Lesson 29: Journalizing Purchase Entries
In this lesson, we will learn how purchases are
recorded using the perpetual inventory system. To do this, we will look at the
types of transactions associated with purchases, as well as how to record their
journal entries.
First let's take a look at what type of transactions are
associated with purchases:
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Purchases - This is the straightforward transaction of purchasing inventory.
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Shipping costs - The seller or purchaser pays a shipping carrier for the item to
be delivered.
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Purchase return - When inventory is returned for defects,
missing pieces or other issues.
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Discounts - The company gives customer a discount on the purchase price.
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What each of these transactions have in common is that they are all related to
the merchandise inventory account. This account will come up in each example we
review. Keep in mind that these transactions are only associated with accounts
on perpetual inventory systems.
Let's say a company paid for overnight shipping for inventory costing $4,
000 with 6 percent tax included. The merchandise inventory would be debited and
accounts payable would be credited.
When you get into more intermediate and
advanced accounting courses,
you will find that
the taxes are
recorded as a separate transaction but we will keep it simple for the purpose
of introducing you to the concept.
After the journal entry for the merchandise is recorded,
we must record the shipping costs. The two types of payment methods for
shipping include FOB shipping and FOB destination. The acronym FOB stands for
free on board.
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When the purchaser pays for the shipping costs, it is considered FOB shipping
terms. In contrast, when the seller pays for shipping, it is FOB destination.
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The best way to remember these terms is that
when the seller pays for shipping costs, they are trying to get the merchandise
to the destination. Normally when a customer purchases merchandise, they
specify in their purchase order or terms and conditions document which type of
shipping they are wanting to use.
Let's say the shipping costs for a shipment of goods is $80. For FOB shipping,
the $80 would be recorded as a debit to merchandise inventory and a credit to
accounts payable. If FOB destination is used, there would be no journal entry
for the transaction because the seller is capitalizing the cost of the inventory.
Now let's review the journal entry for purchase returns,
when the company is returning inventory to the seller.
This is one of the easiest transaction types to
journalize as it is the reverse of a purchase entry. Instead of debiting the
merchandise inventory and crediting the accounts payable, a return is recorded
by debiting the accounts payable and crediting merchandise inventory.
Finally,
the last type of purchase entry is discounts which are
broken down into two types: quantity discounts and purchase discounts.
- Quantity discounts are given for purchasing inventory in bulk. Normally,
a percentage discount is offered when the company purchases a certain amount of
the product.
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- Purchase discounts come up more frequently and
account for when payment is paid early in cash. An example would be when the
seller offers a 3 percent discount, if the full balance is paid within 10 days.
This type of discount is often written in the following form: 3/10 n/30, where
the n/30 stands for the standard net 30 days, which would be the full price.
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For example, a discount of $40 was offered on the inventory purchase that
had a full price of $4,000. First, the purchase entry would be recorded as a
debit of merchandise inventory and credit of accounts payable. To show the
discount, the accounts payable would be debited by 4,000 and cash credited for
$3,960. You can't leave the entry unbalanced, so the merchandise inventory
would need to be credited for $40.
We've covered the four types of purchasing transactions and
examples of how they are recorded as journal entries. In the next lesson,
we will talk about journal entries for different types of sales.