Intro to Purchases

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:

1. request:

–      needed item

•       (purchase requisition)

2. order :

–      from supplier

•       (purchase order)

3. verify

–      items received

•       (packing slip)

4. 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*)

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

•       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)

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)