Patchogue-Medford High School
Accounting I – Chapter 15 Notes
Chapter 15 – Accounting for Purchases and Cash Payments Page 416
Objective: Students will be able to demonstrate their knowledge of processing a purchase on account and by cash. They will show how to post to the general ledger and the accounts payable subsidiary ledger. They will identify and follow cash control procedures.
The Purchasing Process
- Verifying Items Received
- Processing the Invoice
- Purchase Requisition – A written request that contains a certain item to be purchased. It is sent by the requesting department to the purchasing department to get a bid. The form is pre-numbered and must be approved by requesting department. (pg 420)
- Purchase Order – A written offer to a supplier to buy specific items. Information comes from the purchase requisition. It contains: quantity, description, unit price, total cost, suppliers name and address, date needed, and shipping method. These are also pre-numbered. Copies go to the originating department, purchasing department, and accounting (pg. 420). This is an offer to buy the product.
- Verifying – Actually receiving the product. A packing slip is included with the order that states what has been shipped and is in the box. This form lists all of the items and their status from the purchase requisition. This is checked against the purchase order and the supplier’s bill. A receiving report is generated and along with the packing slip gets sent to accounting.
- Processing the Invoice – This is paying the bill. Once all of the documents have been matched and reviewed (purchase req, purchase order, packing slip, receiving report) an invoice will be received. The invoice is matched, approved and sent to accounting with the whole package. A processing stamp will then be put on the invoice to confirm all of the reports and the proper approvals. The bill would then be paid by generating a check using the attached documentation. The stamp would include: date to be paid, discount amount, and check number. (pg 422)
This process is also referred to as the Voucher System. This provides internal control when a company is too large for one person to handle all of the financial responsibilities. A voucher is a document that serves as written authorization for cash payment. It is circulated for approval by the appropriate level of authority.
Discounts – This is taken at the time of payment. Now is when you might apply the 2/10,n/30. This can be in the form of a Debit Memo. A debit memo is used to notify suppliers of a return or allowance taken on the product. The creditors account will be lowered or debited.
The General Ledger accounts used are:
- Purchases – Where all merchandise goes when we buy it. This is a balance sheet account that gets adjusted for the product that is sold in each period. It is a permanent asset account that begins with the number 1. We would debit this account when we purchase the product and credit it when we sell it. The amounts used would be how much we paid for it NOT what we are selling it for. It would appear on the Balance Sheet.
- Cost of Merchandise (Goods) Sold – Actual cost of the merchandise that was sold in that period. Not the selling price. This account, COGS, is a debit balance production cost temporary account that is expensed against net sales to get Gross Profit. It would appear on the Income Statement. It’s account number begins with the number 5.
- Purchase Discounts – Taken at the time of payment. We would credit this account. It is a contra COGS account. This is a temporary account used to reduce the total cost of the purchase. Its account number begins with the number 5. Common terms might be 2/10,n30.
- Purchase Returns & Allowances – Initiated by a debit memo. A return is when the customer returns the product and receives a full refund. An allowance is when there is a price adjustment and the customer keeps the product. Both transactions are in this account and will result in a credit balance. This is also a temporary contra COGS account that begins with the number 5.
Do problem 15-1, Analyzing a purchase order, textbook page 423, wb pg 390
Accounts Payable Control Account
Whenever we use accounts payable we must enter the amount into the Accounts Payable Subsidiary Ledger. This ledger is used in the same manner as the A/R Sub-ledger only for A/P. Here we have all of the venders that we owe money to. Their name, address, and account number would be listed and the sub-ledger has a credit balance. When all of the accounts are added up the total of the sub-ledger will equal the total in the G/L account called Accounts Payable, which is referred to as the controlling account. When we purchase merchandise or anything on account the balance will go up (as a credit to A/P). When we pay a bill, the amount owe, the balance will go down (as a debit to A/P). (Page 424, 429)
-This is used as a reminder as to when a bill or payment is due. It is a file with tabs for every day of the month, 1-31. Bills are placed in the folder in advance of the due date so the payment can be made on time and discounts, when available, can be taken.
Do problem 15-2, Recording Purchase Transactions, text book pg. 430, wb pg 391
15-3, Source Documents, text book pg 430, wb pg 391
Make sure proper cash controls are in place and being followed:
- Proper authorization of all cash payments
- Proper support
- Use of pre-printed checks that are numbered
- You must account for all checks
Recording Payment of Insurance
- Insurance is paid for in advance of being used
- Premiums are the total cost of the policy
When recording it we put it to an asset account called Pre-Paid Insurance
Debit Pre-Paid Insurance
- Credit Cash
- Debit Pre-Paid Insurance
As time passes the policy begins to expire. With insurance, expiring is the same as expensing or using up, you do not need to put a claim in in order to have an expense. The passing of time, usually recorded by month, is what determines the expense.
Debit Insurance Expense
- Credit Pre-Paid Insurance
- Debit Insurance Expense
Recording Freight (page 435)
There are two types of freight charges referred to as FOB (Free on Board):
- Destination – Supplier (seller) pays the freight to the buyers location
- Shipping Point – Buyer pays the freight from the sellers warehouse.
Shipping cost get recorded into the Transportation-In Account. It is a COGS account that begins with the account number 5 and has a debit balance.
- Credit Cash
- Debit Transportation-In
Bank Card Fee Expense
-The amount charge to the vender on purchases by customers so the credit card can be used.
- It is based on a percentage of individual sale on the sales slip.
-It is paid to the bank holding the credit card
- It is recorded by:
For cash sales:
Debit Bank Card Fee Expense
For sales made on credit:
Debit Bank Card Fee Expense
- Bank Card Fee expense is an operating expense that is a temporary account beginning with the number 6 and has a debit balance.
(see page 436, figure 15-7 for J/E)
Terms Page 439
Questions Page 440
Prob. 15-4 Recording cash payments TB pg 437 WB pg 392
Prob. 15-5 Due Dates TB pg 442 WB pg 393
Prob. 15-6 Analyze Purchases & Cash pay TB pg 404 WB pg 394 PC 405
Prob. 15-7 Recording purchase trans TB pg 443 WB pg 395 PC 412 Q 417
Prob. 15-8 Recording cash pay trans TB pg 444 WB pg 396 PC 413 Q 424
Prob. 15-9 Recording purch & cash pay TB pg 445 WB pg 397 PC 414
Prob. 15-10 Record & post purch & pay TB pg 446 WB pg 398 PC 415