ACCOUNTING FOR

MODULE 4

PURCHASES 1 AND 2
 PRAYER
Father God,

As we start this new day for new

learning, we ask for Your guidance.
Lead us all the way. May You let us
see through Your eyes, listen
through Your ears, and speak with
Your Mouth.
Amen.
 OBJECTIVES
01. 02.
Analyze and record
Know the different
transactions for merchandise
documents needed
purchases under a periodic
for the purchase
inventory system including
of goods.
the freight terms.

03. 04. 05.

Post transactions Compute and Compute for the
to their prepare the Cost Gross Profit in the
corresponding of Goods Sold Income Statement.
ledgers. portion of the
Income Statement
WHO IS THE BUYER?
- The one who purchases goods
- Certain documents are prepared
by the buyer to complete a
purchase transaction.
COMMON SOURCE
DOCUMENTS AND
ACCOUNT TITLES
USED
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SOURCE DOCUMENTS
1. Purchase Order - A DOCUMENT SENT BY THE
BUYER TO THE SELLER ORDERING
CERTAIN GOODS WHERE THE
DATE, QUANTITY, DESCRIPTION
OF GOODS, AND THE TOTAL
AMOUNT OF THE ORDER IS
INDICATED. THIS AUTHORIZES
THE SELLER TO DELIVER THE
GOODS TO THE BUYER UNDER
THE AGREED SPECIFICATIONS,
TERMS, AND CONDITIONS.
SOURCE DOCUMENTS
2. Receiving Report
- A FORM PREPARED BY THE
BUYER’S RECEIVING PERSONNEL
STATING THE
QUANTITY AND CONDITION OF
THE GOODS DELIVERED BY THE
SELLER.
ACCOUNT TITLES USED
Purchases Purchase Returns and Allowances

The account used to record the The account used to record

returns acknowledged or
cost of the goods or merchandise
allowances granted by the
bought for the purpose of resale.
supplier to the buyer from the
sale of goods.

- Contra account
 ACCOUNT TITLES USED
Purchase Discount Freight-in

A reduction from the purchase price The cost of transporting the

of the merchandise or goods merchandise or goods from
sold granted by the seller to the the seller’s place to the buyer’s
buyer or customer for paying within place of business.
the discount period.
- added to Net purchases to get Net
--Contra
Contraaccount
account Cost of Purchases which is used in
computing for Cost of Sales
COST OF SALES
Largest single expense of the merchandising
business
Obtained by deducting Ending Inventory
from Goods Available for Sale
Goods available for sale is the sum of
Merchandise Inventory, beg. and net cost of
purchases during the period.
SOME PROFORMA
ENTRIES (BUYER)

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PROFORMA ENTRIES
1. Purchased merchandise for CASH

2. Purchased merchandise ON ACCOUNT

PROFORMA ENTRIES
3.
a. Returned defective merchandise bought on account.
b. Allowances granted by seller for the account purchases.
c. Issued a debit memo to the seller for merchandise returned.

4.Received cash refund for returned merchandise.

PROFORMA ENTRIES
5. Transportation charges incurred in buying
merchandise.

6. Paid account within the discount period arising

from the purchase of merchandise.
PROFORMA ENTRIES
7. Paid account after the discount period.
ILLUSTRATIVE
TRANSACTIONS
(BUYER'S BOOKS)

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ILLUSTRATIVE PROBLEM
Transaction 1

On April 10, Cinder Company purchased

merchandise from Rella Company for cash
worth Php 150,000.

Journal Entry:
ILLUSTRATIVE PROBLEM
Transaction 2

On April 10, Snow Company purchased merchandise from

White Company for Php 300,000 paying Php 50,000 and
the balance on account. Terms: 2/10, n/30.

Journal Entry:
ILLUSTRATIVE PROBLEM
Transaction 3

Snow Company returned defective merchandise

to White Company worth Php 30,000.

Journal Entry:
ILLUSTRATIVE PROBLEM
Transaction 4

Snow Company made a partial payment of Php

20,000 to White Company.

Journal Entry:
ILLUSTRATIVE PROBLEM
Transaction 5

Cinder Company returned defective merchandise

to Rella Company worth Php 20,000 received a
cash refund for the amount.

Journal Entry:
ILLUSTRATIVE PROBLEM
Transaction 6

Paid Php 5,000 transportation charges for

merchandise bought from White Company.

Journal Entry:
ILLUSTRATIVE PROBLEM
Transaction 7

Paid account to White Company on April 20.

Journal Entry:
ILLUSTRATIVE PROBLEM
Transaction 7-continued
Paid account to White Company on April 20. (Inv.
Date: April 10 Terms: 2/10, n/30)
Computation - Cash Payment and Discount
ILLUSTRATIVE PROBLEM
Transaction 7-continued

Paid account to White Company on April 20. (Inv.

Date: April 10 Terms: 2/10, n/30)
Computation - Outstanding Accounts Payable
ILLUSTRATIVE PROBLEM
Transaction 8

On April 15, Harry Company purchased merchandise from

Potter Company worth Php 60,000 on account. Terms:
3/10 EOM, n/60

Journal Entry:
ILLUSTRATIVE PROBLEM
Transaction 9

On May 18, Harry Company paid the account to

Potter Company

Journal Entry:
ILLUSTRATIVE
PROBLEM
WITH FREIGHT
(BUYER'S BOOKS)
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ILLUSTRATIVE PROBLEM
Case 1
On April 25, Blue Merchants made purchases totaling P17,000
FOB Destination, Freight Prepaid; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record
this transaction would be:

Analysis
Analysis: Who should pay for the freight? FOB
Destination=Seller (Owner)Who pays the courier?
Freight Prepaid=Seller
ILLUSTRATIVE PROBLEM
Case 1 - continued
On April 25, Blue Merchants made purchases totaling P17,000
FOB Destination, Freight Prepaid; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record
this transaction would be:

Journal Entry
ILLUSTRATIVE PROBLEM
Case 1 - continued

If the invoice is paid on May 5, the entry to record this

transaction would be (Inv. date:April 25, Terms: 2/10, n/30)

Journal Entry (Compound)

Purchase Discount = 17,000*.02

ILLUSTRATIVE PROBLEM
Case 2
On April 25, Blue Merchants made purchases totaling P17,000
FOB Shipping Point, Freight Collect; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record
this transaction would be:

Analysis
Analysis: Who should pay for the freight? Shipping
Point=Buyer (Owner)
Who pays the courier? Freight Collect=Buyer

ILLUSTRATIVE PROBLEM
Case 2 - continued
On April 25, Blue Merchants made purchases totaling P17,000
FOB Shipping Point, Freight Collect; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record
this transaction would be:

Journal Entry (Compound)

ILLUSTRATIVE PROBLEM
Case 2 - continued

If the invoice is paid on May 5, the entry to record this

transaction would be (Inv. date:April 25, Terms: 2/10, n/30)

Journal Entry (Compound)

Purchase Discount = 17,000*.02

ILLUSTRATIVE PROBLEM
Case 3
On April 25, Blue Merchants made purchases totaling P17,000
FOB Destination, Freight Collect; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record
this transaction would be:

Analysis
Analysis: Who should pay for the freight?
Destination=Seller (Owner)
Who pays the courier? Freight Collect=Buyer

ILLUSTRATIVE PROBLEM
Case 3 - continued
On April 25, Blue Merchants made purchases totaling P17,000
FOB Destination, Freight Collect; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record
this transaction would be:

Journal Entry (Compound)

ILLUSTRATIVE PROBLEM
Case 3 - continued

If the invoice is paid on May 5, the entry to record this

transaction would be (Inv. date:April 25, Terms: 2/10, n/30)

Journal Entry (Compound)

Purchase Discount = 17,000*.02 (17K is inv. price)

ILLUSTRATIVE PROBLEM
Case 4
On April 25, Blue Merchants made purchases totaling P17,000
FOB Shipping Point, Freight Prepaid; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record
this transaction would be:

Analysis
Analysis: Who should pay for the freight? FOB
Shipping Point=Buyer (Owner)
Who pays the courier? Freight Prepaid=Seller

ILLUSTRATIVE PROBLEM
Case 4 - continued
On April 25, Blue Merchants made purchases totaling P17,000
FOB Shipping Point, Freight Prepaid; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record
this transaction would be:

Journal Entry (Compound)

ILLUSTRATIVE PROBLEM
Case 4 - continued

If the invoice is paid on May 5, the entry to record this

transaction would be (Inv. date:April 25, Terms: 2/10, n/30)

Journal Entry (Compound)

Purchase Discount = 17,000*.02 (17K is inv. price)

COST OF GOODS
SOLD AND GROSS
PROFIT

NEXT SLIDE
GROSS PROFIT

NET SALES - COST OF SALES =

GROSS PROFIT
COST OF GOODS SOLD/COST OF
SALES (PERIODIC)
Cost of Sales= Goods Available
for Sale - Merchandise
Inventory, end
COST OF GOODS SOLD/COST OF
SALES (PERIODIC)
Goods Available for sale= Merchandise
Inventory, Beg. + Net Cost of Purchases

Net Cost of Purchases= Net Purchases

+ Freight-in
COST OF GOODS SOLD/COST OF
SALES (PERIODIC)
Net Purchases = Purchases - Purchase
Returns and Allowances- Purchase
Discounts
COST OF GOODS SOLD/COST OF SALES
Illustrative Example 1
PARTIAL INCOME STATEMENT
Illustrative Example 1

COST OF GOODS SOLD SECTION

BREAKING DOWN THE COST OF GOODS
SOLD SECTION
1. Compute for Net Purchases

Net Purchases = Purchases - Purchase

Returns and Allowances- Purchase
Discounts
BREAKING DOWN THE COST OF GOODS
SOLD SECTION
1. Compute for Net Purchases
BREAKING DOWN THE COST OF GOODS
SOLD SECTION
2. Compute for Net Cost of Purchases

Net Cost of Purchases= Net Purchases

+ Freight-in
BREAKING DOWN THE COST OF GOODS
SOLD SECTION
2. Compute for Net Cost of Purchases
BREAKING DOWN THE COST OF GOODS
SOLD SECTION
3. Compute for Goods Available for Sale

Previous period's Ending

Merchandise Inventory
balance
BREAKING DOWN THE COST OF GOODS
SOLD SECTION
4. Compute for Cost of Goods Sold

Obtained from the end of

the period's physical
inventory count
Illustrative Example 1

COST OF GOODS SOLD SECTION

GROSS PROFIT
NET SALES - COST OF SALES =
GROSS PROFIT
GROSS PROFIT

NET SALES - COST OF SALES =

GROSS PROFIT

39,860-12,956=P26,904
Illustrative Example 1
PARTIAL INCOME STATEMENT
Illustrative Example 2 - Compute for the missing figures
Illustrative Example 2 - Compute for the missing figures

1. Compute for Purchases

Illustrative Example 2 - Compute for the missing figures

Net Purchases = Purchases - Purchase Returns and

Allowances- Purchase Discounts

Purchases=Net Purchases+Purchase Returns and

Allowances+Purchase Discounts

Purchases=165,000+25,000+10,000

Purchases=P200,000
Illustrative Example 2 - Compute for the missing figures

2. Compute for Goods Available for Sale

Goods Available for sale= Merchandise

Inventory, Beg. + Net Cost of Purchases

Net Cost of Purchases= Net Purchases + Freight-in

Illustrative Example 2 - Compute for the missing figures
2. Compute for Goods Available for Sale

Goods Available for sale= Merchandise Inventory, Beg. +

(Net Purchases + Freight-in)

Goods Available for Sale = Goods Available for

100,000+(165,000+70,000) Sale = P 335,000
Illustrative Example 2 - Compute for the missing figures

2. Compute for Goods Available for Sale

 Illustrative Example 2 - Compute for the missing figures

3. Compute for Net Sales

Net Sales=Gross Sales-Sales Returns and Allowances-Sales Discounts

Net Sales=1000,000-150,000-50,000

Net Sales=800,000
Illustrative Example 2 - Compute for the missing figures

3. Compute for Net Sales

Illustrative Example 2 - Compute for the missing figures

4. Compute for Cost of Goods Sold

Cost of Goods Sold = Goods Available for Sale - Merchandise
Inventory, end

Cost of Goods Sold=335,000-150,000

Cost of Goods Sold=P185,000

Illustrative Example 2 - Compute for the missing figures

4. Compute for Cost of Goods Sold

Illustrative Example 2 - Compute for the missing figures

5. Compute for Gross Profit

Gross Profit = Net Sales - Cost of Sales

Gross Profit = 800,000-185,000

Gross Profit=P615,000
Illustrative Example 2 - Compute for the missing figures

4. Compute for Cost of Goods Sold

Prayer