Chapter 5.2 Recording purchases of merchandise Flashcards
in perpetual inventory system, inventory account is ALWAYS effected when —-
inventory is eitehr bought or sold
where is purchases of inventory recorded in perpetual inventory system
inventory account
What affects the purchase cost of inventory
-> increased by freight costs
-> decreased by any purchase returns/allowances/discounts
what is the net results of inventory costs (taking into account freight costs and returns/allowances/discounts)
COST OF GOODS PURCHASED
What are two ways the company can purchase inventory
using cash or using credit (on account)
when do companies record purchases
when the goods are receivied from the seller
what are examples of documentation that would be used to support inventory purchases
invoices, receiving reprots, and purchase orders
what is a purchase order
documentation of the types, quantities, and agreed prices of goods taht are purchased (used for larger companies w larger orders)
What are receiving reports
reports that r completed when goods which were ordered are received (document the types and quantities)
Invoices are used for what?
compared w the purchase order and receiving reports to CHECK the goods on the inovice were ordered and recevied
JE for purchase
DR Inventory
CR Cash or accounts payable
Do we care about sales tax?
NO! this could create increased costs for purchasers, but manufacturing companies can offset this by including tax in the price of goods
GST VS PST VS HST
GST= FEDERAL
PST= PROVINCIAL
HST= HARMONIZED SALES TAX (P+F)
What is a freight cost
shipping cost
who agrees on the “Freight terms” (Who will pay for the shipping/who is responsibile for the risk/loss/damage of goods during shipping)
buyer and seller
why do we care about freight terms
helps us determine when the asset of seller becomes asset of buyer
2 types of freight terms
FOB destination
FOB shippig point
FOB meaning
free on board, until ownership is transferred
FOB destination- defintion
FREE ON BOARD, until arrived at DESTINATION
goods are owned by the seller until it reaches the buyer; seller responsbile for safe delivery of goods; seller pays freight costs
**remain in inventory until they are delivered
FOB shipping point- defiintion
FREE ON BOARD until BUYER MAKES THE PURCHASE
buyer responsible for freight costs; buyer responsible for an y loss or damage; goods become part of buyers inventory at the the SHIPPING POINT not when it arrives at the buyers location
Who pays freight when FOB Shipping point
buyer
Who pays freight when FOB Destination
Seller
FOB DESTINATION VISUAL
Seller pays freight costs
seller owns good until received by buyer
when buyer receives goods, ownership passes
FOB SHIPPING POINT VISUAL
Seller loads onto truck
BUYER Owns goods as soon as they are shipped,
BUYER pays freight costs when they recieve the goods
How are freight costs recorded- FOB SHIPPING POINT
Inventory freight cost
Cash freight cost
increases inventory because the cost of invenoty includes the purchase cost AND also any other costs incurred to transport the inventory for sale
when to record in JE about deliver from fob shipping point?
ON THE DAY GOODS ARE DELIVERED
what is a purchase return
when the purchaser returns the goods for cash refund or credit (if bought on account)
what is purchase allownaces
buyer may choose to keep merchandise if seller is willing to give an allowance (Reduce the purchase price)
how to record purchase return and allowances
DR
CR Inventory (reflects the decrease in cogpurchased)
purchase discount
when goods are bought on account, buyer may claim discount for early payment
“Early bird discounts”
is purchase discount good for both buyer and seller
yes! buyer saves money, seller is able to shorten its operating cycle (A/R becomes cash faster)
Example of common purchase discount
2/10, n/30
2% discount if you pay within 10 days of invoice date (Discount period)
otherwise the total price is due in 30 days from the invoice date
what is an invoice
a request to pay from seller to buyer
what does just n/30 mean
the total amount payed in less than 30 days
When an invoice is paid within the discount period, the amount of the discount decreases the cost recorded in the Inventory account. To illustrate, assume that the credit terms were 2/10, n/30, rather than n/30. If Sauk Communications wanted to settle its payable on May 12, the last day of the discount period, it would have to pay $3,528. This is calculated as $3,600 less a $72 purchase discount [gross invoice price of $3,900 − purchase returns and allowances of $300 = $3,600 × 98% (100% less 2% discount), or $72].Note that returns reduce the amount eligible for a discount. In addition, discounts are not taken on freight costs. The entry to record the May 12 assumed payment by Sauk Communications would be:
A/P 3600
CASH 3528
INVENTORY 72
When do you adjust entries for inventory
at year end
how to adjust entry for period end inventory
COGS ###
inventory ####
bc even though inventory not sold we consider it as cogs to easier understand
if fob destination… pays frieght
seller pays freight
if fob shipping point… pays frieght
buyer
if buyer is paying freight (fob shipping point), then how is it recorded in buyers book?
Dr Inventory (freight cost)
Cr Cash (Cash)
You DR inventory because inventory INCLUDES the cost of both purchase+frieght
if buyer is paying freight (fob shipping point), then how is it recorded in buyers book?
Dr Inventory (freight cost)
Cr Cash (Cash)
You DR inventory because inventory INCLUDES the cost of both purchase+frieght
if buyer is paying freight (fob destination), then how is it recorded in buyers book?
no entry
How would a buyer returning inventory in exchange frsstore credit record it in buyers books?
DR A/P (decreases the amount of A/P in the future)
CR inventory (decreased)
How would you record an entry for purchase discount paid within discount period, 2/10 n/30?
Dr A/P (total amount on invoice)
Cr Cash (Cost-purchase discount)
Cr Inventory (amount that was discounted off the cost of the merch, so 2% of the invoice)
can you get discounts on frieght costs
ofc not dumbass
why do companies usually pay wthin the discount period of 2/10 n/30?
because the 2% that is not used is viewed as wasted excess money, or “interest” on using the money
how would you record a payment within the n/30 in a buyers books
Dr AP (Total cost)
Cr Cash (Total cost)
How is accounting books adjusted for shrinkage at the end of the period?
Dr COGS (shrinkage)
Cr Inventory (shrinkage)
when you read, company pays the total amount owing do what?
check if you are w/n dicount period
IF YES:
dr a/p
cr cash (total-discount)
cr inventory (discount)
IF NO:
Dr. a/p
cr. cash
