Acctg 2 lectureAcctg 2 lecture

Purchases Purchases Merchandise and Merchandise and

PaymentsPayments

DR CR

INVENTORY SYSTEMS

Merchandising entities may use either of the following inventory systems:1) Perpetual

Detailed records of the cost of each item are maintained, and the cost of each item sold is determined from records when the sale occurs.

2) PeriodicCost of goods sold is determined only at the end of an accounting period.

Inventory Systems

+

+

Beginninginventory

Net cost ofpurchases

= = Merchandiseavailable for sale

Ending inventory

Cost of goodssold

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When using the Periodic system, inventory transactions are not recorded directly in the INVENTORY account. Instead, separate accounts are used for

PURCHASESPURCHASE RETURNS &

ALLOWANCESPURCHASE DISCOUNTSTRANSPORTATION IN

Periodic Inventory System

Separate Accounts Used

Let’s look at another Inventory system.

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Periodic Inventory Systems• Because entries are not made to the

inventory account during the accounting period, the amount of inventory is not known until the end of the period when the inventory count is done.

• The PERIODIC system is being used less and less due to advancements in technology that make the extra record keeping of the perpetual system easy and inexpensive.

• Periodic inventory systems require more closing entries at the end of the period. (Purchases, Purchase Returns and Allowances, Purchase Discounts, and Transportation In are all separate TEMPORARY accounts that must be closed out at the end of the period.)

Bar codes/scanners

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Periodic Inventory System Purchases and Purchase Returns

and Allowances• Purchases is an account that holds

the current period’s inventory purchases (a debit balance) and is used in the calculation of Cost of Goods Sold on the Income Statement.

• The Purchase Returns and Allowances account also is used to calculate Cost of Goods Sold on the income statement. It is a deduction from the cost of purchases in a periodic inventory system.

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When using the Periodic system Purchase Discounts are recorded in a separate account. This helps managers keep track of the company’s performance in taking advantage of discounts.

Periodic Inventory System

Purchase Discounts

Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/09 358-BI

Sold To

Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501

P.O. Date Salesperson Terms Ship4/25/2009 #25 2/10,n/30 Via FedEx

Item Description Quanity Price AmountAC417 250 Backup System 500 54.00$ 27,000$

Sub Total 27,000 We appreciate your business! Ship Chg. -

Tax - Total 27,000$

Invoice

FOB DestinationFreight

Seller Invoice date PurchaserOrder dateCredit terms Freight termsGoodsTotal invoice

P1

2/10,n/302/10,n/30Discount Percent

Number of Days

Discount Is Available

Otherwise, Net (or All) Is Due in 30

Days

CreditPeriod

PURCHASE DISCOUNTSP1

PURCHASE RETURNS AND ALLOWANCES

Purchase Return . . .Purchase Return . . . Merchandise returned by the purchaser to the supplier.Merchandise returned by the purchaser to the supplier.Purchase Allowance . . .Purchase Allowance . . . A reduction in the cost of defective merchandise received by a A reduction in the cost of defective merchandise received by a

purchaser from a supplier.purchaser from a supplier.

P1

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Terms of Sales & Purchases• F. O. B. (FFree OOn BBoard)

shipping point or F.O.B. destination– tells who pays for the shipping and

when ownership “title” passes from the seller to the buyer.

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FOB Shipping and FOB Destination

• FOB Shipping Point: Buyer pays the shipping costs because ownership “title” transfers to buyer at the point the shipment starts on its journey.

• FOB Destination: Seller pays shipping costs because title does not transfer to the buyer until the goods reach their destination (the buyer’s place of business).

TRANSPORTATION COSTS AND OWNERSHIP TRANSFER

FOB shipping point(buyer pays)

FOB destination(seller pays)

Merchandise

Seller BuyerCarrier

P1

MERCHANDISING COST FLOW IN THE ACCOUNTING CYCLE

Beginning inventory

Net purchases

Merchandise available for sale

Ending inventory

Cost of goods sold To Income Statement

To Balance Sheet

To Income StatementTo Balance Sheet

Peri

od 1

Beginning inventory

Net purchases

Merchandise available for sale

Ending inventory

Cost of goods sold

Peri

od 2

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ACCOUNTING FOR PURCHASES

Assume a periodic inventory systemEach purchase and sale of merchandise is recorded as it occurs

Example 1: purchase merchandise for resale $4,000 on account

Date Account PR Debit CreditMar 1 Purchases $4,000

Accounts payable $4,000

Periodic Inv. System: Purchase, Purchase Returns and Allowance and Purchase

Discounts• On Feb. 10, $1,000 inventory was purchased on credit. $200

inv. was returned on Feb. 15. The payment was made on Feb, 17. The buyer paid freight charge $100 on 2/10.2/10 Purchases 1,000

Accounts Payable 1,000

2/10 Freight-in 100 Cash 1002/15 A/P 200 Purchase R&A 2002/17 A/P 800 Cash 784 Purchase Discounts 16

ACCOUNTING FOR MERCHANDISING OPERATIONS 16

Net Purchases of a Periodic Inventory

System•Net purchases = Purchases – Purchases Returns and Allowances – Purchases Returns + Freight-in

ACCOUNTING FOR MERCHANDISING OPERATIONS

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PURCHASES DISCOUNT

Credit terms Purchases discounts are discounts taken

by the buyer for early payment of an invoice.

These discounts reduce the cost of the merchandise purchased.

Should be taken when offered if not it is a LOSS to the business.

PURCHASE DISCOUNTS

• Credit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due.

• The buyer calls this discount a purchase discount.

• Like a sales discount, a purchase discount is based on the invoice cost less returns and allowances, if any.

PURCHASE DISCOUNTExample 9: Purchase merchandise for resale $4,000, terms

2/10, n/30 on account.Invoice: $ $ 4,000Discount (2% x $4,000) 80Net of discount $ 3,920

PURCHASE DISCOUNT

Date Account PR Debit CreditMar 1 Merchandise inventory $4,000

Accounts payable $4,000

Mar 10 Accounts payable $4,000

Cash $3,920

Merchandise inventory

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PURCHASE DISCOUNTReduction of the cost of the merchandise is reflected in the

merchandise inventory account.

Example 10: Purchase merchandise for resale $6,000, terms 1/15, n/30 on account.

PURCHASES RETURNS AND ALLOWANCESPurchase returns – merchandise is returned to the sellerPurchase allowances – price adjustmentDebit memorandum – notification of the return or allowance by

seller

• A purchaser may be dissatisfied with merchandise received because the goods1) are damaged or defective,2) of inferior quality, or3) not in accord with the purchaser’s

specifications.• The purchaser initiates the request for a reduction

of the balance due through the issuance of a debit memorandum.

• The debit memorandum is a document issued by a buyer to inform a seller that the seller’s account has been debited because of unsatisfactory merchandise.

PURCHASE RETURNS AND ALLOWANCES

PURCHASES RETURNS AND ALLOWANCES

Example 11: Returned merchandise on account $2,500.Date Account PR Debit Credit

Mar 09 Accounts payable $2,500

Cash $2,500

EXAMPLE

Example 12: Purchased merchandise of $8,000 on terms 2/10,n/30. Ennis pays the original invoice less a return of $2,500 within the discount period. Record the above entries

RECAP OF PURCHASES EXAMPLEExample 7: ABC Merchandising had the following

transactions:Purchased merchandise and received payment by

VISA at $6,000.Purchased merchandise on account for $7,500

with credit terms 1/10, n/30. Purchased merchandise on account for $4,000.Return of the merchandise in (c ) of sales price of

$2,000.Paid within the discount period for merchandise in

(b).Paid for merchandise in (c ).

TRANSPORTATION COSTS

The terms of a sale should indicate when the ownership of the merchandise passes to the buyer.

This point determines which party, the buyer or the seller must pay the transportation costs.

• The sales agreement should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of business.• FOB Shipping Point

1) Goods placed free on board the carrier by seller

2) Buyer pays freight costs• FOB Destination

1) Goods placed free on board at buyer’s business

2) Seller pays freight costs

FREE ON BOARD

• Freight -in is debited if buyer pays freight.

• Freight-out (or Delivery Expense) is debited if seller pays freight.

ACCOUNTING FOR FREIGHT COSTS

TRANSPORTATION COSTS FOB – shipping point

The ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the transportation company.

Buyer pays the transportation costsExample 13: Purchased merchandise for $4,000 with shipping

costs of $50 FOB shipping point.

FOB – SHIPPING POINT

Date Account PR Debit Credit

Merchandise inventory $4,000

Accounts payable $4,000

Merchandise Inventory $50

Cash $50

TRANSPORTATION COSTS FOB – destination point

The ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the buyer.

Seller pays the transportation costsExample 14: Sold merchandise for $4,000 with shipping costs

of $50 FOB destination. Cost of merchandise sold is $2,000.

FOB – DESTINATION POINT

Date Account PR Debit Credit

Accounts receivable $4,000 Sales $4,000

Cost of merchandise sold 2000 Merchandise inventory 2000

Delivery expense 50 Cash 50

TRANSPORTATION COSTSFREIGHT TERMS

FOB FOBShipping Point Destination

Ownership (title)passes to buyerwhen merchandise Delivered to Receivedis freight carrier by buyer

Transportationcosts are paidby Buyer Seller

Risk of loss duringtransportationbelongs to Buyer Seller

SALES TAXESLiability to the businessCreate a SALES TAX PAYABLE account

Example 15: Sold merchandise on account $7,000, plus 5% sales tax. Cost of merchandise sold is $3,800.

SALES TAXES

Date Account PR Debit Credit

Accounts receivable $7,350 Sales 7,000

Sales tax payable 350

Cost of merchandise 3,800 Merchandise inventory 3,800

RECAP OF TRANSACTIONS

Seller Buyer

Sold merchandise on account: Accounts receivable DR Sales CRCost of merchandise sold DR Merchandise inventory CR

Purchased merchandise on account: Merchandise Inventory DR Accounts Payable CR

Transportation costs Shipping point Transportation costs Shipping point:Merchandise Inventory DR Cash CR

Transportation costs – Destination:Delivery Expense DR Cash CR

Transportation costs - Destination

Merchandise returned:Sales Returns & Allowances DR Accounts receivable CRMerchandise inventory DR Cost of merchandise sold CR

Merchandise returned:Merchandise inventory DR Accounts payable CR

Payment :Cash DR Accounts receivable CR

Payment:Accounts payable DR Cash CR

Payment with discount:Cash DRSales discount DR Accounts receivable CR

Payment with discount:Merchandise inventory DR Cash CR

COST OF GOODS SOLD

To determine the cost of goods sold under a periodic inventory system, it is necessary to:1) Determine the cost of goods on hand at

the beginning of the accounting period.2) Add to it the cost of goods purchased.3) Subtract the cost of goods on hand at

the end of the accounting period

COST OF GOODS SOLD

• The cost of goods sold may be determined each time a sale occurs or at the end of an accounting period.

• To make the determination when the sale occurs, a company uses a perpetual inventory system.

• When the cost of goods sold is determined only at the end of an accounting period, a company is said to be using a periodic inventory system.

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Periodic Inventory Systems• The ending inventory is determined

at the end of the period by taking a physical count of the goods remaining on hand.

• Cost of goods sold is calculated at the end of the accounting period by subtracting the ending inventory (determined from the physical count) from the Cost of Goods Available for Sale.Beginning Inventory $ 400

+ Purchases, net 2000= Goods Available for Sale 2400- Ending Inv. (from count) 500= Cost of Goods Sold $1900

Sales Revenue

Cost ofGoods Sold

Gross Profit

Operating Expenses

Net Income(Loss)

Less

Equals

Less

Equals

ILLUSTRATION 5-1 INCOME MEASUREMENT PROCESS FOR A

MERCHANDISING COMPANY

IN CLOSING…