Chapter 9
Sales and Purchases
1
College Accounting
10th Edition
McQuaig
McQuaig
Bille
Bille
Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine University
9–1
© 2011 Cengage Learning
Companies Who Buy
and Sell Goods
 Companies who buy and sell goods are
known as merchandising businesses.
 Merchandising businesses can be a
wholesale or a retail business.
 A wholesale business buys goods from
manufacturers and sells them to retailers.
 A retail business sells goods directly to
consumers.
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Specific Accounts for
Merchandising Firms
 Merchandise inventory consists of a stock of goods
that a company buys and intends to resell at a profit.
 The periodic inventory system requires that
companies take a physical inventory of merchandise
on hand and then attach a value to it.
 The perpetual inventory system requires that
companies keep continuous records of inventories by
recording all transactions, so that at any given time
they know what they should have on hand and the
current cost.
 When merchandising firms record sales of
merchandise, they use the Sales account.
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Specific Accounts for
Merchandising Firms
 The Sales Returns and Allowances account is a
contra account that is used to record the physical
return of merchandise or a reduction in a bill
because merchandise was damaged.
 The Sales Tax Payable account is used to record a
tax levied by a state or city government on the
retail sale of goods and services.
 The Purchases account is used strictly to record
the cost of merchandise bought for resale.
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Specific Accounts for
Merchandising Firms
 The Purchases Returns and Allowances account
is a contra account that is used to record the
company’s returns.
 The Sales Discounts and Purchase Discounts
accounts are also contra accounts that are used to
record cash discounts for prompt payments.
 The Freight-In account is used to record the
transportation charges on incoming merchandise.
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T Accounts for
Merchandising Firms
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Source Documents
Related to Sales
 In a retail business, a salesperson usually
prepares a sales ticket for sales on account.
 In a wholesale business, the company
usually receives a written order directly from
a customer or through a salesperson who
obtained the order from the customer.
 Invoices are prepared in multiple copies.
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Sales Transactions
Sales transactions can be recorded two ways:
1. Recording directly into the general journal
2. By using a special journal, called a sales
journal
If a company does not have many transactions
involving sales and/or does not want to use
special journals, the company would use
alternative 1 above.
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Accounts Receivable Ledger
 Even though an accounts receivable ledger is
maintained, the Accounts Receivable account in the
general ledger should still be maintained.
 When all the postings are up to date, the balance of
Accounts Receivable should equal the total of all
credit customers’ individual account balances.
 The Accounts Receivable account in the general
ledger is called a controlling account.
 The accounts receivable ledger, containing the
accounts of all the credit customers is called a
subsidiary ledger.
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Journal–Ledger Interrelationship
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Sales Returns and Allowances
 A return is a physical return of the goods.
 An allowance is a reduction from the
original price because the goods were
defective or damaged.
 A credit memorandum is a written
statement indicating a seller’s willingness to
reduce the amount of a buyer’s debt.
 Sales Returns and Allowances is a contra
account that is deducted from Sales.
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Transaction (a). On September 1, Whitewater Raft
Supply sold merchandise on account to Rugged River
Company, $3,614, and recorded the sale in the general
journal.
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Transaction (b). On September 5, Rugged River Company
returned $254 worth of the merchandise. Whitewater Raft
Supply issued credit memorandum no. 1069.
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Sales Transactions Involving Sales Tax
David Fly-Fishing Outfitters had the following transaction:
Jan. 3 Sold merchandise on account to R. Martinez, invoice no. 101,
$153.50 plus sales tax of $12.28.
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Sales Transactions
Involving Sales Tax
At the end of the first quarter, the accountant for David FlyFishing Outfitters determines that the total sales tax payable
for the quarter is $124.50.
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Sales Returns Involving Sales Tax
Transaction (a). On May 1, David Fly-Fishing Outfitters
sold merchandise on account to B. Hill for $1,550 plus
$124 sales tax.
Transaction (b). On May 5, Hill returned the
merchandise and David Fly-Fishing Outfitters issued
credit memorandum no. 1069.
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Source Documents
Related to Purchases
 The Purchasing Department normally
requires that any requests to buy
merchandise be in writing, in the form
of a purchase requisition.
 After the purchase requisition has been
approved, the Purchasing Department
sends the company’s written offer, a
purchase order, to the supplier.
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Source Documents: Invoices
 Terms means the terms of payment.
 For example, “2/10, n/30” means that if the buyer
pays the amount due within 10 days, they will
receive a 2 percent discount, otherwise the entire
amount is due in 30 days.
 Terms of “net 30 days” means that there is no
cash discount offer; the full amount is due in 30
days.
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Purchase Transaction
August 2. Whitewater Raft Supply bought merchandise on
account from Pataponia, Inc., invoice no. 2706, $1,710;
terms 2/10, n/30; dated July 31; FOB San Francisco, freight
prepaid and added to the invoice, $85.50 (total $1,795.50).
(Journal entries for purchases are taken from a purchase
invoice.)
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Purchase Transaction
August 10. Whitewater Raft Supply bought merchandise
on account from Langseth and Son, invoice no. 982,
$2,772; terms net 30 days; dated August 8; FOB
Cleveland, freight prepaid and added to the invoice, $157
(total $2,929).
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Purchase Transaction
August 17. Whitewater Raft Supply bought merchandise
on account from Dana Manufacturing Company, invoice
no. 10611, $564; terms 2/10, n/30; dated August 15; FOB
Los Angeles.
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Purchase Transaction
August 26. Whitewater Raft Supply bought merchandise
on account from Pataponia, Inc., invoice no. 2801,
$2,503.70; terms 2/10, n/30; dated August 24; FOB San
Francisco, Freight prepaid and added to the invoice,
$102.30 ($total $2,606).
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Purchase Transaction
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Accounts Payable Ledger
 Accounts Payable is a controlling account.
 The accounts payable ledger is a subsidiary ledger,
and it consists of individual accounts for all the creditors
listed in either alphabetical or numerical order.
 When all the postings are up to date, the balance in
Accounts Payable should equal the total of all the
creditors’ individual account balances.
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Schedule of Accounts Payable
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Purchases Returns and Allowances
 Purchases Returns and Allowances is a
contra account to Purchases and is considered
a deduction from Purchases.
 Using a separate account provides a better
record of the total returns and allowances.
 Purchases Returns and Allowances is
deducted from Purchases on the income
statement.
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Purchases Returns and Allowances
Transaction (a). On September 2, bought
merchandise on account from Dana Manufacturing
Company, $830.
Transaction (b). On September 8, received credit
memorandum no. 1629 from Dana Manufacturing
Company for $270.
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Purchases Returns and Allowances
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Purchases Returns and Allowances
The accountant must post the amount to both the Accounts
Payable controlling account and the individual creditor’s
accounts in the accounts payable ledger.
Posted Subsidiary Ledger
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Freight Charges on Incoming Merchandise
 Freight costs are expressed as FOB (free on board)
destination or shipping point.
 Destination is the buyer’s location.
 Shipping point is the seller’s location.
 If the seller assumes the entire cost of transportation,
without any reimbursement from the buyer, the terms are
FOB destination.
 If the buyer is responsible for paying the freight cost, the
shipping terms are called FOB shipping point.
 When goods are shipped FOB destination, the freight
charges are not stated, and the seller pays the amount of
the freight.
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Freight Charges on Incoming Merchandise
When goods are shipped FOB shipping point,
transportation costs may be handled in two
ways:
1. The buyer may pay the freight charges
directly to the transportation company.
2. The transportation or shipping costs may
be listed separately on the invoice.
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Freight Charges on Incoming Merchandise
Transportation Charges on the
Buying of Goods and Services
Other Than Merchandise
Whitewater Raft Supply bought display cases on
account from Carter Cabinet Shop, at a cost of
$2,700 plus freight charges of $200.
Note that the freight is part of the
cost of the store equipment
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Internal Control of Purchases
1. Purchases are made only after proper
authorization is given.
2. The receiving department carefully checks all
goods upon receipt for count, damages, and
description.
3. The person who authorizes the payment is
neither the person doing the order nor the
person actually writing the check.
4. The person who actually writes the check has
not been involved in any of the foregoing
purchasing procedures.
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Special Journals
Sales journal (S): Used to record sales of
merchandise sold on account only.
Purchases journal (P): Used to record
purchases of merchandise purchased on
account only.
Cash receipts journal (CR): Used to record all
transactions that include a debit to Cash.
Cash payments journal (CP): Used to record
all transactions that include a credit to Cash.
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The Sales Journal
The sales journal records sales of merchandise on account only.
Aug. 1 Sold merchandise on account to Mesa River Raft
Company, invoice no. 9384, $1,933.50.
Aug. 8
Sold merchandise on account to Green River
Rafts, invoice no. 9385, $1,116.
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The Sales Journal
Aug. 14
Sold merchandise on account to Marty’s Fly Fishing
Adventures, invoice no. 9386, $1,594.
Aug. 19
Sold merchandise on account to Hi-Flying
Adventures, Inc., invoice no. 9387, $552.30.
The Sales Journal
Aug. 25
Sold merchandise on account to Hi-Flying
Adventures, Inc., invoice no. 9388, $1,674.
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Posting from the
Sales Journal
 Using the sales journal saves time and space
in posting.
 You can make a single posting to Accounts
Receivable and Sales for the amount of the
total as of the last day of the month.
 This is called a summarizing entry because it
summarizes one month’s transactions.
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Sales Journal
After posting the total of the sales journal to
Accounts Receivable in the general
ledger, the account number is written here.
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Sales Journal
After posting the total of the sales
journal to Sales in the general ledger,
the account number is written here.
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Sales Journal with
Sales Taxes Payable
Jan. 3
Sold merchandise on account to R. Martinez, invoice
no. 101, $153.50 plus sales tax of $12.28.
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Purchases Journal (Three-Column)
Aug. 2
Aug. 10
Bought merchandise on account from Pataponia, Inc.,
invoice no. 2706, $1,710; terms 2/10, n/30; dated July 31;
FOB San Francisco, freight prepaid and added to the
invoice, $85.50 (total $1,795.50).
Bought merchandise on account from Langseth and Son,
invoice no. 982, $2,772; terms net 30 days; dated August
8; FOB Cleveland, freight prepaid and added to the
invoice, $157 (total $2,929).
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Purchases Journal (Three-Column)
Aug. 17
Bought merchandise on account from Dana Manufacturing
Company, invoice no. 10611, $564; terms 2/10, n/30; dated
August 15; FOB Los Angeles.
Aug. 26
Bought merchandise on account from Pataponia, Inc.,
invoice no. 2801, $2,503.70; terms 2/10, n/30; dated August
24; FOB San Francisco, freight prepaid and added to the
invoice, $102.30 (total $2,606).
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Purchases Journal and
General Ledger Accounts
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