BUS103: Introduction to Financial Accounting

In merchandising accounting, purchases are the amount of goods a company buys in the course of a year, including the kind, quality, quantity, and cost.

Learning Objective

• Define a purchase and describe how to record it

Key Points

• Purchases are offset by Purchase Discounts, and also by Purchase Returns and Allowances.
• Purchase discounts are an offer, from the supplier to the purchaser, to reduce the selling price if the payment is made within a certain period of time.
• FOB specifies which party (buyer or seller) pays for which shipment and loading costs, and where responsibility for the goods is transferred, with the last distinction important for determining liability for goods lost or damaged in transit.
  

Terms

• purchase discount
  a reduced payment from the customer based on invoice payment terms
• FOB shipping point
  the buyer pays shipping cost and takes responsibility for the goods when the goods leave the seller's premises
• FOB destination
  the seller will pay shipping costs and remain responsible for the goods until the buyer takes possession
• deposits in transit
  money sent from a company to its bank that does not yet appear in the bank account
• Incoterm
  Any of a series of international sales terms that divide transaction costs and responsibilities between buyer and seller.
  

Example

• For an example of a purchase discount, a purchaser who buys a 100 dollar item with a purchase discount term 3/10, net 30 only needs to pay 97 dollars as long as he or she pays within 10 days.

Purchases

In accounting, purchases are the amount of goods a company buys over the course of the year. It also refers to information that should be recorded about the kind, quality, quantity, and cost of goods that are purchased and added to inventory. Purchases are offset by Purchase Discounts, and also Purchase Returns and Allowances. When purchases should be added to inventory depends on the Free On Board (FOB) policy of the trade. For the purchaser, this new inventory is added on shipment (and the seller removes the item from inventory when it is shipped by the seller) if the policy was FOB shipping point. On the other hand, the purchaser adds the inventory on receipt (and the seller removes the item from inventory when it arrives with the purchaser) if the policy was FOB destination.

Purchase Discount

A purchase discount is an offer, from the supplier to the purchaser, to reduce the selling price if payment is made within a certain period of time. For example, a purchaser buying a 100 dollar item with a purchase discount term of 3/10, net 30, will only need to pay 97 dollars if they pay within ten days. Under the gross method, the total cost of purchases are credited to accounts payable first, and discounts realized later if the payments were made in time. Under the net method, purchase discounts are realized right away. And if the payments are not made in time, an anti-revenue account named Purchase Discounts Lost is debited to record the loss.

FOB

Shipping

The initials FOB represent ownership and responsibilities involving the shipping and receiving of goods.

FOB is an abbreviation which pertains to the shipping of goods. Depending on the specific usage, it may stand for Free On Board or Freight On Board. FOB specifies which party (buyer or seller) pays for which shipment and loading costs and where responsibility for the goods is transferred. The last distinction is important for determining liability for goods lost or damaged in transit from the seller to the buyer. Precise meaning and usage of "FOB" can vary significantly. International shipments typically use "FOB" as defined by the Incoterm standards, where it always stands for "Free On Board". Domestic shipments within the U. S. or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterm standards.