Chapter 14


Chapter 14

Expenses & Cash Payments


 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


 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


 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


 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.


 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.


 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