college accounting

1
Chapter
8
Skyline College
2
Accounting for Purchases

• Most merchandising businesses purchase goods on
  credit under open-account arrangements.

• Large firms usually have a centralized purchasing
  department.

3
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.
The Accounting Department receives the invoice
and copies of the purchase order and receiving
report.
4
(No Transcript)
5
You Owe 1,000,000 DUE IN 30 days
6
International Apparel Shop
January 23, 20 9001 Metroplex Express n/30
The Style Shop
2007 Trendsetter Lane Dallas, TX 75268
Metroplex
January 23, 20--
10
4760 360 5,120
7
Wow! I need to order more inventory!
8
Account Classifications
Recall the major account classifications from
earlier chapters

• Assets
• Liabilities
• Owners Equity
• Revenue
• Expenses

The Purchases account is part of the expenses

• Cost of Goods Sold

9
Cost of Goods Sold
10
Freight Charges for Purchases
The Freight In account is the cost of
transportation charges for items purchased.
11
There are two ways to handle 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.

12
Cost of Goods Sold
Price of goods (debit Purchases) 4,760
Purchases
Freight In


Accounts Payable

-
-
-
The cost of goods sold accounts have normal debit
balances.
13
Journal Flow Chart
Does the transaction involve cash?
YES
NO
Was cash RECEIVED?
Was inventory PURCHASED?
NO
NO
YES
YES
Record the transaction in the CASH RECEIPTS (CRs)
Journal
Record the transaction in the CASH DISBURSEMENTS (
CDs) Journal
Record the purchase in the PURCHASES Journal
(PJ)
Was it a credit SALE?
YES
NO
Use the CRs and CDs Journals to prepare the
monthly Bank Reconcilation
Record the Transaction in the SALES Journal (SJ)
Record the Transaction In the GENERAL Journal (GJ)
14
The Purchases Journal
makes it possible to record each purchase on a
single line.
In addition, there is no need to enter account
names and descriptions.
15
GENERAL JOURNAL
PAGE 1
DATE DESCRIPTION
POST. REF. DEBIT
CREDIT
20 Jan.
3 5
Purchases Freight In Accounts Payable
Purchased merchandise from Fashion Design
Inc., Invoice 5879, dated Dec. 29,
terms 2/10, n/30 Purchases Freight In
Accounts Payable Purchased merchandise
from The Trend Center, Invoice 633,
dated Dec. 30, terms n/30
2,675 190
501 502 205/ ü 501 502 205/ ü 501 502 205/
ü 501 502 205/ ü
2,865
3880 175
These four general journal entries require twelve
separate postings to general ledger accounts. It
takes a great deal of time and effort to post
them.
3,620
Purchases Freight In Accounts Payable
Purchased merchandise from The Modern
Woman, Invoice 8011, dated Dec. 31, terms
n/30 Purchases Freight In Accounts Payable
Purchased merchandise from World of
Fashions, Invoice 4321, dated Dec. 31,
terms 2/10, n/30
6
2700 220
2,920
7
3,850 450
3,935
16
PAGE 1
PURCHASES JOURNAL
DATE CREDITORS
INVOICE INV. TERMS POST.
ACCOUNTS PURCHASES FREIGHT IN
ACCOUNT NUMBER
DATE REF. PAYABLE
DEBIT DEBIT
CREDITED

CREDIT
20-- Jan. 3 Fashion Designs
8434 12/29/-- 2/10, n/30
2,865 2,675 190
5 The Trend Center 336
12/30/-- n/30 4,055
3,880 175 6 Modern
Woman 9080 12/31/--
n/30 3,140
2,900 240 7 World of
Fashions 4321 01/03/--
2/10, n/30 3,935
3,675 260 18 Fashion
Warehouse 9789 01/15/--
2/10, n/30 4,200
3,860 340 22 Interl
Apparel Shop 7985 01/22/--
n/30 5,120
4,760 360 31


23,315 21,750
1,565



(205)
1. In the Accounts Payable Credit column, enter
the total owed to the supplier.
3. In the Freight In Debit column, enter the
freight amount.
2. In the Purchases Debit column, enter the price
of the goods purchased .
17
Examples of Credit Terms

• 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.

18
Because I paid the bill early, I saved lots of
money!
19
Posting to the General Ledger

• The purchases journal simplifies the posting
  process.

• Summary amounts are posted at the end of the
  month.

20
Before posting, prove the equality of the debits
and credits recorded in the purchases journal.
21
Post a column total to the general ledger in six
steps.

• Locate the general ledger account.
• Enter the date.
• Enter the posting reference.
• Enter the amount from the purchases journal
  column.
• Enter the new balance in the Debit Balance or
  Credit Balance column.
• Go back to the purchases journal.Enter the
  general ledger account number under the column
  total.

22
PAGE 1
PURCHASES JOURNAL
DATE CREDITORS
INVOICE INV. TERMS POST.
ACCOUNTS PURCHASES FREIGHT IN
ACCOUNT NUMBER
DATE REF. PAYABLE
DEBIT DEBIT
CREDITED

CREDIT
20-- Jan. 3 Fashion Designs
8434 12/29/-- 2/10, n/30
2,865 2,675 190
5 The Trend Center 336
12/30/-- n/30 4,055
3,880 175 6 Modern
Woman 9080 12/31/--
n/30 3,140
2,900 240 7 World of
Fashions 4321 01/03/--
2/10, n/30 3,935
3,675 260 18 Fashion
Warehouse 9789 01/15/--
2/10, n/30 4,200
3,860 340 22 Interl
Apparel Shop 7985 01/22/--
n/30 5,120
4,760 360 31


23,315 21,750
1,565



(205)
ACCOUNT
ACCOUNT NO.
205 DATE DESCRIPTION POST. DEBIT
CREDIT BALANCE
REF. DEBIT
CREDIT 20-- Jan. 1 Balance
ü 10,800 31
P1
23,315 23,315
Accounts Payable
23
PAGE 1
PURCHASES JOURNAL
DATE CREDITORS
INVOICE INV. TERMS POST.
ACCOUNTS PURCHASES FREIGHT IN
ACCOUNT NUMBER
DATE REF. PAYABLE
DEBIT DEBIT
CREDITED

CREDIT
20-- Jan. 3 Fashion Designs
8434 12/29/-- 2/10, n/30
2,865 2,675 190
5 The Trend Center 336
12/30/-- n/30 4,055
3,880 175 6 Modern
Woman 9080 12/31/--
n/30 3,140
2,900 240 7 World of
Fashions 4321 01/03/--
2/10, n/30 3,935
3,675 260 18 Fashion
Warehouse 9789 01/15/--
2/10, n/30 4,200
3,860 340 22 Interl
Apparel Shop 7985 01/22/--
n/30 5,120
4,760 360 31


23,315 21,750
1,565



(205)
ACCOUNT
ACCOUNT NO.
501 DATE DESCRIPTION POST. DEBIT
CREDIT BALANCE
REF. DEBIT
CREDIT 20-- 31
P1 21,750
21,750
Purchases
24
PAGE 1
PURCHASES JOURNAL
DATE CREDITORS
INVOICE INV. TERMS POST.
ACCOUNTS PURCHASES FREIGHT IN
ACCOUNT NUMBER
DATE REF. PAYABLE
DEBIT DEBIT
CREDITED

CREDIT
20-- Jan. 3 Fashion Designs
8434 12/29/-- 2/10, n/30
2,865 2,675 190
5 The Trend Center 336
12/30/-- n/30 4,055
3,880 175 6 Modern
Woman 9080 12/31/--
n/30 3,140
2,900 240 7 World of
Fashions 4321 01/03/--
2/10, n/30 3,935
3,675 260 18 Fashion
Warehouse 9789 01/15/--
2/10, n/30 4,200
3,860 340 22 Interl
Apparel Shop 7985 01/22/--
n/30 5,120
4,760 360 31


23,315 21,750
1,565





(205)
ACCOUNT
ACCOUNT NO.
502 DATE DESCRIPTION POST. DEBIT
CREDIT BALANCE
REF. DEBIT
CREDIT 20-- 31
P1 1,565
1,565
Freight In
25
Advantages of a Purchases Journal

• Allows for the division of accounting work among
  different employees
• Strengthens the audit trail
• Records all credit purchases in one place

26
The Accounts Payable Ledger
27
The Accounts Payable Ledger
NAME International Apparel Shop
TERMS n/30 ADDRESS 1718 Sherry Lane,
Dallas, Texas 75267-6205 DATE
DESCRIPTION POST. DEBIT
CREDIT BALANCE
REF. 20--
JAN. 1
Balance ?
1,600 23 Invoice 7985, 01/23/--
P1 5,120
6,720

• The accounts payable ledger has three money
  columns.

• The Balance column is presumed to contain credit
  amounts.

28
Posting a Credit Purchase
To keep the accounting records up to date,
invoices are posted to the accounts payable
subsidiary ledger every day.
29
Steps to post to the accounts payable ledger
Locate the accounts payable ledger account for
the creditor International Apparel Shop.
NAME International Apparel Shop
TERMS n/30 ADDRESS 1718 Sherry Lane,
Dallas, Texas 75267-6205 DATE
DESCRIPTION POST. DEBIT
CREDIT BALANCE
REF. 20--
JAN. 1
Balance
1,600 23 Invoice 7985, 01/23/--
P1 5,120
6,720
30
Enter the date, invoice number and date, and the
page number from the purchases journal.
31
Enter the amount from the Accounts Payable Credit
column in the purchases journal in the Credit
column of the accounts payable subsidiary ledger.
32
Compute and enter the new balance in the Balance
column.
33
In the purchases journal, enter the check mark in
the Posting Reference column. This indicates that
the transaction is posted in the accounts payable
subsidiary ledger.
34
Sorry, I didnt like the color.
A purchase allowance is a price reduction from
the amount originally billed.
35
A credit to the Purchase Returns and Allowances
account is preferred to making a direct credit to
Purchases.
Purchases Returns and Allowances
Returns and Allowances
A contra cost of goods sold account
36
Recording Purchases Returns Allowances
On January 30 The Style Shop received a credit
memorandum for 476 from International Apparel
Shop as an allowance for damaged merchandise.
International Apparel Shop 1718 Sherry
Lane Dallas, TX 75267
The Style Shop 2007 Trendsetter Lane Dallas, TX
75268
476
37
Purchase Allowance
Accounts Payable
Purchases Returns and Allowances
- 476
476
38
Posting a Purchases Return or Allowance
it is important to promptly post returns and
allowances to the creditors account in the
accounts payable ledger.
39
Posting from the General Journal
40
Schedule of Accounts Payable
is a list of all balances owed to creditors.

• 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.

41
The Style Shop Schedule of Accounts Payable
January 31, 20-- Fashion Designs
1065 Fashion Warehouse 4,200 International
Apparel Shop 3,844 Modern Woman
4,740 The Trend Center 2,205 World Of
Fashions 6,935 Total 22,989
the total of the schedule of accounts payable and
the general ledger A/P account shows that the two
figures are the same
42
Determining the Cost of Purchases
The net delivered cost of purchases for The Style
Shop for January is calculated as follows.
Purchases 23,315 Freight In
1,565
Delivered Cost of Purchases 24,880 Less
Purchases Returns and Allowances lt476gt
Net Delivered Cost of Purchases 24,404
Note there were no purchase discounts