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Accounting for Purchases: Procedures, Accounts Payable, and Invoices

Learn about the purchasing procedures, accounts payable, and invoices involved in accounting for purchases in merchandising businesses.

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Accounting for Purchases: Procedures, Accounts Payable, and Invoices

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  1. Chapter 8 Skyline College

  2. Accounting for Purchases • Most merchandising businesses purchase goods on credit under open-account arrangements. • Large firms usually have a centralized purchasing department.

  3. Purchasing Procedures The Sales Department sends an authorized purchase requisition to the Purchasing Department. The Purchasing Department issues an authorized purchase order and sends to the selected supplier. A receiving report is prepared when the merchandise is received. The Accounting Department receives the invoice and copies of the purchase order and receiving report.

  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.

  5. A purchase invoice is a bill received for goods purchased. A sales invoice is a supplier’s billing document. You Owe: $1,000,000 DUE IN: 30 days

  6. This is a purchase invoice for the customer. This is a sales invoice for the seller. International Apparel Shop The Style Shop January 23, 20— 9001 Metroplex Express n/30 2007 Trendsetter Lane Dallas, TX 75268 January 23, 20-- Metroplex 10 4760 360 5,120

  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. Account Classifications Recall the major account classifications from earlier chapters: • Assets • Liabilities • Owner’s Equity • Revenue • Expenses The Purchases account is part of the expenses: • Cost of Goods Sold

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

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

  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.

  12. Total invoice (credit Accounts Payable) $5,120 Freight charge (debit Freight In) 360 + + + 360 4,760 5,120 Cost of Goods Sold Price of goods (debit Purchases) $4,760 Purchases + Freight In = Accounts Payable - - - The cost of goods sold accounts have normal debit balances.

  13. Journal Flow Chart Does the transaction involve cash? YES NO Was cash RECEIVED? Was inventory PURCHASED? NO NO YES YES Record the transaction in the CASH RECEIPTS (CRs) Journal Record the transaction in the CASH DISBURSEMENTS (CDs) Journal Record the purchase in the PURCHASES Journal (PJ) Was it a credit SALE? YES NO Use the CRs and CDs Journals to prepare the monthly Bank Reconcilation Record the Transaction in the SALES Journal (SJ) Record the Transaction In the GENERAL Journal (GJ)

  14. A purchases journal is a special journal used to 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.

  15. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. REF. DEBIT CREDIT 3 5 20– Jan. Purchases Freight In Accounts Payable Purchased merchandise from Fashion Design Inc., Invoice 5879, dated Dec. 29, terms 2/10, n/30 Purchases Freight In Accounts Payable Purchased merchandise from The Trend Center, Invoice 633, dated Dec. 30, terms n/30 2,675 190 501 502 205/ ü 501 502 205/ ü 501 502 205/ ü 501 502 205/ ü 2,865 3880 175 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. 3,620 6 Purchases Freight In Accounts Payable Purchased merchandise from The Modern Woman, Invoice 8011, dated Dec. 31, terms n/30 Purchases Freight In Accounts Payable Purchased merchandise from World of Fashions, Invoice 4321, dated Dec. 31, terms 2/10, n/30 2700 220 2,920 7 3,850 450 3,935

  16. (502) (501) PAGE 1 PURCHASES JOURNAL DATE CREDITOR’S INVOICE INV. TERMS POST. ACCOUNTS PURCHASESFREIGHTIN ACCOUNT NUMBER DATE REF. PAYABLE DEBITDEBITCREDITEDCREDIT 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 (205) 1. In the Accounts Payable Credit column, enter the total owed to the supplier. 3. In the Freight In Debit column, enter the freight amount. 2. In the Purchases Debit column, enter the price of the goods purchased .

  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.

  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!

  19. Posting to the General Ledger • The purchases journal simplifies the posting process. • Summary amounts are posted at the end of the month.

  20. 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 Before posting, prove the equality of the debits and credits recorded in the purchases journal.

  21. Post a column total to the general ledger in six steps. • Locate the general ledger account. • Enter the date. • Enter the posting reference. • Enter the amount from the purchases journal column. • Enter the new balance in the Debit Balance or Credit Balance column. • Go back to the purchases journal.Enter the general ledger account number under the column total.

  22. (502) (501) PAGE 1 PURCHASES JOURNAL DATE CREDITOR’S INVOICE INV. TERMS POST. ACCOUNTS PURCHASESFREIGHTIN ACCOUNT NUMBER DATE REF. PAYABLE DEBITDEBITCREDITEDCREDIT 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 (205) ACCOUNTACCOUNT NO. 205 DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20-- Jan. 1 Balance ü 10,800 31 P1 23,315 23,315 Accounts Payable

  23. (502) (501) PAGE 1 PURCHASES JOURNAL DATE CREDITOR’S INVOICE INV. TERMS POST. ACCOUNTS PURCHASESFREIGHTIN ACCOUNT NUMBER DATE REF. PAYABLE DEBITDEBITCREDITEDCREDIT 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 (205) ACCOUNTACCOUNT NO. 501 DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20-- 31 P1 21,750 21,750 Purchases

  24. (502) (501) PAGE 1 PURCHASES JOURNAL DATE CREDITOR’S INVOICE INV. TERMS POST. ACCOUNTS PURCHASESFREIGHTIN ACCOUNT NUMBER DATE REF. PAYABLE DEBITDEBITCREDITEDCREDIT 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 (205) ACCOUNTACCOUNT NO. 502 DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20-- 31 P1 1,565 1,565 Freight In

  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

  26. An accounts payable ledger is a subsidiary ledger that contains a separate account for each creditor. The Accounts Payable Ledger

  27. 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 • The accounts payable ledger has three money columns. • The Balance column is presumed to contain credit amounts.

  28. Posting a Credit Purchase To keep the accounting records up to date, invoices are posted to the accounts payable subsidiary ledger every day.

  29. Steps to post to the accounts payable ledger Locate the accounts payable ledger account for the creditor International Apparel Shop. 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

  30. PAGE 1 PURCHASES JOURNAL DATE CREDITOR’S INVOICE INV. TERMS POST. ACCOUNTS PURCHASESFREIGHTIN 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 ü ü 3 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 2 1 Enter the date, invoice number and date, and the page number from the purchases journal.

  31. PAGE 1 PURCHASES JOURNAL DATE CREDITOR’S INVOICE INV. TERMS POST. ACCOUNTS PURCHASESFREIGHTIN 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 ü ü 3 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 2 1 4 Enter the amount from the Accounts Payable Credit column in the purchases journal in the Credit column of the accounts payable subsidiary ledger.

  32. PAGE 1 PURCHASES JOURNAL DATE CREDITOR’S INVOICE INV. TERMS POST. ACCOUNTS PURCHASESFREIGHTIN 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 ü ü 3 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 2 1 4 5 Compute and enter the new balance in the Balance column.

  33. PAGE 1 PURCHASES JOURNAL DATE CREDITOR’S INVOICE INV. TERMS POST. ACCOUNTS PURCHASESFREIGHTIN 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 ü 6 ü 3 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 2 1 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.

  34. A purchase return is a return of unsatisfactory goods. Sorry, I didn’t like the color. A purchase allowance is a price reduction from the amount originally billed.

  35. A credit to the Purchase Returns and Allowances account is preferred to making a direct credit to Purchases. Purchases Returns and Allowances + Returns and Allowances A contra cost of goods sold account

  36. Recording Purchases Returns & Allowances On January 30 The Style Shop received a credit memorandum for $476 from International Apparel Shop as an allowance for damaged merchandise. International Apparel Shop 1718 Sherry Lane Dallas, TX 75267 The Style Shop 2007 Trendsetter Lane Dallas, TX 75268 $476

  37. Purchase Allowance Accounts Payable Purchases Returns and Allowances - 476 + 476

  38. Posting a Purchases Return or Allowance it is important to promptly post returns and allowances to the creditor’s account in the accounts payable ledger.

  39. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. REF. DEBIT CREDITJan. 30 Accounts Payable/ 205/ ü 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 ü1,600 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

  40. Schedule of Accounts Payable • subsidiary ledger must equal the balance of the Accounts Payable control account. is a list of all balances owed to creditors. • To prove that the control account and the subsidiary ledger are equal, businesses prepare a schedule of accounts payable.

  41. ACCOUNT Accounts Payable ACCOUNT NO. 205 DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20-- Jan. 1 Balance ü10,800 30 J1 476 10,324 31 P1 23,315 33,639 31 CP1 12,710 22,989 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 the total of the schedule of accounts payable and the general ledger A/P account shows that the two figures are the same

  42. Determining the Cost of Purchases The net delivered cost of purchases for The Style Shop for January is calculated as follows. Purchases $ 23,315 Freight In 1,565 Delivered Cost of Purchases $ 24,880 Less Purchases Returns and Allowances <476> Net Delivered Cost of Purchases $24,404 Note: there were no purchase discounts

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