The purchase process carried out by the commercial companies is to buy the goods and then offer them to resell them afterwards. In the last lesson, we explained that the commercial companies use two systems to inventory the goods, which are the periodic inventory system and the continuous inventory system. Each system has its own way of recording the operations of the goods, whether they are Sale or purchase operations. In this lesson, purchase operations will be explained according to the periodic inventory system and the perpetual inventory system
Recording purchases according to the periodic inventory system
When a commercial company carries out a purchase of goods, an account is opened for the purchase process called the purchases account. This account is debited with the value of the purchased goods, and the purchase process is either in cash or by bank check or on the account (deferred purchase) as follows:
When a commercial company carries out a purchase of goods, an account is opened for the purchase process called the purchases account. This account is debited with the value of the purchased goods, and the purchase process is either in cash or by bank check or on the account (deferred purchase) as follows:
Procurement expenses
When purchasing the goods, the establishment may bear expenses until the goods reach the warehouses, such as transportation costs, customs fees, and clearance expenses.
And insurance on the goods and others. If an agreement is reached between the seller and the buyer that the buyer bears the costs of transporting the goods from the seller’s place to
The buyer's place (delivery at the seller's place - FOB Shipping Point), then those paid expenses are recorded in the buyer's books in the name of purchase expenses,
But if the agreement is that the seller bears the costs of transporting the goods to the buyer's place (delivery at the buyer's place - FOB Destination), then no entry is recorded:
Returns purchases
The facility may return the purchased goods or part thereof due to damage or because it does not conform to the specifications that have been agreed upon, then a special account called the purchase returns account is opened and is credited with the value of the returned goods as follows:
The facility may return the purchased goods or part thereof due to damage or because it does not conform to the specifications that have been agreed upon, then a special account called the purchase returns account is opened and is credited with the value of the returned goods as follows:
Purchases allowed
Sometimes the process of returning the goods may require costs for the seller, so the seller asks the facility to deduct the value of the damaged goods without the facility returning the goods, and this process is called purchase allowances, and the following entry is recorded:
Sometimes the process of returning the goods may require costs for the seller, so the seller asks the facility to deduct the value of the damaged goods without the facility returning the goods, and this process is called purchase allowances, and the following entry is recorded:
The accounting treatment of discounts on purchases differs according to the type of discount, some of which are recorded in the books, and some that are not. These types include commercial discount, cash discount, and quantity discount.
Commercial discount
It is the discount that arises after a negotiation process takes place between the seller and the buyer to reduce the price of the commodity. This type of discount is not recorded in the books of the seller or in the books of the buyer, even if the value of the discount is present in the invoice.
It is the discount that arises after a negotiation process takes place between the seller and the buyer to reduce the price of the commodity. This type of discount is not recorded in the books of the seller or in the books of the buyer, even if the value of the discount is present in the invoice.
Quantity discount
It is the discount that the seller gives to the buyer according to the quantity of the goods purchased, and it is on two sides, some of which are recorded in the books under the name of an acquired quantity discount, and some of them are not recorded, so if the discount results from a negotiation process so that the buyer asks the seller to give him a discount on a certain quantity of the goods In order to buy it, in this case the acquired discount is not recorded in the books, but if the seller stipulated that the discount be granted to the buyer in return for purchasing a certain quantity of the goods during a certain period, then it is recorded in the books as an acquired quantity discount as follows:
It is the discount that the seller gives to the buyer according to the quantity of the goods purchased, and it is on two sides, some of which are recorded in the books under the name of an acquired quantity discount, and some of them are not recorded, so if the discount results from a negotiation process so that the buyer asks the seller to give him a discount on a certain quantity of the goods In order to buy it, in this case the acquired discount is not recorded in the books, but if the seller stipulated that the discount be granted to the buyer in return for purchasing a certain quantity of the goods during a certain period, then it is recorded in the books as an acquired quantity discount as follows:
Recording the proof of the acquired quantity discount
cash discount
It is the discount in which the seller stipulates that the discount be granted if the buyer pays the value of his purchases before the due date or within an agreed period.
It is the discount in which the seller stipulates that the discount be granted if the buyer pays the value of his purchases before the due date or within an agreed period.
Recording the earned cash discount
Debtor creditor statement
xxx
From h / the fund or suppliers
Debtor creditor statement
xxx
From h / the fund or suppliers
xxx to h/cash discount earned
Evidence of cash discount earned on purchases of goods
Procurement cost
From what has been explained above, it becomes clear to the learner that the cost of purchases during the fiscal year includes the value of the purchased goods, plus all the expenses incurred by the establishment until the goods reached its warehouses, minus purchase returns, allowances and any discounts on purchases as follows:
Purchase cost = net purchases + purchase expenses
whereas :
Net Purchases = Total Purchases - Purchases Returns and Allowances - Earned Discount
Recording purchases according to the continuous inventory system
According to the continuous inventory system, purchases of goods, expenses of purchases, returns and allowances of purchases, as well as discounts on purchases are recorded in one account in the name of the goods or commodity inventory and not in separate accounts as in the periodic inventory system, so that the goods account is debited when purchasing goods and paying purchase expenses and credited when purchasing returns The discount on purchases is as follows:
According to the continuous inventory system, purchases of goods, expenses of purchases, returns and allowances of purchases, as well as discounts on purchases are recorded in one account in the name of the goods or commodity inventory and not in separate accounts as in the periodic inventory system, so that the goods account is debited when purchasing goods and paying purchase expenses and credited when purchasing returns The discount on purchases is as follows:
Recording the purchase of goods according to the continuous inventory system
Debtor creditor statement
xxx
of h/ the goods
Debtor creditor statement
xxx
of h/ the goods
xxx to h/the fund or the bank
Buying goods for cash
Recording purchase expenses according to the continuous inventory system
Debtor creditor statement
xxx
of h/ the goods
xxx to h/box
Transportation expenses of the goods purchased in cash (delivery to the seller's place)
Recording the returns and allowances of purchases according to the continuous inventory system
Debtor creditor statement
xxx
From h/the fund
xxx to h/goods
Returns and allowances received in cash
Recording the cash discount earned according to the continuous inventory system
Debtor creditor statement
xxx
From h / the fund or creditors
xxx to h/goods
Evidence of the cash discount earned for previous purchases of goods
Example
This is a set of financial transactions carried out by Farah Trading Company during the first quarter of 2015:
Operation number Description of the operation
#1 On 10/01 buying goods on account from Salma Company for $20,000 with a commercial discount of 5%, and a cash discount of 10% if payment is made within two months.
#2 On 11/01, the establishment paid $250 for the transportation expenses of the goods purchased in cash.
#3 On 10/02, the facility paid its dues to Salma Company in cash.
#4 On 02/28, the facility returned $500 worth of damaged goods, and got the value in cash.
#5 On 10/03, buying goods on account from Al Reem Company for $7,000 with a 10% cash discount if payment is made within 10 days.
#6 On 31/03, the facility paid its due to Al Reem Company in cash.
Required :
Record previous operations
#1 On 10/01 buying goods on account from Salma Company for $20,000 with a commercial discount of 5%, and a cash discount of 10% if payment is made within two months.
#2 On 11/01, the establishment paid $250 for the transportation expenses of the goods purchased in cash.
#3 On 10/02, the facility paid its dues to Salma Company in cash.
#4 On 02/28, the facility returned $500 worth of damaged goods, and got the value in cash.
#5 On 10/03, buying goods on account from Al Reem Company for $7,000 with a 10% cash discount if payment is made within 10 days.
#6 On 31/03, the facility paid its due to Al Reem Company in cash.
Required :
Record previous operations
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