Accounting for Purchases and
Cash Payments
Chapter 15
15-1 Purchasing Items Needed
The Purchasing Process
1.
Requesting needed items
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2.
In a small business the owner does all the ordering
In a large business departments have designated people in charge of approving
purchase requisitions (written request to order a specified item or items)
Ordering from a supplier
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3.
A purchase order (written offer to the supplier to buy specified items) is submitted
to the supplier
The information on the purchase order comes from the requisition form
Verifying items received
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4.
When the supplier ships to the buyer, the shipment includes a packing slip (a form
that lists the items included in the shipment). That is then checked against what
has actually been sent.
Processing the supplier’s invoice
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•
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Once the supplier sends out the item(s) it prepares an invoice (bill) and sends it to
the customer
The receiver checks the invoice against the packing slip to check that they are
being billed for what was received.
The invoice is marked with a processing stamp which accounts for:
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–
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The date the invoice is to be paid
The discount amount (if any)
The amount to be paid
Check number of payment
Pg 416-418
Pg 417, 419
Vouchers and Purchases Discounts
• When a small business grows too large for one
person to handle all the financial responsibilities,
it may adopt the Voucher System to provide
internal control. A voucher is a document that
serves as written authority for a cash payment
• Purchases Discount – suppliers offer charge
customers a discount for early payment. For the
buyer the discount is called a purchases discount.
The discount period is the time within the invoice
must be paid to take the discount
Pg 418-419
The Purchases Account
• Purchases account – when a business buys
merchandise to sell, the cost is recorded in this
account
– It is a temporary account
– It is classified as a Cost of Merchandise account (actual
cost of the merchandise as it was sold to the business)
– Purchases is a cost of doing business so it is recorded
like an expense
• Increased with a debit
• Decreased with a credit
Pg 419
15-2 Analyzing and Recording Purchases on
Account
• Purchases of Assets on Account
Pg 423-424
– Accounts Payable Subsidiary Ledger – keeps track of each individual
supplier and the amount the business owes to it.
– Accounts Payable Account – records the total amount owed to all
suppliers. It is a controlling account
– Subsidiary Ledgers
• In manual accounting systems subsidiary accounts are arranged in alphabetical
order with no account numbers
• In computerized accounting systems subsidiary accounts are arranged
alphabetically and assigned numbers
• Merchandise Purchases on Account
– Once journalized and posted, invoices are placed in a tickler file by date
they are to be paid so a business doesn’t forget to make the check and
actually pay the bill.
• Other Purchases on Account
– Supplies, computers, store equipment, etc. are journalized the same
way, except the debit is not to purchases and is instead to the asset
account affected
Purchases Returns and Allowances
• Purchase Return – when a business decides to
return an item that was originally meant to be
resold
• Purchase Allowance – when a business keeps an
item to resell that is less than what they expected
and so is compensated by the seller by a reduced
price
• Debit Memorandum – both the purchases return
and purchases allowance are recorded with a
debit memo which offsets the amount owed in
accounts payable
Pg 424-425
Pgs 424, 426
15-3 Analyzing and Recording Cash
Payments
Cash Controls
– Require proper authorization of all cash payments
with an approved source document
– Write checks for all payments and only allow
authorized persons to sign checks
Pg 429
– Use pre-numbered checks
– Retain and account for spoiled checks (Void)
Recording Cash Purchase of Insurance
• Insurance Premium – the cost of a policy for a
given amount of time
– The premium is paid in advance. The unused
portion is an asset to the business called Prepaid
Insurance
Pg 429-430
Cash Transactions
• Recording Cash Purchases of Merchandise
• Recording Cash Payments for Items Purchased on Account
Pgs 430-433
– If no discount taken: debit A/P and the account affected in the subsidiary
ledger and credit cash
– If a discount is taken: debit A/P and the account affected in the subsidiary
ledger and credit cash and the contra account Purchases Discount
• Shipping Fees (FOB means Free On Board)
– FOB destination – means the supplier is paying shipping
– FOB shipping point – means the buyer is paying shipping
• The charge is a cost of merchandise account called Transportation In
– It is journalized like an expense: Increase with a debit, decrease with a credit
• Bankcard Fees
– Banks charge a fee for processing a business’ credit card transactions. The
fee is usually just taken out of the checking account by the bank.
– The amount is debited to Bankcard Fees Expense and cash is credited