Chapter 14

Expenses & Cash Payments

Terms:

Purchase Discounts: Given to the purchaser to encourage early payment.

Purchase Returns & Allowances: A return of goods or a decrease in the amount owed by the purchaser.

Two methods of accounting for Discounts: Gross method: Purchase recorded at

full amount.– If discount taken, Inventory reduced by

amount of the discount. Net method: Purchase recorded at

invoice price LESS the discount.– If discount NOT taken, must use a

Purchases Discount Lost account.

Better Method?

Net - shows which discounts were missed. Gross method doesn’t show this!

Procedures for purchasing: (Old Way) Completed PO (purchase order) sent to

supplier. When goods arrive, a Receiving Report

(RR) is completed when goods are inspected.

PO matched with RR by accounting dept. before bill is paid.

Procedures for Purchasing: (New Ways) Procurement card used for small

purchases. (PO’s expensive to prepare.)

EDI - used by larger companies. Outsourcing - pay someone else to

handle A/Pay.

Accrued Liabilities:

Amounts owed (but not yet paid) for things like salaries, utilities, taxes, etc.

Must record these at end of accounting period or expenses & liabilities will be understated.

Increase the expense account on the left & increase liability account on the right.

Warranties

Must be estimated (like bad debt!) and recorded in the year the sale is made.– Expenses matched against revenues.

Increase Warranty Liabilities on the right & Warranty expense on the left.

Payroll Taxes

Withheld from employees earnings:– FIT - amount depends on gross earnings,

pay period, exemptions, marital status.– SIT - Each state varies.– FICA Social Security - 6.2% on Max. of

$68,400/year. (changes!)– FICA Medicare - 1.45% of all earnings.– “Other” - Medical insurance, union dues, etc.

Payroll Taxes

Paid by the Employer– FICA Social Security (same amount)– FICA Medicare (same amount)– SUTA (varies by state, industry, &

experience rating.)– FUTA - .8% of first $8,000 of wages.

Income Taxes, Sales Taxes

Cover on your own.

Prepaids

Sometimes a company pays for expenses ahead of time.

Increase an asset account when payment is made

Decrease the asset and increase an expense account when the item is “used up”.

Loss Contingencies

A possible loss. May have to report on the financial

statements, depending on two conditions:– 1. Likelihood that the loss will occur.– 2. Ability to estimate the loss. (page 478-

480 gives details!)

Must evaluate liquidity

Be sure to read through this section!

Be sure to also read Appendix A in the back of the text!

The End