, , CR1 15,256.37

CASH PAYMENTS JOURNAL PAGE 1 41 (2005)(1023) (1021)(1001)X ACCOUNT Merchandise Inventory ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 Jan. 31 P1 8, , CP , ACCOUNT Accounts Payable ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 Jan. 1 Balance  2, P1 10, , CP1 6,

Name Clothes-R-UsTerms n/30 Address 1002 Valley Street, Regina, Saskatchewan DATEEXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  Inv. 8090, 12/31/X2 P1 1, , CP , CM 37 J , Name Clothing CentreTerms 2/10, n/30 Address 1111 Katie Avenue, Regina, Saskatchewan DATEEXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 18 Inv. 8979, 12/27/X2 P1 1, ,

Name Family Fashions Terms n/30 Address 9927 Old Canton Road, Regina, Saskatchewan DATEEXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  CP Inv. 8597, 12/31/X2 P1 1, , CP1 1, Name Prestige Clothing StoreTerms 2/10, n/30 Address 1220 Valley Street, Regina, Saskatchewan DATEEXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1  P1 1, , CP11, CP

Name Quality Clothes Terms 2/10, n/30 Address 808 Spring Hill Road, Regina, Saskatchewan DATEEXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  Inv. 1234, 12/31/X2 P1 2, , CP1 2, Name Wholesale Fashion ShopTerms n/30 Address 3300 Prairie Circle Road, Regina, Saskatchewan DATEEXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  Inv. 633, 12/30/X2 P1 1, ,

ACCOUNT Accounts Payable ACCOUNT NO DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF.DEBIT CREDIT 20X3 Jan. 1Balance  2, J , Jan.31 P1 10, , CP1 6, , A Schedule of Accounts Payable and the Accounts Payable Account FASHION WORLD Schedule of Accounts Payable January 31, 20X3 Clothes-R-Us Clothing Centre Family Fashions Prestige Clothing Store Quality Clothes Wholesale Fashion Shop Total

OBJECTIVE 8 Prepare a schedule of accounts payable. OBJECTIVE 8 Prepare a schedule of accounts payable. 46

OBJECTIVE 9 Demonstrate a knowledge of the procedures for effective internal control of merchandise inventory. OBJECTIVE 9 Demonstrate a knowledge of the procedures for effective internal control of merchandise inventory. 47