Accounting Ch.8

Purchase order

The purchasing department selects a supplier who can furnish the goods at a competitive price and then issues a purchase order. The purchase order specifies the exact items, quantity, price and credit terms. It is signed by someone with authority to approve purchases. Usually the purchasing agent.

cash discount

a discount offered by suppliers to encourage quick payment by customers. To the customer it is known as a purchases discount. To the seller/ supplier it is known as a sales discount.

schedule of accounts payable

a list of all balances owed to creditors

Purchase requisition

Sent by the purchasing department of a merchandising business when a sales department needs goods. This purchase requisition lists the items to be ordered. It is signed by someone with the authority to approve requests for merchandise, usually the manager of the sales department.

The freight charge is debited to:

The Freight in or Transportation In account. This is an expense account, included in cost of goods sold, showing transportation charges for merchandise purchased.

If the freight terms are free on board (FOB) shipping point:

The buyer pays the freight charge- the cost of shipping the goods from the seller's warehouse to the buyer's location.

What is the purpose of a purchase requisition? A purchase order?

The purchase requisition is used by a sales department to notify purchasing department of the items wanted. The purchase order is prepared by the purchasing department to order the necessary goods at an appropriate price from the selected supplier.

What is the difference between a receiving report and an invoice?

The receiving report shows the quantity of goods received and the condition of the goods. The invoice shows quantities and prices. The accounts payable clerk should compare the quantities per the invoice to the receiving report in order to ensure the firm is only billed for goods received. The accounts payable clerk should also compare the prices per the invoice to the purchase order to ensure the firm has not been overcharged. Checks written to pay for the purchases are based on the invoice.

Purchase allowance

When the purchaser keeps the goods but receives a reduction in the price of the goods. The supplier issues a credit memorandum for the return or allowance. The credit memorandum reduces the amount that the purchaser owes.

Purchases Returns and Allowances:

an account that is a complete record of returns and allowances. This account is analyzed to identify problem suppliers. This is a contra expense account under cost of goods sold. The normal balance of cost of goods sold is a debit. The Purchase Returns and Allowances account has a normal credit balance.

2/10, n/30 means:

if payment is made within 10 days of the invoice date, the customer can take a 2 percent discount. Otherwise the payment is due in full in 30 days. Note that discounts are not allowed on any freight portion of the invoice.

Cost of goods sold

the actual cost to the business of the merchandise sold to customers. Cost of goods sold accounts follow the debit and credit rules of expense accounts.The purchases account is increased by debits and decreased by credits. Its normal balance is a debit. In the chart of accounts, the cost of goods sold accounts appear just before the expense accounts.

Perpetual inventory system

the amount of inventory on hand is adjusted for each sale, purchase or return. Electronic equipment such as point-of-sale cash registers and scanners, help track inventory balances.

n/10 EOM means:

the payment is due in full 10 days after the end of the month in which the invoice was issued.

Purchase return

When the business returns the goods either because they are wrong items or damaged or defective.

The total of the schedule of accounts payable should equal the balance of which general ledger account?

accounts payable

Two ways to handle the freight charges paid by the buyer

1. The buyer is billed directly by the transportation company for the freight charge. The buyer issues a check directly to the freight company. 2. The seller pays the freight charge and includes it on the invoice. The invoice includes the price of the goods and the freight charge.

Periodic inventory system

In a periodic inventory system, the amount of inventory on hand must be determined by counting merchandise in stock.

What is the purpose of the schedule of accounts payable?

It lists all the creditors to whom money is owed

The purchase of merchandise is debited to the:

Purchase account. This is a temporary expense account classified as cost of goods sold.

What is the name of the account used to record purchases of merchandise inventory?

Purchases

If the freight terms are free on board (FOB) destination:

The seller pays the freight charge

What is the purpose of the Freight In account?

To record freight charges paid for merchandise inventory

Receiving report

prepared to show the quantity and condition of the goods received. The purchasing department receives a copy of the receiving report and compares it to the order.

customer and seller invoices called:

purchase invoice and sales invoice, which accounts for items ordered and shipped

Which accounts are kept in the accounts payable ledger?

individual accounts for all suppliers

The accounts payable ledger

provides information about the individual accounts for all creditors. It is a subsidiary ledger which means it is separate from and subordinate to the general ledger. It contains a separate account for each creditor. Each account shows purchases, payments, and returns and allowances. The balance of the account shows the amount owed to the creditor.

What type of account is Purchases Returns and Allowances?

Contra expense account