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“In this lecture. We will define purchase order according to fundamental accounting principles. While the the 22nd edition. The definition of purchase order is document used by the purchasing department.
Place an order with a seller or vendor. Talking about this actual document used in order to initiate the process of placing the order that is given to the vendor. Let s take a look at an example..
We re going to be the owner on the left hand side. We want to purchase inventory from a vendor. Which is going to be on the right hand side in order to do that the owner is first the business owner is first going to have the purchase order that will then be given to the vendor listing out what is needed from the vendor and in that case. It s a little bit different than we might think of when we actually make a purchase ourselves on the individual side of things say from something like amazon offer to pi something we would usually make the payment at the point in time that we reach we request we request the goods and that point in time that payment would actually happen.
But in this case. No journal entry. We re not going to make the payment..
We re not recording anything we haven t received the goods. We haven t made a payment. We re just requesting the goods. No journal entry on our side and of course.
No generally a journal entry on the vendor side. As well. Then what s going to happen of course is that the vendor will ship the goods and services at the point of receipt..
Then on the owner side of things we can then record the transaction meaning. We now have the inventory we re going to debit inventory. And we re going to credit the iou at this point in time because now the transaction has taken place in that we own the inventory. We re going to count it make sure it ties out to what we ordered on the purchase order and now we owe the vendor therefore.
We have the journal entry increase in inventory and increase in accounts. Payable on the vendor side of things they have now had the transaction as well they have done the work therefore they have a receivable that is due from the owner. And they have earned revenue at that point in time that are also decreasing their inventory by making this transaction and they should record the related cost of goods sold at that point in time then what s going to happen of course is the payment will take place at a later point in time possibly and that would mean that of course..
The journal entry would be that the cash would go down. And the accounts payable would go down on the vendor side of things they would be receiving cash and the accounts receivable would be going down. Therefore the purchase order is the document that initiates the process between these two parties. However.
It s not a document in which there s an actual journal entry related to it net. ” ..
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