0 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 4 The Accounting Cycle for a Merchandising Corporation Chapter 14Accounting for Sales and Cash Receipts Chapter 15Accounting for Purchases and Cash Payments Chapter 16Special Journals: Sales and Cash Receipts Chapter 17Special Journals: Purchases and Cash Payments Chapter 18Adjustments and the Ten-Column Work Sheet Chapter 19Financial Statements for a Corporation Chapter 20Completing the Accounting Cycle for a Merchandising Corporation Chapter 21Accounting for Publicly Held Corporations

1 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15 Accounting for Purchases and Cash Payments What You’ll Learn  Explain the procedures for processing a purchase on account.  Describe the accounts used in the purchasing process.  Identify controls over cash.  Analyze transaction relating to the purchase of merchandise.  Record a variety of purchases and cash payment transactions.  Post to the accounts payable subsidiary ledger.  Define the accounting terms in this chapter.

2 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15, Section 1 Purchasing Items Needed by a Business What Do You Think? What could occur if the buying process was not handled in an orderly fashion?

3 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Merchandising businesses follow an orderly process for purchasing merchandise, supplies, and equipment. You Will Learn  the fours stages in purchasing items for a business and the processes and documents related to each stage.  the purpose of the Purchases account. Purchasing Items Needed by a Business SECTION 15.1

4 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  purchase requisition  purchase order  packing slip  processing stamp  purchases discount  discount period  Purchases account  cost of merchandise Purchasing Items Needed by a Business SECTION 15.1

5 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Purchasing Process Retail businesses need shopping bags, sales slips, and register receipts. They must also purchase other supplies, equipment, and merchandise. The purchase of the latter is divided into four stages:  requesting needed items  ordering from a supplier  verifying items received  processing the supplier’s invoice Purchasing Items Needed by a Business SECTION 15.1

6 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Requesting Needed Items When a company needs to buy supplies, equipment, or merchandise, a purchase requisition is prepared to request to order the specified items.purchase requisition Purchasing Items Needed by a Business SECTION 15.1

7 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Ordering from a Supplier Information from the purchase requisition is used to write a purchase order. The purchase order contains:purchase order  quantity  description  unit price  total cost  supplier’s name and address  date needed  shipping method (optional) Purchasing Items Needed by a Business SECTION 15.1

8 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Verifying Items Received A supplier accepts a purchase order by shipping the items and billing the buyer for them. A shipment includes a packing slip that lists all shipped items. When a shipment arrives:packing slip  The buyer unpacks and checks the contents against the packing slip.  The buyer reports discrepancies to the accounting department. Purchasing Items Needed by a Business SECTION 15.1

9 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Processing the Supplier’s Invoice The supplier sends an invoice, or bill, to the buyer containing the terms and the item quantity, description, price, and total cost. The accounting department checks the invoice against the packing slip and purchase order. If there are no discrepancies, a processing stamp is placed on the invoice and the invoice becomes the source for a journal entry.processing stamp Large businesses may use the voucher system for internal control. Purchasing Items Needed by a Business SECTION 15.1

10 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Purchases Discounts The buyer may receive a purchases discount for early payment. If the credit terms listed on the invoice are 2/10, n/30, the buyer can receive a 2% discount if payment is made within 10 days, the discount period.purchases discount discount period If the invoice is not paid within 10 days, the buyer must pay the net amount within 30 days. Purchasing Items Needed by a Business SECTION 15.1

11 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Processing the Supplier’s Invoice Purchasing Items Needed by a Business SECTION 15.1

12 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Purchases Accounts Merchandise bought to sell to customers is recorded in the Purchases account, a temporary account that is classified as a cost of merchandise account. The Purchases account follows the rules of debit and credit for expense accounts. It isPurchases accountcost of merchandise  increased by debits,  decreased by credits, and  has a normal debit balance. Purchasing Items Needed by a Business SECTION 15.1

13 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  purchase requisition A written request that a specified item or items be orders.  purchase order A written offer to a supplier to buy specified items.  packing slip A form that lists the items included in the shipment.  processing stamp A stamp placed on a creditor’s invoice that outlines the steps to be followed in processing the invoice for payment. Purchasing Items Needed by a Business SECTION 15.1

14 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  purchases discount The buyer’s cash discount for early payment of an invoice on account.  discount period The period of time within which an invoice must be paid if a discount is to be taken.  Purchases account The account used to record the cost of merchandise purchased during a period.  cost of merchandise The actual cost to the business of the merchandise sold to customers. Purchasing Items Needed by a Business SECTION 15.1

15 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15, Section 2 Analyzing and Recording Purchases on Account What Do You Think? Why do you think a large business needs to maintain an accounts payable subsidiary ledger?

16 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Individual accounts payable transactions are posted to a subsidiary ledger. You Will Learn  how to journalize purchases on account.  how to journalize and post purchases returns and allowances. Analyzing and Recording Purchases on Account SECTION 15.2

17 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  accounts payable subsidiary ledger  tickler file  due date  purchases return  purchases allowance  debit memorandum Analyzing and Recording Purchases on Account SECTION 15.2

18 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Purchases of Assets on Account The most important thing a retail business purchases is merchandise to resell. Merchandise can be bought on a cash basis or on account. Analyzing and Recording Purchases on Account SECTION 15.2

19 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Accounts Payable Subsidiary Ledger A business that makes many purchases on credit will set up an accounts payable subsidiary ledger with an account for each creditor or supplier. The individual accounts are summarized in the Accounts Payable general ledger controlling account.accounts payable subsidiary ledger Analyzing and Recording Purchases on Account SECTION 15.2

20 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Accounts Payable Subsidiary Ledger Form The ledger account form has a space for the creditor’s name and address and contains three amount columns:  the Debit column  the Credit column  the Balance column Analyzing and Recording Purchases on Account SECTION 15.2

21 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Merchandise Purchases on Account When a purchase of merchandise on account is recorded, a diagonal line is entered in the Posting Reference column to indicate the credit amount is posted in two places.  First to the Accounts Payable controlling account.  Then to the individual account in the accounts payable subsidiary ledger. The invoice is then placed in a tickler file according to its due date.tickler file due date Analyzing and Recording Purchases on Account SECTION 15.2

22 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing and Recording Purchases on Account SECTION 15.2

23 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing and Recording Purchases on Account SECTION 15.2

24 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing and Recording Purchases on Account SECTION 15.2

25 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing and Recording Purchases on Account SECTION 15.2

26 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Other Purchases on Account The following example illustrates the purchase of store equipment on account. Analyzing and Recording Purchases on Account SECTION 15.2

27 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Other Purchases on Account Analyzing and Recording Purchases on Account SECTION 15.2

28 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Other Purchases on Account Analyzing and Recording Purchases on Account SECTION 15.2

29 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Other Purchases on Account Analyzing and Recording Purchases on Account SECTION 15.2

30 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Other Purchases on Account Analyzing and Recording Purchases on Account SECTION 15.2

31 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Purchases Returns and Allowances A purchase return occurs when a business returns merchandise for a full credit.purchase return A purchase allowance occurs when a business keeps unsatisfactory merchandise but pays a discounted price.purchase allowance A debit memorandum is used to notify suppliers of a purchase return or request for purchases allowance.debit memorandum Analyzing and Recording Purchases on Account SECTION 15.2

32 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Purchases Returns and Allowances Analyzing and Recording Purchases on Account SECTION 15.2

33 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording a Purchases Returns and Allowances Transaction Analyzing and Recording Purchases on Account SECTION 15.2

34 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording a Purchases Returns and Allowances Transaction Analyzing and Recording Purchases on Account SECTION 15.2

35 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording a Purchases Returns and Allowances Transaction Analyzing and Recording Purchases on Account SECTION 15.2

36 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording a Purchases Returns and Allowances Transaction Analyzing and Recording Purchases on Account SECTION 15.2

37 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Posting to General Ledger Accounts Payable Subsidiary Ledger Analyzing and Recording Purchases on Account SECTION 15.2

38 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  accounts payable subsidiary ledger A separate ledger that contains accounts for all creditors; it is summarized in the Accounts Payable controlling account in the general ledger.  tickler file A file that contains a folder for each day of the month into which invoices are placed according to their due dates.  due date The date by which an invoice must be paid. Analyzing and Recording Purchases on Account SECTION 15.2

39 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  purchases return The return of merchandise bought on account to the supplier for full credit.  purchases allowance A price reduction given when a business keeps unsatisfactory merchandise it has bought.  debit memorandum The form a business uses to notify its suppliers (creditors) of a return or to request an allowance. Analyzing and Recording Purchases on Account SECTION 15.2

40 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15, Section 3 Analyzing and Recording Cash Payments What Do You Think? Why do you think the accounting department is responsible for making cash payments for a business?

41 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea The accounting department is responsible for making the cash payments for the business. You Will Learn  the procedures for managing cash payments.  how to record the different types of cash payment transactions. Analyzing and Recording Cash Payments SECTION 15.3

42 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  premium  FOB destination  FOB shipping point  bankcard fee Analyzing and Recording Cash Payments SECTION 15.3

43 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Controls over Cash A business can manage cash payments by following these procedures:  Require proper authorization of all cash payments.  Write checks for all payments.  Use prenumbered checks.  Retain and account for voided checks. Analyzing and Recording Cash Payments SECTION 15.3

44 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Cash Payment Transactions Businesses buy needed items on account or with cash. This section discusses how to record several types of cash payment transactions. Analyzing and Recording Cash Payments SECTION 15.3

45 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording Cash Purchase of Insurance Businesses purchase insurance to protect against losses from theft, fire, and flood. An insurance premium is paid at the beginning of the covered period and is recorded in the Prepaid Insurance asset account.premium Analyzing and Recording Cash Payments SECTION 15.3

46 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording Cash Purchases of Merchandise Usually businesses purchase merchandise on account. Sometimes a business buys merchandise for cash. Analyzing and Recording Cash Payments SECTION 15.3

47 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording Cash Purchases of Merchandise Analyzing and Recording Cash Payments SECTION 15.3

48 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording Cash Purchases of Merchandise Analyzing and Recording Cash Payments SECTION 15.3

49 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording Cash Purchases of Merchandise Analyzing and Recording Cash Payments SECTION 15.3

50 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording Cash Payments for Items Purchased on Account Each day, invoices due for payment are removed from the tickler file. Checks are prepared, signed, and mailed to creditors. Analyzing and Recording Cash Payments SECTION 15.3

51 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Other Cash Payments The shipping terms define if a buyer will be charged for the shipment of goods. Shipping terms are stated as:  FOB destination – the supplier pays the shipping cost FOB destination  FOB shipping point – the buyer pays the shipping cost. FOB shipping point Analyzing and Recording Cash Payments SECTION 15.3

52 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording Bankcard Fees Banks charge a bankcard fee for handling bankcard sales slips.bankcard fee Analyzing and Recording Cash Payments SECTION 15.3

53 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  premium The amount paid for insurance.  FOB destination Shipping term specifying that the supplier pays the shipping cost to the buyer’s destination.  FOB shipping point Shipping term specifying that the buyer pays the shipping charge from the supplier’s shipping point. Analyzing and Recording Cash Payments SECTION 15.3

54 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  bankcard fee A fee charged for handling bankcard sales slips; usually based on the total amounts recorded on the sales slips processed. Analyzing and Recording Cash Payments SECTION 15.3

55 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 1 From the four choices below, select the form that is related to each step in the purchasing process. a)purchase order b)packing slip c)processing stamp d)purchase requisition 1. Requesting needed items __________ 2. Ordering from the supplier__________ 3. Verifying items received__________ 4. Processing supplier’s invoice __________ Chapter 15 Review CHAPTER 15

56 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 1 1.Requesting needed items: Purchase Requisition (d) 2.Ordering from the supplier: Purchase Order (a) 3.Verifying items received: Packing Slip (b) 4.Processing supplier’s invoice: Processing Stamp (c) Chapter 15 Review CHAPTER 15

57 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 2 Your business received an invoice dated February 5 totaling $2, The vendor has offered the terms of 2/10, n/30. You pay on February 15. Calculate the following: 1.total amount of purchase __________ 2.amount of discount__________ 3.amount of check__________ Now indicate whether you would debit or credit the following accounts. 4.Accounts Payable __________ 5.Vendor’s subsidiary account__________ 6.Purchases Discounts__________ 7.Cash in Bank__________ Chapter 15 Review CHAPTER 15

58 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 2 1.Total amount of purchase: $2, Amount of discount: $58.00 ($2,900  2% or.02. The bill is paid within the first 10 days from the invoice date, so the terms 2/10 apply). 3.Amount of check: $2, Accounts Payable: Debit 5.Vendor’s subsidiary account: Debit 6.Purchases Discounts: Credit 7.Cash in Bank: Credit Chapter 15 Review CHAPTER 15

59 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 3 If you ordered merchandise from a vendor in New York City and the terms stated “FOB Chicago” and your company is in Denver, what would that mean? Chapter 15 Review CHAPTER 15

60 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 3 FOB, which means “free on board,” can be the starting point, the destination, or any point in between. In this case, with FOB Chicago as the shipping terms, the vendor would pay all transportation and bear the liability for the goods from New York City to Chicago. In Chicago, ownership of the goods would shift from the vendor to you, the customer. At this time, you must pay all transportation and assume the liability for the goods from Chicago to Denver. Chapter 15 Review CHAPTER 15

61 Glencoe Accounting Unit 4 Chapter 15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Resources Glencoe Accounting Online Learning Center English Glossary Spanish Glossary