Merchandising Operations and the Accounting Cycle - Pearson

debiting the Inventory account. A $500 purchase on account is recorded as follows:
June 14 Inventory .......................................................................... 500
Accounts payable....................................................... 500
Purchased inventory on account.
The Purchase Invoice: A Basic Business Document
Business documents are the tangible evidence of transactions. In this section, we
trace the steps that Austin Sound Centre Inc., in Kingston, Ontario, takes to order,
receive, and pay for inventory. Many companies buy and sell their goods electronically—with
no invoices, no cheques, and so on. Here we use actual documents to
illustrate what takes place behind the scenes.
1. Suppose Austin Sound Centre Inc. wants to stock JVC brand CD players, cassette
decks, and speakers. Austin prepares a purchase order and mails it, faxes it,
or transmits it via computer to JVC Canada Inc.
2. On receipt of the purchase order, JVC searches its warehouse for the inventory that
Austin Sound Centre Inc. ordered. JVC ships the equipment and sends the invoice
to Austin Sound on the same day. The invoice is the seller’s request for payment
from the purchaser. It is also called the bill.
3. Often the purchaser receives the invoice before the inventory arrives. Austin
Sound does not pay immediately. Instead, Austin waits until the inventory arrives
in order to ensure that it is the correct type and quantity ordered, and in good
condition. After the inventory is inspected and approved, Austin Sound pays
JVC the invoice amount according to the terms of payment previously negotiated.
Exhibit 5-3 is a copy of an invoice from JVC Canada Inc. to Austin Sound Centre Inc.
From Austin Sound’s perspective, this document is a purchase invoice (it is being used
to purchase goods). To JVC it is a sales invoice (it is being used to sell goods).
Discounts from Purchase Prices
There are two major types of discounts from purchase prices: quantity discounts
and cash discounts (called purchase discounts).
Quantity Discounts A quantity discount works this way. The larger the quantity
purchased, the lower the price per item. For example, JVC may offer no quantity discount
for the purchase of only one or two CD players, and charge the list price—the
full price—of $200 per unit. However, JVC may offer the following quantity discount
terms in order to persuade customers to buy more CD players:
Quantity
Quantity Discount Net Price Per Unit
Buy minimum quantity, 3 CD players 5% $190 [$200 – 0.05($200)]
Buy 4–9 CD players 10% $180 [$200 – 0.10($200)]
Buy more than 9 CD players 20% $160 [$200 – 0.20($200)]
Suppose Austin Sound Centre Inc. five CD players from this manufacturer. The
cost of each CD player is, therefore, $180. Purchase of five units on account would
be recorded by debiting Inventory and crediting Accounts Payable for the total
price of $900 ($180 per unit × 5 items purchased).
There is no Quantity Discount account and no special accounting entry for a
quantity discount. Instead, all accounting entries are based on the net price of a
purchase after the quantity discount has been subtracted, as shown on the invoice.
Purchase Discounts Many businesses also offer purchase discounts to their customers.
A purchase discount is totally different from a quantity discount. A purchase
discount is a reward for prompt payment. If a quantity discount is also offered, the purchase
discount is computed on the net purchase amount after the quantity discount
has been subtracted, further reducing the cost of the inventory to the purchaser.
The Inventory account should be
used only for purchases of
merchandise for resale. Purchases
of any other assets are recorded in
a different asset account. For
example, the purchase of supplies
is debited to Supplies, not to
Inventory.
JVC Canada Inc.
www.jvc.ca
LEARNING TIP
THINKING IT OVER
(1) What is meant by the terms
1/10 n/60?
(2) By the terms 2/10 n/eom?
(3) By the term n/30?
A: (1) 1% discount if paid within
10 days after the invoice date, or
the full (“net”) amount is due in 60
days.
(2) 2% discount if paid within 10
days, or the full amount is due at
the end of the month.
(3) No discount allowed,
and the full amount is
due in 30 days.
Chapter Five Merchandising Operations and the Accounting Cycle 227