Rain Shield offers credit terms of 2/10, n/30 to credit customers. Putter Pro Shops bought 200 golf umbrellas with a list price of $35 each on March5, on account. The shipping terms were FOB shipping point. Putter received the merchandise on March 7. On March 14, Putter writes a check to Rain Shield to pay for the umbrellas.



If Putter uses a periodic inventory system, what effect does recording the purchase of the golf umbrellas on March 5 have on Putter’s accounting equation?


I say Assets and liabilities increase

Smith21000

Read it again and tell me what did we recieve on March 5.

deezerdoo

Ok I did some more studying and I think I got it

Liabilities increase, and owners equity decreases

Beacause purchases are not an assest account. It is included in the income statement as an intergral part of the caculation of cost of goods sold and is therefor shown as reduction of owners equity in the accounting equation.

Assests= Liabilities + Owners Equity
+7,000 -7,000

Smith21000

Forget everything else for a minute and just tell me what we RECEIVED on MARCH 5.

deezerdoo

Well we didn't really receive anything we only purchased them. We didn't receive them until March 7th. I guess I'm lost

Smith21000

Your right we didn't receive anything and therefore we are not liable for anything! As of March 5 there is no entry that should be made to the accounting records. However most companies will record a purchase order into the system but once again this should not appear in the accounting records it would be entered only to track PO's for informational purposes. One of three characteristics that must be present in order for a item to qualify as a liability is "The event that obligates the enterprise has occurred" hence us receiving the umbrellas which did not occur until March 7.

Extreme case: What if on March 5 right after you put in your order for the umbrellas Rain Shield burn down and nothing remained. Do you owe them anything? Did title ever pass to you?

Just a quick tip: Always in accounting read the the question first before you read the scenario or set of facts, it will help you identify what you are looking for as you read through the scenario or facts. I hope this helps.

deezerdoo

That makes sense thanks for your help.

CaptainForest

I would say there is not enough information to reach your conclusion Smith.

The goods were ordered March 5, received March 7 with terms FOB shipping.

Therefore, if the goods were sent out March 5, the purchase has taken place March 5 since Putter now assumes ownership of the goods in transit.

If we are to assume that they were shipped on March 7 (or March 6), then no journal entry should be made for March 5.

Although without anything to the contrary, and this being a homework problem, I would place my marbles on a shipping date of March 5.