Chapter 14 Expenses & Cash Payments

Terms: n Purchase Discounts: Given to the purchaser to encourage early payment. n Purchase Returns & Allowances: A return of goods or a decrease in the amount owed by the purchaser.

Two methods of accounting for Discounts: n Gross method: Purchase recorded at full amount. –If discount taken, Inventory reduced by amount of the discount. n Net method: Purchase recorded at invoice price LESS the discount. –If discount NOT taken, must use a Purchases Discount Lost account.

Better Method? n Net - shows which discounts were missed. Gross method doesn’t show this!

Procedures for purchasing: (Old Way) n Completed PO (purchase order) sent to supplier. n When goods arrive, a Receiving Report (RR) is completed when goods are inspected. n PO matched with RR by accounting dept. before bill is paid.

Procedures for Purchasing: (New Ways) n Procurement card used for small purchases. (PO’s expensive to prepare.) n EDI - used by larger companies. n Outsourcing - pay someone else to handle A/Pay.

Accrued Liabilities: n Amounts owed (but not yet paid) for things like salaries, utilities, taxes, etc. n Must record these at end of accounting period or expenses & liabilities will be understated. n Increase the expense account on the left & increase liability account on the right.

Warranties n Must be estimated (like bad debt!) and recorded in the year the sale is made. –Expenses matched against revenues. n Increase Warranty Liabilities on the right & Warranty expense on the left.

Payroll Taxes n Withheld from employees earnings: –FIT - amount depends on gross earnings, pay period, exemptions, marital status. –SIT - Each state varies. –FICA Social Security - 6.2% on Max. of $68,400/year. (changes!) –FICA Medicare % of all earnings. –“Other” - Medical insurance, union dues, etc.

Payroll Taxes n Paid by the Employer –FICA Social Security (same amount) –FICA Medicare (same amount) –SUTA (varies by state, industry, & experience rating.) –FUTA -.8% of first $8,000 of wages.

Income Taxes, Sales Taxes n Cover on your own.

Prepaids n Sometimes a company pays for expenses ahead of time. n Increase an asset account when payment is made n Decrease the asset and increase an expense account when the item is “used up”.

Loss Contingencies n A possible loss. n May have to report on the financial statements, depending on two conditions: –1. Likelihood that the loss will occur. –2. Ability to estimate the loss. (page gives details!)

Must evaluate liquidity n Be sure to read through this section!

Be sure to also read Appendix A in the back of the text!

The End