TRANSACTIONS RELATING TO PURCHASES Accounting Help

In addition to the basic transactions illustrated and explained in this chapter, merchandising companies must account for a variety of additional transactions relating to purchases of merchandise. Examples include discounts offered for prompt payment, merchandise returns, and transportation costs. In our discussion of these transactions, we assume the use of a perpetual inventory system

Credit Terms and Cash Discounts

Manufacturers and wholesalers normally sell their products to merchandisers on account. The credit terms are stated in the seller’s bill, or invoice. One common example of credit terms is “net 30 days,” or “n/30,” meaning full payment is due in 30 days. Another common form of credit terms is “10 eom,” meaning payment is due 10 days after the end of the month in which the purchase occurred

Most well-managed companies have a policy of taking advantage of all cash discounts available on purchases of merchandise.f These companies initially record purchases of ‘ merchandise at the net cost-that is, the invoice price minus any available discount. After all, this is the amount that the company expects to pay .: To illustrate, assume that on November 3 Computer Barn purchases 100 spreadsheet programs from PC Products. The cost of these programs is $100 each. for a total of $10,000. However, PC Products offers credit terms of 2110, n/30. If Computer Barn pays for this purchase within the discount period, it will have to pay only $9,800, or 98% of the full invoice price. Therefore, Computer Barn will record this purchase as follows:

Purchase recorded at net cost

Purchase recorded at net cost

Through oversight or carelessness, Computer Barn might fail to make payment within the discount period. In this event, ‘Computer Barn must pay PC Products the entire invoice price of $10,000, rather than the recorded liability of $9.800. The journal entry to record payment after the discount period-s-em. say, December 3-is:

Recording the loss of a cash discount

Recording the loss of a cash discount

The fact that purchase discounts not taken are recorded in a separate expense account is the primary reason why a company should record, purchases of merchandise at lief cost. The use of a Purchase Discounts Lost account immediately brings to management’s attention any failure to take advantage of the cash discounts offered by suppliers

Returns of Unsatisfactory Merchandise

On occasion, a buyer may find the purchased merchandise unsatisfactory and want to return it to the seller for a refund. Most sellers permit such returns

To illustrate, assume that on November 9 Computer Barn returns to PC Products five of the spreadsheet programs purchased on-November 3, because these programs were not properly labeled. As Computer Barn has not yet paid for this merchandise, the return will reduce the amount that Computer Barn owes PC Products. The gross invoice price of the returned merchandise was $500 ($100 per program). Remember, however, that Computer Barn records purchases at net cost. Therefore, these spreadsheet programs are carried in Computer Barn’s inventory subsidiary ledger at a per-unit cost of $98, or $490 for the five programs being returned. The entry to record this purchase return is:

Retum Is baSBd on recorded acquisition cost

Retum Is baSBd on recorded acquisition cost

TRANSACTIONS RELATING TO SALES

Credit terms. and merchandise returns also affect the amount of sales revenue earned by the seller. To the extent’ that credit customers take advantage of cash discounts or return merchandise for a refund, the seller’s revenue is reduced. Thus revenue shown in the income statement of a merchandising concern is often called net sales.

The term net sales means total’ sales revenue minus sales returns and allowances and min,u.s s8ICS discounts. The following partial income statement illustrates this relationship:

What are net sales

What are net sales

Sales Returns and Allowances

Most merchandising companies allow custoiners to obtain a refund by returning any merchandise considered to be unsatisfactory. If the merchandise has only minor defects, customers sometimes agree to keep the merchandise if an allowance (reduction) is made in the sales price.

First, let us consider the effects on revenue of granting either a refund or an allowance. Both refunds and allowances have the effect of nullifying previously recorded sales and reducing the amount of revenue earned by the business. The journal entry to reduce sales revenue as the result of a sales return (or allowance) is shown below:

A sales return reserverse

A sales return reserve’s

Sales Returns and Allowances is a contra-revenue account that is, it is deducted from gross sales revenue as a step in determining net’ sales.

Delivery Expenses

If the seller incurs any costs in delivering merchandise to the customer, these costs are debited to an expense account entitled Delivery Expense. In an income statement, delivery expense is Classified as a regular operating expense, not as part of the .costof goods sold.

Accounting for Sales Taxes

Sales taxes are levied by ‘many states and cities on retail sales.” Sales taxes actually are imposed on the consumer, not on the seller. However, the seller must collect the tax, file tax returns at times specified by law, and remit to governmental agencies the taxes collected

For cash sales, sales tax is collected from the customer at the time of the sales transaction. For credit sales, the sales tax is included in the amount charged to the customer’s account. The liability to the governmental unit for sales taxes may be recorded at the time the sale is made, as shown in the following journal entry:

Sales tax recorded at time of sale

Sales tax recorded at time of sale

This approach requires a separate credit entry to the Sales Tax Payable account for each sale. At first glance, this may seem to require an excessive amount of bookkeeping. However, today’s electronic cash registers automatically record the sales tax liability at the time of each sale.

Posted on November 23, 2015 in Accounting for Merchandising Activities

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