Accounting for Purchases and Cash Payments

1. Accounting for Purchases and Cash Payments Chapter 15

2. 14-1 Purchasing Items Needed The Purchasing Process • Requesting needed items • 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 • 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 • 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 • 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: • 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

3. Pg 417, 419

4. 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

5. 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

6. 14-2 Analyzing and Recording Purchases on Account Pg 423-424 • Purchases of Assets on Account • 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

7. 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

8. Pgs 424, 426

9. 14-3 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 • Use pre-numbered checks • Retain and account for spoiled checks (Void) Pg 429

10. 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

11. Cash Transactions Pgs 430-433 • Recording Cash Purchases of Merchandise • Recording Cash Payments for Items Purchased on Account • 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