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					         Chapter

           8




Skyline College



  8-1
         Accounting for Purchases

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


   Large firms usually have a centralized purchasing
    department.




                          8-2
             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.




                                    8-3
A purchase requisition is a list sent
to the purchasing department
showing the items to be ordered.

A purchase order is an order to the
supplier of goods specifying items
needed, quantity, price, and credit
terms.

A receiving report is a form showing
quantity and condition of goods
received.
                  8-4
A purchase invoice
is a bill received                 You Owe:
for goods                           $1,000,000
purchased.
                                    DUE IN: 30 days




 A sales invoice is a supplier’s billing
 document.

                     8-5
                                  International Apparel Shop

                                                               January 23, 20—
               The Style Shop
                                                               9001
               2007 Trendsetter Lane
                                                               Metroplex Express
               Dallas, TX 75268
                                                               n/30




January 23, 20--                       Metroplex

     10                                                               4760
                                                                        360
                                                                      5,120


          This is a purchase invoice for the customer.

                   This is a sales invoice for the seller.
                                                   8-6
                         Wow! I need
                        to order more
                          inventory!

The Purchases account
is an account used to
record cost of goods
bought for resale
during a period.



                  8-7
        Account Classifications
Recall the major account classifications from earlier
chapters:
  Assets
  Liabilities
  Owner’s Equity
  Revenue
  Expenses


The Purchases account is part of the expenses:

    Cost of Goods Sold

                          8-8
      Cost of Goods Sold



Cost of goods sold is the actual cost
to the business of the merchandise
sold to customers (inventory
expense).




                 8-9
     Freight Charges for Purchases




The Freight In
account is the cost
of transportation
charges for items
purchased.


                      8-10
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.




                           8-11
                 Cost of Goods Sold
Price of goods (debit Purchases)                     $4,760
Freight charge (debit Freight In)                      360
Total invoice     (credit Accounts Payable)          $5,120

     Purchases     +        Freight In    =   Accounts Payable

 +         -            +             -          -        +

4,760                   360                             5,120


     The cost of goods sold accounts have normal
     debit balances.

                               8-12
                              Journal Flow Chart
                          Does the transaction involve cash?



                        YES                              NO



      Was cash RECEIVED?                           Was inventory PURCHASED?


      YES                NO                              YES               NO



  Record the            Record the                   Record the       Was it a credit SALE?
transaction in        transaction in                 purchase in
  the CASH              the CASH                         the
 RECEIPTS          DISBURSEMENTS                    PURCHASES
                                                                       YES             NO
(CRs) Journal        (CDs) Journal                   Journal (PJ)

Use the CRs and CDs Journals to prepare
    the monthly Bank Reconcilation                                   Record the     Record the
                                                                    Transaction    Transaction
                                                                       in the         In the
                                                                      SALES        GENERAL
                                                                    Journal (SJ)   Journal (GJ)
                                          8-13
        The Purchases Journal

A purchases journal is a special journal used
to record the purchase of goods on credit.

makes it possible to record each purchase
on a single line.

In addition, there is no need to enter account
names and descriptions.

                     8-14
                                   GENERAL JOURNAL                             PAGE      1

 DATE                    DESCRIPTION                      POST. REF.   DEBIT       CREDIT

 20–    3   Purchases                                       501        2,675
Jan.        Freight In                                      502          190
             Accounts Payable                               205/               2,865
                Purchased merchandise from
                Fashion Design Inc.,
                Invoice 5879, dated Dec. 29,
                terms 2/10, n/30
        5   Purchases                                       501        3880
            Freight In                                      502         175
             Accounts Payable                               205/      These four general
                                                                                  3,620
                Purchased merchandise from
                The Trend Center, Invoice 633,                         journal entries
                dated Dec. 30, terms n/30                   501
                                                            502
                                                                       require twelve
        6   Purchases                                       205/      separate postings to
            Freight In                                                 2700
             Accounts Payable                                          general ledger
                                                                         220
               Purchased merchandise from                                          2,920
               The Modern Woman, Invoice 8011,              501
                                                                       accounts. It takes a
               dated Dec. 31, terms n/30                               great deal of time and
                                                            502
        7   Purchases
                                                            205/      3,850
            Freight In                                                 effort to post them.
                                                                         450
             Accounts Payable
                                                                                 3,935
               Purchased merchandise from
               World of Fashions, Invoice 4321, dated
               Dec. 31, terms 2/10, n/30

                                                   8-15
                                         PURCHASES JOURNAL                                PAGE       1
DATE         CREDITOR’S          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   Inter’l Apparel Shop    7985     01/22/--    n/30               5,120        4,760       360
     31                                                                   23,315      21,750     1,565
                                                                            (205)      (501)       (502)


1. In the Accounts Payable Credit column,
   enter the total owed to the supplier.

                                                                             3. In the Freight In
          2. In the Purchases Debit column,                                  Debit column, enter
             enter the price of the goods                                    the freight amount.
             purchased .
                                                  8-16
          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.

                              8-17
                          Because I paid
                          the bill early, I
                           saved lots of
                             money!

A purchase discount
is a discount offered
by suppliers for
payment received
within a specified
period of time.


                   8-18
      Posting to the General Ledger



   The purchases journal simplifies the posting
    process.

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




                       8-19
 Before posting, prove the equality of the debits and
 credits recorded in the purchases journal.

            Proof of Purchases Journal
                                         Debits
Purchases Debit column                  $21,750
Freight In Debit column                   1,565
                                        $23,315
                                         Credits
Accounts Payable Credit column          $23,315


                          8-20
Post a column total to the general ledger in six
steps.
1. Locate the general ledger account.
2. Enter the date.
3. Enter the posting reference.

4. Enter the amount from the purchases journal column.
5. Enter the new balance in the Debit Balance or Credit Balance
   column.

6. Go back to the purchases journal.
   Enter the general ledger account number under the column
   total.



                                  8-21
                                               PURCHASES JOURNAL                                 PAGE       1
DATE          CREDITOR’S            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   Inter’l Apparel Shop         7985      01/22/--    n/30               5,120        4,760       360
      31                                                                         23,315      21,750     1,565
                                                                                   (205)     (501)      (502)




ACCOUNT         Accounts Payable                                 ACCOUNT NO. 205

DATE       DESCRIPTION            POST.        DEBIT     CREDIT               BALANCE
                                  REF.                                      DEBIT  CREDIT
20--
Jan. 1      Balance                                                                10,800
     31                            P1                  23,315                       23,315

                                                         8-22
                                               PURCHASES JOURNAL                                 PAGE       1
DATE           CREDITOR’S            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    Inter’l Apparel Shop        7985      01/22/--    n/30                 5,120      4,760       360
      31                                                                           23,315    21,750     1,565
                                                                                     (205)    (501)       (502)




ACCOUNT          Purchases                                       ACCOUNT NO. 501

DATE        DESCRIPTION            POST.       DEBIT     CREDIT               BALANCE
                                   REF.                                     DEBIT  CREDIT
20--
       31                          P1      21,750                         21,750


                                                         8-23
                                            PURCHASES JOURNAL                                   PAGE      1
DATE          CREDITOR’S             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   Inter’l Apparel Shop        7985       01/22/--    n/30                5,120      4,760      360
       31                                                                          23,315    21,750    1,565
                                                                                   (205)    (501)      (502)




ACCOUNT        Freight In                                        ACCOUNT NO. 502

DATE        DESCRIPTION            POST.   DEBIT          CREDIT              BALANCE
                                   REF.                                     DEBIT  CREDIT
20--
       31                          P1      1,565                           1,565


                                                          8-24
    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




                            8-25
The Accounts Payable Ledger



An accounts payable ledger is a
subsidiary ledger that contains a
separate account for each creditor.




                 8-26
                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.



                                               8-27
         Posting a Credit Purchase



To keep the accounting records up to date, invoices
are posted to the accounts payable subsidiary
ledger every day.




                        8-28
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




                                        8-29
Enter the date, invoice number and date, and the page number from the
purchases journal.

                                            PURCHASES JOURNAL                              PAGE     1
DATE       CREDITOR’S            INVOICE       INV.     TERMS       POST. ACCOUNTS PURCHASES FREIGHT IN
           ACCOUNT               NUMBER       DATE                  REF. PAYABLE     DEBIT      DEBIT
           CREDITED                                                        CREDIT
20--
Jan. 3 Fashion Designs               5879     12/29/-- 2/10, n/30             2,865         2,675   190
     18 Designer’s Fashion           9789     01/15/-- 2/10, n/30              2,100         1,930   170
     23 Intern’l Apparel Shop        7985     01/23/-- n/30                   5,120         4,760   360


                                                                                 3
          NAME       International Apparel Shop               TERMS     n/30

         ADDRESS 1718 Sherry Lane, Dallas, Texas 75267-6205
         1                       2
         DATE          DESCRIPTION            POST.       DEBIT       CREDIT      BALANCE
                                              REF.
         20--

         JAN.
                1    Balance                                                         1,600
                23   Invoice 7985, 01/22/--       P1                  5,120          6,720

                                                       8-30
       Enter the amount from the Accounts Payable Credit column in the
       purchases journal in the Credit column of the accounts payable
       subsidiary ledger.

                                            PURCHASES JOURNAL                              PAGE     1
DATE       CREDITOR’S            INVOICE       INV.     TERMS       POST. ACCOUNTS PURCHASES FREIGHT IN
           ACCOUNT               NUMBER       DATE                  REF. PAYABLE     DEBIT      DEBIT
           CREDITED                                                        CREDIT
20--
Fashion Designs                      5879     12/29/-- 2/10, n/30             2,865           2,675   190
     18 Designer’s Fashion           9789     01/15/-- 2/10, n/30              2,100           1,930   170
     23 Intern’l Apparel Shop        7985     01/23/-- n/30                   5,120           4,760   360


                                                                                   3
          NAME       International Apparel Shop               TERMS     n/30

         ADDRESS 1718 Sherry Lane, Dallas, Texas 75267-6205
         1                       2
         DATE          DESCRIPTION            POST.       DEBIT       CREDIT
                                                                               4   BALANCE
                                              REF.
         20--

         JAN.
                1    Balance                                                           1,600
                23   Invoice 7985, 01/22/--       P1                  5,120            6,720

                                                       8-31
         Compute and enter the new balance in the Balance column.

                                            PURCHASES JOURNAL                              PAGE     1
DATE       CREDITOR’S            INVOICE       INV.     TERMS       POST. ACCOUNTS PURCHASES FREIGHT IN
           ACCOUNT               NUMBER       DATE                  REF. PAYABLE     DEBIT      DEBIT
           CREDITED                                                        CREDIT
20--
Jan. 3 Fashion Designs               5879     12/29/-- 2/10, n/30             2,865               2,675   190
     18 Designer’s Fashion           9789     01/15/-- 2/10, n/30              2,100               1,930   170
     23 Intern’l Apparel Shop        7985     01/23/-- n/30                   5,120               4,760   360


                                                                                       3
          NAME       International Apparel Shop               TERMS     n/30

         ADDRESS 1718 Sherry Lane, Dallas, Texas 75267-6205
         1                       2
         DATE          DESCRIPTION            POST.       DEBIT       CREDIT
                                                                               4       BALANCE
                                              REF.
         20--

         JAN.
                1    Balance
                                                                                   5       1,600
                23   Invoice 7985, 01/22/--       P1                  5,120                6,720

                                                       8-32
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.
                                            PURCHASES JOURNAL                              PAGE     1
DATE       CREDITOR’S            INVOICE       INV.     TERMS       POST. ACCOUNTS PURCHASES FREIGHT IN
           ACCOUNT               NUMBER       DATE                  REF. PAYABLE     DEBIT      DEBIT
           CREDITED                                                        CREDIT
20--
Jan. 3 Fashion Designs               5879     12/29/-- 2/10, n/30             2,865               2,675   190
     18 Designer’s Fashion           9789     01/15/-- 2/10, n/30              2,100               1,930   170
     23 Intern’l Apparel Shop        7985     01/23/-- n/30                   5,120               4,760   360


                                                                                       3
          NAME       International Apparel Shop               TERMS     n/30

         ADDRESS 1718 Sherry Lane, Dallas, Texas 75267-6205
         1                       2
         DATE          DESCRIPTION            POST.       DEBIT       CREDIT
                                                                               4       BALANCE
                                              REF.
         20--

         JAN.
                1    Balance
                                                                                   5       1,600
                23   Invoice 7985, 01/22/--       P1                  5,120                6,720

                                                       8-33
                                    Sorry, I
                                   didn’t like
                                   the color.



A purchase return is a
return of unsatisfactory
goods.


A purchase allowance is a price
reduction from the amount originally billed.


                   8-34
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
                        8-35
   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

                                      8-36
       Purchase Allowance

Accounts Payable          Purchases Returns and Allowances

  -                                           +
476                                          476




                   8-37
Posting a Purchases Return or Allowance


it is important to promptly post returns
and allowances to the creditor’s account
in the accounts payable ledger.




                   8-38
                   Posting from the General Journal
                             GENERAL JOURNAL                  PAGE    1

 DATE      DESCRIPTION                           POST.
                                                 REF.      DEBIT     CREDIT
Jan. 30 Accounts Payable/                        205/     476
        International Apparel Shop
           Purchases Returns and Allowances       503                 476
              Received Credit Memo 103 for
              an allowance for damaged
              merchandise; original Invoice
              7985, Jan. 23, 20--

                     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
                            27                            CP1      2,400                  4,320
                            30   CM 103                    J1        476                  3,844
       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.



                          8-40
                                                    The Style Shop
                                          Schedule of Accounts Payable
                                                    January 31, 20--
the total of the            Fashion Designs                                1065
schedule of accounts
                            Fashion Warehouse                              4,200
payable and the
general ledger A/P          International Apparel Shop                     3,844
account shows that          Modern Woman                                   4,740
the two figures are
                            The Trend Center                               2,205
the same
                            World Of Fashions                              6,935
                            Total                                         22,989
      ACCOUNT       Accounts Payable                            ACCOUNT NO. 205


     DATE         DESCRIPTION          POST.      DEBIT    CREDIT        BALANCE
                                       REF.                            DEBIT  CREDIT

      20--

     Jan.     1   Balance                                                    10,800
             30                         J1         476                        10,324
             31                         P1                 23,315             33,639
             31                        CP1       12,710                       22,989

                                          8-41
  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           <476>
Net Delivered Cost of Purchases             $24,404


       Note: there were no purchase discounts

                         8-42

				
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