1. Ch. 15, Sec. 2: Analyzing and Recording Purchases on Account
Accounting II
Ms. Alltucker

2. Learning Objectives What you will learn: Why it’s important:
How the accounts payable subsidiary ledger is used
How to record the purchase of merchandise on account
How to record the purchase of other assets on account
How to record purchases returns and allowances transactions
How to post to creditor accounts in the accounts payable subsidiary ledger
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

3. Analyzing Purchases of Assets on Account
Accounts Payable Subsidiary Ledger
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.

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

5. Recording the Purchase of Merchandise on Account
Business Transaction (cont'd.)
ANALYSIS Classify 2. Purchases is a cost of merchandise account. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are liability accounts.
On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

6. Recording the Purchase of Merchandise on Account
Business Transaction (cont'd.)
ANALYSIS + / – 3. Purchases is increased by $2,300. This is the cost of merchandise purchased. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are increased by $2,300.
On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

7. Recording the Purchase of Merchandise on Account
Business Transaction (cont'd.)
DEBIT-CREDIT RULE 4. Increases to cost of merchandise accounts are recorded as debits. Debit Purchases for $2,300.
5. Increases to liability accounts are recorded as credits. Credit Accounts Payable (controlling) for $2,300. Also credit Accounts Payable—Pro Runner Warehouse (subsidiary) for $2,300.
On December 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

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

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

10. Recording the Purchase of Merchandise on Account
When the entry is recorded:
Diagonal line is entered in the Posting Reference column to indicate that the credit amount is posted in two places
1st—Accounts Payable controlling account in the general ledger
2nd—post to accounts payable subsidiary ledger

11. Purchases Returns and Allowances
Purchase return: business returns merchandise to the supplier for full credit
Purchase allowance: occurs when a business keeps less than satisfactory merchandise and pay a reduced price
Debit Memorandum: used to notify suppliers of a return or to request an allowance
Always results in a decrease to Accounts Payable controlling account and subsidiary ledger

12. Purchases Returns and Allowances
Contra cost of merchandise
Reduces the balance of the related account, purchases
Credit +
Increase Side
Normal Balance
Debit –
Decrease Side
Purchases Returns and Allowances

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

14. Recording a Purchase Returns and Allowances Transactions
Business Transaction (cont'd.)
ANALYSIS Classify 2. Accounts Payable (controlling) and Accounts Payable— FastLane Athletics (subsidiary) are liability accounts. Purchases Returns and Allowances is a contra cost of merchandising account.
On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.

15. Recording a Purchase Returns and Allowances Transaction
Business Transaction (cont'd.)
ANALYSIS + / – 3. Accounts Payable (controlling) and Accounts Payable— FasLane Athletics (subsidiary) are decreased by $200. Purchases Returns and Allowances is increased by $200.
On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.

16. Recording a Purchase Returns and Allowances Transaction
Business Transaction (cont'd.)
DEBIT-CREDIT RULE 4. Decreases to liability accounts are recorded as debits. Debit Accounts Payable (controlling) for $200. Also debit Accounts Payable—FastLane Athletics (subsidiary) for $200.
5. Increases to contra cost of merchandise accounts are recorded as credits. Credit Purchases Returns and Allowances for $200.
On December 16, On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics.

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

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

19. Posting to the Accounts Payable Subsidiary Ledger
Refer to figure 15-6 on page 399 in your textbook
Don’t forget about the diagonal line in the general journal and posting the check mark and the post reference in the general journal

20. Thinking Critically
When and why would a business use an accounts payable subsidiary ledger?
When merchandise purchased by a business is unacceptable, what can the business do to recover the cost of merchandise?