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CHAPTER TWELVE

CHAPTER TWELVE. ACCOUNTING FOR PURCHASES AND CASH PAYMENTS. PURCHASES. Merchandise acquired for resale: Must be items for RESALE Procedures and documents vary depending on the size of the business. Can be made “on account” or for cash. PURCHASING PROCESS DOCUMENTS. PURCHASE REQUISITION.

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CHAPTER TWELVE

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  1. CHAPTER TWELVE ACCOUNTING FOR PURCHASES AND CASH PAYMENTS

  2. PURCHASES • Merchandise acquired for resale: • Must be items for RESALE • Procedures and documents vary depending on the size of the business. • Can be made “on account” or for cash

  3. PURCHASING PROCESS DOCUMENTS PURCHASE REQUISITION

  4. PURCHASE REQUISITION • A form used to request the purchase of merchandise or other property • Can be prepared by any authorized person • One copy to the Purchasing department • One copy to the Accounting department • One copy kept by the department preparing the requisition

  5. PURCHASING PROCESS DOCUMENTS PURCHASE REQUISITION PURCHASE ORDER

  6. PURCHASE ORDER • A written order to buy goods from a specific vendor • Purchasing department reviews and approves the purchase requisition and prepares a purchase order: • One to vendor • One to the Accounting department • One kept in the Purchasing department • Copies may also be sent to the receiving area and to the department initiating the purchase.

  7. PURCHASING PROCESS DOCUMENTS PURCHASE ORDER RECEIVING REPORT

  8. RECEIVING REPORT • Prepared by the receiving clerk • Indicates what has been received: • Including date of receipt, and • condition of the goods • This report will be compared with the purchase order and requisition to determine if items ordered were received in good condition before payment is approved.

  9. PURCHASING PROCESS DOCUMENTS RECEIVING REPORT PURCHASE INVOICE

  10. PURCHASE INVOICE • Prepared by the seller • As a bill for the merchandise shipped: • Seller calls it a sales invoice. • Buyer calls it a purchase invoice. • Before payment is made, Accounting department compares the purchase invoices with: • Purchase Requisition • Purchase Order • Receiving Report

  11. CASH DISCOUNTS • Available if the bill is paid within the discount period • Buyer calls it a Purchase Discount. • Seller calls it a Sales Discount.

  12. TRADE DISCOUNTS • Often offered by manufacturers and wholesalers • Reduction from the list or catalog price: • Discounts offered to different classes of customers • Buyer and Seller both record the transaction at the NET amount (after the discount).

  13. MERCHANDISE PURCHASES ACCOUNTS PURCHASES PURCHASES DISCOUNTS PURCHASES RETURNS & ALLOWANCES FREIGHT-IN

  14. PURCHASES ACCOUNT Used to record the cost of merchandise purchased PURCHASES CR. DR. + The account is debited when merchandise is purchased.

  15. PURCHASES ACCOUNT Used to record the cost of merchandise purchased PURCHASES CR. DR. + The account is only credited during the closing process.

  16. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Purchases 100 00 1 Cash 2 100 00 3 Made cash purchase 4 5 Example: Made $100 purchase for cash 6 7 8 9 10 11

  17. GENERAL JOURNAL DATE DESCRIPTION PR DEBIT CREDIT Purchases 100 00 1 Accts. Payable/Vendor 2 100 00 3 Made purchase on account 4 5 What if the purchase had been made on account? 6 7 8 9 10 11

  18. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Purchases 100 00 1 Accts. Payable/Vendor 2 100 00 3 Made purchase on account 4 5 We would credit the Accounts Payable account instead of cash. 6 7 8 9 10 11

  19. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Purchases 100 00 1 Accts. Payable/Vendor 2 100 00 3 Made purchase on account 4 The specific supplier is identified. 5 6 7 8 9 10 11

  20. PURCHASE RETURNS AND ALLOWANCES CONTRA-PURCHASES account used to record purchase returns and purchase allowances. PURCHASES RETURNS & ALLOWANCES DR. CR. + The account is credited for the amount of returns and allowances.

  21. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 2 3 4 Example: Merchandise purchased on account for $200 is defective and is returned to the supplier. 5 6 7 8 9 10 11

  22. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Accts. Payable/Vendor 200 00 1 2 3 4 Accounts Payable is debited. The specific vendor is identified. 5 6 7 8 9 10 11

  23. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Accts. Payable/Vendor 200 00 1 200 00 Pur. Returns & Allow. 2 3 Returned merchandise 4 Purchases Returns & Allowances is credited. This account will be shown as a deduction from the Purchases account on the Income Statement. 5 6 7 8 9 10 11

  24. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 2 3 4 Example: If the same merchandise is retained but the supplier grants a price reduction of $45 because of the defects 5 6 7 8 9 10 11

  25. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Accts. Payable/Vendor 45 00 1 2 3 Accounts Payable is debited to reflect the price reduction. 4 5 6 7 8 9 10 11

  26. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Accts. Payable/Vendor 45 00 1 45 00 Pur. Returns & Allow. 2 3 Allowance for defective 4 merchandise 5 Purchases Returns & Allowances is credited. Same as the entry for Returns! 6 7 8 9 10 11

  27. PURCHASES DISCOUNTS CONTRA-PURCHASES account used to record cash discounts allowed on purchases. PURCHASES DISCOUNTS DR. CR. + The account is credited for the discount granted by the vendor for prompt payment.

  28. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 2 3 4 Example: Merchandise is purchase for $100 on account with credit terms 2/10, n/30 and payment is made within the discount period. 5 6 7 8 9 10 11

  29. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Accts. Payable/Vendor 100 00 1 2 3 Accounts Payable is debited for the entire amount of the purchase. 4 5 6 7 8 9 10 11

  30. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Accts. Payable/Vendor 100 00 1 98 00 Cash 2 3 4 5 Cash is credited for the actual amount paid, $98 ($100 - $2 discount). 6 7 8 9 10 11

  31. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Accts. Payable/Vendor 100 00 1 98 00 Cash 2 3 2 00 Purchases Discounts 4 Made payment on account 5 Purchase Discounts is credited for the discount amount, $2 ($100 x 2%). 6 7 8 9 10 11

  32. FREIGHT-IN ADJUNCT-PURCHASES account used to record transportation charges on merchandise purchases. FREIGHT-IN DR. CR. + The account is debited for transportation charges.

  33. TRANSPORTATION CHARGES • Expressed as FOB (Free on Board) • FOB Shipping Point: • Buyer pays for transportation. • Freight charges are either listed on invoice or sent as a separatebill. • FOB Destination: • Seller pays for transportation.

  34. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 2 3 Example: Merchandise was purchased on account for $400 plus freight charges of $38. 4 5 6 7 8 9 10 11

  35. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Purchases 400 00 1 2 3 4 Purchases is debited only for the cost of the merchandise. 5 6 7 8 9 10 11

  36. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Purchases 400 00 1 Freight-In 38 00 2 3 4 Freight-In is debited for the transportation costs. 5 6 7 8 9 10 11

  37. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Purchases 400 00 1 Freight-In 38 00 2 3 Accts. Payable/Vendor 438 00 4 Made purchase on account 5 Accounts Payable is credited for the entire purchase price (merchandise + freight). 6 7 8 9 10 11

  38. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 2 3 What if the freight charges were on a separate bill from the transportation company? 4 5 6 7 8 9 10 11

  39. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Purchases 400 00 1 2 3 4 Purchases is again debited for the cost of the merchandise. 5 6 7 8 9 10 11

  40. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Purchases 400 00 1 Accts. Payable/Vendor 400 00 2 3 Made purchase on account 4 Accounts Payable is credited for the amount due to the supplier. 5 6 7 8 9 10 11

  41. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Purchases 400 00 1 Accts. Payable/Vendor 400 00 2 3 Made purchase on account 4 A separate journal entry is made to record the freight charges. 5 6 7 8 9 10 11

  42. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT Purchases 400 00 1 Accts. Payable/Vendor 400 00 2 3 Made purchase on account 4 38 00 Freight-In 5 6 Accts. Payable/Vendor 38 00 7 Freight charges on purchase Accounts Payable is credited, but the vendor is the transportation company. 8 9 10 11

  43. GROSS PROFIT • Also called Gross Margin • Difference between Net Sales and Cost of Goods Sold • Tells management the amount of sales dollars available to cover expenses, after covering the cost of the goods sold

  44. GROSS PROFIT FORMULA: NET SALES COST OF GOODS SOLD GROSS PROFIT Let’s look at an example.

  45. EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7.50 each. NET SALES COST OF GOODS SOLD GROSS PROFIT $200 20 hats @ $10 each = $200 in Sales There were no Sales Returns & Allowances or Sales Discounts, so NET SALES = $200.

  46. EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7.50 each. GROSS PROFIT NET SALES COST OF GOODS SOLD $150 $200 20 hats @$7.50each = $150

  47. EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7.50 each. GROSS PROFIT NET SALES COST OF GOODS SOLD $150 $200 $50 The Gross Profit on these 20 hats was $50. This $50 is used to cover expenses.

  48. COMPUTATION OF GROSS PROFIT

  49. NORTHERN MICRO Sales Let’s compute the Gross Profit. $200,500 1,200 Sales Returns & Allowances Purchases 105,000 800 Purchases Returns & Allowances Purchases Discounts 1,000 Freight-In 300 26,000 Merchandise Inventory, 1/1/-- Merchandise Inventory, 12/31/-- 18,000

  50. COMPUTATION OF GROSS PROFIT STEP #1: COMPUTE NET SALES. FORMULA: SALES RETURNS & ALLOWANCES SALES

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