Accounting 1: Program #18 – “Purchase Cycle Journal Entries”

Hello folk for you folks at home welcome back
what we did before we start taping today was to take a quiz in here why don't you go ahead
and switch it over to the Elmo if you would so that folks at home can see the quiz we
took. This is the quiz we took everybody at home hopefully you can see that if I think
a good idea for you folks at home to just pause this and take this as if it were quiz
for you folks and go ahead and push play when you were done and see how you would have done.
So go ahead and do that but let's go ahead and go over for the folks here that are live.
Think I have the answers right here ok take a look at that I just did that myself real
quick does that look right folks now those numbers that are highlighted in yellow are
answers but they're not necessarily in that right order that I asked correct? So make
sure your looking at the right one so those are very important equations and I certainly
want you to know those you'll be using those a lot in all your business classes especially
your accounting ones.

Ok so I'm not going to read through them I think it's self-explanatory
but are there any questions on that quiz? Those were worth two points each so if you
got all five of the yellow numbers right then you got ten for each one that you got wrong
you missed two ok. Did I put in something extra that you don't need? What did I put?
Withdrawals and accumulated depreciation yeah I put in some things that you didn't need
in there I want you to know the equation that you need to know and have confidence in them
just cause you see something extra don't throw it in there alright because in real life you
be able to discern what you need and what you don't need.

Alright any questions on that
if not lets switch over to the PowerPoint's just a quick little review on some of these
slide we are talking about merchandising operations which is the same thing as retailers right?
These companies do not manufacture items they sell but they purchase them for manufactures
and then they sell them to the user what is the main thing merchandisers provide? They
provide convenience they provide convenience ok.

We have talked going over to the slide
we have talked for chapters one through four we have talked about service organizations
that sell time now were talking about merchandisers and there is that equation that was there
on the quiz they sell products to earn revenues we gave examples of Wal-Mart or Grocery stores
or best buy or Kohl's we talked about the cycle right you have money you purchase inventory
you sell it either on credit or for cash eventually you get more cash and then you can purchase
more inventory to sell correct? Now coming off of that to me we talked about how there
is two main roles of a merchandiser they do a lot of purchasing from manufacture right?
And then of course they sell it to customers ok.

So there is the purchase cycle and then
there's the sales cycle correct? What we're going to talk about today is the purchase
cycles were not selling to customers well talk about that next time. What we're doing
now is visioning yourself as the retailer and you are praising dishwashers form whirlpool
and you're purchasing televisions from Sony your purchasing computer monitors from HP
or whatever. We talked about the very important flow equation that was also on the quiz ok.
Now let's start talking about the journal entries from the perspective of the retailer
on the purchase side ok.

Let's say on June twenty Jason Inc. purchased fourteen thousand
dollars of merchandise inventory and they paid cash will there you go right there that's
not too hard is it? Now merchandise inventory is a new account and it is a current asset
and merchandise inventory is different from office supplies or something like that merchandise
inventory are items that we have purchase that we will resale to customers hopefully
ok. So merchandise inventory is an asset it's a current asset and everything that we have
purchased that will be sold to customers goes into merchandise inventory now of course there
might be a lot of different sub groupings in our detail but it all goes into merchandise
inventory. Kara? "Is it always a debit balance account" merchandising inventory is a current
asset and it is a debit balance account as all assets are. Now let's talk about some
different types of terminology in this account or in this chapter and some of these are similar
but are different so I want to make sure you're paying attention there's one thing called
a trade discount and this is used by manufacturers to offer better prices if you purchase in
large quantities.

Ok let's look at an example Matrix Inc. Offers a thirty percent trade
discount of orders of one thousand units or more of their popular product racer each racers
has a list price of five dollars and twenty five. Ok so let's say that they sell a thousand
to us as the retailer well a thousand times the list price of five twenty five if they
didn't offer any discount at all we would have to pay this fifty two fifty, but that
is at the amount you have to purchase a thousand or more to get that thirty percent discount
right? So we can take thirty percent of five two fifty subtract it and we only have an
invoice price of thirty six seventy five you with me? And this isn't a concept that's to
foreign to us there are things that if you purchase in a larger quantity you get a cheaper
price can you think of anything like that in real life? If you purchase in a larger
quantity you get a cheaper price? Yeah sometimes Sam's club kind of works that way right? "Is
that why Wal-Mart is so cheap because they buy so much of something?" well yeah that's
a little different concept but Sam's Club is probably the if you buy twelve things of
tooth paste you know which well last you a while then your unit price is probably cheaper
than if you just bought one right? So that is what a trade discount is to offered as
an incentive to purchasing greater quantities alright, and a lot of times manufacturers
can do this because a lot of times some of the costs or effort to process a n order of
a thousand units is not a lot different than five units right? You see what I'm saying
as far as the paper work and all the shipping stuff they have to do a lot of times it's
the same amount of costs so they would rather they certainly would rather sell one order
of a thousand than ten orders of a hundred that come in during the year does that make
sense? Alright lets go to the next thing let's take a look at an invoice you guys have seen
an invoice before right? This is not a new deal for you let's look at some of the things
on this invoice now number one is the seller that who's selling it and number three is
who it's sold to ok.

Number tow is the invoice date and a lot of times there's an invoice
number on there, number five is the credit terms were going to talk about that in a minute
let's not worry about that now, now number seven is the goods that were sold and it looks
like what we purchased as the retailer here was a something called a two fifty back up
system and that is item number AC417 ok how many did we purchase we purchased five hundred
of them what was the price per two fifty back up system it was fifty four so the invoice
amount is twenty seven thousand dollars ok now of course the difference between an invoice
for a retailer is versus you and the invoice you see is your probably not going to purchase
five hundred backup systems aren't you you're probably going to purchase one for yourself
and that's it. But think about the quantity that these retailers purchase in its pretty
large isn't it? Now let's talk about what the heck is this term two that looks like
two fractions I don't know what that is let's talk about that what does that mean in shipping
terms of two ten in thirty well what that means that if you pay within ten days you
can knock two percent of the price off.

But if you chose not to do that you owe the full
amount in thirty days so if you pay within ten days you can knock off two percent of
the invoice price but if you chose not to do that you owe the full amount in thirty
days you with me? This is on top of it there's a traded discount Matt and I'm glad you pointed
that out a purchase discount is to as an incentive to pay early a trade discount is to buy it
in large quantities make sense? Now this isn't always two ten net thirty ok you could have
going to the Elmo you could have you know three ten in thirty which would mean you get
three percent off if you pay within ten days otherwise the full amount is due within thirty
days or you could have one fifteen in sixty you get one percent off if you pay within
fifteen days but the full amount is due within sixty or sometimes you'll see something like
this two ten in EOM do you know what EOM stand for? End of month so this would mean if you
paid within ten days you would knock off two percent otherwise the full amount by the end
of the month so there's different ways that you can say that but in this particular example
it was two ten in thirty.

Ok now how does this work out? Well let's look at an example
on May the seventh Jason Inc. purchased twenty seven thousand dollars of merchandise inventory
this time on account not with cash but on account and the credit terms are two ten and
thirty so when we record this we debit merchandise inventory increasing that current asset and
we increase our accounts payable for twenty seven thousand alright. Now that was on May
seventh and the terms here that was on May seventh and our terms are two ten and thirty
so what day do we have to pay by to enjoy that ten percent discount? May seventeenth
right? If we pay May seventeenth or earlier we won't have to give them twenty seven thousand
we will pay them well figure out how much we give them but it's less than that.

We pay
them on May fifteenth so is that within the date is that within the discount date or within
the discount period yes it is so we do not have to give them twenty seven thousand we
only have to give them ninety eight percent of twenty seven thousand which is the hu7ndred
percent minus the two percent discount. So I get ninety eight percent times twenty seven
thousand and that's how much cash we have to pay we have to give them twenty six for
sixty now we debit accounts payable don't make the mistake of debiting accounts payable
for twenty six four sixty cause in our original entry we credited or increased that liability
for twenty seven grand if you mistakenly just debit it for twenty sic four sixty it's going
to imply that you still owe money.

So accounts payable is debited for the full twenty seven
thousand it's satisfied it's taken care of even though we've given them twenty six four
sixty well how do you complete this journal entry you credit merchandise inventory for
five fifty now sometimes that seems odd to people and I'll show you why we do that in
a second ok any questions on how we came up with these numbers let's talk about why these
merchandise inventory is credited for five forty. Ok well if you go back to the original
journal entry we debited inventory on five seven for twenty seven thousand right? On
the original journal entry date, but in the end is that how much we paid for it? No it
isn't so how much did we pay for it in the end twenty six four sixty so by us crediting
it merchandise inventory for five forty that means that merchandise inventory is going
to be recoded on the books and twenty six four sixty which was the true cost of that
inventory correct? So what principle does this follow? Remember the cost principle assets
should be stated on your balance sheet at what they're true cost was right? And our
true cost for this inventory when it was all said and done thus it should be on the books
for twenty six four sixty.

Cool now looking back at that account payable you can see to
that our original credit was to increase AP was twenty seven thousand even though we only
paid twenty six four sixty we debited it and our balance is zero we don't owe that manufacture
any more money do we? Make sense? Now I asked you I believe I handed you guys something
like this and it said basic purchase journal entries did you get a chance to try to do
that did you have success or did you get confused? Let's take a look and actually what I want
to do is and for you folks at home of course everything is under lessons tab on the handouts
for chapter five is basic purchasing journal entries is there but I want to go ahead and
do the bottom one first ok let's go ahead and read that.

On September fifteenth Schneider
company purchased some merchandise inventory from Makarov Inc. with an invoice price of
thirty five thousand and credit terms of two ten net thirty. Schneider Company paid Makarov
on September twenty eighth. Prepare the journal entries for Schneider company the purchaser
on the following dates ok well on September fifteenth we debit merchandise inventory and
credit accounts payable for thirty five thousand ok.

Ok now the terms were two ten net thirty
right? We bought it on September fifteenth so when do we need to pay by to get that discount?
September twenty fifth when did we pay the twenty eighth missed the discount didn't we
so all it is here well you have to pay the full thirty five thousand you blew it. "I
just didn't know since it wasn't thirty days I didn't know if you would like pay part of
that" yeah what she's asking is why not wait to day thirty and that's actually a good question
in businesses it's like if you don't want to pay before you need to what this company
should have done is pay on day ten not day five not day six but day ten taken the discount
so they missed the discount they might as well paid on day thirty cause the longer you
have the money the better it can maybe earn some money in a savings account maybe you
can sweep it over in a nightly certificate deposit or some sort of interest earning investment
right? But that's a little on this but going to this that's the journal entry right you
missed the discount let's take at what it is if you made the discount and for you folks
at home if you didn't print this out or you didn't understand it pause it now before we
go over the answer and try to do it.

Alright on august first Gilmore company purchased
merchandise from Hendren Inc. with an invoice of sixty thousand and credit terms of two
ten net thirty. Gilmore Company paid Hendren August the eighth. Prepare the journal entries
for Gilmore on the following dates. Ok on august first we debit merchandise inventory
and credit account payable for sixty thousand ok. Ok we had credit terms of two ten net
thirty so if we purchased it on august first what date do we need to get it paid by to
get the discount? By the eleventh we paid the eighth so we got the discount didn't we?
So we did not have to give them cash of sixty thousand did we? So how much cash did we have
to give them we only have to give them ninety eight percent of sixty thousand which is the
hundred percent minus the two percent discount what is the ninety eight percent of sixty
thousand? Fifty eight-eight hundred right? So we only have to give them cash of fifty
eight-eight hundred now were going to go ahead and decrease the accounts payable for the
full amount cause were good were not giving them any more money we don't owe them any
more money so that journal entry doesn't balance right? What do we credit for twelve hundred
we credit merchandise inventory so that the merchandise inventory will be recorded on
our books at the true cost which was in the end fifty eight-eight hundred alright.

the order of the credits matter?" nope you can switch the you looking at the Elmo you
can switch these in any order as long as they're both credited. Ok alright good appreciate
those who read that and tried it you're probably a little better prepared than other wise alright.
Any other questions on that ok? Let's talk about a few more things ion the purchase cycle
oh first of all let's ask us this if we don't take that discount is it really that big a
deal? Yes the answers is yes it's a big deal its expensive and people might say oh Krug
its only an extra two percent it's not that big of deal it is a big deal and let me tell
you why.

People are used to thinking of annually aren't they and like if I had
a two percent annual rate on my mortgage or on my auto loan buy that would be awesome
wouldn't it? ok however you have to pay an extra two percent for how many more days now
you can pay by day ten and get the discount but if you don't pay by day ten when do you
have to pay by? Day thirty right? Ok looking at me here you can pay on day ten and get
the discount but otherwise you have to pay on day thirty that's just an extra twenty
days correct? So you're in essence for two percent more for just twenty more days of
credit. Now the way I like to look at this as follows going to the Elmo we said we get
only get twenty more days right now how many twenty day periods are there in a year? Well
a year has three hundred and sixty five days right? So the true annual cost of that that's
two percent for twenty more days the true cost of that is what bang that out there Sarah?
"Thirty six point five percent?" Thirty six point five percent is that a good rate ok
let's say that Jessica was my controller and I'm the owner of my company ok.

Let's say
Jessica and I'm the owner and she says hey Dave I went and secured us a new bank loan
and I said really what was the new rate you got and she says it's an annual interest rate
on our new loan of thirty six and a half percent. Would I be happy with her? No but when we
don't take these discounts essentially that is exactly what has happened isn't it? You'd
be better off to take the discount and put it on a credit card that charges you nineteen
percent a year.

Very important to make these discounts when I go work with my clients I
often see that they have not made there purchased discounts do you know what the most common
reason they haven't made them is? "They don't want to pay early?" "Negligence?" it's not
because they don't have the money it's just because of oh it's so busy I missed it again
do you have any classes here at school where there's always the same couple of students
that are always four or five minutes late? Well they'll probably grow up to be the sort
of person that's always late two or three days in their invoices but it makes a big
difference doesn't it? Cause think about how much purchasing think about how much purchasing
best buy does in a year think if you added an extra two percent times the amount that
they purchase that would be probably tens of millions of dollars maybe not that much
cause they purchase probably hundreds of millions per year don't they? That would be somebody
would get fired ok for good cause we have this in our own lives right it's like you
get your cable TV bill you we a hundred dollars if paid by October thirty first if you pay
after that a hundred dollars and fifty cents and you look at your calendar and you missed
it you ever had that happen? I've had that happen in my own life well that's a lot isn't
it? if you figure out annual interest rate it's a lot so the main reasons my clients
don't make their purchase discounts is they're just I'm so busy I'm just missed it I'm just
so busy well you need to hire you'd be better off to hire some help and make those discounts

One last thing I want to point is folks there are people out there who hope you stay
financially ignorant not saying you are now but they don't even like that I'm going to
tell what I'm going to tell you they like people they like consumers that are financially
stupid ok. And they'll send you stuff you folks getting credit card offers in the mail?
I could fill my wall in the basement with credit card offers now here's the way they
used to sell these credit card offers is you would get an envelope in the mail ok and it
would say new credit card only four percent interest rate and then they'd have an asterisk
rate it would say four percent per month and then down here there would be a message we
love you ok. And they want you to be stupid they want you to think hey a new credit card
I don't know much but I know this I know four percent a pretty low rate we pay more than
that on our mortgage a lot more well listen Einstein its four percent per month it's not
annual is it? So what is a four percent per month roughly speaking what is that on a annual
rate? Forty eight percent there sued to be credit card companies and banks and credit
unions and lending authorities that would try to mask what the annual percentage rate
was and that's why they made rules that say you have to have certain type of font certain
size of font what your APR is right annual percentage rate cause they were trying to
deceive they want you folks to be stupid they want you to be stupid and they want you to
go buy a big screen TV on their credit cards and the big screen TV costs six hundred dollars
and before it's all said and done you gave them nine hundred and eighty dollars.

let them take advantage of you these credit card companies they don't love you I'm going
to tell they do not love you they say they love you they do not love you they want you
stay fat dumb and stupid dumb and stupid are the same things so word to the wise. Alright
let's talk about a few more things in regards to purchasing purchase returns and purchase
allowances ok these are very similar things and they look similar like journal entries
but they're actually different ok. Here's let's talk bout these purchase returns versus
purchase allowances ok let's come off there if we can let's say you're going to purchase
some table and let's say that you purchase ten of these tables that you're sitting at
and let's say you pay fifty dollars each for them and you're going to sell them in your
retail store for ninety.

Well let's say you sell how many did I say we purchased? Ten
let's say for whatever reason you bought too many and so you just returned one there was
nothing wrong with it you just returned it. Now chances are you haven't paid for it by
then so they just knocked off fifty dollars to what you owed them right? You guys know
what purchased returns right? Ok you buy a sweater form JC Penny and you take it home
and you show your husband and you go does this look nice on me? And he says oh… ok
and you decide you didn't like it and you take it back and get your money there's nothing
wrong with it that's a purchase return they just knock off what they owe you will see
how that looks. Well a purchase allowance is the following let's say I purchased ten
of these tables for fifty dollars each and so I owe them ten times fifty five hundred
dollars ok and let's say that once I unpack them I notice that one of these has a scratch
on it's not real big but maybe a four five inch scratch on the top.

Well I call the manufacturer
and I say hey one of these tables that you sold me for fifty dollars has a scratch on
it and they would probably say you can do one of two things you can send it back to
us and will knock off fifty dollars of what you owe us or if you want keep the table we'll
knock thirty five dollars of what you owe and essentially you'll end up buying the table
for fifteen dollars. Does that make sense? With the purchase allowance I don't actually
return the product to the manufacturer they just kind of give me an allowance and I might
decide yeah I'll keep the table if I could buy it for fifteen because I might be able
to sell it to a customer and actually make more money on it than a regular table. There's
people like me who are cheap who like to buy stuff like that when I bought a clothes dryer
the clothes dryer was normally two hundred and eighty bucks or something like that but
it had a big long scratch the side it was till brand new it just had a scratch and there
was nothing wrong with it just had a big long scratch and so they said you can buy it for
half price if you want? And I said giddy up baby right? Cause who cares if my clothes
dryer has a scratch on it? Do you ever go to your friend's house and say I'm going to
look at the side of their clothes dryer who cares? Ok so a purchase return you actually
return the good to the manufacturer purchase allowance you keep it and they knock off of
what you owe them make sense? Let's take a look and see how that looks ok on May ninth
Matrix Inc.

Purchased twenty thousand dollars of merchandise inventory on account credit
terms are two ten net thirty. Ok well that's the journal entry we debit merchandise inventory
we credit accounts payable now on May the tenth we returned five hundred dollars of
defected merchandise to the supplier. We haven't paid yet so all that happens is we decrease
our liability we debit our accounts payable by five hundred dollars and we also decrease
or credit merchandise inventory because we don't have it anymore.

Does that make sense?
Now Kara you asked if merchandise inventory always a debit balance account yes it is always
a debit balance account but we know all accounts are debited and credited right going back
to this journal entry when we credit merchandise inventory since it's a debit balance account
that's simply means were decreasing it which is what reality is right were returning five
hundred dollars of merchandise so how much do we owe them at this point? We owed them
twenty thousand then we sent some back and we decreased it by five hundred what do we
owe them at this point? No we owed them twenty thousand dollars we returned five hundred
we only owe them nineteen thousand five hundred don't we? And t hats if we pay that's if we
don't take advantage of the discount here.

So we pay do we pay within the discount period?
Yes we do so we don't have to give them the full nineteen thousand five hundred we only
have to give them ninety eight percent of the nineteen thousand five hundred which in
this case is nineteen thousand one hundred and ten now one thing that they want to point
out there is we take the discount based on the nineteen five don't take it on the twenty
thousand cause that's not what you owe them cause you see what I'm saying cause you sent
back five hundred dollars' worth of those goods take it on the nineteen thousand five

Ok let's talk about what I want to do now is this I want you to do and we are
going to take a few minutes to do this I want you to do quick study five point three on
page two oh nine on two hundred and nine page two hundred and nine I want you to do quick
study five point three for you folks at home you do it as well, we'll come back in a few
minutes and well go over the answers to quick study five point three roll that music. (36:35-42:20)
ok if you folks at home aren't done just pause it and you can start us up when you are done,
but in that transaction on quick study five point three on march the fifth we purchased
five hundred units of product at five dollars per unit and the terms were two ten net sixty.
Ok so the journal entry on March the fifth would be a debit to merchandise inventory
for two five hundred dollars or five times five hundred and a credit to AP correct? Now
what happened on March the seventh? We returned fifty defected units and this was a purchase
return and we received full credit so what's five times fifty? Its two fifty we decrease
our accounts payable and we decrease our merchandise inventory for two fifty right? So how much
at this point do we owe them? Twenty two fifty do we pay within the discount period? Yes
so we don't have to give them twenty two fifty we only have to give them ninety eight percent
of twenty two fifty which in this case is cash of twenty two-o-five and of course we
credit or decrease the accounts payable for twenty two fifty and we have fully extinguished
that liability it's taken care of we don't owe them anymore do we? Now somebody pointed
out something in break that was good when we say we pay in cash that doesn't mean I'm
taking hundred dollar bills and shoving them in an envelope and sending them we are writing
a check right? But that's the same thing as paying with cash it comes out of our checking

Alright going back to that any questions on quick study five point three? Ok a couple
last things that I want to go over it will just take a minute is there's also the item
we need to cover of transportation costs now there are sometimes that the seller pays for
transportation and there's sometimes that the buyer pays for transportation. And it's
important to know now the way that they do this do you know what FOV stands for? Free
on board and we're always thinking from the perspective of the merchandiser so if it is
free on board clear to the destination it is free on board clear to the destination
well we are the destination that means its free clear to here that's the destination
that mean that the seller pays for transportation now if its free on board only up to the point
where they ship it this is where they start to ship it right here. That means while its
traveling we are paying for it the buyer is paying for it. So free on board shipping point
it's only free up to the shipping point thus the buyer has to pay if it's free onboard
to the destination that means that whole time it's free for us and the seller pays.

the question might come up who owns those goods while they are being transported well
the answer is this whoever is paying for the transportation owns the goods while they are
being transported. So if you see a train full of stuff moving along or a truck full of stuff
moving along on the highway and you're going I wonder who owns that all I would say is
well tell me is the buyer or the seller paying for the transportation. If the buyer is paying
for the transportation then as it is moving along the road the buyer has it in their inventory
on their books.

If the seller is paying for it then they own it does that make sense?
"Transportation and something happens?" Ok then you get into insurance there's usually
insurance on it ok. Usually there is some sort of insurance with the transportation
company, but whoever owns the goods is whoever is paying for the goods while they are being
transported. Now lastly let's look at an example on May the twelfth Jason Inc.

purchased eight
thousands of merchandise inventory for cash and they also paid one hundred for transportation
costs. I want you to recognize that we debit merchandise inventory for that full eighty
one hundred which includes that one hundred dollar transportation cost. We don't have
a separate expense account called transportation expense we want to capture those transportation
cost in merchandise inventory so we debit merchandise inventory does that make sense?
Any costs that were necessary to get that as inventory become part of merchandise inventory
okay? Ok that is it I'm only giving one homework question to do but I want to make sure you
do it so do exercise five point one for next time do exercise five point one alright see
you guys..

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