This is Part Two in our Merchandising Operation series where we'll be
discussing, or looking at a purchase discounts example, and a purchase returns
and allowances example. The first one we'll look at is a purchases discounts
example. Suppose the GAAP store purchased T-shirts on account for $10,000.
Credit terms are 2/10 net 30 and GAAP paid within the discount period. The
first step is to generalize the purchase of inventory. So this should be more of a
review. This first entry here. When we purchase inventory, our inventories
increasing, and inventories and asset therefore, we debit our inventory for the
amount of $10,000 in this case. It also states that we're purchasing these
T-shirts on account. So we owe the money; we'll pay it later, and that's a credit
to accounts payable for the $10,000. And our description for this entry would be
purchase inventory on account, and then of course after our journal entry we
would want to post it to our ledger. So here's our inventory T- Account. We
debited inventory. We increased it, therefore, we debit inventory in the
ledger as well. So now generalize the payment on account. Well we have to think
about this for a second. We owe $10,000 but it said we're paying it within the
discount period. So obviously we're taking our discount, in this case, it's
2% of the amount we owe. We owe $10,000, so 2% of that would be
a $200 discount. However, on the books, we have an accounts
payable of $10,000. That we owe $10,000 for these t-shirts, but we're only going
to pay $9800 for these t-shirts because we're taking our
2% discount. So what do we debit accounts payable for?
Good we need to take it completely off the books.
The books show that we have a $10,000 debt. If we debit accounts payable for
only $9800, then the books would show we still owe $200.
And that's not true. So we need to wipe off this debt by debiting
accounts payable for the full $10,000.
As stated before , we're only going to pay $9800 in cash
because we're taking a $200 discount. But what's the other
account that needs to get credited here? Keep in mind there's no such account
called purchase discounts or purchase returns allowances. Because remember we
keep our inventory on the books at what we paid for it. So we need to reduce the
value of our inventory here, so we're going to credit our inventory for the
$200. And our description would be to record payment of inventory
on account within the discount period, and again your description could be much
shorter, it could be different depending on the person writing it. Now we need to
post our entry. In this case, I'm only going to post inventory, as that's the
only T-Account I have. So I'm going to post the $200 to the
inventory count to show that I have $9800 worth of
inventory because that is what I paid for that inventory. Now let's look at a
purchase returns and allowances example. Suppose We Sell Broken Toys buys a
$100,000 worth of Lego toys on credit terms of 3/15
n/45. Some of the goods are damaged in shipment, so We Sell Broken
Toys returns $10,000 of the merchandise to Lego. Record the purchase
and the return. And this case you can omit your descriptions for your entries.
So the first thing we want to do is to record the purchase. Let's say that the
purchase was on May 6th. So when we record the purchase again we're debiting
our inventory for the $100,000
and we're crediting our accounts payable for the $100,000. So let's go ahead and set
up our T-Accounts for both. I debited inventory for the $100,000, so I will post
that to the ledger, and I credit accounts payable for a $100,000 and I'll
post that to the ledger. Now we need to record the return. We're returning
$10,000 worth of merchandise. Let's say that we returned that on the
13th. So I no longer owe $10,000 worth of or in the liability. So I take away
$10,000 from the liability accounts payable by debiting it and I no
longer have $10,000 worth of inventory. So I have to take it out of
inventory with a credit and we'll post this journal entry to the ledger. So now
I have inventory valued at $90,000 and I also owe $90,000.
Now in this scenario I have two different options for pay. I could pay
within the next 15 days from May the 6th, and take a 3% discount
on what I owe, or I could pay after the discount period of 15 days and pay
within 45 days and pay the total owed of $90,000. So let's take a
look at both. So remember the purchase was made on May the 6th. So how much
must We Sell Broken Toys pay Lego if paid on May the 22nd? Well 15 days is our
discount period, and if we purchase them on May the 6th then the last day of the
discount period would be the 21st. So we are not paying within the discount
period here, therefore, we need to pay the entire amount owed. So looking at our T-
Accounts here we see that we own $90,000. So we'll need to debit accounts payable
for the $90,000, and of course we're paying cash, so will credit cash for
$90,000. Now let's say that we paid on May the 20th. That is paying within the
discount period, and again our accounts payable shows we owe $90,000. But we're
paying within the discount period so we're going to take the discount of 3%.
So there's a couple ways you can calculate the discount or how much
you're actually going to pay. So let's do that first.
The first one here is the discount amount. So we take the amount we owe, not
the amount of the original purchase only the amount that you actually owe at this
point. Remember we returned $10,000, so we only owe $90,000 at this
point times the discount of 3%, gives me a $2,700
discount. Or I can calculate the amount of cash I'm going
to pay by taking $90,000 times 97%, which is what I'm
going to pay, because I'm taking a 3% discount. So that means I'm going
to pay in cash $87,300, that's what I owe.
So I'm going to debit my accounts payable just as before for the entire
amount that I owe which is $90,000.Because I got to get that off
the books because I no longer oh the Lego money. So I've got to get
it off the books.
Then I will credit cash for the $87,300. What about
the discount? Remember that's a reduction of your inventory, so we credit our
inventory for $2,700. So let's post that to the inventory account to show my new
balance in inventory. So my new balance in inventory would be
$87,300 because that's what I
actually paid for the inventory that's in the account. And obviously my accounts
payable at this point, I would debit, I would post the debit to my T- Account and
my new balance accounts payable with these zero.