208
The payment amount for the bill would be $4,200 less the $84 discount ($4,200 × 2%). Since the
business is paying less for the purchases of
inventory, the value of the purchase must decrease
by the discount amount. The entry to record the
discount when the payment was made to Roofs
and More on January 12 is shown in Figure 7A.7.
Both purchase returns and allowances and purchase discounts are known as contra accounts as they
have the opposite balance to the account they are related to.They reduce the balance of purchases
when reported on the financial statements.
From the above journal entries,
the amount of net purchases is
determined in Figure 7A.8.
Freight-In and Freight-Out
In a periodic inventory system, shipping charges on inventory shipped FOB shipping point is
recorded by the purchaser debiting the
freight-in
account which is an income statement account
that is part of cost of goods sold. Similarly, the shipping charges on inventory that is shipped
FOB destination are recorded by the seller by debiting
the
freight-out
account. Assume Tools 4U paid $100
freight cost for the inventory on January 10, the journal
entry is shown in Figure 7A.9.
Journal
Page 1
date
2016
account title and explanation debit Credit
Jan 12 Accounts Payable
4,200
Cash
4,116
Purchase Discounts
84
Paid invoice owing to Roofs and More
less discount for early payment
___________
fIGuRe 7A.7
INCOME STATEMENT
GROSS PROFIT
OPERATING EXPENSES
SALES REVENUE
COST OF GOODS SOLD
BALANCE SHEET
CURRENT ASSETS
CASH
INVENTORY
ACCOUNTS
RECEIVABLE
PREPAID
EXPENSES
PROPERTY, PLANT
& EQUIPMENT
LONG-TERM
ASSETS
ACCOUNTS
PAYABLE
BANK LOAN
CURRENT LIABILITIES
UNEARNED
REVENUE
LONG-TERM
LIABILITIES
OWNER’S EQUITY
OWNER’S
CAPITAL
OPERATING INCOME
PURCHASES
+$4,200 DR
PURCHASE DISCOUNTS
+$84 CR
$4,200 CR
– $4,200 DR
+ $4,116 CR
Purchases
$14,200
Less: Purchase Returns and Allowances
$360
Purchase Discounts
84
444
Net Purchases
$13,756
______________
fIGuRe 7A.8
INCOME STATEMENT
GROSS PROFIT
OPERATING EXPENSES
SALES REVENUE
COST OF GOODS SOLD
BALANCE SHEET
CURRENTASSETS
CASH
INVENTORY
ACCOUNTS
RECEIVABLE
PREPAID
EXPENSES
PROPERTY,PLANT
&EQUIPMENT
LONG-TERM
ASSETS
ACCOUNTS
PAYABLE
BANK LOAN
CURRENTLIABILITIES
UNEARNED
REVENUE
LONG-TERM
LIABILITIES
OWNER’SEQUITY
OWNER’S
CAPITAL
OPERATING INCOME
FREIGHT-IN
+ $100 DR
– $100 CR
Journal
Page 1
date
2016
account title and explanation debit Credit
Jan 10 freight-In
100
Cash
100
Record the payment of freight cost
____________
fIGuRe 7A.9
Inventory: Merchandising Transactions
Chapter 7
Appendix
