1. Accounting for Purchases and Cash Payments
Chapter 15 $
Accounting for Purchases and Cash Payments $
Making Accounting Relevant
We participate in the purchasing of goods and services daily. $
Have you ever wanted to buy something, but the store was out of that item? What effect does the out-of-stock situation have on business revenue? $

2. $ $ $ $ Why It’s Important Chapter 15
Section 1 Purchasing Items Needed by a Business (cont'd.)
Chapter 15 $
Why It’s Important
In Chapter 14 you learned that the primary source of income from a merchandising business is from the sale of its merchandise.
However, to sell merchandise, a business must first buy the items. Most of the items you find for sale at stores are purchased from wholesalers and suppliers.
In this chapter you will learn how to analyze these transactions. $ $ $

3. $ $ $ $ The Purchasing Process Chapter 15
Section 1 Purchasing Items Needed by a Business (cont'd.)
Chapter 15 $
The Purchasing Process
The purchase of supplies, equipment, and merchandise is divided into four stages: $ $
requesting needed items
ordering from a supplier
verifying items received
processing the supplier’s invoice $

4. $ $ $ $ Requesting Needed Items Chapter 15
Section 1 Purchasing Items Needed by a Business (cont'd.)
Chapter 15 $
Requesting Needed Items $
A purchase requisition is a written request that a certain item or items be purchased.
Purchase req’s are pre-numbered, multicopy forms.
Approved by the manager of the department requesting the purchase. $ $

5. $ $ $ $ Ordering from a Supplier 1. quantity 2. description
Section 1 Purchasing Items Needed by a Business (cont'd.)
Chapter 15 $
Ordering from a Supplier
A purchase order is a written offer to a supplier to buy certain items.
The purchase order contains: $ $
1. quantity
2. description
3. unit price
4. total cost
5. supplier’s name and address
6. date needed
7. shipping method (optional) $

6. $ $ $ $ Purchases Discounts Chapter 15
Section 1 Purchasing Items Needed by a Business (cont'd.)
Chapter 15 $
Purchases Discounts
Suppliers frequently offer charge customers a cash discount for early payment. $
1. Merchandise Discount
Purchased X Rate = Discount $
$2,300 X .02 = $46 $
Amount Paid
Within
Invoice Discount Discount
Amount – Amount = Period
$2,300 – $46 = $2,254

7. $ $ $ $ The Purchases Account Chapter 15
Section 1 Purchasing Items Needed by a Business (cont'd.)
Chapter 15 $
The Purchases Account
When a business buys merchandise to sell to customers, the cost of the merchandise is recorded in the Purchases account. The Purchases account is a temporary account, classified as a cost of merchandise account. $ $ $
Purchases
Debit +
Increase Side
Normal Balance
Credit –
Decrease Side

8. $ $ $ $ Why It’s Important Chapter 15
Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15 $
Why It’s Important
Purchasing is a critical, ongoing process in a merchandising business; therefore, it is essential that you learn how to record the different kinds of purchases transactions. $ $
In Chapter 14 you learned that when a business sells to many customers on credit, it is efficient to set up an accounts receivable ledger.
Likewise, when a business purchases on account from many different suppliers, it is efficient to set up an accounts payable ledger. $

9. $ $ $ $ The Accounts Payable Subsidiary Ledger Chapter 15
Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15
The Accounts Payable Subsidiary Ledger
The individual accounts in the accounts payable subsidiary ledger are summarized in the general ledger controlling account, Accounts Payable. $ $ $
General Ledger
Accounts Receivable—controlling account $4,500
Accounts Receivable Subsidiary Ledger
Individual Accounts Within Ledger:
Sandals Etc. $
Shoe Warehouse 2,100
Shoe Wholesale Inc. 1,000
Store Supply Shop 500
Total $4,500 $
Controlling account balance equals total of accounts in subsidiary ledger.

10. $ $ $ $ The Accounts Payable Subsidiary Ledger Form Chapter 15
Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15 $
The Accounts Payable Subsidiary Ledger Form $
Has lines at the top for the creditor’s name and address.
Has three amount columns. $ $

11. $ $ $ $ Recording the Purchase of Merchandise on Account Chapter 15
Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15 $
Recording the Purchase of Merchandise on Account $
Business Transaction
On December 14, On
Your Mark purchased
$2,300 in merchandise
on account from Pro
Runner Warehouse,
Invoice 7894. $ $
ANALYSIS Identify 1. The accounts affected are Purchases, Accounts Payable (controlling), and Accounts Payable—Pro Runner Warehouse (subsidiary).

12. Business Transaction (cont'd.)
Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15 $
Recording the Purchase of Merchandise on Account (cont'd.)
Business Transaction (cont'd.) $
On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.
T ACCOUNTS 6.
Accounts
Purchases Payable $
Debit +
2,300
Credit –
Debit –
Credit +
2,300 $
Accounts Receivable
Subsidiary Ledger
Pro Runner Warehouse
Debit –
Credit +
2,300

13. Business Transaction (cont'd.)
Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15 $
Recording the Purchase of Merchandise on Account (cont'd.) $
Business Transaction (cont'd.)
On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894. $
JOURNAL ENTRY 7. $

14. $ $ $ $ Purchases Returns and Allowances Chapter 15
Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15 $
Purchases Returns and Allowances $
Occasionally, a business buys merchandise that, upon inspection, is unacceptable.
A purchases return occurs when a business returns merchandise to the supplier for full credit.
A purchases allowance occurs when a business keeps less than satisfactory merchandise and pays a reduced price. $ $

15. Purchases Returns and Allowances
Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15 $
Purchases Returns and Allowances (cont'd.) $
A debit memorandum, or debit memo, is used to notify suppliers (creditors) of a return or to request an allowance. $
Purchases Returns and Allowances $
Debit –
Decrease Side
Credit +
Increase Side
Normal Balance

16. Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15 $
Recording a Purchases Returns and Allowances Transaction $
Business Transaction
On December 16, On Your
Mark issued Debit Memo-randum 51 for the return of
$200 in merchandise
purchased on account
from FastLane Athletics. $ $
ANALYSIS Identify 1. The accounts affected are Accounts Payable (controlling), Accounts Payable— FastLane Athletics (subsidiary), and Purchases Returns and Allowances.

17. Business Transaction (cont'd.)
Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15 $
Recording a Purchases Returns and Allowances Transaction (cont'd.)
Business Transaction (cont'd.) $
On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.
T ACCOUNTS 6.
Accounts Purchases Returns
Payable and Allowances $
Debit –
200
Credit +
Debit –
Credit +
200 $
Accounts Receivable
Subsidiary Ledger
FastLane Athletics
Debit –
200
Credit +

18. Business Transaction (cont'd.)
Section 2 Analyzing and Recording Purchases on Account (cont'd.)
Chapter 15 $
Recording a Purchases Returns and Allowances Transaction (cont'd.) $
Business Transaction (cont'd.)
On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics. $
JOURNAL ENTRY 7. $

19. $ $ $ $ Why It’s Important Chapter 15
Section 3 Analyzing and Recording Cash Payments (cont'd.)
Chapter 15 $
Why It’s Important
If cash is the lifeblood of a business, the accounting department is its heart.
All cash entering or leaving a business is “pumped” through the accounting department at some time.
About half of all business transactions result in the outflow of cash; therefore, it is essential that you understand how businesses record various cash payment transactions. $ $ $

20. $ $ $ $ Controls over Cash Chapter 15
Section 3 Analyzing and Recording Cash Payments (cont'd.)
Chapter 15 $
Controls over Cash
The following are procedures to manage cash payments: $
Authorize all cash payments.
Write checks for all payments.
Use pre-numbered checks.
Retain and account for spoiled checks. $ $

21. $ $ $ $ Recording Cash Purchase of Insurance Chapter 15
Section 3 Analyzing and Recording Cash Payments (cont'd.)
Chapter 15 $
Recording Cash Purchase of Insurance $
Business Transaction
On December 17, On
Your Mark paid $1,500
to Keystone Insurance
Company for the premium on a six-month insurance policy, Check 1001. $ $
ANALYSIS Identify 1. The accounts affected are Prepaid Insurance and Cash in Bank.

22. Business Transaction (cont'd.)
Section 3 Analyzing and Recording Cash Payments (cont'd.)
Chapter 15 $
Recording Cash Purchase of Insurance (cont'd.) $
Business Transaction (cont'd.)
On December 17, On Your Mark paid $1,500 to Keystone Insurance Company for the premium on a six-month insurance policy, Check 1001. $
T ACCOUNTS 6.
Prepaid Cash in
Insurance Bank $
Debit +
1,500
Credit –
Debit +
Credit –
1,500

23. Business Transaction (cont'd.)
Section 3 Analyzing and Recording Cash Payments (cont'd.)
Chapter 15 $
Recording Cash Purchase of Insurance (cont'd.) $
Business Transaction (cont'd.)
On December 17, On Your Mark paid $1,500 to Keystone Insurance Company for the premium on a six-month insurance policy, Check 1001. $
JOURNAL ENTRY 7. $

24. $ $ $ $ Purchases Discounts Chapter 15
Section 3 Analyzing and Recording Cash Payments (cont'd.)
Chapter 15 $
Purchases Discounts
The Purchases Discounts account tracks the cash discounts a business takes.
Purchases Discounts is a contra cost of merchandise account.
It’s balance reduces the balance of the Purchases account, therefore, its normal balance is a credit. $ $ $

25. $ $ $ $ Recording Cash Payments for Items Purchased on Account
Section 3 Analyzing and Recording Cash Payments (cont'd.)
Chapter 15 $
Recording Cash Payments for Items Purchased on Account $
Business Transaction
On December 24, On
Your Mark paid $2,254
to Pro Runner Warehouse
for merchandise pur-
chased on account,
$2,300 less a discount of $46, Check 1003. $ $
ANALYSIS Identify 1. The accounts affected are Accounts Payable (controlling), Accounts Payable—Pro Runner Warehouse (subsidiary), Cash in Bank, and Purchases Discounts.

26. Business Transaction (cont'd.)
Section 3 Analyzing and Recording Cash Payments (cont'd.)
Chapter 15 $
Recording Cash Payments for Items Purchased on Account (cont'd.)
Business Transaction (cont'd.) $
On December 24, On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise purchased on
account, $2,300 less a discount of $46, Check 1003.
T ACCOUNTS 6.
Accounts Cash
Payable in Bank $
Debit –
2,300
Credit +
Debit +
Credit –
2,254 $
Accounts Receivable
Subsidiary Ledger Purchases
Pro Runner Warehouse Discount
Debit –
2,300
Credit +
Debit –
Credit + 46

27. Business Transaction (cont'd.)
Section 3 Analyzing and Recording Cash Payments (cont'd.)
Chapter 15 $
Recording Cash Payments for Items Purchased on Account (cont'd.) $
Business Transaction (cont'd.)
On December 24, On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise purchased on
account, $2,300 less a discount of $46, Check 1003. $
JOURNAL ENTRY 7. $