{"id":194,"date":"2024-09-06T16:47:22","date_gmt":"2024-09-06T16:47:22","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/purchases-under-a-periodic-system\/"},"modified":"2024-09-11T19:09:12","modified_gmt":"2024-09-11T19:09:12","slug":"purchases-under-a-periodic-system","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/purchases-under-a-periodic-system\/","title":{"raw":"Purchases under a Periodic System","rendered":"Purchases under a Periodic System"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Record purchases under a periodic system<\/li>\r\n \t<li>Record purchase returns and allowances and purchase discounts under a periodic system<\/li>\r\n<\/ul>\r\n<\/section>&nbsp;\r\n\r\nCompanies using periodic inventory don\u2019t update the Merchandise Inventory account when purchases or sales are made. Instead, the company posts purchases of inventory to an expense account called Purchases. The Purchases account is usually grouped with the income statement expense accounts in the chart of accounts.\r\n\r\n[caption id=\"attachment_5420\" align=\"aligncenter\" width=\"670\"]<img class=\"wp-image-5420 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09173012\/Screen-Shot-2020-11-09-at-9.28.51-AM.png\" alt=\"See caption for link to long description.\" width=\"670\" height=\"739\" \/> See the <a href=\"https:\/\/docs.google.com\/document\/d\/1m8DW0MlHb0twBhUBrXBmHM1_5rZkSDPOkL3YtMKOGYc\/edit?usp=sharing\" target=\"_blank\" rel=\"noopener\">invoice long description<\/a> here.[\/caption]\r\n\r\nLet\u2019s record this invoice using a periodic system:\r\n\r\nBefore we record the invoice though, let\u2019s take a closer look at this formula:\r\n<p style=\"padding-left: 30px;\">[latex]\\text{Beginning inventory}+\\text{Purchases}-\\text{Ending inventory}=\\text{Cost of goods sold}[\/latex]<\/p>\r\nWe can expand it to look like this:\r\n<p style=\"padding-left: 30px;\">[latex]\\text{Beginning inventory}+\\text{Purchases}+\\text{freight in}-\\text{Ending inventory}=\\text{Cost of goods sold}[\/latex]<\/p>\r\n\r\n<h2>Shipping on Inventory Purchases (Freight In)<\/h2>\r\nWe learned that shipping terms tell you who is responsible for paying for shipping. Free on board (FOB) destination means the seller is responsible for paying shipping and the buyer would not need to pay or record anything for shipping. Free on board (FOB) shipping point means the buyer is responsible for shipping and must pay and record for shipping.\r\n\r\nBuyers must record shipping charges as transportation in (or freight in) when the goods were shipped FOB shipping point and they have received title to the merchandise.\r\n\r\nThe general rule is that all the costs we incur to get the product on the shelf and ready to sell are product costs. The freight we pay to get the sound systems into our shop is part of the cost of the inventory. In other words, instead of the unit cost being $100, it is actually $103.50 (total cost, including freight, of $20,700 divided by 200 units).\r\n\r\nThe entry is as you might expect it to be:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20XX<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 19<\/th>\r\n<td>Purchases<\/td>\r\n<td><\/td>\r\n<td>20,000.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\r\n<td>Freight in<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">700.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Accounts Payable<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">20,700.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\r\n<td>To record purchase of XPS-101 from Bryan Whls 200 count<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNotice that we did not post the purchases to the inventory account, which is a major difference between this periodic system and the perpetual system. The perpetual system is what we will be doing in the next unit as we study the perpetual system.\r\n\r\nAlso, we are going to make some adjustments in the next section for returns, allowances, and discounts; but first, let\u2019s check in on recording purchases.\r\n\r\n<section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25165[\/ohm2_question]\r\n[ohm_question hide_question_numbers=1]204620[\/ohm_question][ohm_question hide_question_numbers=1]204621[\/ohm_question]<\/section>\r\n<h2>Purchase Adjustments under a Periodic System<\/h2>\r\nLet\u2019s make one more adjustment to our formula to account for three common events:\r\n<ol>\r\n \t<li style=\"font-weight: 400;\">Inventory we return in exchange for a credit to our account with the vendor (or a refund).<\/li>\r\n \t<li style=\"font-weight: 400;\">Inventory that is damaged or otherwise unusable and not worth returning for which we get an allowance (reduction in the amount we owe).<\/li>\r\n \t<li style=\"font-weight: 400;\">Discounts we take for prompt payment (e.g., 2% if we pay within 10 days).<\/li>\r\n<\/ol>\r\n<p style=\"padding-left: 30px;\"><strong>Beginning inventory + (Purchases, net of returns and allowances, and purchase discounts) + freight in \u2212 Ending inventory = Cost of goods sold<\/strong><\/p>\r\nThe account called Purchases is only used with the periodic inventory system. It is a temporary account used in the periodic inventory system to record the purchases of merchandise for resale. This account reports the gross amount of purchases of merchandise.\r\n\r\nNet purchases are the amount of gross purchases minus purchase returns, purchase allowances, and purchase discounts. While the Purchases Accounts are normally classified as temporary expense accounts, they are actually hybrid accounts. The purchase accounts are used along with freight in, and the beginning and ending inventory to determine the cost of goods sold (COGS).\r\n\r\nBefore we dive into the COGS details for the periodic system, begin to familiarize yourself with this chart. This is a quick way to compare the differences between how the two methods record the details involved with inventory.\r\n<div align=\"left\">\r\n<table><caption>Comparative chart of accounts for Cost of Goods Sold (also called Cost of Sales)<\/caption>\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\">Periodic Method<\/th>\r\n<th scope=\"col\">Perpetual Method<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>Merchandise Inventory\u2014only one entry made at the end of the period<\/td>\r\n<td>Merchandise Inventory\u2014purchases, purchase discounts, returns and allowances, and freight in are all posted here, and every time a sale is made, this account is updated.<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of Goods Sold\u2014all the other accounts listed below are closed to this one at the end of the period including the adjustment to Merchandise inventory<\/td>\r\n<td>COGS\u2014every time a sale is made, this account is updated (with a debit entry)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Purchases\u2014purchases of inventory are posted here as a debit<\/td>\r\n<td>Purchases\u2014not used<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Purchase Discounts (Contra Account)\u2014purchase discounts are posted here as a credit<\/td>\r\n<td>Purchase Discounts (Contra Account)\u2014not used<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Purchase Returns and Allowances (Contra Account)\u2014purchase returns and allowances are posted here as a credit<\/td>\r\n<td>Purchase Returns and Allowances (Contra Account)\u2014not used<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Freight in\u2014shipping on inventory purchases are posted here as a debit<\/td>\r\n<td>Freight in\u2014not used<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nNow, let\u2019s go back to our invoice:\r\n\r\n[caption id=\"attachment_5420\" align=\"aligncenter\" width=\"670\"]<img class=\"wp-image-5420 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09173012\/Screen-Shot-2020-11-09-at-9.28.51-AM.png\" alt=\"\" width=\"670\" height=\"739\" \/> See the <a href=\"https:\/\/docs.google.com\/document\/d\/1m8DW0MlHb0twBhUBrXBmHM1_5rZkSDPOkL3YtMKOGYc\/edit?usp=sharing\" target=\"_blank\" rel=\"noopener\">invoice long description<\/a> here.[\/caption]\r\n\r\nIn the accounting department, you have matched up the receiving documents sent with this invoice and it is now ready to be paid.\r\n<h3>Gross Method of Recording Accounts Payable<\/h3>\r\nFor review, here is the journal entry the accounts payable department made based on the invoice and the shipping documents:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20XX<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 19<\/th>\r\n<td>Purchases<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">20,000.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\r\n<td>Freight in<\/td>\r\n<td><\/td>\r\n<td class=\"r\">700.00<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Accounts Payable<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">20,700.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\r\n<td>To record purchase of XPS-101 from Bryan Whls 200 count<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nFirst, let\u2019s assume one whole case was returned for some reason on December 26. So 40 units went back to Bryan and the accounting department received a credit memo for $4,000. They also paid shipping of some amount that will be posted to a shipping expense account that is not part of COGS.\r\n\r\nBryan issues us a \u201cCredit Memo\u201d because they debited accounts receivable when they shipped the product to us, so when they get it back, they reduce their receivable by crediting our account. We are going to debit accounts payable and reduce inventory:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 26<\/th>\r\n<td>Accounts Payable<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">4,000.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 26<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Inventory<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">4,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 26<\/span><\/th>\r\n<td>To record return on 40 XPS-101 to Bryan C.M 12-3--G<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe are also going to update two subsidiary ledgers: the Accounts Payable subsidiary ledger that showed we owed Bryan $20,700 will now show we owe $16,700 and the inventory subsidiary ledger that lists all our items and the corresponding costs will now show 160 units of XPS-101 at $104.375 each ($16,700 divided by 160).\r\n\r\nAn allowance would be the same entry. The basic difference between a return and an allowance is that we usually don\u2019t return the goods if they are damaged or unsatisfactory in some way. The vendor issues a Credit Memo anyway and we remove the items from inventory and dispose of them.\r\n\r\nLet\u2019s assume then that you, in the accounting department, pay the invoice on January 10:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Jan 10<\/th>\r\n<td>Accounts Payable<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">16,700.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Jan 10<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking Account<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">16,700.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Jan 10<\/span><\/th>\r\n<td>Payment on Bryan account inv. 1258<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nBecause the terms were 2\/10, n 30, and the invoice was dated December 19, the discount for prompt payment (a.k.a. cash discount) expired at the close of business on the 29th. How much was the discount not taken?\r\n<p style=\"padding-left: 30px;\">[latex]\\$16,000 \\times 0.02 = \\$320.00[\/latex]<\/p>\r\nRemember, the discount does not apply to shipping costs that are passed through to the buyer.\r\n\r\nIf total purchases for the year were $1,532,444 and the company missed the discount window every time, what would be the effect on the bottom line of the company (how much would the company end up paying out in missed discounts)?\r\n<p style=\"padding-left: 30px;\">[latex]\\$1,532,444 \\times 0.02 = \\$30,648.88[\/latex]<\/p>\r\nLet\u2019s back up for a minute then and assume you paid the invoice on the 29th. What would the journal entry look like?\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 29<\/th>\r\n<td>Accounts Payable<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">16,700.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 29<\/span><\/th>\r\n<td>Purchase Discounts<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">320.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 29<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking Account<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">16,380.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 29<\/span><\/th>\r\n<td>Payment on Bryan account inv. 1258<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe entry extinguishes the account payable for that invoice and the check includes $700 for shipping plus the invoice minus the credit memo minus the 2% discount on the adjusted balance of $16,000. Check the calculations above and make sure the journal entry is correct.\r\n\r\nThis is called the gross method of recording accounts payable.\r\n\r\nThere is another way to do it: the net method.\r\n<h3>Net Method of Recording Accounts Payable<\/h3>\r\nUnder the net method, the payable net of the discount ($20,000 \u2212 $320 = $19,600) would have been recorded like this:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20XX<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 19<\/th>\r\n<td>Purchases<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">19,600.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\r\n<td>Freight in<\/td>\r\n<td><\/td>\r\n<td class=\"r\">700.00<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Accounts Payable<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">20,300.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\r\n<td>To record purchase of XPS-101 from Bryan Whls 200 count, net of 2% discount<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe unit cost would then be net of the discount but would include freight, so $101.50 [latex]\\left(\\dfrac{\\$20,300}{200\\text{ units}}=\\$101.50\\right)[\/latex].\r\n\r\nThe return of 40 units on Dec. 30th would be recorded like this, even though the credit memo was for $4,000 [latex]\\left(\\$4,000 \\times 0.02\\text{ discount}= \\$80.00 : \\$4,000 - \\$80 = \\$3,920\\right)[\/latex]:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 30<\/th>\r\n<td>Accounts Payable<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">3,920.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 30<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Inventory<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">3,920.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 30<\/span><\/th>\r\n<td>To record return on 40 XPS-101 to Bryan C.M 12-3--G, net of 2% discount allowed<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nAnd the prompt payment on Dec. 29th would look like this [latex]\\left(\\$19,600 - \\$3,920 + \\$700 = \\$16,380\\right)[\/latex]:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 29<\/th>\r\n<td>Accounts Payable<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">16,380.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 29<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking Account<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">16,380.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 29<\/span><\/th>\r\n<td>Payment on Bryan account inv. 1258<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nBecause we recorded the original invoice net of the discount under the assumption that we always take the discount, we don\u2019t need the Purchase Discount account. Here is what the subsidiary ledger (and the GL) would show us under this net method:\r\n<table class=\"fin-table acctstatement\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Invoice dated 12\/19<\/th>\r\n<td><\/td>\r\n<td>20,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Less discount<\/th>\r\n<td><\/td>\r\n<td>(400.00)<span class=\"u-sr-only\">Single line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Invoice net of discount<\/th>\r\n<td><\/td>\r\n<td class=\"line-single\">19,600.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Credit memo dated 12\/26<\/th>\r\n<td><\/td>\r\n<td>(4,000.00)<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Adjusted for discount<\/th>\r\n<td><\/td>\r\n<td>80.00<span class=\"u-sr-only\">Single line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Balance due after adjustments<\/th>\r\n<td><\/td>\r\n<td class=\"line-single\">15,680.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Plus freight due on original order<\/th>\r\n<td><\/td>\r\n<td>700.00<span class=\"u-sr-only\">Single line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Total due<\/th>\r\n<td><\/td>\r\n<td class=\"line-single line-double\">16,380.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThis example may look unreasonably complicated, but there is a hidden benefit. Let\u2019s follow this through with one more scenario though\u2014paying after the cash discount has expired:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Jan 10<\/th>\r\n<td>Accounts Payable<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">16,700.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Jan 10<\/span><\/th>\r\n<td>Discounts Lost<\/td>\r\n<td><\/td>\r\n<td class=\"r\">320.00<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Jan 10<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking Account<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">16,380.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Jan 10<\/span><\/th>\r\n<td>Payment on Bryan account inv. 1258, after disc expired<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe net method allows you to track discounts lost, which then gives you a direct read on how much profit you are losing to what is essentially a finance charge.\r\n\r\nNext, let's tackle something a bit easier\u2014recording sales.\r\n\r\n<section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25166[\/ohm2_question]\r\n[ohm2_question hide_question_numbers=1]25167[\/ohm2_question]<\/section>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Record purchases under a periodic system<\/li>\n<li>Record purchase returns and allowances and purchase discounts under a periodic system<\/li>\n<\/ul>\n<\/section>\n<p>&nbsp;<\/p>\n<p>Companies using periodic inventory don\u2019t update the Merchandise Inventory account when purchases or sales are made. Instead, the company posts purchases of inventory to an expense account called Purchases. The Purchases account is usually grouped with the income statement expense accounts in the chart of accounts.<\/p>\n<figure id=\"attachment_5420\" aria-describedby=\"caption-attachment-5420\" style=\"width: 670px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-5420 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09173012\/Screen-Shot-2020-11-09-at-9.28.51-AM.png\" alt=\"See caption for link to long description.\" width=\"670\" height=\"739\" \/><figcaption id=\"caption-attachment-5420\" class=\"wp-caption-text\">See the <a href=\"https:\/\/docs.google.com\/document\/d\/1m8DW0MlHb0twBhUBrXBmHM1_5rZkSDPOkL3YtMKOGYc\/edit?usp=sharing\" target=\"_blank\" rel=\"noopener\">invoice long description<\/a> here.<\/figcaption><\/figure>\n<p>Let\u2019s record this invoice using a periodic system:<\/p>\n<p>Before we record the invoice though, let\u2019s take a closer look at this formula:<\/p>\n<p style=\"padding-left: 30px;\">[latex]\\text{Beginning inventory}+\\text{Purchases}-\\text{Ending inventory}=\\text{Cost of goods sold}[\/latex]<\/p>\n<p>We can expand it to look like this:<\/p>\n<p style=\"padding-left: 30px;\">[latex]\\text{Beginning inventory}+\\text{Purchases}+\\text{freight in}-\\text{Ending inventory}=\\text{Cost of goods sold}[\/latex]<\/p>\n<h2>Shipping on Inventory Purchases (Freight In)<\/h2>\n<p>We learned that shipping terms tell you who is responsible for paying for shipping. Free on board (FOB) destination means the seller is responsible for paying shipping and the buyer would not need to pay or record anything for shipping. Free on board (FOB) shipping point means the buyer is responsible for shipping and must pay and record for shipping.<\/p>\n<p>Buyers must record shipping charges as transportation in (or freight in) when the goods were shipped FOB shipping point and they have received title to the merchandise.<\/p>\n<p>The general rule is that all the costs we incur to get the product on the shelf and ready to sell are product costs. The freight we pay to get the sound systems into our shop is part of the cost of the inventory. In other words, instead of the unit cost being $100, it is actually $103.50 (total cost, including freight, of $20,700 divided by 200 units).<\/p>\n<p>The entry is as you might expect it to be:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20XX<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 19<\/th>\n<td>Purchases<\/td>\n<td><\/td>\n<td>20,000.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\n<td>Freight in<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">700.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Accounts Payable<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">20,700.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\n<td>To record purchase of XPS-101 from Bryan Whls 200 count<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Notice that we did not post the purchases to the inventory account, which is a major difference between this periodic system and the perpetual system. The perpetual system is what we will be doing in the next unit as we study the perpetual system.<\/p>\n<p>Also, we are going to make some adjustments in the next section for returns, allowances, and discounts; but first, let\u2019s check in on recording purchases.<\/p>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm25165\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25165&theme=lumen&iframe_resize_id=ohm25165&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><br \/>\n<iframe loading=\"lazy\" id=\"ohm204620\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=204620&theme=lumen&iframe_resize_id=ohm204620&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><iframe loading=\"lazy\" id=\"ohm204621\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=204621&theme=lumen&iframe_resize_id=ohm204621&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><\/section>\n<h2>Purchase Adjustments under a Periodic System<\/h2>\n<p>Let\u2019s make one more adjustment to our formula to account for three common events:<\/p>\n<ol>\n<li style=\"font-weight: 400;\">Inventory we return in exchange for a credit to our account with the vendor (or a refund).<\/li>\n<li style=\"font-weight: 400;\">Inventory that is damaged or otherwise unusable and not worth returning for which we get an allowance (reduction in the amount we owe).<\/li>\n<li style=\"font-weight: 400;\">Discounts we take for prompt payment (e.g., 2% if we pay within 10 days).<\/li>\n<\/ol>\n<p style=\"padding-left: 30px;\"><strong>Beginning inventory + (Purchases, net of returns and allowances, and purchase discounts) + freight in \u2212 Ending inventory = Cost of goods sold<\/strong><\/p>\n<p>The account called Purchases is only used with the periodic inventory system. It is a temporary account used in the periodic inventory system to record the purchases of merchandise for resale. This account reports the gross amount of purchases of merchandise.<\/p>\n<p>Net purchases are the amount of gross purchases minus purchase returns, purchase allowances, and purchase discounts. While the Purchases Accounts are normally classified as temporary expense accounts, they are actually hybrid accounts. The purchase accounts are used along with freight in, and the beginning and ending inventory to determine the cost of goods sold (COGS).<\/p>\n<p>Before we dive into the COGS details for the periodic system, begin to familiarize yourself with this chart. This is a quick way to compare the differences between how the two methods record the details involved with inventory.<\/p>\n<div style=\"text-align: left;\">\n<table>\n<caption>Comparative chart of accounts for Cost of Goods Sold (also called Cost of Sales)<\/caption>\n<tbody>\n<tr>\n<th scope=\"col\">Periodic Method<\/th>\n<th scope=\"col\">Perpetual Method<\/th>\n<\/tr>\n<tr>\n<td>Merchandise Inventory\u2014only one entry made at the end of the period<\/td>\n<td>Merchandise Inventory\u2014purchases, purchase discounts, returns and allowances, and freight in are all posted here, and every time a sale is made, this account is updated.<\/td>\n<\/tr>\n<tr>\n<td>Cost of Goods Sold\u2014all the other accounts listed below are closed to this one at the end of the period including the adjustment to Merchandise inventory<\/td>\n<td>COGS\u2014every time a sale is made, this account is updated (with a debit entry)<\/td>\n<\/tr>\n<tr>\n<td>Purchases\u2014purchases of inventory are posted here as a debit<\/td>\n<td>Purchases\u2014not used<\/td>\n<\/tr>\n<tr>\n<td>Purchase Discounts (Contra Account)\u2014purchase discounts are posted here as a credit<\/td>\n<td>Purchase Discounts (Contra Account)\u2014not used<\/td>\n<\/tr>\n<tr>\n<td>Purchase Returns and Allowances (Contra Account)\u2014purchase returns and allowances are posted here as a credit<\/td>\n<td>Purchase Returns and Allowances (Contra Account)\u2014not used<\/td>\n<\/tr>\n<tr>\n<td>Freight in\u2014shipping on inventory purchases are posted here as a debit<\/td>\n<td>Freight in\u2014not used<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>Now, let\u2019s go back to our invoice:<\/p>\n<figure id=\"attachment_5420\" aria-describedby=\"caption-attachment-5420\" style=\"width: 670px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-5420 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09173012\/Screen-Shot-2020-11-09-at-9.28.51-AM.png\" alt=\"\" width=\"670\" height=\"739\" \/><figcaption id=\"caption-attachment-5420\" class=\"wp-caption-text\">See the <a href=\"https:\/\/docs.google.com\/document\/d\/1m8DW0MlHb0twBhUBrXBmHM1_5rZkSDPOkL3YtMKOGYc\/edit?usp=sharing\" target=\"_blank\" rel=\"noopener\">invoice long description<\/a> here.<\/figcaption><\/figure>\n<p>In the accounting department, you have matched up the receiving documents sent with this invoice and it is now ready to be paid.<\/p>\n<h3>Gross Method of Recording Accounts Payable<\/h3>\n<p>For review, here is the journal entry the accounts payable department made based on the invoice and the shipping documents:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20XX<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 19<\/th>\n<td>Purchases<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">20,000.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\n<td>Freight in<\/td>\n<td><\/td>\n<td class=\"r\">700.00<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Accounts Payable<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">20,700.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\n<td>To record purchase of XPS-101 from Bryan Whls 200 count<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>First, let\u2019s assume one whole case was returned for some reason on December 26. So 40 units went back to Bryan and the accounting department received a credit memo for $4,000. They also paid shipping of some amount that will be posted to a shipping expense account that is not part of COGS.<\/p>\n<p>Bryan issues us a \u201cCredit Memo\u201d because they debited accounts receivable when they shipped the product to us, so when they get it back, they reduce their receivable by crediting our account. We are going to debit accounts payable and reduce inventory:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 26<\/th>\n<td>Accounts Payable<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">4,000.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 26<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Inventory<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">4,000.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 26<\/span><\/th>\n<td>To record return on 40 XPS-101 to Bryan C.M 12-3&#8211;G<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>We are also going to update two subsidiary ledgers: the Accounts Payable subsidiary ledger that showed we owed Bryan $20,700 will now show we owe $16,700 and the inventory subsidiary ledger that lists all our items and the corresponding costs will now show 160 units of XPS-101 at $104.375 each ($16,700 divided by 160).<\/p>\n<p>An allowance would be the same entry. The basic difference between a return and an allowance is that we usually don\u2019t return the goods if they are damaged or unsatisfactory in some way. The vendor issues a Credit Memo anyway and we remove the items from inventory and dispose of them.<\/p>\n<p>Let\u2019s assume then that you, in the accounting department, pay the invoice on January 10:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Jan 10<\/th>\n<td>Accounts Payable<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">16,700.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Jan 10<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking Account<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">16,700.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Jan 10<\/span><\/th>\n<td>Payment on Bryan account inv. 1258<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Because the terms were 2\/10, n 30, and the invoice was dated December 19, the discount for prompt payment (a.k.a. cash discount) expired at the close of business on the 29th. How much was the discount not taken?<\/p>\n<p style=\"padding-left: 30px;\">[latex]\\$16,000 \\times 0.02 = \\$320.00[\/latex]<\/p>\n<p>Remember, the discount does not apply to shipping costs that are passed through to the buyer.<\/p>\n<p>If total purchases for the year were $1,532,444 and the company missed the discount window every time, what would be the effect on the bottom line of the company (how much would the company end up paying out in missed discounts)?<\/p>\n<p style=\"padding-left: 30px;\">[latex]\\$1,532,444 \\times 0.02 = \\$30,648.88[\/latex]<\/p>\n<p>Let\u2019s back up for a minute then and assume you paid the invoice on the 29th. What would the journal entry look like?<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 29<\/th>\n<td>Accounts Payable<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">16,700.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 29<\/span><\/th>\n<td>Purchase Discounts<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">320.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 29<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking Account<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">16,380.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 29<\/span><\/th>\n<td>Payment on Bryan account inv. 1258<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The entry extinguishes the account payable for that invoice and the check includes $700 for shipping plus the invoice minus the credit memo minus the 2% discount on the adjusted balance of $16,000. Check the calculations above and make sure the journal entry is correct.<\/p>\n<p>This is called the gross method of recording accounts payable.<\/p>\n<p>There is another way to do it: the net method.<\/p>\n<h3>Net Method of Recording Accounts Payable<\/h3>\n<p>Under the net method, the payable net of the discount ($20,000 \u2212 $320 = $19,600) would have been recorded like this:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20XX<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 19<\/th>\n<td>Purchases<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">19,600.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\n<td>Freight in<\/td>\n<td><\/td>\n<td class=\"r\">700.00<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Accounts Payable<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">20,300.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 19<\/span><\/th>\n<td>To record purchase of XPS-101 from Bryan Whls 200 count, net of 2% discount<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The unit cost would then be net of the discount but would include freight, so $101.50 [latex]\\left(\\dfrac{\\$20,300}{200\\text{ units}}=\\$101.50\\right)[\/latex].<\/p>\n<p>The return of 40 units on Dec. 30th would be recorded like this, even though the credit memo was for $4,000 [latex]\\left(\\$4,000 \\times 0.02\\text{ discount}= \\$80.00 : \\$4,000 - \\$80 = \\$3,920\\right)[\/latex]:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 30<\/th>\n<td>Accounts Payable<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">3,920.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 30<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Inventory<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">3,920.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 30<\/span><\/th>\n<td>To record return on 40 XPS-101 to Bryan C.M 12-3&#8211;G, net of 2% discount allowed<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>And the prompt payment on Dec. 29th would look like this [latex]\\left(\\$19,600 - \\$3,920 + \\$700 = \\$16,380\\right)[\/latex]:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 29<\/th>\n<td>Accounts Payable<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">16,380.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 29<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking Account<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">16,380.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 29<\/span><\/th>\n<td>Payment on Bryan account inv. 1258<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Because we recorded the original invoice net of the discount under the assumption that we always take the discount, we don\u2019t need the Purchase Discount account. Here is what the subsidiary ledger (and the GL) would show us under this net method:<\/p>\n<table class=\"fin-table acctstatement\">\n<tbody>\n<tr>\n<th scope=\"row\">Invoice dated 12\/19<\/th>\n<td><\/td>\n<td>20,000.00<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Less discount<\/th>\n<td><\/td>\n<td>(400.00)<span class=\"u-sr-only\">Single line<\/span><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Invoice net of discount<\/th>\n<td><\/td>\n<td class=\"line-single\">19,600.00<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Credit memo dated 12\/26<\/th>\n<td><\/td>\n<td>(4,000.00)<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Adjusted for discount<\/th>\n<td><\/td>\n<td>80.00<span class=\"u-sr-only\">Single line<\/span><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Balance due after adjustments<\/th>\n<td><\/td>\n<td class=\"line-single\">15,680.00<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Plus freight due on original order<\/th>\n<td><\/td>\n<td>700.00<span class=\"u-sr-only\">Single line<\/span><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Total due<\/th>\n<td><\/td>\n<td class=\"line-single line-double\">16,380.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>This example may look unreasonably complicated, but there is a hidden benefit. Let\u2019s follow this through with one more scenario though\u2014paying after the cash discount has expired:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Jan 10<\/th>\n<td>Accounts Payable<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">16,700.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Jan 10<\/span><\/th>\n<td>Discounts Lost<\/td>\n<td><\/td>\n<td class=\"r\">320.00<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Jan 10<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking Account<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">16,380.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Jan 10<\/span><\/th>\n<td>Payment on Bryan account inv. 1258, after disc expired<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The net method allows you to track discounts lost, which then gives you a direct read on how much profit you are losing to what is essentially a finance charge.<\/p>\n<p>Next, let&#8217;s tackle something a bit easier\u2014recording sales.<\/p>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm25166\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25166&theme=lumen&iframe_resize_id=ohm25166&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><br \/>\n<iframe loading=\"lazy\" id=\"ohm25167\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25167&theme=lumen&iframe_resize_id=ohm25167&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><\/section>\n","protected":false},"author":6,"menu_order":8,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Purchases Under a Periodic System\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective\",\"author\":\"James Don Edwards, University of Georgia & Roger H. 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