Chapter 9 Sec. 2

Inventory value is recorded in a general ledger account titled Merchandise Inventory , an asset account.Two Principles to determine the value of inventory Perpetual Inventory Method Merchandise is directly accounted for in Merchandise Inventory account. Businesses that have perpetual inventory usually have computerized accounting systems to maintain detailed records required. When the bar code is scanned the system instantly records the sale price and updates the merchandise records. 2. Periodic Method Once at the end of every fiscal year, quarter or month. Depending on the volume of sales. Easier to maintain than the perpetual method, but requires: weighing and counting. When a periodic inventory system is used the, the cost of merchandise is recorded to the Purchases account. Purchases is increased by a debit and decreased by a credit, so it has a normal debit balance. No other items bought, such as store supplies are recorded in the Purchases accounts. The Income Statement of a merchandising business places Purchases in a section titled Cost of Goods of Goods Sold section include all the costs necessary to make an item of merchandise available for sale. The cost of merchandise sold should appear when the goods are sold [Concept: Matching Expenses with Revenue] For a business using the perpetual inventory method, the cost of merchandise is recorded in the Merchandise Inventory account until the goods are sold. When goods are sold, the cost of merchandise is removed from Merchandise Inventory and recorded to accounts in the Cost of Goods Sold section. Cost of merchandise purchased is recorded directly to Cost of Goods. The process of ordering merchandise begins when an authorized employee submits a purchase request. Requisition includes a description of the merchandise to be ordered, the quantity to be purchased and the required delivery date. Requisition require managerial approval. After a requisition is approved, it is submit to another employee who is responsible for placing the order w/ a good supplier (best combo of quality and price). Purchase orders list the number, description, quantity and unit price of each item ordered. The vendor uses the purchase order to: Approve the sale Process the order No transaction occurs until the customer receives the goods. *Rest of the paragraph is just saying the Internet makes things faster and easier for small business owners because convenience* Businesses uses 5 journals: Purchases Journal- for all purchases of merchandise on account. Cash payments journal- for all cash payments. Sales journal- for all sales of merchandise on account. Cash receipts journal- for all cash receipts General Journal- for all other transactions. Each purchase of merchandise on account transaction is recorded on one line of the purchases journal. The amount column has two amount titles in it's heading: Purchase Debits and Accounts Payable CreditSpecial amount columns are used for frequently occurring transactions. All transactions for purchasing merchandise on account involve a debit to Purchases and a credit to Accounts Payable. The special account column in the purchase journal includes those accounts in the heading. Using special amount columns eliminates writing general ledger account titles in the Account Credited column. Recording entries in a journal with special amount columns saves time and helps to reduce to reduce mistakes. When a vendor sells merchandise to a buyer, the vendor prepares an invoice showing what has been sold. An invoice is used as a source document. [CONCEPT: Objective Evidence] A purchase invoice lists the quantity, the description, and the price of each item and shows the total amount of the purchase. It provides the information needed for recording a purchase on account. When the invoice is received, an employee verifies the accuracy of the invoice. A stamp may be used to provide a place of to enter his or her initials, the date the invoice is received and the purchase invoice number assigned. The date entered in the stamp should not be confused with the vendor's date on the invoice. Each vendor uses a different numbering system. Therefore, vendor invoice numbers would not be recorded in sequence. That would make it impossible to detect a missing purchase invoice. A business that pays an invoice after the due date is usually required to pay a late fee. Some business file purchase invoices by the date the check should be written to ensure that the vendor receives the payment by the due date. *All purchases of merchandising on account are recorded in the purchases journal. If a purchase is made for cash, the transaction is not recorded in the purchases journal* Receiving a Purchase Invoice Record the initials of the employee processing the invoice, date received and the purchase invoice number in the stamp. Place a check mark by each of the amounts in the Total column to show that the items have been received and that amounts have been checked and are correct. Review the vendor's terms and the payment due date. A purchase on account transaction increases the amount owed to a vendor. This transaction increases the Purchases balance and increases the Accounts Payable balance. Because Purchase is increased by a debit. Therefore Accounts Payable is credited to show the increase in this liability account. Journalizing a Purchase of Merchandising on Account Write the date in the date column. Write the vendor account title in the Account Credited column. Write the purchase invoice number in the _Purchase Number column. Write the amount of the invoice in the special amount column. This single amount is both a debit to Purchases and a credit to Accounts payable. Therefore it is not necessary to write the title of either general ledger account.