Lecture Week 2

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Principles of Accounting (2)

College of Management and Techology in Alexandria

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Lecture Week 2
Accounting for Merchandising Transactions

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Learning Objectives

1. Recording Purchases transactions for a merchandising


business
2. Discussing purchases discounts and purchases returns and
allowances for a merchandising business
3. Illustrating transportation terms and the effect on purchases
transactions for a merchandising business
4. Calculating the total cost of inventory for a merchandising
business

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Recording Purchases under Perpetual Inventory System

• Made using cash or credit (on account)


• Normally recorded when goods are received from seller
• Purchase invoice should support each credit purchase

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Purchases without Cash Discounts

On November 2, Z-Mart purchased $1,200 of


merchandise inventory for cash.

If these goods are instead purchased on credit, and no discounts


are offered for early payment, Z-Mart would make the same entry
except that Accounts Payable would be credited instead of Cash.
Trade Discounts

Used by manufacturers and wholesalers to offer


better prices for greater quantities purchased.

Example
Example Quantity sold 1,000
Z-Mart
Z-Mart offers
offers aa 30%
30% trade
trade Price per unit $ 5.25
Total 5,250
discount
discount for
for orders
orders of of 1,000
1,000 Less 30% discount (1,575)
units
units or
or more
more on on its
its popular
popular Invoice price $ 3,675
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price ofof $5.25.
$5.25.
Purchase Discounts

A deduction from the invoice price granted to


induce early payment of the amount due.
Purchase Discounts

2/10, n/30
Number of
days Otherwise,
Discount discount Is net (or all) Credit
per cent available is due in 30 period
days
Purchases with Cash Discounts

On November 2, Z-Mart purchased $500 of


merchandise inventory on account; credit
terms are 2/10, n/30.
Payment within Discount Period

On November 12, Z-Mart paid the amount


due on the purchase of November 2.
Payment within Discount Period: Ledger Accounts

After we post these entries, the accounts involved


look like these:
Payment after Discount Period

On December 2, Z-Mart paid the amount


due on the purchase of November 2.
Purchase Returns and Allowances

Purchase
Purchase Return
Return
Merchandise
Merchandise returned
returned by
by the
the purchaser
purchaser to
to
the
the supplier.
supplier.

Purchase
Purchase Allowance
Allowance
AA reduction
reduction in
in the
the cost
cost of
of defective
defective or
or
unacceptable
unacceptable merchandise
merchandise received
received by
by aa
purchaser
purchaser from
from aa supplier.
supplier.
Purchase Returns and Allowances

On November 5, Z-Mart (buyer) issues a


$30 allowance from Trex for defective
merchandise.
Purchase Returns and Allowances

Z-Mart purchases $1,000 of merchandise on June


1 with terms 2/10, n/60. Two days later, Z-Mart
returns $100 of goods before paying the invoice.
When Z-Mart later pays on June 11, it takes the
2% discount only on the $900 remaining balance.
Purchase Returns and Allowances

Z-Mart purchases $1,000 of merchandise on June 1 with terms


2/10, n/60. Two days later, Z-Mart returns $100 of goods before
paying the invoice. When Z-Mart later pays on June 11, it takes
the 2% discount only on the $900 remaining balance.
Purchases and Transportation Costs

Goods in
Ownership Transportation Costs
Shipping Terms Transit
Transfers at Paid by
Owned by
FOB shipping Shipping point Buyer Buyer Merchandise Inventory #
point
Cash #
FOB destination Destination Seller Seller Delivery Expense #
Cash #
Transportation Costs

Z-Mart purchased merchandise on terms of FOB


shipping point. The transportation charge is $75 paid
on June 6.
Summary of Purchasing Transactions

Merchandise
Inventory
Purchase June 1 1,000 June 3 100 Purchase return
Freight-in 6 75 11 18 Purchase discount
Balance 957
Calculating Net Cost of Inventory
The accounting system described in this part does not provide separate records
(accounts) for total purchases, total purchase discounts, total purchase returns and
allowances, and total transportation-in, They are all added to the inventory account
under perpetual system. Yet, nearly all companies collect this information in
supplementary records because managers need this information to evaluate and control
each of these cost elements.
DO IT! Purchase Transactions
On September 5, Smith Company buys merchandise on account
from Williams Company. The purchase price of the goods paid by
Smith is $15,000, and the cost to Williams Company was $8,000.
On September 8, Smith returns defective goods with a selling
price of $2,000.
Record the transactions on the books of Smith Company.
Sept. 5 Merchandise Inventory 15,000
Accounts Payable 15,000
8 Accounts Payable 2,000

Merchandise Inventory 2,000


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References
• Wild, J., Shaw, K., Chiappetta, B. and Samaha, K., 2017. Fundamental
Accounting Principles. 2nd ed. McGraw-Hill Education.
• Weygandt, J., Kimmel, P. and Kieso, D., 2019. Accounting Principles
IFRS Version. Global Edition. Wiley.

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