Ch.7 Accounting for a Merchandising Business: Purchases and Cash Payments

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Procedures and forms used in purchasing merchandise

Record credit purchases in a general journal and a purchases

journal, and post to the accounts payable ledger and the

general ledger

Purchases returns and allowances

Purchases discounts

Cash Payments Journal and posting to the accounts payable

ledger and the general ledger

Prepare a schedule of accounts payable

Record freight charges on incoming merchandise

A merchandising business earns its revenue by buying

goods and then reselling the goods to customers.

Goods that are to be sold to customers are called

merchandise.

Merchandising can take place at two levels--retail and

wholesale.

A retail business sells directly to consumers.

A wholesale business purchases goods in bulk from

manufacturers and then sells the goods to

Retailers

Other wholesalers

Schools and other nonprofit institutions

Directly to consumers

Merchandising Activity

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Steps in Purchasing Procedures

Step 1: Managers identify goods needed and request

them by preparing a purchase requisition,

which is sent to the purchasing department.

Step 2: The purchasing department chooses the seller

(vendor) and sends an order.

Step 3: The seller receives the order and prepares an

invoice (bill), which is shipped with the goods

or a few days after the goods.

Step 4: When the merchandise is received by the buyer,

it is checked against the invoice and payment

is approved.

Purchasing Procedures

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A written request for goods to be purchased

Purchase Requisition

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A written or online form sent from a buyer of goods to the

seller that specifies the quantity and description of goods to

be purchased.

Purchase Order

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• A business document that shows

Names and address of the buyer and the seller

Date and terms of the sale

Description of the goods

Price of the goods and total owed

Mode of transportation for delivery

• The same invoice serves as both a sales invoice and

a purchase invoice

Sales invoice to the seller

Purchase invoice to the buyer

Invoice

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Invoice

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• Percentage reductions from the list or catalog price of

merchandise.

• Not recorded in the accounting records of the buyer or the seller.

The buyer always records goods at their actual cost.

The seller records items sold at their actual selling price.

Trade Discounts

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Cash Discounts

• A discount offered to encourage prompt and early payment by

a buyer.

• Recorded in the accounting records of both the seller and the

buyer (unlike trade discounts).

The seller refers to as sales discounts.

The buyer refers to as purchase discounts.

• A common expression of a cash discount is 2/10, n/30.

This means that a 2% discount can be taken from the

invoice price of the merchandise if the invoice is paid

within 10 days of the date of the invoice.

• The sole purpose is to keep a record of the cost of

merchandise purchased for resale during an

accounting period

• Debited for the cost of merchandise purchased for

resale

• Falls under the category of cost accounts

Cost accounts are like expense accounts

Both are presented on the income statement

and enter into the calculation of net income

The Purchases Account

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• Assume a company purchases $575 of

merchandise from Key Suppliers on Nov. 2.

• The entry would be recorded as follows:

Recording Purchases on Account in the General Journal

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+cost

+liability

• Used to record transactions that are similar in

nature

• Save time in recording specialized transactions

• Allow for a delegation of work because individual

accountants can be assigned to specific journals

• Examples

Purchase Journal

Cash Payments Journal

Special Journals

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A journal used to record only credit purchases

The Purchases Journal

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• A separate ledger containing only one type of

account is called a

• A subsidiary ledger containing only creditors’

accounts is called an

The Accounts Payable Subsidiary Ledger

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subsidiary ledger.

accounts payable ledger.

• An account in the general ledger that summarizes

accounts in a related subsidiary ledger.

• The Accounts Payable account in the general

ledger is said to control the accounts payable

ledger.

Controlling Account

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Relationship Between the Accounts Payable Ledger and the Controlling Account in the General Ledger

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• The purchases journal must be posted to both the

subsidiary ledger and the general ledger.

• Individual credits must be posted to the creditor’s

accounts in the accounts payable ledger.

• Posting is usually done on a daily basis, to keep the

ledger current.

• The total of the money column must be posted to

the general ledger as a

Debit to the Purchases account

Credit to the Accounts Payable account

• Since this total represents total credit purchases for

the month, it is posted at the end of the month.

Posting the Purchases Journal

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Step 1. Enter the journal entry’s date.

Step 2. Enter the amount of the journal entry in the

Credit column.

Step 3. Calculate the balance of the account and

enter it in the Balance column.

Step 4. Enter the purchase journal page in the P.R.

column.

Step 5. Enter a check mark in the P.R. column of the

purchases journal.

Posting to the Accounts Payable Ledger

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Posting to the Accounts Payable Ledger

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Step 1. Enter the last day of the month.

Step 2. Enter the total of the money column.

Step 3. Calculate the new balances.

Step 4. Enter the posting references.

Step 5. Enter the account numbers in the

purchases journal.

Posting to the General Ledger

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Posting to the General Ledger

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• In merchandising, a return occurs when a customer

returns to the seller part or all of the items

purchased.

• An allowance occurs when the seller grants a

customer a price reduction on items due to some

factor, such as damaged or defective goods.

• The seller refers to merchandise returns or

allowances as sales returns and allowances.

• The purchaser refers to merchandise returns or

allowances as purchase returns and allowances.

Merchandise Returns and Allowances

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• An account in which the amount of returns and

allowances is usually recorded

• Contra to the Purchases account

• Has a credit balance, which is opposite to the debit

balance of the Purchases account

Purchases Returns and Allowances Account

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Purchases Returns and Allowances Account

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• A debit memorandum is the buyer’s written request

to the seller for credit for a merchandise return or

allowance.

• When a return or allowance is made, part or all of the

balance in the creditor’s account will not be paid.

• The buyer debits (decreases) the creditor’s account

for the amount of the return or allowance.

Recording Purchases Returns and Allowances

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Recording Purchases Returns and Allowances

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Purchase Return Journal Entry and Dual Posting

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A contra purchases account used to record

discounts received for prompt payment of

merchandise invoices.

The Purchases Discounts Account

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Example

Assume an invoice for $575, subject to a cash

discount of 2/10, n/30, is paid within the discount

period on Nov. 12.

The following entry would be prepared.

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-liability

+contra purchases

-asset

Recording a Cash Payment Within the Discount Period

• A special journal used for recording all

disbursements of cash

• Designed to meet the needs of the business using it

• Common money columns include

Cash Cr. column

Purchases Discounts Cr. column

Account Payable Dr. column

General Dr. column

Cash Payments Journal

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Cash Payments Journal

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• Follows some of the same procedures used for

posting the purchases journal

• Three different types of postings made

Posting of individual debits to creditors’

accounts in the accounts payable ledger.

Usually done on a daily basis.

Posting of individual debits to appropriate

general ledger accounts from the General Debit

column. Can be posted on a daily, weekly, or

monthly basis.

Posting of special columns totals to the

appropriate general ledger accounts. Summary

posting is done at the end of the month.

Posting the Cash Payments Journal

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Posting the Cash Payments Journal

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Amounts in the Accounts Payable Debit column are posted separately to the

creditors’ accounts in the accounts payable ledger. A check mark is entered in

the P.R. column of the cash payments journal to indicate an individual posting.

Amounts in the General Debit column are posted individually to the general ledger

accounts identified in the Account Debited column. Account numbers of those accounts

are entered in the P.R. column of the cash payments journal. The check mark at the

bottom of the General Debit column indicates that the column total is not posted.

Posting the Cash Payments Journal

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The totals of special columns are posted to the general ledger accounts

identified in the headings of the columns. Account numbers are entered under

the column totals to indicate that a summary posting has been made.

Posting the Cash Payments Journal

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• A schedule of accounts payable is a listing of the

balances in the accounts payable ledger.

• The total of this schedule should agree with the

accounts payable account in the general ledger, the

controlling account.

Proving the Accounts Payable Ledger

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Proving the Accounts Payable Ledger

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Proving the Accounts Payable Ledger

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Only accounts with open

balances are included on the

schedule of account payable.

• FOB Shipping Point — the buyer is responsible for all

freight costs while the goods are in transit.

• FOB Destination — the seller is responsible for all

freight costs while the goods are in transit.

• If the terms are FOB shipping point, the purchaser

debits the cost of freight to the Freight In account.

Freight Charges on Incoming Merchandise

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Example

The following journal entry indicates the $30 freight

charge incurred by the purchaser under the freight

terms of FOB shipping point. Merchandise costing

$700 was purchased from Pantech Corp. on account

on Dec. 2.

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General Journal

Date Account Title P.R. Debit Credit

Dec. 2 Purchases 700

Freight In 30

Accounts Payable-Pantech Corp. 730

Notice how the Freight In, Purchases Returns and

Allowances, and Purchases Discounts accounts

affect the Purchases account:

Summing Up

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Purchases

- Purchases Discount

-Purchases Returns and

Allowances

+ Freight In

= Net Purchases