CHAPTER THIRTEEN
ACCOUNTING
FOR PURCHASES
13-3
ACCOUNTING FOR PURCHASES
Objectives:
1. Record the entries for the purchase of
merchandise for cash and on credit.
2. Record the entries for the purchase of
supplies and other assets.
3. Record purchases discounts
4. Record the entries for freight in.
5. Record the entries for purchases returns and
allowances.
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13-4
Recording Purchases of
Merchandise
The purchase of merchandise for
resale is recorded in an account
called Merchandise Purchases.
This account is usually referred to as
a cost account and is a temporary
account.
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13-5
Recording Purchases of
Merchandise (continued)
Like the expense accounts,
the Purchases account
decreases owner’s equity.
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13-6
Transaction
• $880 worth of merchandise was
purchased for cash.
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13-7
Transaction Analysis
• Merchandise purchases is debited
for $880.
• Cash is credited for $880.
Date
Description
Post
Ref
Debit
Credit
20 xx
Mar
2
Merchandise Purchases
Cash
880
880
Purchased merchandise.
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13-8
Transaction
•$1150 worth of merchandise was
purchased on credit.
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13-9
Transaction Analysis
• Merchandise purchases is debited
for $1150.
• Accounts payable is credited for
$1150.
Mar
4
Merchandise Purchases
Accounts Payable
1150
1150
Purchased merchandise on credit from
American Electric, Invoice J7632,
dated 3/1/xx, terms 2/10, n/30.
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13-10
Recording Other Purchases
• Be careful to record only purchases of
merchandise for resale in the Merchandise
Purchases account.
• Purchases of permanent assets, such as
computers, copiers, and delivery
equipment should be debited to the
appropriate asset account and credited to
Cash or Accounts Payable.
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13-11
Recording Amounts Paid for
Purchases of Merchandise on Credit
• Accounts Payable is debited and
Cash is credited.
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13-12
Transaction
• If the business takes advantage of a
2% discount on purchases of $1150,
how would the transaction be
recorded?
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13-13
Transaction Analysis
•2% of $1150 is $23.
•Accounts payable is debited
for $1150.
•Cash is credited for $1127.
•Purchases discount is credited
for $23.
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13-14
Transaction Analysis (continued)
Date
Description
Post
Ref
Debit
Credit
20 xx
Mar
10
Accounts Payable
Cash
Purchases Discount
1150
1127
23
Paid American Electric for Invoice J7632
less discount.
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13-15
Recording Transportation Charges
on Merchandise Purchases
• Freight in, another cost account,
is debited for the transportation
charges on all incoming
merchandise purchases.
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13-16
Recording Transportation Charges
on Merchandise Purchases (continued)
• If the purchaser pays the
transportation company directly,
Freight In is debited and Cash is
credited.
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13-17
Recording Transportation Charges
on Merchandise Purchases (continued)
• If the seller lists the transportation
charges on the invoice, then the
purchaser owes the seller for both
the merchandise and the
transportation charges, resulting in
a compound entry.
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13-18
Recording Purchases Returns and
Allowances
• When a business returns goods or
receives an allowance, there is a
decrease in the cost of its
merchandise purchases.
• This decrease is recorded in a cost
account called Purchases Returns
and Allowances.
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13-19
Accounting Terminology
•Freight in
•Merchandise purchases
•Purchases discount
•Purchases returns and allowances
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13-20
Chapter Summary
• Purchases of merchandise for resale
are debited to a cost account called
Merchandise Purchases.
• Purchases of permanent assets, such
as equipment, are debited to an
appropriate asset account.
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13-21
Chapter Summary (continued)
• For a cash discount, the buyer
credits the amount of the discount
to a cost account called Purchases
Discount.
• The purchaser may be required to
pay transportation charges on
merchandise. These charges are
debited to the Freight In account.
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13-22
Chapter Summary (continued)
• The Purchases Returns and
Allowances account is used to
record the decrease in the cost of
merchandise purchases that
results when a business returns
goods or receives allowances.
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13-23
Chapter Summary (continued)
• Purchases Returns and Allowances is
credited for all returns and
allowances.
• If the business is given a cash refund,
the Cash account is debited.
• If the amount is deducted from a
balance that the business owes,
Accounts Payable is debited.
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13-24
Topic Quiz
Answer the following true/false questions:
1. Purchases Returns and Allowances is
debited for all returns and allowances.
FALSE
2. For a cash discount, the buyer credits
the amount of the discount to a cost
account called Purchases Discount.
TRUE
3. If the business is given a cash refund,
the Cash account is credited.
FALSE
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13-25
Investigating on the Internet
Sources of information about purchases
can be accessed at various corporate
websites.
As a research assignment, access a
business website and report those sources
of information that might concern
purchases of merchandise.
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13-26
1. Purchases Returns and Allowances is debited
for all returns and allowances.
FALSE
Purchases Returns and Allowances is credited
for all returns and allowances.
(Return to Topic Quiz)
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13-27
3. If the business is given a cash refund, the
Cash account is credited.
FALSE
If the business is given a cash refund,
the Cash account is debited.
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(Return to Topic Quiz)
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.