University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

400

Pages:

2
Author:

stud_ice13

Analyzing and Recording Transactions for Merchandise Purchases (Perpetual System) When using a perpetual inventory system, merchandise inventory and the cost of goods sold are continuously updated as transactions occur. The following steps outline how transactions are recorded under various purchase conditions: 1. Purchases Without Cash Discounts • • Cash Purchase: If a company like Z-Mart buys merchandise with cash, it debits Merchandise Inventory and credits Cash for the purchase amount. Credit Purchase: When merchandise is bought on credit, Accounts Payable is credited instead of Cash. Example (Z-Mart buys $500 of merchandise on cash): • • Debit Merchandise Inventory $500 Credit Cash $500 For purchases on credit: • • Debit Merchandise Inventory $500 Credit Accounts Payable $500 2. Purchases with Cash Discounts Credit terms provide discounts to buyers who pay earlier than the full credit period. Terms like 2/10, n/60 mean the buyer receives a 2% discount if payment is made within 10 days, but the full amount is due in 60 days if not paid earlier. • Gross Method: Initially, purchases are recorded at their full (gross) invoice amount. The discount is only accounted for if payment is made within the discount period. Example (Z-Mart purchases $500 with 2/10, n/30 terms): • • • • Debit Merchandise Inventory $500 Credit Accounts Payable $500 If paid within the discount period (before November 12), Z-Mart takes a 2% discount ($10), paying $490: o Debit Accounts Payable $500 o Credit Cash $490 o Credit Merchandise Inventory $10 If payment is made after the discount period, the full $500 is paid: o Debit Accounts Payable $500 o Credit Cash $500 3. Purchases Returns and Allowances • • Purchases Returns: When merchandise is returned, the buyer reduces the Merchandise Inventory and the Accounts Payable for the value of the returned goods. Purchases Allowances: If merchandise is defective, the seller may grant a price reduction (allowance). The buyer reduces Merchandise Inventory and Accounts Payable for the allowance amount. Example (Z-Mart receives a $30 allowance for defective goods): • • Debit Accounts Payable $30 Credit Merchandise Inventory $30 If $50 of goods are returned: • • Debit Accounts Payable $50 Credit Merchandise Inventory $50 4. Purchases and Transportation Costs • • FOB Shipping Point: The buyer pays shipping costs, and these costs are added to Merchandise Inventory as part of the total cost of the merchandise. o Example (Z-Mart pays $75 for shipping):  Debit Merchandise Inventory $75  Credit Cash $75 FOB Destination: The seller bears the shipping costs, recording them as a Delivery Expense. Summary of Key Entries: 1. Recording a purchase: Debit Merchandise Inventory and credit Accounts Payable or Cash. 2. Paying within the discount period: Debit Accounts Payable, credit Cash and Merchandise Inventory (for the discount). 3. Paying after the discount period: Debit Accounts Payable and credit Cash for the full amount. 4. Returns or allowances: Debit Accounts Payable and credit Merchandise Inventory for the returned or discounted amount. 5. Freight charges under FOB Shipping Point: Debit Merchandise Inventory and credit Cash.