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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
Section
BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

Describe how each of the following accounts is used: (1) Purchases, (2) Purchases Returns and Allowances, (3) Purchases Discounts, and (4) Freight-In.

To determine

Explain the way in which the given accounts are used.

Explanation

Purchases: The amount of cost of merchandise bought during a certain period is referred to as cost of purchases.

1.

Purchases account: Purchases is an expense account used to record the cost of merchandise purchased. Since merchandise is purchased, expense value increased. An increase in expenses decreases equity, and a decrease in equity is debited, so this account is debited.

2.

Purchases Returns and Allowances account: Purchase returns are the goods returned by the buyer out of the goods purchased. Purchases Returns and Allowances is a contra-purchases account, and contra-purchases accounts increase the equity value (as the value of cost of merchandise or purchases reduces), and an increase in equity is credited, so this account is credited.

3.

Purchases Discounts account: The sellers offer a reduction in purchase price on initial purchases, to accelerate the collection of on account purchases, by their customers, within the purchase terms promptly...

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