The Accounting Cycle for a Merchandising Corporation!!!Chapter 15: Accounting forPurchases and Cash Payments Welcome to…
Essential Outcomes15. Understands relationship between purchases, other assets, and returns, allowances and discounts by being able to: a. Read, calculate & record credit terms for suppliers b. Explain the procedures for processing a purchase on account c. Describe the accounts used in the purchasing process. d. Record a variety of purchases and cash payment transactions e. Post to the accounts payable subsidiary ledger f. Define the accounting terms used in this chapter.
1. Purchase merchandise for resale 2. Sale of goods 5. Profit for cash or on account 4. Pay expenses: rent, utilities, 3. Collect cash salaries, etc. from accountsFirst step for business is #1
All items bought/purchased from Wal-Mart are purchased from wholesalers and suppliers.
Four Stages of buying:1. Requesting needed items2. Ordering from a supplier3. Verifying items received4. Processing the supplier’s invoice
Requesting Needed Itemso Small business: owner does all buying of merchandiseo Large business: purchasing department buys items for entire company equipment supplies inventory
Requesting Needed ItemsPurchase requisition: departments make written request to managers to purchase items for department thru this requisition formOnce approved, original copy sent to purchasing department & person making requests receives copy
Ordering from Supplier Purchase Order <PO>: after requisition form is approved, fill out order form Information for purchase order comes off purchase requisition formOn PO form: 1. Quantity 2. Description 3. Unit price 4. Total cost 5. Supplier’s name & address 6. Date needed 7. Shipping method
Verifying Items ReceivedWhen order is shipped to buyer, packing slip included with orderPacking Slip: form that lists items included in shipmentUse packing slip to make sure all items have been includedBuyer does not pay for items that were missing or damaged or unordered
Processing Supplier’s Invoice Supplier prepares “invoice” for buyer Invoice sent; accounting clerk checks for accuracy Invoice is source document for journal entry for buyer Before invoice is journalized, processing stamp placed on invoice: date to be paid, discount amount, amount to be paid & check #
Purchases DiscountPurchases Discount: supplier offers customer (or buyer) cash discount for early paymentPurchases Discount and Sales <Cash> discount figured same wayCredit terms: 2/10, n/30Discount period: first 10 days of billAfter 10 days, pay full amount
The Purchases AccountPurchases Account: when business buys merchandise to sell to customers, cost of merchandise is recorded to this accountPurchases Account: 1. Temporary account 2. Classified as a cost of merchandise account 3. Cost of merchandise accounts: contain actual cost to business of merchandise sold to customers
The Purchases AccountMerchandise purchased for resale is cost of doing businessPurchases Account: normal balance: debitUsed whenever merchandise is sold for resale
Accounts Payable & Accounts Payable Subsidiary LedgerWhen business purchases from many suppliers on account, hard to keep track of debts by using only Accounts Payable account in General LedgerAccounts Payable: controlling accountControlling account: where balance of all accounts are set up
Accounts Payable & Accounts Payable Subsidiary LedgerAccounts Payable Subsidiary Ledger: listing of suppliers that company purchases from on continuous bases on accountThe total of all of suppliers listed in Accounts Payable Subsidiary ledger should equal balance in Accounts Payable in General Ledger
Recording the Purchase of Merchandise on account
Recording Merchandise Purchased for ResaleOn Dec. 14, On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Inv. #7894 Purchases A/R or Cash P $2,300 $2,300
Purchased $900 in merchandise on account from Sunrise Novelty Supply. Invoice SN 110. Purchases A/P – Sunrise Novelty $900 $900
Posting to Accounts Payable & Accounts Payable Subsidiary Ledger1. First: Post to General Ledger—Accounts Payable (controlling account)—return to General Journal & put account # on top of diagonal line2. Second: Post to individual account in Subsidiary ledger—return to General Journal & put check mark below diagonal line in Post. Ref.
A ComparisonAccounts Receivable Accounts Payable• Controlling Account • Controlling Account• Used for merchandise • Used for merchandise sold on account purchased on account• Normal Balance: Debit • Normal Balance: Credit• Accounts Receivable • Accounts Payable Subsidiary Ledger Subsidiary Ledger• Double Post • Double Post• Sales Returns & • Purchases Returns & Allowances Allowances• Sales Discount • Purchases Discount• Credit Memo • Debit Memo
Recording other Purchases on Account Purchase/buy supplies, equipment, land, etc. for cash or on account The Purchases account is ONLY used for buying of “merchandise”. Accounts used for buying other assets will be debited to that particular asset account.
Purchases Returns and Allowances Contra account : to Purchases, meaning it has opposite balance Normal balance: credit Purchase Returns: business returns purchased merchandise to creditor for full credit Purchases allowance: business keeps less than satisfactory merchandise and pays reduction in price Source document: Debit Memorandum
Debit MemorandumOur business want to return $900 of merchandise purchased on account due to damage. Entry would be as follows Purchases Returns & A/P Sunrise Novelty Allowances $900 $900
A Comparison Sales Returns & Allowances Purchases Returns & Allowances• Contra account to Sales • Contra acct to Purchases• Source document: Credit • Source document: Debit Memorandum Memorandum• Used for sales customers • Used by business who who return merchandise purchased merchandise due to wrong size, wrong due to wrong size, wrong color, defective, etc. color, defective, etc.• Normal Balance: Debit • Normal Balance: Credit
Analyzing Cash PaymentsUsually all payments by business are paid by checkInternal control measures to safe guard moneyThree types of cash payments that occur frequently: 1. Purchases Discounts 2. Purchase of Insurance 3. Purchase of Items bought on account
Purchases Discounts Purchases Discount: used whenever company pays early on merchandise bought/purchased on account Purchases Discount: contra asset account to Purchases account (has opposite normal balance) Normal Balance: credit
1. Purchases DiscountsPurchase Invoice has credit terms of 2/10, n/30. Invoice purchase costs $1,150.Company pays bill within 10, must figure purchases discount$1,150 x .02 = $23.00$1,150 - $23 (discount) = $1,127
1. Purchases DiscountsJournal Entry:Accounts Payable $1,150 Purchases Discount $ 23 Cash in Bank 1,127 Check #115
A Comparison Sales Discount Purchases Discount Customer pays early • Business (buyer of within credit terms merchandise) pays early Control account: Sales within credit terms Normal Balance: Debit • Control account: Purchases Accounts affected: Cash • Normal Balance: Credit in Bank (dr); Sales • Accounts affected: A/P Discount (dr) & A/R (dr) & Purchases Discount credit (cr); Cash in Bank (cr)
2. Analyzing Insurance Payments Businesses usually buy insurance to protect company against fire, flood, etc. Usually company pays 6-month premium in advance for protection of its company every two years Premium: cost of insurance protection Premiums charged to account called, “Prepaid Insurance.”
Analyzing Insurance Payments At end of year, used amount of insurance or the “expired amount” becomes an adjusting entry (more on this later). Prepaid Insurance: asset account Normal Balance: debit
Journalizing Insurance Payments On December 17, pay $1,500 to Keystone Insurance Company for premium on six-month insurance policy, check #1001 Journal Entry:Prepaid Insurance $1,500 Cash in Bank $1,500 Check #1001
3. Other Cash Payments: Shipping cost of merchandise Buy merchandise from supplier, someone must pay for shipping (moving) merchandise from warehouse to place of sale Shipping terms determine who pays shipping charges: either buyer or supplier FOB: Means Free on Board
3. Shipping cost of merchandise FOB destination: supplier pays shipping costs from supplier to buyer’s business. FOB Shipping point: buyer pays the shipping charge from supplier’s shipping point to buyer’s business. FOB Shipping Point: additional cost to merchandise purchased.
Transportation In Journal Entry FOB Shipping Point: additional cost to merchandise purchased. Account used: Transportation In Transportation In: NB: Debit Journal Entry:Transportation In Debit Cash in Bank Credit
3. Bankcard Feeso Fee that banks charge for handling bankcard sales slipso Usually percentage of total amount on bankcard sales slips.o Bankcard Fees: expense & has NB-debito Journal Entry:Bankcard Fees Expense $75 Cash in Bank $75
That’s all folks!!!Now, on to some class activities!!!