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4. CHAPTER # 07
REVIEW

5. Chapter 07
Accounting for Sales,

6. Accounting for Sales, Accounts Receivable, and
Chapter 07
Accounting for Sales, Accounts Receivable, and

7. Accounting for Sales, Accounts Receivable, and Cash Receipts
Chapter 07
Accounting for Sales, Accounts Receivable, and Cash Receipts

8. Accounting for Sales, Accounts Receivable, and Cash Receipts
Chapter 7
Accounting for Sales, Accounts Receivable, and Cash Receipts
Section 1: Understanding Merchandising Companies
Section Objectives
Chapter 6 explained the closing process and post-closing trial balance. Chapter 7 explains the accounting processes for retail and wholesale sales. In this first of the two sections, we are introduced to recording transactions for a retailer in a general journal.
7-1 Record sales on account, credit card sales, sales returns, and cash receipt transactions in a general journal

9. Meet Maxx-Out Sporting Goods
Maxx-Out Sporting Goods is a merchandising business that sells the latest sporting goods and sportswear for men, women, and children.
It is a retail business.
Max Ferraro is the sole proprietor of the firm.
There are three types of business operations: service, merchandising, and manufacturing. A service business provides a service to its customers. A merchandising business, sells a product to its customers and generates a profit on those sales. A manufacturing business makes a product and sells its product to customers or to retailers who then sell it to customers.
In this chapter, we will be working with a merchandising business called the Maxx-Out Sporting Goods. A retailer is another name for a merchandising business. It sells directly to the customer. The Maxx-Out Sporting Goods will sell goods that it purchases from its suppliers and will keep track of its available-for-sale stock in an account called Merchandise Inventory. Merchandise inventory is the stock of goods a merchandising business keeps on hand.
Merchandise Inventory is an asset account which will appear on the balance sheet.

10. Accounts of a Merchandising Companies
<< Insert the table>>
PDF page 191
The new accounts we will be using in this chapter are summarized in this slide.

11. Recording Sales for Cash and On Account.
The journal entry to record a sale of $500 for cash on January 2
The Sales account is the primary revenue account for a merchandising company. Let’s suppose Maxx-Out Sporting Goods sells merchandise for cash and on account. The journal entry to record a sale of $500 for cash on January 2 is provided in this slide.

12. Recording Sales for Cash and On Account
On January 3, Maxx-Out Sporting Goods sold merchandise on credit to Roy Anderson, issuing Sales Slip 1101 for $400. The journal entry to record the sale
Maxx-Out Sporting Goods also grants credit terms to certain customers. One of those customers is Roy Anderson. On January 3, Maxx-Out Sporting Goods sold merchandise on credit to Roy Anderson, issuing Sales Slip 1101 for $400. The journal entry to record that sale is presented in this slide.

13. Recording Sales for Cash and On Account
The journal entry records Roy Anderson’s payment of the amount due on January 31.
The journal entry presented in the slide records Roy Anderson’s payment of the amount due on January 31.

14. Recording Sales with Sales Tax Payable for Cash and On Account
The journal entry to record a sale of $500 plus tax for cash follows.
Most state and many local governments impose a sales tax on the sale of certain goods and services. Businesses are required to collect this tax from their customers and pay to tax agency. When taxable goods and services are sold on credit, the sales tax is usually recorded at time of sale, even though it will be collected from the customer later. A liability account called Sales Tax Payable is credited for the sales tax charged.
If Maxx-Out Sporting Goods was required to charge its customers an 8 percent sales tax, the amount collected for the sales tax on a $500 sale for cash would be $40 ($500 * 8% = $40). The amount collected from the customer would be $540 ($500 for the merchandise, plus $40 for the sales tax). The journal entry to record a sale of $500 plus tax for cash is presented in the slide.

15. Recording Sales with Sales Tax Payable for Cash and On Account
The journal entry to record the sale of merchandise on credit.
If Maxx-Out Sporting Goods sold merchandise on credit to Ann Anh on January 8 for $600 plus tax, it would bill Ann Anh for $600 plus tax of $48 (600 * 8% = $48). The total amount billed would be $648 ($600 for the merchandise, plus $48 for the sales tax). The journal entry to record that sale is presented in the slide.

16. Sales Slip
The sales slip tells us who the customer is and the sales amount, the sales tax charged and the total amount that the customer must pay.

17. Recording Sales Returns and Sales Allowances
If something is wrong with the goods sold, the firm may
take a sales return, or
give a sales allowance.
If something is wrong with the goods sold, the firm may take back the goods, resulting in a sales return. Or, they may negotiate a reduction in the sales price, resulting in a sales allowance.
If the goods returned were initially paid for with cash, the customer will receive a cash refund. When a return or allowance is related to a credit sale, the normal practice is to issue a document called a credit memorandum to the customer instead of giving a cash refund.
A cash refund is given in the case of a cash sale
A credit memorandum is given in the case of a credit sale

18. Sales Returns and Allowances
The Sales Returns and Allowances account is debited to record returns and allowances.
Sales Returns and Allowances
Returns and Allowances
When a customer returns a product, the business makes an opposite entry of that of a sale, but instead of debiting the Sales account, we debit the Sales Returns and Allowances account.
By debiting Sales Returns and Allowances instead of debiting the Sales account, management can monitor the balance of the Sales Returns and Allowances account and see if product returns or allowances increase.
The Sales Returns and Allowances account is a contra-revenue account that keeps track of all customer returns. A contra revenue account is an account with a debit balance, which is contrary to the normal balance for a revenue account.

19. Cash Refund The journal entry to record a cash refund:
The journal entry to record a cash refund for a return on January 2 of $100 in merchandise sold for cash, plus sales tax of $8, is presented in the slide.

20. Credit Memorandum
Here is an example of a sales allowance which is granted to Ann Anh.
Let’s revisit the sale on account to Ann Anh of $600 plus sales tax of $48 recorded January 8, If Maxx-Out Sporting Goods issued Credit Memorandum 101 on January 20 for a return of $200 merchandise purchased on account by Ann Anh, plus 8 percent sales tax, the credit memorandum would total $216 ($200 for the merchandise returned, plus $16 sales tax previously billed to Ann Anh).

21. Sales Returns and Allowances
Sales Allowance
Sales Returns and Allowances
Accounts Receivable
Sales Tax Payable
200 16
216
The Sales Returns and Allowances account will be debited for $200 and the Sales Tax Payable account will be debited for $16. The corresponding credit of $216 will go to the customer’s Accounts Receivable account.
Here is how it looks in the T accounts.
A sales allowance will reduce net sales on the income statement and will reduce Accounts Receivable and Sales Tax Payable on the balance sheet.

22. Advantages of Credit Sales Disadvantages of Credit Sales
The volume of both sales and profits will increase, if buyers are given a period of a month or more to pay for the goods or services they purchase.
Disadvantages of Credit Sales
Sales on credit will lead to increases in profit only if each customer completes the transaction by paying for the goods or services purchased.
If payment is not received, the expected profits become actual losses and the purpose for granting the credit is defeated.
Therefore businesses need to closely analyze a customer’s ability to pay before granting credit.
The use of credit is considered to be one of the most important factors in the rapid growth of businesses today.
Stores grant credit to make it easier for customers to purchase goods. Like anything else, there are advantages and disadvantages.

23. Credit Policies
Each business must develop well-balanced credit policies:
Tight credit policies results in a low level of losses.
Lenient credit policies may result in increased sales
volume with a high level of losses.
Decisions about granting credit may be based on personal judgment or on reports available from credit bureaus, information supplied by other creditors, and credit ratings supplied by national firms such as Dun & Bradstreet.

24. Types of Credit Sales Open-account credit Business credit cards
Bank credit cards
Cards issued by credit card companies
The four most common types of credit sales are: Open-account credit, Business credit cards, Bank credit cards, and Cards issued by credit card companies. You should become familiar with what each one is and how to account for each type of transaction.

25. Open-account credit
Open-account credit sales and business credit card sales are accounted for as sales on credit.
Sales to customers using bank credit cards, and cards issued by credit card companies, require special accounting procedures.

26. Accounting for Credit Card Sales
Sales made to customers using bank credit
cards, such as MasterCard and VISA are treated
as cash sales.
The processing fees charged by the credit card company are debited to the Credit Card Expense account.
Sales made to customers paying with bank credit cards, such as MasterCard and VISA, are treated as cash sales. In most cases, the amount processed on the card is transferred to the seller’s bank account the same day. Fees charged by the credit card company for processing these sales are debited to an account called Credit Card Expense.

27. Maxx-Out Sporting Goods sells merchandise on January 15 totaling $900 to customers using bank credit cards, plus 8 percent sales tax. The bank credit card company charges a 3 percent discount fee.
This is an example of sales to customers using bank credit cards.

28. Credit Card Transactions
Journal entry to record the sales made to customers using bank credit cards on January 15.
This is how a journal entry to record the sales made to customers using bank credit cards on January 15 should look.

29. Credit Card Companies
Sales to customers using nonbank credit cards such as American Express and Diners Club are accounted for as sales on account.
Nonbank credit cards usually take a few days to pay the seller.
The amount remitted to the seller is net of the
discount fee.
If a customer pays with a nonbank credit card such as American Express, the sale is accounted for as sales on account. The amount remitted to the seller should equal the net of the discount fee.

30. Maxx-Out Sporting Goods sells merchandise on
January 16 totaling $1,000 to customers paying with
American Express, plus 8 percent sales tax.
American Express charges a 7 percent discount fee.
The discount withheld by American Express would be $75.60 ($1, X 7%).
This is an example of sales to customers using nonbank credit cards

31. American Express Charges and Payments
Journal entry to record the sales on January 16 and the subsequent payment on January 23 by American Express
This is how a journal entry to record the sales of a payment by American Express should look.

32. Accounting for Sales, Accounts Receivable, and Cash Receipts
Chapter 7
Accounting for Sales, Accounts Receivable, and Cash Receipts
Section 2: Special Topics in Merchandising
Section Objectives
7-2. Compute trade discounts.
7-3. Compute and record cash discounts on sales.
7-4. Post from the general journal to the general ledger accounts and to the subsidiary ledger.
7-5. Prepare a schedule of accounts receivable.
7-6. Record the payment of sales taxes.
In section 2 we will learn how to record transactions for a wholesaler.

33. Computing Trade Discounts.
The basic procedures used by wholesalers to handle sales and accounts receivable are the same as those used by retailers.
However, many wholesalers offer
Cash discounts
Trade discounts
How do wholesale businesses record credit sales?
A wholesale business is a firm which sells goods to another firm who will then sell it to the final consumer.
When businesses sell goods to other businesses, they frequently offer trade and/or cash discounts, which vary according to the nature of the business. Trade discounts are not the same as cash discounts. A trade discount is a reduction from the list price. (The list price is the established retail price.)
The net price is the list price less all trade discounts.
The amount of the trade discount may depend on the size of the order and the costs of selling to the various types of customers. When a firm offers more than one discount on the same sale then this is considered a series of trade discounts.

34. Compute and record cash discounts on sales.
Modern Sportsman, a wholesaler, records the sale and subsequent payment received follow.
Modern Sportsman, a wholesaler, offers credit terms of 1/10, n/30 to its customers. On January 20, Modern Sportsman sold merchandise for $2,000 on account to Maxx-Out Sporting Goods, issuing Invoice 909. Modern Sportsman received payment for Invoice 909, less the cash discount of $20 ($2,000 1%), on January 29.

35. Cash Discounts on Sales, with Sales Returns
A customer returning merchandise and paying within the discount period is only entitled to a cash discount on the balance owed after the return.
Modern Sportsman sells merchandise for $1,000 on account to Maxx-Out Sporting Goods on January 21, terms 1/10, n/30, Invoice 910. Maxx-Out Sporting Goods returned $100 of the merchandise on January 23, receiving credit memorandum 120 from Modern Sportsman. Maxx-Out Sporting Goods paid the balance owed, less a 1 percent discount, on January 30. The amount received by Modern Sportsman on January 30 would be $891, calculated as presented in the slide.

36. Reporting Net Sales
At the end of each accounting period, the balance of the Sales Returns and Allowances account and the Sales Discount account is subtracted from the balance of the Sales account in the Revenue section of the income statement. The resulting figure is the net sales for the month ended January 31, 2016.
For example, the Sales Returns and Allowances account contains a balance of $600 at the end of January. The Sales Discount account balance is $100 at the end of January. The Sales account has a balance of $25,700 at the end of January. The Revenue section of the firm’s income statement is presented in the slide. Notice how the $25,000 of net sales is derived.

37. The Accounts Receivable Ledger
Accounts receivable is a big asset on the balance sheet for most businesses. This asset must be converted into cash in a timely manner. If not, cash flow problems will exist.
An accounts receivable ledger is a subsidiary ledger that contains credit customer accounts. This ledger makes it possible to verify that customers are paying their balances on time and that they are within their credit limits. It also provides a convenient way to answer questions from customers regarding their current balances or about a possible billing error.
A subsidiary ledger has three money columns. Because a business doesn’t want to wait until the end of the month to find out which customers still owe them money, any time a customer’s account is affected, the subsidiary ledger must be updated that same day.
The accounts receivable ledger has three money columns.
The BALANCE column is presumed to contain debit amounts.

38. Posting from the General Journal.
111 indicates that the amount was posted to the Accounts Receivable account in the general ledger. The check mark indicates that the amount was posted to the customer’s account
Each sales return or allowance must be posted from the journal to the appropriate customer’s account in the accounts receivable ledger. In addition, any subsidiary ledger accounts must be updated daily.
Please note the double posting reference if the return had been journalized in a general journal instead.

39. Prepare a schedule of accounts receivable.
The use of an accounts receivable ledger does not eliminate the need for the Accounts Receivable account in the general ledger.
However, the Accounts Receivable account (in
the General Ledger) is now considered a control
account.
At the end of each month, after all the postings have been made, the balances in the accounts receivable ledger must be proved against the balance of the Accounts Receivable general ledger account. First a schedule of accounts receivable, which lists the subsidiary ledger accounts balances, is prepared. The total of the schedule is compared with the balance of the Accounts Receivable account. If the two figures are not equal, errors must be located and corrected.

40. At the end of each month, after all the postings have been made, the balances in the accounts receivable ledger must be proved against the balance of the Accounts Receivable general ledger account.
The schedule of accounts receivable is simply a list of all of your customers and how much they owe.
TOTAL OF INDIVIDUAL
CUSTOMER BALANCES
ACCOUNTS RECEIVABLE BALANCE =

41. Prepare a schedule of accounts receivable
The schedule of accounts receivable is particularly important to a business owner or credit manager in keeping track of how much money someone owes the company and for how long that amount has been outstanding.

42. The figure illustrates the relationship between the Accounts Receivable balance, the Accounts Receivable ledger, and the Schedule of Accounts Receivable.

43. Record the payment of sales taxes.
At the end of each month, after all the accounts have been posted, Maxx-Out Sporting Goods prepares the sales tax return.
Three accounts are involved:
Sales Tax Payable
Sales
Sales Returns and Allowances
A sales tax may be levied on all retail sales, but often certain items are exempt. The retailer is required to collect sales tax from customers, make periodic reports to the taxing authority, and pay the taxes due when the reports are filed.
Sales taxes collected must be submitted to the state on a regular basis. Sales tax returns are filed monthly or quarterly depending on the state. Maxx-Out Sporting Goods submits its sales taxes collected at the end of the month. It will complete a sales tax return.

44. Sales Tax Computation Sales Tax Due 8% Sales Tax Rate
Taxable Gross Sales for January
$25,000.00 x
$ 2,000.00
Sales Tax Computation
Taxable gross sales for the month were $25,000. (This includes sales less any returns and allowances.) Based on the sales tax return, Maxx-Out Sporting Goods owes $2,000 of sales tax to the state. This particular state allows an offset or discount in the amount of $20, so the net taxes owed are $1,

45. Accounting for Purchases,
Chapter 08
Accounting for Purchases,

46. Accounting for Purchases, Accounts Payable, and
Chapter 08
Accounting for Purchases, Accounts Payable, and

47. Accounting for Purchases, Accounts Payable, and Cash payments
Chapter 08
Accounting for Purchases, Accounts Payable, and
Cash payments

48. Accounting for Purchases, Accounts Payable and Cash Payments
Chapter 8
Accounting for Purchases, Accounts Payable and Cash Payments
Section 1: Merchandising Purchases
Section Objectives
This chapter shows how a merchandiser manages its purchases of goods for resale and its accounts payable.
8-1 Record purchases of merchandise on credit in a general journal.
8-2 Compute the net delivered cost of purchases.

49. Accounting for Purchases
Most merchandising businesses purchase goods on credit under open-account arrangements.
A large firm usually has a centralized purchasing
department that is responsible for locating suppliers,
obtaining price quotations, negotiating credit terms, and
placing orders.
In small firms purchasing activities are handled by a
single individual, usually the owner or manager.
In this chapter you will learn how Maxx-Out Sporting Goods manages its purchases of goods for resale and its accounts payable.

50. Purchasing Procedures
The Sales Department
sends an authorized purchase requisition to the Purchasing Department
The Purchasing Department
issues an authorized purchase order and sends to the selected supplier
A receiving report is prepared when the merchandise is received
For good internal control, normally three departments will be involved in purchasing merchandise for a company.
You should study basic internal documents that are needed in the purchasing department and become familiar with them. These documents include a purchase requisition, a purchase order, a receiving report, and an invoice.
The Accounting Department
receives the invoice and copies of the purchase order and receiving report

51. Lists the items to be ordered
Purchase Requisition and Purchase Order
Lists the items to be ordered
Specifies the exact items, quantity, price, credit termsand
A purchase requisition lists the items to be ordered. It is signed by someone with the authority to approve requests for merchandise, usually the manager of the sales department.
The purchase order specifies the exact items, quantity, price, and credit terms. It is signed by someone with authority to approve purchases, usually the purchasing agent.
A receiving report is prepared to show the quantity and condition of the goods received. The purchasing department receives a copy of the receiving report and compares it to the purchase order.

52. Invoice This is a purchase invoice for the customer
A purchase invoice is what the customer receives from the seller. It is also the sales invoice for the seller.
This is a purchase invoice for the customer
This is a sales invoice for the seller

53. Account Classifications
In Chapter 7, we learned to account for the various sales and sales-related transactions typically engaged in by merchandising firms. In this chapter, we will learn to account for purchases and purchase-related transactions. The new accounts we will be using in this chapter are summarized in the slide.

54. Wow! I need to order more inventory!
The Purchases Account
Wow! I need to order more inventory!
QUESTION:
What is the Purchases
account?
The Purchases account
is an account used to
record cost of goods
bought for resale
during a period.
ANSWER:
The purchase of merchandise for resale is a cost of doing business. The purchase of merchandise is debited to the Purchases account. Purchases is a temporary expense account classified as cost of goods sold. The cost of goods sold is the actual cost to the business of the merchandise sold to customers.

55. What is the Freight In account?
Purchases And Cash Payments With Freight Charges
QUESTION:
What is the Freight In account?
The Freight In account is an account showing transportation charges for items purchased. It is also called Transportation In account.
ANSWER:
This is an expense account, included in cost of goods sold, showing transportation charges for merchandise purchased. It is also known as Transportation In account.

56. FOB shipping point and FOB destination
Buyer pays the freight charge—the cost of shipping the goods from the seller’s warehouse to the buyer’s location
FOB destination:
Seller pays the freight charges
Two ways to handle the freight charges paid by the buyer:
Buyer is billed directly by the transportation company for the freight charge.
Seller pays the freight charge and includes it on the invoice.
If the freight terms are free on board (FOB) shipping point, the buyer pays the freight charge—the cost of shipping the goods from the seller’s warehouse to the buyer’s location.
If the freight terms are FOB destination, the seller pays the freight charges. There are two ways to handle the freight charges paid by the buyer:
The buyer is billed directly by the transportation company for the freight charge. The buyer issues a check directly to the freight company.
The seller pays the freight charge and includes it on the invoice. The invoice includes the price of the goods and the freight charge. 56

57. Cost of Goods Sold Price of goods (debit Purchases) $4,760.00
Total invoice (credit Accounts Payable) $5,120.00
Freight charge (debit Freight In)
Purchases +
Freight In =
Accounts Payable
Dr.
4,760
Cr.
Dr.
360
Cr.
Dr.
Cr.
5,120
The account is treated as a Cost of Goods Sold account because it increased the cost of the merchandise purchased.
The cost of goods sold accounts have normal debit balances

58. Record purchases of merchandise on credit in a general journal.
Recording purchases of merchandise on credit in a general journal.

59. Purchases with Freight
Maxx-Out Sporting Goods purchased merchandise from Modern Sportsman on January 15. Modern Sportsman paid the freight charge and included it on their invoice Maxx-Out Sporting Goods enters three elements in the accounting records:
Price of goods
Freight charge
Total invoice
The journal entry to record the purchase of merchandise on credit in a general journal and posting to respective accounts is presented in the slide. 59

60. Payment of Invoice with freight
The journal entry to record payment of this invoice on January 30 using check number 152 appears below:
This is how the journal entry to record this payment should appear. 60

61. Purchases Returns and Allowances Sorry, I didn't like the color.
A purchase return is a return of unsatisfactory goods
When merchandise arrives, it is examined to confirm that it is satisfactory. Occasionally, the wrong goods are shipped, or items are damaged or defective. A purchase return is when the business returns the goods. A purchase allowance is when the purchaser keeps the goods but receives a reduction in the price of the goods.
A purchase allowance is a reduction in the price of the goods 61

62. Purchases Returns and Allowances Returns and Allowances
A credit to the Purchase Returns and Allowances account is made when a vendor returns something to a supplier.
Purchases Returns and Allowances
Returns and Allowances
Purchases returns and allowances are entered in the Purchases Returns and Allowances account, not in the Purchases account. Managers analyze this account to identify problem suppliers. It is a contra expense under cost of goods sold.
The normal balance of cost of goods sold accounts is a debit. The Purchases Returns and Allowances account has a normal credit balance.
A complete record of returns and allowances
A contra cost of goods sold account
Normal credit balance 62

63. Recording Purchases Returns And Allowances
On January 15 Maxx-Out Sporting Goods received merchandise costing $4,760 from Modern Sportsman with freight charges of $360 paid by Modern Sportsman. This is the original entry that was made on January 15.
This is how the journal entry to record the transaction should look. 63

64. Recording Purchases Returns And Allowances
Some goods received from the January 15 purchase were damaged, and the supplier granted a $476 purchase allowance on their credit memo #103 dated January 27.
Notice the entry to record the receipt of the credit memorandum from Modern Sportsman reduces Accounts Payable by debiting it for $476. 64

65. Recording the payment on account:
Accounts Payable
Purchases Returns and Allowances
476
476
The amount owed to Modern Sportsman, after the purchase allowance, is $4,644 ($5,120 - $476 = $4,644).
The entry to pay the amount owed to Modern Sportsman on January 31 with check number 153 is presented in the slide. 65

66. Purchases Discounts Net 30 days or n/30:
Payment in full is due 30 days after the date of the invoice.
Net 10 days EOM, or n/10 EOM:
Payment in full is due 10 days after the end of the month in which the invoice was issued.
2% 10 days, net 30 days; or 2/10, n/30:
If payment is made within 10 days of the invoice date, the customer can take a 2 percent discount. Otherwise, payment in full is due in 30 days.
A business may be able to take advantage of an early payment discount if it pays the invoice within a certain period of time. Here are some examples of credit terms which a seller might give a firm on a purchase. Take a moment to review the most common ones.
Cash discounts are given to encourage early payment. A cash discount is a discount offered by suppliers for payment received within a specified period of time. If a customer pays within a period of time it may receive a “cash discount” called a purchase discount. 66

67. Recording Purchases Discounts
Maxx-Out Sporting Goods received merchandise costing $3,000 from The Modern Sportsman on January 10, Invoice 880, terms 2/10, n/30, with freight charges of $200 paid by Modern Sportsman and added to the invoice.
Maxx-Out Sporting Goods recorded the purchase as presented in the slide.

68. Recording Purchases Discounts
Maxx-Out Sporting Goods paid the amount due, after deducting a $60 discount ($3,000 * 2%), on January 19 with check number 150.
The balance owed to Modern Sportsman was paid using check 150.

69. Purchase return processed within the discount period
If there is a purchase return processed within the discount period, the buyer is entitled to take the cash discount only on the balance owed after the return.
To illustrate, a purchase of $500 from Modern Sportsman on January 11, terms 2/10, n/30, with freight of $25 added, Invoice 910; a return of $100 on January 12, credit memorandum 112; and the final payment on January 20, check 149.
The amount to be paid on January 20 is $417, calculated as follows:
Original amount owed $525
Less: purchase return
Difference
Less: discount ($400 X 2%)
Amount paid $417

70. Determining the cost of purchases
Compute the net delivered cost of purchases.
Determining the cost of purchases
The income statement of a merchandising business contains a section showing the total cost of purchases.
This section combines information about
Cost of the purchases
Freight in
Purchases returns and allowances
Purchase Discounts
The Purchases account accumulates the cost of merchandise bought for resale. The income statement of a merchandising business contains a section showing the total cost of purchases. This section combines information about the cost of the purchases, freight in, purchases returns and allowances, and purchases discounts for the period. 70

71. Net Delivered Cost of Purchases
The net delivered cost of purchases for Maxx-Out Sporting Goods for January is calculated as follows.
Purchases $23,315
Freight In ,565
Delivered Cost of Purchases $24,880
Less Purchases Returns and Allowances
Less Purchases Discounts
Take a moment to review the calculation on the slide for the net delivered cost of purchases.
In Chapter 13, you will see how the complete income statement for a merchandising business is prepared. You will learn about the Cost of Goods Sold section and how the net delivered cost of purchases is used in calculating the results of operations.
Net Delivered Cost of Purchases $24,280 71

72. Accounting for Purchases, Accounts Payable and Cash Payments
Chapter 8
Accounting for Purchases, Accounts Payable and Cash Payments
Section 2: Accounts Payable
Section Objectives
8-3 Post from the general journal to the general ledger accounts.
8-4 Post transactions to the accounts payable subsidiary ledger.
8-5 Prepare a schedule of accounts payable.
8-6 Demonstrate a knowledge of the procedures for effective internal control of purchases.
8-7 Record purchases, sales, returns, cash payments, and cash receipts using the perpetual inventory system.
Section 2 of the chapter continues the purchasing process and introduces the accounts payable subsidiary ledger. 72

73. Accounts Payable Recording Merchandise Purchased with a Trade Discount
International Sportsman offers merchandise for sale with a list price of $1,000, with trade discounts of 20 percent and 10 percent, terms 2/10, n /30.
Maxx- Out Sporting Goods purchases merchandise with a list price from International Sportsman, Invoice 5201.
The amount owed for the purchase is computed as follows.
Businesses that buy merchandise on credit can conduct more extensive operations and use financial resources more effectively than if they paid cash for all purchases. It is important to pay invoices on time so that the business maintains a good credit reputation with its suppliers.
Recall from Chapter 7 that certain wholesale businesses offer goods to trade customers with the price computed using trade discounts.

74. Recording Merchandise Purchased with a Trade Discount
The journal entry to record the purchase on January 20 is presented in the slide.
If Maxx-Out Sporting Goods pays the invoice within 10 days, it will be entitled to a $14.40 discount (2% X $720). The amount paid will be $ ($720 - $14.40 = $705.60). The journal entry to record the payment on January 29 with check number 151 is presented in the slide.

75. Post from the general journal to the general ledger accounts.
Posting to the general ledger is done in the same manner as demonstrated in Chapter 4.
The process for posting to the general ledger is done in the same manner as demonstrated in Chapter 4.

76. The Accounts Payable Ledger
Post transactions to the accounts payable subsidiary ledger.
The Accounts Payable Ledger
An accounts payable ledger is a subsidiary ledger that contains a separate account for each creditor. Many businesses use an accounts payable subsidiary ledger to track amounts owed, to whom they are owed, when they are due, and discount terms. This ensures that the firms will have enough cash to pay for obligations.
Let’s review what an accounts payable subsidiary ledger looks like. It is similar to the accounts receivable subsidiary ledger discussed in the previous chapter.
The accounts payable ledger has three money columns.
The Balance column is presumed to contain credit amounts. 76

77. Posting to the subsidiary ledger:
Posting from the general journal to the accounts payable ledger is similar to posting the accounts receivable subsidiary ledger. The posting to the vendor’s account in the accounts payable subsidiary ledger is signified by entering a “/ ”, followed by a check mark, after the account number for accounts payable in the chart of accounts.

78. Prepare a schedule of accounts payable.
The total of the individual creditor accounts in the subsidiary ledger must equal the balance of the Accounts Payable control account.
To prove that the control account and the subsidiary ledger are equal, businesses prepare a schedule of accounts
payable.
The schedule of accounts payable displays the balances of the all vendor/creditor accounts. The total of all the vendor accounts will equal the total balance in the general ledger accounts payable control account. The schedule of accounts payable is particularly important to a business owner or accounts payable manager in keeping track of how much money the company owes and when that amount is due. 78

79. Schedule of Accounts Payable
The total of all vendor balances must equal the total in the accounts payable control account in the general ledger. Notice that the figure on the Schedule of Accounts payable matches the controlling total of Accounts Payable in the ledger. 79

80. Demonstrate a knowledge of the procedures for effective internal control of purchases.
In this section, we will discuss procedures for effective internal control of purchases. 80

81. Internal Control of Purchases
The objectives of the controls are to:
Create written proof that purchases and
payments are authorized;
Ensure that different people are involved in the process of buying goods, receiving goods, and making payments.
Because of the large amount of money spent to buy goods, most businesses develop careful procedures for the control of purchases and payments. Some firms have a voucher system, a special system used to achieve internal control. Whether the voucher system is used or not, a business should be sure that its control process includes sufficient safeguards. 81

82. Internal Control of Purchases
Effective systems have the following controls in place
1. All purchases should be made only after proper authorization has been given in writing.
2. Goods should be carefully checked when received. They
should then be compared with the purchase order and with the
invoice received from the supplier.
Separating duties among employees provides a system of checks and balances. In a small business with just a few employees, it might be difficult or impossible to separate duties. However, the business should design as effective a set of control procedures as the company’s resources will allow.
Effective systems have controls in place. Take a moment to review these internal controls related to the purchasing process.
3. The purchase order, receiving report, and invoice should be checked to confirm that the information on the documents is in agreement. 82

83. Internal Control of Purchases
4. The computations on the invoice should be checked for accuracy.
5. Authorization for payment should be made by someone other than the person who ordered the goods, and this authorization should be given only after all the verifications have been made.
All of these controls insure that proper accounting is taking place.
6. Another person should write the check for payment. 83

84. Internal Control of Purchases
7. Prenumbered forms should be used for purchase requisitions, purchase orders, and checks. Periodically
the numbers of the documents issued should be verified
to make sure that all forms can be accounted for.
All of these controls insure that proper accounting is taking place. 84

85. Record purchases, sales, returns, cash payments, and cash receipts using the perpetual inventory system.
The seventh objective of the chapter is to record purchases, sales, returns, cash payments, and cash receipts using the perpetual inventory system. So far the accounting for sales and purchases discussed in Chapter 7 and so far in Chapter 8 has assumed the use of a periodic system

86. The Perpetual Inventory System
When the perpetual system is used, an account called Merchandise Inventory replaces all purchase related accounts.
Additionally, perpetual inventory accounting requires a second entry when sales are made.
Summarized journal entries using both systems are summarized on the next few slides.
There are significant differences between a periodic inventory system and a perpetual inventory system. When the periodic system is used, the inventory records are only updated when a physical inventory is taken. This system is adequate for most small businesses.
Larger businesses may require up-to-date information of inventories on hand, and use the perpetual system. Take a moment to review the next few slides which will show the similarities and differences between the two inventory methods.

87. Purchases - Perpetual Inventory System
Take a moment to review the journal entries that would be used by a company that uses a period inventory system and compare them to a company that uses a perpetual inventory system.

88. Payments - Perpetual Inventory System
Take a moment to review the journal entries for cash payments and receipts using both a periodic system and a perpetual system.

89. Thank you and See You Thursday at the Same Time, Take Care