Chapter 14
Expenses & Cash Payments

Terms:
 Purchase Discounts: Given to the purchaser to encourage early payment.
 Purchase Returns & Allowances: A return of goods or a decrease in the amount owed by the purchaser.

Two methods of accounting for
Discounts:
 Gross method: Purchase recorded at full amount.
– If discount taken, Inventory reduced by amount of the discount.
 Net method: Purchase recorded at invoice price LESS the discount.
– If discount NOT taken, must use a
Purchases Discount Lost account.

Better Method?
 Net - shows which discounts were missed. Gross method doesn’t show this!

Procedures for purchasing: (Old
Way)
 Completed PO (purchase order) sent to supplier.
 When goods arrive, a Receiving Report
(RR) is completed when goods are inspected.
 PO matched with RR by accounting dept. before bill is paid.

Procedures for Purchasing: (New
Ways)
 Procurement card used for small purchases. (PO’s expensive to prepare.)
 EDI - used by larger companies.
 Outsourcing - pay someone else to handle A/Pay.

Accrued Liabilities:
 Amounts owed (but not yet paid) for things like salaries, utilities, taxes, etc.
 Must record these at end of accounting period or expenses & liabilities will be understated.
 Increase the expense account on the left & increase liability account on the right.

Warranties
 Must be estimated (like bad debt!) and recorded in the year the sale is made.
– Expenses matched against revenues.
 Increase Warranty Liabilities on the right
& Warranty expense on the left.

Payroll Taxes
 Withheld from employees earnings:
– FIT - amount depends on gross earnings, pay period, exemptions, marital status.
– SIT - Each state varies.
– FICA Social Security - 6.2% on Max. of
$68,400/year. (changes!)
– FICA Medicare - 1.45% of all earnings.
– “Other” - Medical insurance, union dues, etc.

Payroll Taxes
 Paid by the Employer
– FICA Social Security (same amount)
– FICA Medicare (same amount)
– SUTA (varies by state, industry, & experience rating.)
– FUTA - .8% of first $8,000 of wages.

Income Taxes, Sales Taxes
 Cover on your own.

Prepaids
 Sometimes a company pays for expenses ahead of time.
 Increase an asset account when payment is made
 Decrease the asset and increase an expense account when the item is “used up”.

Loss Contingencies
 A possible loss.
 May have to report on the financial statements, depending on two conditions:
– 1. Likelihood that the loss will occur.
– 2. Ability to estimate the loss. (page 478-
480 gives details!)

Must evaluate liquidity
 Be sure to read through this section!

Be sure to also read Appendix A in the back of the text!

The End