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  1. College Accounting First Canadian Edition Price • Haddock • Brock • Hahn • Reed McGraw-Hill Ryerson 1

  2. CHAPTER 7 ACCOUNTING FOR MERCHANDISE PURCHASES, ACCOUNTS PAYABLE AND CASH PAYMENTS 2

  3. JOURNALS Type of Journal Purpose Sales To record sales of merchandise on credit Purchases To record purchases of merchandise on credit Cash receipts To record cash received from all sources Cash payments To record all disbursements of cash General To record all transactions that are not recorded in another special journal and all adjusting and closing entries 3

  4. LEDGERS Type of Ledger Content General Assets, liabilities, owner’s equity, revenue, and expense accounts Accounts receivable Accounts for credit customers Accounts payable Accounts for creditors 4

  5. FASHION WORLD Chart of Accounts • ASSETS OWNER’S EQUITY • 1001 Cash 3001 Carolyn Wells, Capital • 1005 Petty Cash Fund 3002 Carolyn Wells, Drawing • 1009 Notes Receivable 3099 Income Summary • 1011 Accounts Receivable REVENUE • 1012 Allowance for Doubtful Accounts 4001 Sales • 1016 Interest Receivable 4051 Sales Returns and Allowances • 1021 Merchandise Inventory 4091 Interest Revenue • 1023 Prepaid GST 4093 Miscellaneous Revenue • 1024 GST Payable EXPENSES • 1026 Prepaid Insurance 5001 Cost of Goods Sold • 1027 Prepaid Interest 5011 Sales Salaries Expense • 1029 Supplies 5014 Advertising Expense • 1031 Store Equipment 5017 Supplies Expense • 1032 Accumulated Amortization-Store Equipment 5020 Cash Over or Short • 1041 Office Equipment 5026 Amortization Expense - Store Equipment • 1042 Accumulated Amortization-Office Equipment 5035 Rent Expense • LIABILITIES 5036 Insurance Expense • 2001 Notes Payable-Trade 5038 Utilities Expense • 2002 Notes Payable –Bank 5041 Office Sales Expense • 2005 Accounts Payable 5044 Payroll Taxes Expense • 2016 Interest Payable 5053 Telephone Expense • 2021 Canada Pension Plan Payable 5056 Uncollectible Accounts Exp. • 2022 Employee Benefits Payable 5059 Amortization Exp. – Office Equipment • 2023 Employee Income Taxes Payable 5091 Interest Expense • 2025 Employment Insurance Payable 5093 Miscellaneous Expense • 2029 Salaries Payable • 2031 Sales Tax Payable 5

  6. FASHION WORLD 5001 S. Portland Hamilton, ON No. FC-736 PURCHASE REQUISITION DEPARTMENT Juniors DATE OF REQUEST June 4, 20X2 ADVISE ON DELIVERY Mr. Johnson DATE REQUIRED July 6, 20X2 QUANTITYDESCRIPTION 100 Designer beaded jeans APPROVED BYREQUESTED BY FOR PURCHASING DEPT. USE ONLY PURCHASE ORDER NO. 8001 ISSUED TO: LaShawn’s Fashion Design DATEJUNE 6, 20X2 1010 N. Michigan Quebec, PQ 6

  7. FASHION WORLD 5001 S. Portland Hamilton, ON PURCHASE ORDER TO: LaShawn’s Fashion Designs DATE: June 6, 20X2 1010 N. Michigan ORDER NO.: 8001 Quebec, PQ SHIPPED BY: 2/10, n/30 QUANTITY DESCRIPTION UNIT PRICE TOTAL 100 Designer beaded jeans 40 00 4,000 00 7

  8. LaShawn’s Fashion Designs 1010 N. Michigan Montreal, PQ No. 4201 INVOICE SOLD Fashion World DATE: June 30,20X2 TO: 5001 S. Portland ORDER NO.: 8001 Hamilton, ON SHIPPED BY: North Freight Line TERMS: 2/10, n/30 YOUR ORDER NO. SALESPERSON TERMS 8001 2/10, n/30 DATE SHIPPED SHIPPED BY FOB June 30, 20X2 North Freight Line Chicago QUANTITY DESCRIPTION UNIT PRICE TOTAL 100 Designer beaded jeans 40 00 4,000.00 Freight 40.00 GST 282.80 Total 4,322.80 8

  9. FREIGHT IN The seller can bill the buyer and add the cost of transportation to the invoice. OR The buyer can pay the freight charges directly to the freight company. 9

  10. PURCHASING PROCEDURES Sales Department sends authorized Purchase Requisition to Purchasing Department. Purchasing Department issues authorized Purchase Order and sends to selected supplier. Receiving Report is prepared when merchandise is received; Purchasing Department audits the supplier’s Invoice, or bill. Purchasing Department contacts supplier if merchandise is defective. The Accounting Department is given a copy of Invoice, Purchase Order, and Receiving Report to recheck. They then issue a cheque to supplier and record payment. 10

  11. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2 4 20X3 Jan. Merchandise Inventory Prepaid GST Accounts Payable Purchased merchandise from Prestige Clothing Store, Invoice 43480, dated Dec. 28, terms 2/10, n/30 Merchandise Inventory Prepaid GST Accounts Payable Purchased merchandise from Wholesale Fashion Shop, Invoice 633, dated Dec. 30, terms n/30 1,625.00 113.25 1738.75 1,810.00 126.70 1,936.70 Merchandise Inventory Prepaid GST Accounts Payable Purchased merchandise from Clothes-R-Us, Invoice 8090, dated Dec. 31, terms n/30 Merchandise Inventory Prepaid GST Accounts Payable Purchased merchandise from Quality Clothes, Invoice 1234, dated Dec. 31, terms 2/10, n/30 5 1,460.00 102.20 1,562.20 6 2,350.00 150.50 2,300.50 1021 1023 2005 1021 1023 2005 1021 1023 2005 1021 1023 2005 11

  12. ACCOUNT Accounts Payable ACCOUNT NO. 2005 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 Jan. 1 Balance  2,700.00 2 J1 1,738.75 4,438.75 4 J1 1,936.70 6,375.45 5 J1 1,562.20 7,937.65 6 J1 2,300.50 10,238.15 12

  13. ACCOUNT Prepaid GST ACCOUNT NO. 1023 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 2 J1 113.25 113.25 4 J1 126.70 239.95 5 J1 102.20 342.15 6 J1 150.50 492.65 13

  14. OBJECTIVE 1 Record purchases of merchandise on credit in a four-column purchases journal. 14

  15. PURCHASES JOURNAL PAGE 1 A purchases journal is used to record the purchase of merchandise on account. The purchases account is used only for the purchase of merchandise for resale. 15

  16. PURCHASES JOURNAL PAGE 1 The invoice number column contains the number of the invoice sent to Fashion World by the vendor. 16

  17. PURCHASES JOURNAL PAGE 1 Look at the terms for Prestige Clothing Store---2/10, n/30 means that if you want to receive a 2% discount you must pay within 10 days; otherwise, you must pay the full amount within 30 days.“N” stands for the net amount of the invoice. 17

  18. OBJECTIVE 2 Post from the four-column purchases journal to the general ledger accounts. 18

  19. ACCOUNT Merchandise Inventory ACCOUNT NO. 1021 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 Jan. 31 P1 8,610.00 8,610.00 PURCHASES JOURNAL PAGE 1 ((1021) 19

  20. ACCOUNT Freight In ACCOUNT NO. 5006 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 Jan. 31 P17 765.00 765.00 PURCHASES JOURNAL PAGE 1 20

  21. ACCOUNT Prepaid GST ACCOUNT NO. 1023 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 Jan. 31 P1 655.75 655.75 PURCHASES JOURNAL PAGE 1 (1023) 21

  22. ACCOUNT Accounts Payable ACCOUNT NO. 2005 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 Jan. 1 Balance  2,700.00 Jan. 31 P1 10,031.25 12,731.25 PURCHASES JOURNAL PAGE 1 (2005) 22

  23. Name Clothes-R-Us Terms n/30 Address 1002 Valley Street, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  400.00 5 Inv. 8090, 12/31/X2 P1 1,562.20 1,962.20 23

  24. OBJECTIVE 3 Post purchases on credit from the purchases journal to the accounts payable subsidiary ledger. 24

  25. Name Clothes-R-Us Terms n/30 Address 1002 Valley Street, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  400.00 5 Inv. 8090, 12/31/X2 P1 1,562.20 1,962.20 CREDIT BALANCE ACCOUNTS PAYABLE SUBSIDIARY LEDGER 25

  26. ACCOUNTS PAYABLE SUBSIDIARY LEDGER Name Clothes-R-Us Terms n/30 Address 1002 Valley Street, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  400.00 1962.20 5 Inv. 8090, 12/31/X2 P1 1,562.20 17 CM 37 J1 267.50 1694.70 26

  27. OBJECTIVE 4 Record purchases returns and allowances in the general journal. 27

  28. CREDIT BALANCE Name Clothes-R-Us Terms n/30 Address 1002 Valley Street, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  400.00 5 Inv. 8090, 12/31/X2 P1 1,562.20 1,962.20 17 CM 37 J1 267.50 1,694.70 Accounts Payable Subsidiary Account 28

  29. 1. Fashion World received merchandise from Clothes-R-Us on January 5, 20X3. 2. Fashion World finds some of the merchandise is damaged. 3. Clothes-R-Us agrees to accept the return of damaged goods. 4. Clothes-R-Us issues Fashion World a credit memo. 22 29

  30. OBJECTIVE 5 Post purchases returns and allowances from the general journal to the accounts payable subsidiary ledger. 30

  31. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. 20X3 2005/ 267.50 1021 250.0 1023 17.50 Jan. 17 Accounts Pay./Clothes-R-Us Merchandise Inventory Prepaid GST Received Credit Memo 37 for damaged merchandise that was returned; original purchase made on Invoice 8090, Jan. 5, 20X3 31

  32. OBJECTIVE 6 Record cash payments in a cash payments journal. 32

  33. CASH PAYMENTS JOURNAL PAGE 1 33

  34. CASH PAYMENTS JOURNAL, cont’d. PAGE 1 34

  35. When there is a cash discount, four elements must be recorded. 1. The total amount of the purchase (as a debit to Accounts Payable). 2. The amount of the discount (as a credit to Merchandise Inventory). 3. The amount of GST avoided (as a credit to Prepaid GST). 4. The amount of cash paid out (as a credit to Cash). 35

  36. GENERAL JOURNAL PAGE 15 DATE DESCRIPTION POST. DEBIT CREDIT REF. 20X2 1401.87 98.13 1500.00 Aug 1 Store Equipment Prepaid GST Notes Payable Issued a 6 month note to Allen new Equipment Company for purchase of store fixtures 36

  37. The cash payment journal provides the same kind of benefits as other special journals.They are: 1. It simplifies and speeds up both the journalizing and posting of cash payments. 2. It permits division of labour because several members of the accounting staff can record transactions in different special journals at the same time. 3. It improves the audit trail because all cash payments are grouped together in one record and are listed by cheque number. 37

  38. OBJECTIVE 7 Post from the cash payments journal to subsidiary and general ledgers. 38

  39. Name Prestige Clothing Store Terms 2/10,n/30 Address 1220 Valley Street, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  550.00 2 P1 1,738.75 2,288.75 12 CP1 1,738.75 550.00 29 CP1 200.00 350.00 39

  40. CASH PAYMENTS JOURNAL PAGE 1 ACCOUNT Prepaid GST ACCOUNT NO. 1023 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 Jan. 31 P1 655.75 655.75 31 CP1 245.70 7.08 894.37 ACCOUNT Cash ACCOUNT NO. 1001 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 Jan. 1 Balance  5,600.00 31 CR1 10,031.25 12,731.25 31 CR1 15,256.37 (2005) X (1023) (1023) (1021) (1001) 40

  41. CASH PAYMENTS JOURNAL PAGE 1 (2005) X (1023) (1023) (1021) (1001) ACCOUNT Merchandise Inventory ACCOUNT NO. 1021 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 Jan. 31 P1 8,610.00 8,610.00 31 CP1 101.10 8,508.90 ACCOUNT Accounts Payable ACCOUNT NO. 2005 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 Jan. 1 Balance  2,700.00 31 P1 10,031.25 12,731.25 31 CP1 6,708.85 6.022.40 41

  42. Name Clothes-R-Us Terms n/30 Address 1002 Valley Street, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  400.00 5 Inv. 8090, 12/31/X2 P1 1,562.20 1,962.20 12 CP1 600.00 1,362.20 17 CM 37 J1 267.50 1,094.70 Name Clothing Centre Terms 2/10, n/30 Address 1111 Katie Avenue, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 18 Inv. 8979, 12/27/X2 P1 1,123.50 1,123.50 42 42

  43. Name Family Fashions Terms n/30 Address 9927 Old Canton Road, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  750.00 10 CP1 500.00 250.00 22 Inv. 8597, 12/31/X2 P1 1,369.60 1,619.60 31 CP1 1,369.60 250.00 Name Prestige Clothing Store Terms 2/10, n/30 Address 1220 Valley Street, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1  550.00 2 P1 1,738.75 2,288.75 12 CP1 1,738.75 550.00 29 CP1 200.00 350.00 42 43

  44. Name Quality Clothes Terms 2/10, n/30 Address 808 Spring Hill Road, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  600.00 6 Inv. 1234, 12/31/X2 P1 2,300.50 2,900.50 16 CP1 2,300.50 Name Wholesale Fashion Shop Terms n/30 Address 3300 Prairie Circle Road, Regina, Saskatchewan DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. 20X3 Jan. 1 Balance  400.00 4 Inv. 633, 12/30/X2 P1 1,936.70 2,336.70 42 44

  45. A Schedule of Accounts Payable and the Accounts Payable Account FASHION WORLD Schedule of Accounts Payable January 31, 20X3 Clothes-R-Us 1094.70 Clothing Centre 1123.50 Family Fashions 250.00 Prestige Clothing Store 350.00 Quality Clothes 600.00 Wholesale Fashion Shop 2336.70 Total 5754.90 ACCOUNT Accounts Payable ACCOUNT NO. 2005 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X3 Jan. 1 Balance  2,700.00 17 J1 267.50 2,432.50 Jan.31 P1 10,031.25 12,463.75 31 CP1 6,708.85 5,754.90 45

  46. OBJECTIVE 8 Prepare a schedule of accounts payable. 46

  47. OBJECTIVE 9 Demonstrate a knowledge of the procedures for effective internal control of merchandise inventory. 47