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MGAB01H3 (127)
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Chapter 5.2

Chapter 5.2

2 Pages
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Department
Financial Accounting
Course Code
MGAB01H3
Professor
Liang Chen

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Chapter 5.2
Recording Purchases of Merchandise
Purchases are recorded by the buyer when the goods are received from the seller. When orders are
placed with a supplier, each order is documented with a purchase order. Cash purchases are supported
by a cash register receipt. Credit purchases should be supported by a purchase invoice that indicated the
total purchase price and other relevant information.
Sales Taxes
Sales taxes are collected on the goods and services sold by companies. When companies purchase goods
for resale, GST is charged. However, because GST is offset by the GST they collect from customers; GST is
not part of the cost of the merchandise. PST is never charged to the merchandiser, only to the final
consumer.
Freight Costs
The invoice should indicate whether the seller or buyer is paying for the transportation costs of the
goods. Freight terms discuss who is in charge of costs and who is responsible for damages during
transportation. FOB (free on board) shipping point means the buyer of the goods is responsible, while
FOB destination means the seller is responsible. Note that if the buyer of the goods is responsible, the
cost of transportation should be added to the cost of the merchandise.
Purchase Returns and Allowances
The purchaser may be dissatisfied with the merchandise received and demand for a refund of cash,
credit, or at a discount. These types of transactions are known as purchase returns and allowances. In
either case, it results in a decrease in the cost of goods purchased.
Discounts
The terms of a purchase may include an offer of quantity discount or a purchase discount. Quantity
discounts involve purchases of large quantity, while purchase discount is offered to customers for early
payment of the balance due on account. A purchase discount offers advantages to both parties: a
discount to the purchaser and earlier payment for the seller. Purchase discounts are noted on the
invoice as a credit term. They indicate the discount, discount time frame, and when the net amount is
due. An example may be 2/10, n/30. This means you will receive a 2% discount if paid within 10 days;
otherwise the net amount is due in 30 days.
Summary of Purchase Transactions
To calculate cost of goods purchased, it is listed in the following equation:
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Description
Chapter 5.2 Recording Purchases of Merchandise Purchases are recorded by the buyer when the goods are received from the seller. When orders are placed with a supplier, each order is documented with a purchase order. Cash purchases are supported by a cash register receipt. Credit purchases should be supported by a purchase invoice that indicated the total purchase price and other relevant information. Sales Taxes Sales taxes are collected on the goods and services sold by companies. When companies purchase goods for resale, GST is charged. However, because GST is offset by the GST they collect from customers; GST is not part of the cost of the merchandise. PST is never charged to the merchandiser, only to the final consumer. Freight Costs The invoice should indicate whether the seller or buyer is paying for the transportation costs of the goods. Freight terms discuss who is in charge of costs and who is responsible for damages during transportation. FOB (free on board) shipping point means the buyer of the goods is responsible, while FOB destination means the seller is responsible. Note that if the buyer of the goods is responsible, the cost
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