Merchandising Operations and the Accounting Cycle - Pearson

Austin paid within the discount period so its cash payment entry is
June 10 Accounts Payable ....................................................... 707.00
Cash ........................................................................ 685.79
Inventory................................................................ 21.21
Paid on account within discount period.
The discount is $21.21 [707.00 0.03]
After paying the account, Austin Sound’s assets and liabilities both decrease, as
follows:
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
Cash + Inventory = Accounts Payable
–$685.29 -$21.21 = –$707 + 0
–$707
Note the credit to Inventory. After Austin Sound has taken its discount, Austin
Sound must adjust the Inventory account to reflect its true cost of the goods. In
effect, this inventory cost Austin Sound $685.79 ($707.00 minus the purchase discount
of $21.21 [3% of $707.00]), as shown in the following Inventory account:
Inventory
May 27 707.00 June 10 21.21
Bal. 685.79
However, if Austin Sound pays this invoice after the discount period, it must
pay the full invoice amount. In this case, the payment entry is
June 29 Accounts Payable ....................................................... 707.00
Cash ........................................................................ 707.00
Paid on account after discount period.
Without the discount, Austin Sound’s cost of the inventory is the full amount of
$707, as shown in the following T-account:
May 27 707.00
Inventory
Purchase Returns and Allowances
Most businesses allow their customers to return merchandise that is defective, damaged
in shipment, or otherwise unsuitable. Or if the buyer chooses to keep damaged
goods, the seller may deduct an allowance from the amount the buyer owes. Both purchase
returns and purchase allowances decrease the amount that the buyer must pay
the seller.
Suppose the $70 CD player (model LA100) purchased by Austin Sound Centre Inc.
(in Exhibit 5-3) was not the CD player ordered. Austin Sound returns the merchandise
to the seller and records the purchase return as follows:
June 3 Accounts Payable ....................................................... 70.00
Inventory................................................................ 70.00
Returned inventory to seller.
Now assume that one of the JVC CD players was damaged in shipment to Austin
Sound Centre Inc. The damage is minor, and Austin decides to keep the CD player
in exchange for a $10 allowance from JVC. To record this purchase allowance, Austin
Sound Centre Inc. makes this entry:
June 4 Accounts Payable ....................................................... 10.00
Inventory................................................................ 10.00
Received a purchase allowance.
Chapter Five Merchandising Operations and the Accounting Cycle 229