Accounting 1

1. The Accounting Cycle for a Merchandising
Corporation!!!
Chapter 15: Accounting for
Purchases and Cash Payments
Welcome to…

2. Essential Outcomes
15. 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.

3. 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 accounts
First step for business is #1

4. All items bought/purchased from Wal-Mart
are purchased from wholesalers and
suppliers.

5. The Purchasing Process

6. Four Stages of buying:
1. Requesting needed items
2. Ordering from a supplier
3. Verifying items received
4. Processing the supplier’s invoice

7. Requesting Needed Items
o Small business: owner
does all buying of
merchandise
o Large business:
purchasing department buys
items for entire company
 equipment
 supplies
 inventory

8. Requesting Needed Items
Purchase requisition: departments make
written request to managers to purchase items
for department thru this requisition form
Once approved, original copy sent to
purchasing department & person making
requests receives copy

9. Ordering from Supplier
 Purchase Order <PO>: after requisition form is
approved, fill out order form
 Information for purchase order comes off purchase
requisition form
On PO form:
1. Quantity
2. Description
3. Unit price
4. Total cost
5. Supplier’s name & address
6. Date needed
7. Shipping method

10. Verifying Items Received
When order is shipped to buyer, packing slip
included with order
Packing Slip: form that lists items included in
shipment
Use packing slip to make sure all items have been
included
Buyer does not pay for items that were missing or
damaged or unordered

11. 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 #

12. Purchases Discount
Purchases Discount: supplier offers
customer (or buyer) cash discount for
early payment
Purchases Discount and Sales <Cash>
discount figured same way
Credit terms: 2/10, n/30
Discount period: first 10 days of bill
After 10 days, pay full amount

13. Purchases Discount
Credit terms:
Merchandised Purchase x Discount Rate = Discount
$2,300 x .02 (2%) = $46
$2,300 - $46 = $2,254 amount buyer owes

14. The Purchases Account
Purchases Account: when business buys
merchandise to sell to customers, cost of
merchandise is recorded to this account
Purchases 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

15. The Purchases Account
Merchandise purchased
for resale is cost of doing
business
Purchases Account:
normal balance: debit
Used whenever
merchandise is sold for
resale

16. Analyzing & Recording Purchases on
Account

17. Accounts Payable & Accounts Payable Subsidiary
Ledger
When business purchases from
many suppliers on account, hard to
keep track of debts by using only
Accounts Payable account in
General Ledger
Accounts Payable: controlling
account
Controlling account: where
balance of all accounts are set up

18. Accounts Payable & Accounts Payable Subsidiary
Ledger
Accounts Payable Subsidiary Ledger: listing
of suppliers that company purchases from on
continuous bases on account
The total of all of suppliers listed in Accounts
Payable Subsidiary ledger should equal
balance in Accounts Payable in General
Ledger

19. Recording the Purchase of Merchandise
on account

20. Recording Merchandise Purchased for Resale
On 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

21. Purchased $900 in merchandise on
account from Sunrise Novelty
Supply. Invoice SN 110.
Purchases A/P – Sunrise Novelty
$900 $900

22. Posting

23. Posting to Accounts Payable & Accounts Payable
Subsidiary Ledger
1. First: Post to General Ledger—Accounts
Payable (controlling account)—return to
General Journal & put account # on top of
diagonal line
2. Second: Post to individual account in
Subsidiary ledger—return to General Journal
& put check mark below diagonal line in
Post. Ref.

24. A Comparison
Accounts 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

25. Recording Other Purchases on Account

26. 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.

27. Purchases Returns & Allowances

28. 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

29. Debit Memorandum
Our 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

30. 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

31. Analyzing Cash Payment Transactions

32. Analyzing Cash Payments
Usually all payments by business
are paid by check
Internal control measures to safe
guard money
Three types of cash payments
that occur frequently:
1. Purchases Discounts
2. Purchase of Insurance
3. Purchase of Items bought on
account

33. 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

34. 1. Purchases Discounts
Purchase 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

35. 1. Purchases Discounts
Journal Entry:
Accounts Payable $1,150
Purchases Discount $ 23
Cash in Bank 1,127
Check #115

36. 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)

37. 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.”

38. 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

39. 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

40. 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

41. 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.

42. 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

43. 3. Bankcard Fees
o Fee that banks charge for handling bankcard
sales slips
o Usually percentage of total amount on
bankcard sales slips.
o Bankcard Fees: expense & has NB-debit
o Journal Entry:
Bankcard Fees Expense $75
Cash in Bank $75

44. That’s all folks!!!
Now, on to some class activities!!!