ACC 250 Lecture 5: Accounting Lecture Notes 5

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10 Jun 2018

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The Purchases Account

Purchases is the other account where the merchandise inventory of a business is kept. The

merchandise purchased during the fiscal period is collected in the purchases account.

Purchases is a short version of purchases of merchandise for resale. The purchases

accounting is found in the expense section of the lodger. Some accountants place it as the

first account in that section.

Be sure you understand that it is the purchase of merchandise inventory that is being

discussed here. Other items purchased are handled in the usual way. For example, if a tire

company buys office supplies, office supplies is debited. However, if a tire company buys

tired for sale to its customers, purchases is debited.

The Sales Account

The revenue account for a merchandising business is called sales. When a business sells

goods, the physical inventory is reduced. However, no accounting entries are made to record

this decrease in inventory when the periodic system is used. It is easier to allow the inventory

to be inexact during the fiscal period and to correct it at the end.

The Freight-In Account

Freight on incoming merchandise is considered to be one of the costs of the goods. The

freight in account is used to accumulate any transportation charges on incoming goods.

These charges are kept separate from transportation charges on outgoing goods, which are

recorded in delivery expense. Freight in is accumulated separately because it is a cost related

to the goods purchased and must be included in the calculation of the cost of goods sold. The

freight in account is usually placed right after the purchases account in the ledger.

The charges for freight in and for delivery expense are usually found on invoices from

trucking companies, railways, or other transportation companies. If a business has its own

trucks, these charges may be found on bills related to the running of the equipment, such as

bills for gasoline, oil, and repairs.

Duty refers to the special charges imposed by the government on certain goods imported

from a foreign country. If any duty is being charged, it is handled in the same way as freight

in and debited to a duty account.

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Document Summary

Purchases is the other account where the merchandise inventory of a business is kept. The merchandise purchased during the fiscal period is collected in the purchases account. Purchases is a short version of purchases of merchandise for resale. The purchases accounting is found in the expense section of the lodger. Some accountants place it as the first account in that section. Be sure you understand that it is the purchase of merchandise inventory that is being discussed here. Other items purchased are handled in the usual way. For example, if a tire company buys office supplies, office supplies is debited. However, if a tire company buys tired for sale to its customers, purchases is debited. The revenue account for a merchandising business is called sales. When a business sells goods, the physical inventory is reduced. However, no accounting entries are made to record this decrease in inventory when the periodic system is used.

Related Questions

16. The Allowance for Bad Debts account has a debit balance of$7,000 before the adjusting entry for bad debts expense. Afteranalyzing the accounts in the accounts receivable subsidiary ledgerusing the aging-of-receivables method, the company's managementestimates that uncollectible accounts will be $15,000. What amountof bad debts expense will be reported on the income statement?

19. In reviewing the T-account for Accounts Receivable, you findthat the beginning balance is zero, the total increases are $4,900and the total decreases are $2,400. This means that the endingbalance of the account is a credit balance of $2,500.

True

False

29. An invoice is also known as a bill.

True

False

30. A cash equivalent is a highly liquid investment that can beconverted into cash in three years or less.

True

False

32. Which of the following is true of a purchases journal?

A.Cash purchases are recorded in the purchases journal.

B.For a periodic inventory system, the Merchandise Inventory DRcolumn is replaced with a column titled Cost of Goods Sold DR.

C.The Other Accounts DR column is used for purchases on accountof items other than merchandise inventory and office supplies.

D.For a perpetual inventory system, a column titled Purchases DRis needed.

salmonpig565

Andrews Company, a merchandising firm that sells one product, estimates it will sell 11,000 units of its product at $59 per unit in December. In November, the company prepared other information to prepare a budget for December, as shownâ here:

Merchandise inventory, December 12,000 units
Desired merchandise inventory for December 31 2,800 units
Cost per unit of merchandise purchases $34
Selling and administrative expenses $210,000
Cash balance, December 1 $33,000
November sales $610,000

The company estimates that 80 % of eachâ month's sales are collected in the month of sale and that the remaining
20 % is collected in the month after sale. The $ 210,000 of selling and administrative expenses includes $ 20,000of depreciation.The company pays for thirty percent of merchandise purchases during the month of purchase and pays the remainder during the month following purchase. Estimated merchandise purchases for November are $ 366,000.All otherâ out-of-pocket expenses are paid for in cash.

Requirements

â(a) How many units of merchandise will Andrews budget to purchase in Decemberâ? What is the dollar amount of
Andrews' budgeted merchandise purchases for Decemberâ?
â(b) Prepare a budgeted income statement for the month ended December for Andrews Company.
â(c) Prepare a statement of estimated cash flows for the month ended December for Andrews Company.

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12 ACCOUNTING QUESTIONS

4. Using a perpetual inventory system, the buyer'sjournal entry to record the return of merchandise purchased onaccount includes a:

Select one:

A. Credit to Cost of Goods Sold

B. Credit to Accounts Payable

C. Credit to Purchase Returns

D. Credit to Inventory

6.Using a perpetual inventory system, the buyerâsjournal entry to record the payment for merchandise within thediscount period includes a:

Select one:

A. Debit to Accounts Payable

B. Debit to Cost of Goods Sold

C. Debit to Purchases

D. Debit to Inventory

7.Which of the following statements regarding cost flows istrue?

Select one:

Cost of goods available for sale is equal to beginning inventoryminus cost of goods purchased.

CGAS = beginning inventory minus ending inventory.

Cost of goods available for sale is equal to beginning inventoryplus cost of goods purchased.

CGAS = cost of goods sold minus cost of goods purchased.

10. Using a perpetual inventory system, the buyerâsjournal entry to record the purchase of merchandise on creditincludes a:

Select one:

A. Debit to Inventory

B. Debit to Freight In

C. Debit to Cost of Goods Sold

D. Debit to Purchases

11. Which of the following is not shown in thestatement of stockholder's equity?

Select one:

A. Unearned revenue

B. Common stock

C. Retained earnings

D. Dividends

13. Using a perpetual inventory system, the sellerâsjournal entry to record the sale of merchandise on account includesa:

Select one:

A. Debit to Accounts Receivable

B. Credit to Cost of Goods Sold

C. Credit to Purchases

D. Debit to Inventory

14. A merchandising company's multi-step income statementdiffers from that of a service company in what way?

Select one:

A service company does not include a line for cost of goodssold.

A service company has a line for selling expenses whereas amerchandising company does not.

There is no difference.

A merchandising company will have a line for income fromoperations whereas a service company will not.

16.Using a perpetual inventory system, the sellerâs journalentry to record the return, by the buyer, of merchandise purchasedon account includes a:

Select one:

A. Credit to Purchase Returns

B. Debit to Cost of Goods Sold

C. Debit to Accounts Receivable

D. Debit to Sales and Allowances

20. For a firm that uses the perpetual inventory system, theSales Returns and Allowances account:

Select one:

A. Is not a contra account

B. Is not used

C. Is debited by the firm receiving returned goods from acustomer

D. Has a normal credit balance

21. Current assets are cash and other assets that will beconverted into cash or used up within:

Select one:

A. One year

B. The normal operating cycle of the business

C. The normal operating cycle of the business or one year,whichever is longer

D. The normal operating cycle of the business or one year,whichever is shorter

22. The balance sheet format that reports assets first and then,beneath the assets, reports the liabilities and stockholders'equity is called the:

Select one:

A. Account form

B. Report form

C. Stack form

D. Classified form

23. Safari Monkey Company sold $2,400,000 worth of merchandise,had $200,000 returned, and then the balance was received during the2% discount period.

What were the companyâs net sales?

Select one:

A. $1,800,000

B. $1,760,000

C. $2,156,000

D. $2,040,000

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ACC 250 Lecture 5: Accounting Lecture Notes 5

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