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Merchandising businesses follow an
orderly process for purchasing
merchandise, supplies, and equipment.
The accounting department is responsible
for making the cash payments for the
business. Individual accounts payable
transactions are posted to a subsidiary
ledger.
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Explain the procedures for processing a purchase on account.
Describe the accounts used in the purchasing accounts.
Analyze transactions relating to the purchase of merchandise.
Record a variety of purchases and cash payments.
Post to the accounts payable subsidiary ledger.
Identify controls over cash.
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Section 15.1
Purchasing Items
Needed by a Business
Key Terms
purchase requisition
purchases discount
purchase order
discount period
packing slip
Purchases account
processing stamp
cost of merchandise
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The Purchasing Process
Section 15.1
Purchasing Items
Needed by a Business
Requesting needed items
The purchase of
supplies,
equipment, and
merchandise is
divided into four
stages:
Ordering from a supplier
Verifying items received
Processing the supplier’s invoice
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The Purchasing Process
Section 15.1
Purchasing Items
Needed by a Business
Purchase Requisition
See page 420
purchase requisition
A written request that a specified item or items be ordered.
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The Purchasing Process
Section 15.1
Purchasing Items
Needed by a Business
Contents of the Purchase Order Include:
Quantity
Description
Unit price
Total cost
purchase order
A written offer to a
supplier to buy
specified items.
Supplier’s name and address
Date needed
Shipping method (optional)
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The Purchasing Process
Section 15.1
Purchasing Items
Needed by a Business
Verifying Items
Received
The buyer unpacks and
checks the contents against
the packing slip.
When a shipment
arrives:
The buyer reports
discrepancies to the
accounting department.
packing slip
A form that lists the items included in the shipment.
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The Purchasing Process
Section 15.1
Purchasing Items
Needed by a Business
Processing the Supplier’s Invoice
The supplier sends
an invoice, or bill, to
the buyer.
The accounting
department checks
the invoice against
the packing slip and
purchase order.
If there are no
discrepancies, a
processing stamp
is placed on the
invoice.
processing stamp
A stamp placed on a creditor’s invoice that outlines
the steps to be followed in processing the invoice
for payment.
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The Purchasing Process
Section 15.1
Purchasing Items
Needed by a Business
Purchases Discount
Two Types of Discounts:
Discount Period
purchases discount
The buyer’s cash discount for early payment of an
invoice on account.
discount period
The period of time within which an invoice must be
paid if a discount is to be taken.
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The Purchasing Process
Section 15.1
Purchasing Items
Needed by a Business
Processing the Supplier’s Invoice
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See page 422
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The Purchases Account
Section 15.1
Purchasing Items
Needed by a Business
Merchandise bought to sell to customers is recorded in the
Purchases account, a temporary account that is classified as a
cost of merchandise account.
Purchases account
The account used to record the cost of merchandise
purchased during a period.
cost of merchandise
The actual cost to the business of the merchandise
sold to customers.
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Section 15.2
Analyzing and Recording
Purchases on Account
Key Terms
accounts payable subsidiary ledger
tickler file
due date
purchases return
purchases allowance
debit memorandum
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Purchases of
Assets on Account
Section 15.2
Analyzing and Recording
Purchases on Account
The most important thing a retail business
purchases is merchandise to resell.
Merchandise can be bought on a cash basis
or on account.
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Purchases of
Assets on Account
Section 15.2
Analyzing and Recording
Purchases on Account
The Accounts Payable Subsidiary Ledger Form
See page 424
accounts payable subsidiary ledger
A separate ledger that contains accounts for all creditors;
it is summarized in the Accounts Payable controlling account
in the general ledger.
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Purchases of
Assets on Account
Section 15.2
Analyzing and Recording
Purchases on Account
When a purchase of
merchandise on
account is recorded,
The Accounts Payable
controlling account
a diagonal line is
entered in the
Posting Reference
column to indicate
the credit amount is
posted in two places:
The individual account in
the accounts payable
subsidiary ledger
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Purchases of
Assets on Account
Section 15.2
Analyzing and Recording
Purchases on Account
After an invoice is journalized, it is put in a
tickler file according to its due date.
tickler file
A file that contains a folder for each day of the
month into which invoices are placed according
to their due dates.
due date
The date by which an invoice must be paid.
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Purchases of
Assets on Account
Section 15.2
Analyzing and Recording
Purchases on Account
Business Transaction
On December 14 The
Starting Line purchased
$2,300 in merchandise
on account from Pro
Runner Warehouse,
Invoice 7894.
See pages 425–426
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Purchases of
Assets on Account
Section 15.2
Analyzing and Recording
Purchases on Account
Business Transaction
On December 15 The
Starting Line received
Invoice 3417, dated
December 13, from
Champion Store Supply
for store equipment
bought on account for
$1,200, terms n/30.
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See pages 426–427
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Purchases Returns
and Allowances
Section 15.2
Analyzing and Recording
Purchases on Account
Purchases Return
Occasionally, a
business buys
merchandise
that, upon
inspection, is
unacceptable.
Purchases Allowance
Debit Memorandum
purchases return
The return of merchandise bought on account to the
supplier for full credit.
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Purchases Returns
and Allowances
Section 15.2
Analyzing and Recording
Purchases on Account
Purchases Return
Occasionally, a
business buys
merchandise
that, upon
inspection, is
unacceptable.
Purchases Allowance
Debit Memorandum
purchases allowance
A price reduction given when a business keeps unsatisfactory
merchandise it has bought.
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Purchases Returns
and Allowances
Section 15.2
Analyzing and Recording
Purchases on Account
Purchases Return
Occasionally, a
business buys
merchandise
that, upon
inspection, is
unacceptable.
Purchases Allowance
Debit Memorandum
debit memorandum
The form a business uses to notify its suppliers
(creditors) of a return or to request an allowance.
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Purchases Returns
and Allowances
Section 15.2
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Analyzing and Recording
Purchases on Account
See page 427
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Purchases Returns
and Allowances
Section 15.2
Analyzing and Recording
Purchases on Account
Business Transaction
On December 16 The
Starting Line issued
Debit Memorandum 51
for the return of $200 in
merchandise purchased
on account from
FastLane Athletics.
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See page 428
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Purchases Returns
and Allowances
Section 15.2
Analyzing and Recording
Purchases on Account
Posting to General
Ledger Accounts
Payable Subsidiary
Ledger
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See page 429
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Section 15.3
Analyzing and Recording
Cash Payments
Key Terms
premium
FOB destination
FOB shipping point
bankcard fee
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Controls over Cash
Section 15.3
Analyzing and Recording
Cash Payments
How Businesses Can Manage Cash Payments
Require proper authorization of all cash payments.
Write checks for all payments.
Use prenumbered checks.
Retain and account for voided checks.
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Cash Payment
Transactions
Section 15.3
Analyzing and Recording
Cash Payments
An insurance premium is paid at the beginning of the covered
period and is recorded in the Prepaid Insurance asset account.
premium
The amount paid for insurance.
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Cash Payment
Transactions
Section 15.3
Analyzing and Recording
Cash Payments
Business Transaction
On December 19 The Starting Line purchased
merchandise from FastLane Athletics for $1,300, Check 1002.
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See page 433
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Cash Payment
Transactions
Section 15.3
Analyzing and Recording
Cash Payments
Recording Cash Payments for
Items Purchased on Account
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See page 433
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Cash Payment
Transactions
Section 15.3
Analyzing and Recording
Cash Payments
FOB destination
Shipping terms are
stated as
FOB shipping point
FOB destination
Shipping term specifying that
the supplier pays
the shipping cost to the
buyer’s destination.
FOB shipping point
Shipping term specifying that
the buyer pays the shipping
charge from the supplier’s
shipping point.
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Cash Payment
Transactions
Section 15.3
Analyzing and Recording
Cash Payments
Business Transaction
On December 24, The Starting Line issued Check 1004 for $275 to
Dara’s Delivery Service for shipping charges on merchandise
purchased from Sports Link Footwear.
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See page 435
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Cash Payment
Transactions
Section 15.3
Analyzing and Recording
Cash Payments
Banks charge a bankcard fee for handling
bankcard sales slips.
Business Transaction
On December 31 The Starting Line records the bankcard fee of $75,
December bank statement.
bankcard fee
A fee charged for handling bankcard sales slips; usually
based on the total amounts recorded on the sales slips processed.
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See page 435
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Question 1
From the four choices below, select the form that is related to each step
in the purchasing process.
a) purchase order
b) packing slip
c) processing stamp
d) purchase requisition
1. Requesting needed items
2. Ordering from the supplier
purchase requisition
___________________
purchase order
___________________
packing slip
___________________
processing stamp
4. Processing supplier’s invoice ___________________
3. Verifying items received
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Question 2
If you ordered merchandise from a vendor in New York City and the
terms stated “FOB Chicago” and your company is in Denver, what would
that mean?
FOB, which means “free on board,” can be the starting point, the
destination, or any point in between. In this case, with FOB Chicago
as the shipping terms, the vendor would pay all transportation and
bear the liability for the goods from New York City to Chicago. In
Chicago, ownership of the goods would shift from the vendor to
you, the customer. At this time, you must pay all transportation and
assume the liability for the goods from Chicago to Denver.
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Question 3
Your business received an invoice dated February 5 totaling $2,900.00.
The vendor has offered the terms of 2/10, n/30. You pay on February 15.
Calculate the following:
1. total amount of purchase
2. amount of discount
3. amount of check
$2900.00
__________
$58.00
__________
$2842.00
__________
Now indicate whether you would debit or credit the following accounts.
Debit
4. Accounts Payable
__________
Debit
5. Vendor’s subsidiary account __________
Credit
6. Purchases Discounts
__________
7. Cash in Bank
__________
Credit
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