10-1College AccountingHeintz & ParryHeintz & Parry2020ththEditionEditionChapter11Accounting for Purchases and Cash Payments1Define merchandise purchases transactions.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 cashPURCHASING PROCESS DOCUMENTSPURCHASE REQUISITIONPURCHASE REQUISITION• A form used to request the purchase of merchandise or other property• Can be prepared by any authorized person• One copy is sent to the purchasing department• One copy is sent to the accounting department• One copy is kept by the department that prepared the requisitionPURCHASING PROCESS DOCUMENTSPURCHASE REQUISITIONPURCHASE ORDERPURCHASE ORDER• A written order to buy goods from a specific vendor (supplier)• The purchasing department reviews and approves the purchase requisition and prepares a purchase order– One copy is sent to the vendor to order the goods– One copy is sent to the accounting department– One copy is kept in the purchasing department– Copies may also be sent to the receiving area and to the department initiating the purchase requisitionPURCHASING PROCESS DOCUMENTSPURCHASE ORDERRECEIVING REPORTRECEIVING REPORT• Indicates what has been received• Can be a separate form or created from the vendor’s purchase invoicePURCHASING PROCESS DOCUMENTSRECEIVING REPORTPURCHASE INVOICEPURCHASE INVOICE• Prepared by the seller as a bill for the merchandise shipped– The seller calls it a sales invoice– The buyer calls it a purchase invoice• Before payment is made, the accounting department compares the purchase invoice with the:– Purchase requisition– Purchase order– Receiving reportCASH DISCOUNTS• Available if the bill is paid within the discount period– The buyer calls it a purchase discount– The seller calls it a sales discountTRADE DISCOUNTS• Often offered by manufacturers and wholesalers• A reduction from the list or catalog price offered to different classes of customers• The buyer and seller both record the transaction at the NET amount (after the discount)2Describe and use merchandise purchases accounts and compute gross profit.MERCHANDISE PURCHASES ACCOUNTSPURCHASES PURCHASES DISCOUNTSPURCHASES RETURNS AND ALLOWANCESFREIGHT-INPURCHASES ACCOUNTPURCHASESDR.CR.+Used to record the cost of merchandise purchased. The account is debited whenmerchandise is purchased. –PURCHASES ACCOUNTPURCHASESDR.CR.+Used to record the cost of merchandise purchased. –The account is only creditedduring the closing process.©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.DATE DESCRIPTION PR DEBIT CREDITPurchases1234567891011Example:Made $100 purchase for cash.100 00Cash100 00Made cash purchaseCASH PURCHASE JOURNAL ENTRY©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.PURCHASE MADE ON ACCOUNT JOURNAL ENTRYDATE DESCRIPTION PR DEBIT CREDITPurchases1234567891011What if the purchase hadbeen made on account?100 00Accounts Payable/Vendor100 00Made purchase on account©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.PURCHASE MADE ON ACCOUNT JOURNAL ENTRYDATE DESCRIPTION PR DEBIT CREDITPurchases1234567891011100 00100 00Made purchase on accountWe would credit Accounts Payable instead of Cash.Accounts Payable/Vendor©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.PURCHASE MADE ON ACCOUNT JOURNAL ENTRYDATE DESCRIPTION PR DEBIT CREDITPurchases1234567891011100 00100 00Made purchase on accountThe specific supplier is identified.Accounts Payable/VendorPURCHASES RETURNS AND ALLOWANCES ACCOUNTPURCHASES RETURNS AND ALLOWANCESDR.CR.+A CONTRA-PURCHASES account used to record purchases returns and purchases allowances.The account is credited for the amountof returns and allowances. The account is debited during the closing process.–©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.RETURNED MERCHANDISE JOURNAL ENTRYDATE DESCRIPTION PR DEBIT CREDIT1234567891011Example:Merchandise purchased on accountfor $200 is defective and is returned to the supplier.©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.RETURNED MERCHANDISE JOURNAL ENTRYDATE DESCRIPTION PR DEBIT CREDIT1234567891011Accounts Payable is debited.The specific vendor is identified.Accounts Payable/Vendor200 00©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.RETURNED MERCHANDISE JOURNAL ENTRYDATE DESCRIPTION PR DEBIT CREDIT1234567891011Purchases Returns and Allowances is credited.This account will be shown as a deduction from the purchases account on the income statement.200 00Pur. Returns and Allow.200 00Accounts Payable/VendorReturned merchandise©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.PURCHASES ALLOWANCE JOURNAL ENTRYDATE DESCRIPTION PR DEBIT CREDIT1234567891011Example:Now assume the same merchandise is retainedbut the supplier grants a price reductionof $45 because of the defects.©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.PURCHASES ALLOWANCE JOURNAL ENTRYDATE DESCRIPTION PR DEBIT CREDIT1234567891011Accounts Payable is debited to reflect the price reduction.Accounts Payable/Vendor45 00©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.PURCHASES ALLOWANCE JOURNAL ENTRYDATE DESCRIPTION PR DEBIT CREDIT1234567891011Purchases Returns and Allowances is credited.It is the same as the entry for returns!45 00Pur. Returns and Allow.45 00Accounts Payable/VendorAllowance for defectivemerchandisePURCHASES DISCOUNTS ACCOUNTPURCHASES DISCOUNTSDR.CR.A CONTRA-PURCHASES