[ctinamarie]

I was hopping that someone would look at these 2 journal entries and tell me if I am on the right track?? Please and Thank you. This accounting is killing me. HA HA


I purchased merchandise from the Graham Co. for $9000, terms 1/10, n/30.
I journalized this entries as:

Merchandise Inventory 9000
Accounts payable-Graham Co. 9000

Then within the terms I paid them.(This is where I am having problem)
I journalized this as:

Accounts Payable-Graham Co. 8910
Cash 8820
Merchandise Inventory 90

Is this right?

[bberna]

1.st journal entry is okey.
2nd one should be

Accounts Payable-Graham Co. 9000
Cash 8910
Purchase Discount 90

[morgaine300]

Please write Dr & Cr on the account names or we can't tell what you're trying to do.

You have taken the discount off twice. You've reduced the payable down to 8910 by taking off the discount. And then reduced it by 90 again and reduced it again off the 8910 for the payment of 8820. You can't deduct the discount twice.

If you only take 8910 out of payables, what are you going to do with the 90 left over? If you do that, all those discounts will just stay there, and add up, and then you'll have a payables account full of discounts.

You remove things from payables, not because they are paid, but because they are no longer due, for whatever reason. There is a difference. Payables represents how much is due. If you get a discount, the discount is no longer due, so it must be removed also. i.e. the 9000 is no longer due, and the whole thing must come out of payables.

Then you figure the discount on that amount and reduce the 9000 by the discount. So they get 90 off, leaving 8910 that is paid in cash. bberna's answer is only partially correct. The numbers are correct. However, using the Purchase Discount account for the discount is making an assumption about the method being used. Since you've already use the Inventory account for the discount, I have to assume you got that idea from somewhere, i.e. the book, and that that's the method you're to be using and that it's correct. I doubt anyone would use that account on their own if they didn't know they were supposed to.