Accounting for Purchases and Cash Payments

1. Chapter 15 $ Accounting for Purchases and Cash Payments $ Making Accounting Relevant We participate in the purchasing of goods and services daily. $ Have you ever wanted to buy something, but the store was out of that item? What effect does the out-of-stock situation have on business revenue? $

2. Chapter 15 $ Section 1 Purchasing Items Needed by a Business • What You’ll Learn • About the paperwork involved in the purchasing process. • The purpose of the Purchases Discounts account. • The purpose of the Purchases account and its rules of debit and credit. $ $ $

3. Section 1 Purchasing Items Needed by a Business (cont'd.) Chapter 15 $ Why It’s Important It is essential that businesses establish controls and procedures for handling the purchase of assets in a systematic manner because the purchasing process results in a large outflow of cash. $ $ • Key Terms • purchase requisition • purchase order • packing slip • processing stamp • purchases discount • discount period • Purchases account • cost of merchandise $

4. Section 1 Purchasing Items Needed by a Business (cont'd.) Chapter 15 $ The Purchasing Process The purchase of supplies, equipment, and merchandise is divided into four stages: $ $ • requesting needed items • ordering from a supplier • verifying items received • processing the supplier’s invoice $

5. Section 1 Purchasing Items Needed by a Business (cont'd.) Chapter 15 $ Requesting Needed Items $ • A purchase requisition is a written request that a certain item or items be purchased. • Pre-numbered, multicopy form. • Approved by the manager of the department requesting the purchase. $ $

6. Section 1 Purchasing Items Needed by a Business (cont'd.) Chapter 15 $ Ordering from a Supplier • A purchase order is a written offer to a supplier to buy certain items. • The purchase order contains: $ $ 1. quantity 2. description 3. unit price 4. total cost 5. supplier’s name and address 6. date needed 7. shipping method (optional) $

7. Section 1 Purchasing Items Needed by a Business (cont'd.) Chapter 15 $ Purchases Discounts Suppliers frequently offer charge customers a cash discount for early payment. $ 1.Merchandise Discount Purchased X Rate = Discount $ $2,300 X .02 = $46 $ 2. Amount Paid Within Invoice Discount Discount Amount – Amount = Period $2,300 – $46 = $2,254

8. Section 1 Purchasing Items Needed by a Business (cont'd.) Chapter 15 $ The Purchases Account When a business buys merchandise to sell to customers, the cost of the merchandise is recorded in the Purchases account. The Purchases account is a temporary account, classified as a cost of merchandise account. $ $ $ Purchases Credit – Decrease Side Debit + Increase Side Normal Balance

9. Section 1 Purchasing Items Needed by a Business (cont'd.) Chapter 15 $ Check Your Understanding $ Explain the steps in the purchasing process from the request for merchandise to the payment of the invoice. $ $