1. 1 Chapter 9 Sales and Purchases College Accounting 10th Edition
McQuaig Bille Nobles
McQuaig Bille
PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University
© 2011 Cengage Learning

2. LEARNING OBJECTIVES
After studying this chapter, you should be able to:
After you have completed this chapter, you will be able to do the following:
Describe the specific accounts used by a merchandising firm. 1
Journalize sales transactions in a general journal, and post to the accounts receivable ledger and general ledger. 2
Prepare a schedule of accounts receivable. 3
(continued)

3. After studying this chapter, you should be able to:
After you have completed this chapter, you will be able to do the following:
Journalize sales returns and allowances, including credit memorandums and returns, in a general journal, and post to the accounts receivable ledger and general ledger. 4
Journalize sales transactions and returns involving sales tax. 5
Journalize purchase transactions in a general journal, and post to the accounts payable ledger and general ledger. 6
Prepare a schedule of accounts payable. 7
(continued)

4. After studying this chapter, you should be able to:
After you have completed this chapter, you will be able to do the following:
Journalize transactions involving purchases returns and allowances in a general journal, and post to the accounts payable ledger and general ledger. 8
Describe the procedures for handling freight charges on merchandise and other goods. 9
Journalize transactions in a sales journal, and post to the accounts receivable ledger and general ledger. 10
Journalize transactions in a three-column purchases journal, and post to the accounts payable ledger and general ledger. 11

5. Companies Who Buy and Sell Goods
Companies who buy and sell goods are known as merchandising businesses.
Merchandising businesses can be a wholesale or a retail business.
A wholesale business buys goods from manufacturers and sells them to retailers.
A retail business sells goods directly to consumers.

6. Learning Objective 1
Describe the specific accounts used by a merchandising firm.

7. Specific Accounts for Merchandising Firms
Merchandise inventory consists of a stock of goods that a company buys and intends to resell at a profit.
The periodic inventory system requires that companies take a physical inventory of merchandise on hand and then attach a value to it.
(continued)

8. Specific Accounts for Merchandising Firms
The perpetual inventory system requires that companies keep continuous records of inventories by recording all transactions, so that at any given time they know what they should have on hand and the current cost.
When merchandising firms record sales of merchandise, they use the Sales account.
(continued)

9. Specific Accounts for Merchandising Firms
The Sales Returns and Allowances account is a contra account that is used to record the physical return of merchandise or a reduction in a bill because merchandise was damaged.
The Sales Tax Payable account is used to record a tax levied by a state or city government on the retail sale of goods and services.
(continued)

10. Specific Accounts for Merchandising Firms
The Purchases account is used strictly to record the cost of merchandise bought for resale.
The Purchases Returns and Allowances account is a contra account that is used to record the company’s returns.
(continued)

11. Specific Accounts for Merchandising Firms
The Sales Discounts and Purchase Discounts accounts are also contra accounts that are used to record cash discounts for prompt payments.
The Freight-In account is used to record the transportation charges on incoming merchandise.

12. Following is the fundamental accounting equation with the T accounts for merchandising businesses.

13. Source Documents Related to Sales
In a retail business, a salesperson usually prepares a sales ticket for sales on account.
In a wholesale business, the company usually receives a written order directly from a customer or through a salesperson who obtained the order from the customer.
Invoices are prepared in multiple copies.
(continued)

14. FIGURE 1
Possible distribution of sales invoice copies to various parties

15. Learning Objective 2
Journalize sales transactions in a general journal, and post to the accounts receivable ledger and the general ledger.

16. Sales Transactions Sales transactions can be recorded two ways:
Recording directly into the general journal
By using a special journal, called a sales journal
If a company does not have many transactions involving sales and/or does not want to use special journals, the company would use alternative 1 above.

17. FIGURE 2
Sales invoice
(continued)

18. FIGURE 2
Sales invoice (concluded)

19. On August 14, sold merchandise on account to Marty’s Fly Fishing Adventures, invoice no. 9386, $1,594.
On August 1, sold merchandise on account to Mesa River Raft Company, invoice no. 9384, $1,
On August 8, sold merchandise on account to Green River Rafts, invoice no. 9385, $1,116.
(continued)

20. On August 19, sold merchandise on account to Hi-Flying Adventures, Inc
On August 19, sold merchandise on account to Hi-Flying Adventures, Inc., invoice no. 9387, $
On August 25, sold merchandise on account to Hi-Flying Adventures, Inc., invoice no. 9388, $1,674.

21. Whitewater Raft Supply After Posting Slide 20

22. FIGURE 3
Accounts receivable ledger (computerized)

23. FIGURE 4
Accounts receivable ledger (manual)

24. The Accounts Receivable Ledger
Even though an accounts receivable ledger is maintained, the Accounts Receivable account in the general ledger should still be maintained.
When all the postings are up to date, the balance of Accounts Receivable should equal the total of all credit customers’ individual account balances.
(continued)

25. The Accounts Receivable Ledger
The Accounts Receivable account in the general ledger is called a controlling account.
The accounts receivable ledger, containing the accounts of all the credit customers is called a subsidiary ledger.

26. PRACTICE EXERCISE 1
Record the following transaction for Rodgers Refrigerator Supply in general journal form.
Aug. 23 Sold merchandise on account to Robbins Hardware Store, invoice no. 3209, $1,340.

27. PRACTICE EXERCISE 1 SOLUTION

28. Learning Objective 3
Prepare a schedule of accounts receivable.

29. FIGURE 5
Schedule of accounts receivable

30. Interrelationship of the accounts receivable ledger, general ledger, and schedule of accounts receivable
FIGURE 6

31. Fill in the missing amounts in the accounts receivable subsidiary ledgers for Willis Spas and Pools. Then, using the information from the ledgers, prepare a schedule of accounts receivable.
(continued)

32. PRACTICE EXERCISE 2 (concluded)

33. $2,561.40
$1,356.40
$276.60

34. Learning Objective 4
Journalize sales returns and allowances, including credit memorandums and returns, in a general journal, and post to the accounts receivable ledger and general ledger.

35. Sales Returns and Allowances
A return is a physical return of the goods.
An allowance is a reduction from the original price because the goods were defective or damaged.
A credit memorandum is a written statement indicating a seller’s willingness to reduce the amount of a buyer’s debt.
Sales Returns and Allowances is a contra account that is deducted from Sales.

36. Transaction (a). On September 1, Whitewater Raft Supply sold merchandise on account to Rugged River Company, $3,614, and recorded the sale in the general journal.

37. Transaction (b). On September 5, Rugged River Company returned $254 worth of the merchandise. Whitewater Raft Supply issued credit memorandum no (Slide 38).
(continued)

38. FIGURE 7
Credit memorandum
(continued)

39. The following entries in the general journal, general ledger, and accounts receivable ledger are shown after posting of the transactions are complete.
(continued)

40. (continued)

41. PRACTICE EXERCISE 3
Refer to the transaction in Practice Exercise 1. Assume that on September 1, Robbins Hardware Store returned $81 of the merchandise. Rodgers Refrigerator Supply issued credit memo no Record the journal entry for the return.
Left click the mouse to go to Practice Exercise 1 on Slide 26. To return to this slide, type “41” and press “Enter.”

42. PRACTICE EXERCISE 3 SOLUTION

43. Learning Objective 5
Journalize sales transactions and returns involving sales tax.

44. Sales Transactions Involving Sales Tax
David Fly-Fishing Outfitters, a retail store, had the following transaction that included sales tax computed on the amount of the sale of merchandise:
Jan. 3 Sold merchandise on account to R. Martinez, invoice no. 101, $ plus sales tax of $12.28.
(continued)

45. (continued)

46. Sales Transactions Involving Sales Tax
At the end of the first quarter, the accountant for David Fly-Fishing Outfitters determines that the total sales tax payable for the quarter is $

47. Sales Returns Involving Sales Tax
Transaction (a). On May 1, David Fly-Fishing Outfitters sold merchandise on account to B. Hill for $1,550 plus $124 sales tax.
Transaction (b). On May 5, Hill returned the merchandise and David Fly-Fishing Outfitters issued credit memorandum no
(continued)

48. Following is the general journal entry required for this type of return:

49. Source Documents Related to Purchases
The Purchasing Department normally requires that any requests to buy merchandise be in writing, in the form of a purchase requisition.
(continued)

50. FIGURE 8
Purchase requisition

51. Source Documents Related to Purchases
After the purchase requisition has been approved, the Purchasing Department sends the company’s written offer, a purchase order, to the supplier.
(continued)

52. FIGURE 9
Purchase order
(continued)

53. FIGURE 10
Purchase invoice

54. Source Documents Related to Purchases
Terms means the terms of payment.
The terms shown in Figure 9 (Slide 52) are “2/10, n/30.” This means that if the buyer pays the amount due within 10 days, they will receive a 2 percent discount, otherwise the entire amount is due in 30 days.
Terms of “net 30 days” means that there is no cash discount offer; the full amount is due in 30 days.

55. PRACTICE EXERCISE 4
Record the following transaction for Powers Company in general journal form.
July 14 Sold merchandise on account to C. Heald, invoice no. D446, $560 plus $44.80 sales tax.

56. PRACTICE EXERCISE 4 SOLUTION

57. Learning Objective 6
Journalize purchase transactions in a general journal, and post to the accounts payable ledger and general ledger.

58. Purchase Transaction
August 2. Whitewater Raft Supply bought merchandise on account from Pataponia, Inc., invoice no. 2706, $1,710; terms 2/10, n/30; dated July 31; FOB San Francisco, freight prepaid and added to the invoice, $85.50 (total $1,795.50).
Journal entries for purchases are taken from a purchase invoice. The one for this entry is found on Slide 53. Whitewater Raft Supply records purchases of merchandise in a general journal.
Left click the mouse on the button to go to Slide 53. To return to this slide, enter “58,” then press “Enter.”
(continued)

59. Purchase Transaction
(continued)

60. Purchase Transaction
August 10. Whitewater Raft Supply bought merchandise on account from Langseth and Son, invoice no. 982, $2,772; terms net 30 days; dated August 8; FOB Cleveland, freight prepaid and added to the invoice, $157 (total $2,929).
(continued)

61. Purchase Transaction
August 17. Whitewater Raft Supply bought merchandise on account from Dana Manufacturing Company, invoice no , $564; terms 2/10, n/30; dated August 15; FOB Los Angeles.
(continued)

62. Purchase Transaction
August 26. Whitewater Raft Supply bought merchandise on account from Pataponia, Inc., invoice no. 2801, $2,503.70; terms 2/10, n/30; dated August 24; FOB San Francisco, Freight prepaid and added to the invoice, $ ($total $2,606).
(continued)

63. Purchase Transaction

64. The Accounts Payable Ledger
Accounts Payable is a controlling account.
The accounts payable ledger is a subsidiary ledger, and it consists of individual accounts for all the creditors listed in either alphabetical or numerical order.
When all the postings are up to date, the balance in Accounts Payable should equal the total of all the creditors’ individual account balances.
(continued)

65. FIGURE 11
Accounts payable ledger (computerized)

66. FIGURE 12
Accounts payable ledger (manual)

67. PRACTICE EXERCISE 5
Record the following transaction for Byrne Corporation in general journal form:
Apr. 14 Bought merchandise on account from Jabari, Inc., invoice no. C3009, $1,125; terms net 30 days; dated April 12; FOB shipping point, freight prepaid and added to the invoice, $72.50 (total $1,197.50).

68. PRACTICE EXERCISE 5 SOLUTION

69. Learning Objective 7
Prepare a schedule of accounts payable.

70. FIGURE 13
Schedule of accounts payable

71. FIGURE 14
Accounts payable controlling account

72. PRACTICE EXERCISE 6
Fill in the missing amounts in the accounts payable subsidiary ledgers for Updike Train Supply. Then, using the information from the ledgers, prepare a schedule of accounts payable.
(continued)

73. PRACTICE EXERCISE 6 (concluded)

74. PRACTICE EXERCISE 6 SOLUTION
$175.40
$4,450.25
$2,950.25

75. Learning Objective 8
Journalize transactions involving purchases returns and allowances in a general journal, and post to the accounts payable ledger and general ledger.

76. Purchases Returns and Allowances
Purchases Returns and Allowances is a contra account to Purchases and is considered a deduction from Purchases.
Using a separate account provides a better record of the total returns and allowances.
Purchases Returns and Allowances is deducted from Purchases on the income statement.
(continued)

77. Purchases Returns and Allowances
Transaction (a). On September 2, bought merchandise on account from Dana Manufacturing Company, $830.
Transaction (b). On September 8, received credit memorandum no from Dana Manufacturing Company for $270.
(continued)

78. Purchases Returns and Allowances
(continued)

79. Purchases Returns and Allowances
(continued)

80. Purchases Returns and Allowances
The accountant must post the amount to both the Accounts Payable controlling account and the individual creditor’s accounts in the accounts payable ledger. The postings of the journal in Slide 79 are shown in Slides 81 and 82.
(continued)

81. (continued)

82. Posted Subsidiary Ledger

83. PRACTICE EXERCISE 7
Refer to the transaction in Practice Exercise 5. Assume that on April 24, Byrne Corporation received credit memo no. 117 from Jabari, Inc., for merchandise returned, $127. Record the transaction for the purchase return.
Left click the mouse on the button to return to Practice Exercise 5. To return to this slide type “83” and press the “Enter” key.

84. PRACTICE EXERCISE 7 SOLUTION

85. Learning Objective 9
Describe the procedures for handling freight charges on merchandise and other goods.

86. Freight Charges on Incoming Merchandise
Freight costs are expressed as FOB (free on board) destination or shipping point.
Destination is the buyer’s location.
Shipping point is the seller’s location.
If the seller assumes the entire cost of transportation, without any reimbursement from the buyer, the terms are FOB destination.
(continued)

87. Freight Charges on Incoming Merchandise
If the buyer is responsible for paying the freight cost, the shipping terms are called FOB shipping point.
When goods are shipped FOB destination, the freight charges are not stated, and the seller pays the amount of the freight.
(continued)

88. Freight Charges on Incoming Merchandise
When goods are shipped FOB shipping point, transportation costs may be handled in two ways:
The buyer may pay the freight charges directly to the transportation company.
The transportation or shipping costs may be listed separately on the invoice.
(continued)

89. Freight Charges on Incoming Merchandise
(continued)

90. Freight Charges on Incoming Merchandise

91. Transportation Charges on the Buying of Goods and Services Other than Merchandise
Whitewater Raft Supply bought display cases on account from Carter Cabinet Shop, at a cost of $2,700 plus freight charges of $200.
Note that the freight is part of the cost of the store equipment

92. Internal Control of Purchases
Purchases are made only after proper authorization is given.
The receiving department carefully checks all goods upon receipt for count, damages, and description.
The person who authorizes the payment is neither the person doing the order nor the person actually writing the check.
The person who actually writes the check has not been involved in any of the foregoing purchasing procedures.

93. PART TWO—RECORDING TRANSACTIONS INTO SALES JOURNAL AND PURCHASES JOURNAL

94. Special Journals
Sales journal (S): Used to record sales of merchandise sold on account only.
Purchases journal (P): Used to record purchases of merchandise purchased on account only.
Cash receipts journal (CR): Used to record all transactions that include a debit to Cash.
Cash payments journal (CP): Used to record all transactions that include a credit to Cash.

95. a. Who pays the freight when the terms of sale are FOB shipping point?
PRACTICE EXERCISE 9
a. Who pays the freight when the terms of sale are FOB shipping point?
b. Who pays the freight when the terms of sale are FOB destination?
PRACTICE EXERCISE 9 SOLUTION
Buyer
Seller

96. Learning Objective 10
Journalize transactions in a sales journal, and post to the accounts receivable ledger and general ledger.

97. The Sales Journal
The sales journal records sales of merchandise on account only.
Aug. 1 Sold merchandise on account to Mesa River Raft Company, invoice no. 9384, $1,
(continued)

98. The Sales Journal
Aug. 8 Sold merchandise on account to Green River Rafts, invoice no. 9385, $1,116.
(continued)

99. The Sales Journal
Aug. 14 Sold merchandise on account to Marty’s Fly Fishing Adventures, invoice no. 9386, $1,594.
(continued)

100. The Sales Journal
Aug. 19 Sold merchandise on account to Hi-Flying Adventures, Inc., invoice no. 9387, $
(continued)

101. The Sales Journal
Aug. 25 Sold merchandise on account to Hi-Flying Adventures, Inc., invoice no. 9388, $1,674.

102. Posting from the Sales Journal
Using the sales journal saves time and space in posting.
You can make a single posting to Accounts Receivable and Sales for the amount of the total as of the last day of the month.
This is called a summarizing entry because it summarizes one month’s transactions.
(continued)

103. (continued)

104. FIGURE 15
Sales journal
After posting the total of the sales journal to Accounts Receivable in the general ledger, the account number is written here.
(continued)

105. FIGURE 15
Sales journal (concluded)
After posting the total of the sales journal to Sales in the general ledger, the account number is written here.

106. Sales Journal with Sales Taxes Payable
Jan. 3 Sold merchandise on account to R. Martinez, invoice no. 101, $ plus sales tax of $12.28.

107. PRACTICE EXERCISE 9
Record the following sales of merchandise on account on page 25 of the sales journal and then post to the general ledger. (The company uses the same account numbers as Whitewater Raft Supply.)
Apr. 1 Sold merchandise on account to West Company, invoice no. 1054, $1,
15 Sold merchandise on account to Ruiz Company, invoice no. 1055, $

108. PRACTICE EXERCISE 9 SOLUTION
(continued)

109. PRACTICE EXERCISE 9 SOLUTION (concluded)

110. Learning Objective 11
Journalize transactions in a three-column purchases journal and post to the accounts payable ledger and general ledger.

111. Purchases Journal (Three-Column)
Aug. 2 Bought merchandise on account from Pataponia, Inc., invoice no. 2706, $1,710; terms 2/10, n/30; dated July 31; FOB San Francisco, freight prepaid and added to the invoice, $85.50 (total $1,795.50).
(continued)

112. Purchases Journal (Three-Column)
Aug. 10 Bought merchandise on account from Langseth and Son, invoice no. 982, $2,772; terms net 30 days; dated August 8; FOB Cleveland, freight prepaid and added to the invoice, $157 (total $2,929).
(continued)

113. Purchases Journal (Three-Column)
Aug. 17 Bought merchandise on account from Dana Manufacturing Company, invoice no , $564; terms 2/10, n/30; dated August 15; FOB Los Angeles.
(continued)

114. Purchases Journal (Three-Column)
Aug. 26 Bought merchandise on account from Pataponia, Inc., invoice no. 2801, $2,503.70; terms 2/10, n/30; dated August 24; FOB San Francisco, freight prepaid and added to the invoice, $ (total $2,606).

115. FIGURE 16
Purchases journal and general ledger accounts
(continued)

116. Purchases journal and general ledger accounts (concluded)
FIGURE 16

117. PRACTICE EXERCISE 10
Record the following purchases of merchandise on account on page 52 of the purchases journal and then post to the general ledger. (The company uses the same account numbers as Whitewater Raft Supply.)
Jan. 4 Bought merchandise on account from Switzer Corporation, invoice no. A459, $578; terms net 60 days; dated January 2; FOB destination.
24 Bought merchandise on account from Stevens Company, invoice no , $799.80; terms 2/10, n/30; dated January 22: FOB shipping point, freight prepaid and added to the invoice, $50 (total $849.80).

118. PRACTICE EXERCISE 10 SOLUTION
(continued)

119. PRACTICE EXERCISE 10 SOLUTION (concluded)

120. THE END