Accounting for Purchases and Cash Payments
• Buy
goods from supplier
• Sell
merchandise to consumer
Things to buy:
• Selling
Supplies
– shopping
bags
– cash
register tapes
– sales
slips
• Office
Supplies
• Equipment
• merchandise
– Debit
Purchases
Four Stages of Purchasing:
- request:
– needed
item
• (purchase
requisition)
- order
:
– from
supplier
• (purchase
order)
- verify
– items
received
• (packing
slip)
- journalize
– transaction
• (invoice)
10 Steps of Purchasing
Requesting Department:
1. fills out purchase requisition
– with
manager approval
– sends
form to Purchasing department
Purchasing Department
2. writes purchase order
– sends
this written offer to buy certain items to the supplier
– copy
to accounting and requesting department
Receiving Department
3. receives goods
– verifies
quantity (and quality) of against packing slip
4. sends copy of packing slip to accounting department
– noting
any missing, damaged or returned items
Accounting Department
5. receives invoice from supplier (date stamp)
6. Invoice is verified against P.O. and packing slip
7. Processing stamp is completed* on invoice
(pay date, discount, pay amount, check number*)
(pay date, discount, pay amount, check number*)
8. Transaction is journalized
9. Transaction is posted
10. Invoice is filed in tickler file by due date.
Purchases Discounts
• cash
discount offered by suppliers to encourage early payment
• credit
terms of 3/15 n/45
• if
paid within 15 days
then receive 3% discount,
otherwise full payment within 45 days
then receive 3% discount,
otherwise full payment within 45 days
• discount
period:
• time
within which payment must be made in order to take discount
• Disc.
Amt = Purchases x Disc. Rate
The Purchases Account
• account
in which the cost of merchandise bought is recorded
Purchases:
• temporary
account
• classified
as Cost of Merchandise
• normal
debit balance
• cost
of merchandise sold will offset revenue generated from sale
• (decrease
owners equity)
Accounts Payable Subsidiary Ledger
• used
when business has many credit suppliers
• contains
an account for each creditor
• individual
accounts are summarized in controlling account called Accounts Payable
• balance
in controlling account must equal total of all accounts in subsidiary ledger
after posting
• A/P
subsidiary ledger form is same as A/R form
• Name
and Address
• Debit
and Credit columns
• One
balance column
Bought Merchandise on account:
Debit Purchases
Credit Accounts
Payable (control and subsidiary)
Bought Equipment on account:
Debit Equipment
Credit Accounts Payable (control and
subsidiary)
Tickler File
• Accordion
file with section for each day of month.
• Invoices
are filed by due date.
Purchases Returns and Allowances
• purchase
return
• return merchandise for full credit
• purchase
allowance
• price reduction for less than satisfactory
merchandise
• debit
memorandum
• used
to notify suppliers of a return or request for allowance
(debit A/P)
(debit A/P)
Return Merchandise previously
purchases on account:
Debit Accounts Payable (control and
subsidiary)
Credit Purchases
Returns and Allowances
Return Equipment previously
purchases on account:
Debit Accounts Payable (control
and subsidiary)
Credit Equipment
Cash Payments
• on
account
• purchase
(merchandise or other asset)
• payroll
• expense
Cash Purchase of Insurance:
• pay
for insurance before you use it
• insurance
has value to protect against losses that you cannot afford
• Prepaid
Insurance is an Asset (normal debit balance)
• Purchase
12 mo. of insurance for $1200
Prepaid Insurance
1200
Cash in Bank 1200
• Each
month we use 1/12 of the insurance.
• Insurance
is used as times passes by (not when you have a loss).
• expense
what we use (this will lower the balance in Prepaid Insurance
• the
unused portion still has value and remains an asset in Prepaid Insurance
Insurance Expense 100
Prepaid
Insurance 100
Shipping and Handling:
• FOB = Free
on Board
• FOB
Destination = Supplier pays shipping (part of the cost of product)
• FOB
Shipping Point = Buyer pays shipping (extra cost of getting product into our
building
• Debit
to account called Transportation In
Bank Card Fee Expense
• Fee
charged by bank for processing business’ bankcard transactions
• Expense
account (normal debit balance)
