9–1McQuaig Bille

11College Accounting10th Edition

McQuaig Bille Nobles

© 2011 Cengage Learning

PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University

Chapter 9

Sales and Purchases

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Companies Who Buy and Sell Goods

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 FirmsSpecific 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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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.

Specific Accounts for Merchandising FirmsSpecific Accounts for Merchandising Firms

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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.

Specific Accounts for Merchandising FirmsSpecific Accounts for Merchandising Firms

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T Accounts for Merchandising Firms

T Accounts for Merchandising Firms

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Source Documents Related to Sales

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 TransactionsSales 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 LedgerAccounts 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 InterrelationshipJournal–Ledger Interrelationship

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Sales Returns and AllowancesSales 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.

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 TaxSales 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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At the end of the first quarter, the accountant for David Fly-Fishing Outfitters determines that the total sales tax payable for the quarter is $124.50.

Sales Transactions Involving Sales TaxSales Transactions Involving Sales Tax

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Sales Returns Involving Sales Tax

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 PurchasesSource 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: InvoicesSource 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 TransactionPurchase TransactionAugust 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 TransactionPurchase 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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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.

Purchase TransactionPurchase Transaction

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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).

Purchase TransactionPurchase Transaction

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Purchase TransactionPurchase Transaction

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Accounts Payable LedgerAccounts 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 PayableSchedule of Accounts Payable

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Purchases Returns and AllowancesPurchases 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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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.

Purchases Returns and AllowancesPurchases Returns and Allowances

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Purchases Returns and AllowancesPurchases Returns and Allowances

Purchases Returns and AllowancesPurchases Returns and AllowancesThe accountant must post the amount to both the Accounts Payable controlling account and the individual creditor’s accounts in the accounts payable ledger.

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Posted Subsidiary LedgerPosted Subsidiary Ledger

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Freight Charges on Incoming MerchandiseFreight 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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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.

Freight Charges on Incoming MerchandiseFreight Charges on Incoming Merchandise

Freight Charges on Incoming MerchandiseFreight Charges on Incoming Merchandise

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Transportation Charges on the Buying of Goods and Services

Other Than 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 PurchasesInternal 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 JournalsSpecial 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 JournalThe Sales JournalThe 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.

Aug. 14 Sold merchandise on account to Marty’s Fly Fishing Adventures, invoice no. 9386, $1,594.

The Sales JournalThe Sales Journal

Aug. 19 Sold merchandise on account to Hi-Flying Adventures, Inc., invoice no. 9387, $552.30.

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Aug. 25 Sold merchandise on account to Hi-Flying Adventures, Inc., invoice no. 9388, $1,674.

The Sales JournalThe Sales Journal

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Posting from the Sales Journal

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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After posting the total of the sales journal to Accounts Receivable in the general

ledger, the account number is written here.

Sales JournalSales Journal

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After posting the total of the sales journal to Sales in the general ledger,

the account number is written here.

Sales JournalSales Journal

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Sales Journal with Sales Taxes PayableSales 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)Purchases Journal (Three-Column)Aug. 2 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).

Aug. 10 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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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.

Purchases Journal (Three-Column)Purchases Journal (Three-Column)

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).

Purchases Journal and General Ledger AccountsPurchases Journal and

General Ledger Accounts

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