8-1

Skyline College

Chapter

8

8-2

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

Large firms usually have a centralized purchasing department.

Accounting for Purchases

8-3

The Accounting Departmentreceives the invoice and copies of the purchase order and receiving report.

The Purchasing Departmentissues an authorized purchase order and sends to the selected supplier.

The Sales Departmentsends an authorized purchase requisition to the Purchasing Department.

A receiving report is prepared when the merchandise is received.

Purchasing Procedures

8-4

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.

8-5

A purchase invoice is a bill received for goods purchased.

You Owe:

$1,000,000

DUE IN: 30 days

A sales invoice is a supplier’s billing document.

8-6

International Apparel Shop

This is a sales invoice for the seller.

January 23, 20—

9001

Metroplex Express

n/30

The Style Shop

Metroplex

10

2007 Trendsetter Lane

Dallas, TX 75268

This is a purchase invoice for the customer.

January 23, 20--

4760

360

5,120

8-7

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

Wow! I need to order more

inventory!

8-8

Account Classifications

Assets Liabilities Owner’s Equity Revenue Expenses

The Purchases account is part of the expenses:

Recall the major account classifications from earlier chapters:

Cost of Goods Sold

8-9

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

Cost of Goods Sold

8-10

Freight Charges for Purchases

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

8-11

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.

8-12

- +

5,120

-+

4,760

Purchases

-+

360

Freight In+ =

Cost of Goods Sold

Total invoice (credit Accounts Payable) $5,120

Price of goods (debit Purchases) $4,760

Freight charge (debit Freight In) 360

The cost of goods sold accounts have normal debit balances.

Accounts Payable

8-13

Journal Flow Chart

Does the transaction involve cash?

YES

Was cash RECEIVED?

YES NO

Record thetransaction in

the CASHRECEIPTS

(CRs) Journal

Use the CRs and CDs Journals to preparethe monthly Bank Reconcilation

Record thetransaction in

the CASHDISBURSEMENTS

(CDs) Journal

NO

Was inventory PURCHASED?

YES NO

Record thepurchase in

the PURCHASES Journal (PJ)

Was it a credit SALE?

YES NO

Record theTransaction

in theSALES

Journal (SJ)

Record theTransaction

In theGENERALJournal (GJ)

8-14

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

The Purchases Journal

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

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

8-15

GENERAL JOURNAL

DATE DESCRIPTION POST. REF. DEBIT CREDIT

PAGE 1

20– Jan.

3

5

PurchasesFreight In Accounts Payable Purchased merchandise from Fashion Design Inc., Invoice 5879, dated Dec. 29, terms 2/10, n/30PurchasesFreight In Accounts Payable Purchased merchandise from The Trend Center, Invoice 633, dated Dec. 30, terms n/30

2,675 190

2,865

3880 175

3,620

7

PurchasesFreight In Accounts Payable Purchased merchandise from The Modern Woman, Invoice 8011, dated Dec. 31, terms n/30PurchasesFreight In Accounts Payable Purchased merchandise from World of Fashions, Invoice 4321, dated Dec. 31, terms 2/10, n/30

2700 220

2,920

3,850 450

3,935

6

501502205/

501502205/

501502205/

501502205/

These four general journal entries require twelve separate postings to general ledger accounts. It takes a great deal of time and effort to post them.

8-16

(205)

PURCHASES JOURNAL

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

PAGE 1

(501) (502)

2. In the Purchases Debit column, enter the price of the goods purchased .

3. In the Freight In Debit column, enter the freight amount.

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

8-17

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.

8-18

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

Because I paid the bill early, I saved lots of

money!

8-19

Posting to the General Ledger

The purchases journal simplifies the posting process.

Summary amounts are posted at the end of the month.

8-20

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

8-21

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.

Post a column total to the general ledger in six steps.

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(205)

PURCHASES JOURNAL

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

PAGE 1

(501) (502)

ACCOUNT ACCOUNT NO. 205

DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT20--Jan. 1 Balance 10,800 31 P1 23,315 23,315

Accounts Payable

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(205)

PURCHASES JOURNAL

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

PAGE 1

(501) (502)

ACCOUNT ACCOUNT NO. 501

DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT20-- 31 P1 21,750 21,750

Purchases

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(205)

PURCHASES JOURNAL

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

PAGE 1

(501) (502)

ACCOUNT ACCOUNT NO. 502

DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT20-- 31 P1 1,565 1,565

Freight In

8-25

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

8-26

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

The Accounts Payable Ledger

8-27

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

The accounts payable ledger has three money columns.

The Balance column is presumed to contain credit amounts.

8-28

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

Posting a Credit Purchase

8-29

Locate the accounts payable ledger account for the creditor International Apparel Shop.

Steps to post to 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

8-30

PURCHASES JOURNAL 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

PAGE 1

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, 01/22/-- P1 5,120 6,720

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

1 2

3

8-31

PURCHASES JOURNAL 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

PAGE 1

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, 01/22/-- P1 5,120 6,720

1 2

3

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

4

8-32

PURCHASES JOURNAL 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

PAGE 1

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, 01/22/-- P1 5,120 6,720

1 2

3

4

Compute and enter the new balance in the Balance column.

5

8-33

PURCHASES JOURNAL 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

PAGE 1

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, 01/22/-- P1 5,120 6,720

1 2

3

4

5

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.

6

8-34

A purchase return is a return of unsatisfactorygoods.

Sorry, I didn’t like the color.

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

8-35

Purchases Returns and Allowances

A credit to the Purchase Returns and Allowances account is preferred to making a direct credit to Purchases.

+Returns

and Allowances

A contra cost of goods sold account

8-36

On January 30 The Style Shop received a credit memorandum for $476 from International Apparel Shop as an allowance for damaged merchandise.

International Apparel ShopInternational Apparel Shop1718 Sherry Lane1718 Sherry LaneDallas, TX 75267Dallas, TX 75267

$476

The Style Shop2007 Trendsetter LaneDallas, TX 75268

Recording Purchases Returns & Allowances

8-37

Purchase Allowance

Accounts Payable

-476

Purchases Returns and Allowances

+476

8-38

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

Posting a Purchases Return or Allowance

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

Posting from the General Journal

8-40

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.

Schedule of Accounts Payable

is a list of all balances owed to creditors.

8-41

The Style Shop

Schedule of Accounts Payable

January 31, 20--

Fashion Designs 1065

Fashion Warehouse 4,200

International Apparel Shop 3,844

Modern Woman 4,740

The Trend Center 2,205

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

the total of the schedule of accounts payable and the general ledger A/P account shows that the two figures are the same

8-42

The net delivered cost of purchases for The Style Shop for January is calculated as follows.

Net Delivered Cost of Purchases $24,404

Purchases $ 23,315

Freight In 1,565

Delivered Cost of Purchases $ 24,880

Less Purchases Returns and Allowances <476>

Note: there were no purchase discounts

Determining the Cost of Purchases