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  • 1/25/16

    1

    ACCT 652 Accounting

    Week 3Merchandisers and special journals

    Some slides Times Mirror Higher Education Division, Inc. Used by permission

    Michael D. Kinsman, Ph.D.

    ACCT 652 Week 3 2

    Review of last week

    Some highlights of what we did last week are:We introduced the General Journal.We introduced the General Ledger.We posted from the GJ to the GL.We use explanations in only five situations.Dollar signs only go in formal financial

    statements.

    ACCT 652 Week 3 3

    Review of last time (2)

    The accounting process. Contra accounts.Cash and accrual accounting.Reversing entries.

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    ACCT 652 Week 3 4

    General Journal and General Ledger posting

    GENERAL JOURNAL Page 1

    Date DescriptionPost. Ref. Debit Credit

    Dec. 1 Cash 101 30,000.00 T. Dow, Capital 30,000.00

    Investment by owner.

    GENERAL LEDGERAccount: Cash Acct. No. 101

    Date ItemPost. Ref. Debit Credit Balance

    Dec. 1 J1 30,000.00 30,000.00

    ACCT 652 Week 3 5

    Five explanations only in the GL

    Opening Closing Adjusting Error Correction Reversing

    ONLY those five have explanations.

    ACCT 652 Week 3 6

    Contra accounts Contra accounts are, in fact, parts of other

    accounts. You can usually spot them in a Balance Sheet or an Income Statement because of the word less or net of, as in Accounts receivable, less allowance for doubtful accounts Accounts receivable, net of allowance for doubtful accounts

    We have contra accounts because they preserve information: In the above example, we know how much accounts receivable we have and how much we expect to write off.

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    ACCT 652 Week 3 7

    Cash basis businesses

    When is revenue? That is to say, when do you recognize revenue?

    You recognize revenue when you get the cash.

    That means cash basis businesses dont have accounts receivable on their books. They simply keep a list of receivables. They also recognize expense when they actually pay the bill.

    ACCT 652 Week 3 8

    Accrual basis businesses

    When is revenue? That is to say, when do you recognize revenue?

    You recognize revenue when you complete a sale.

    Completing a sale means that you have shipped product and the customer has agreed to pay.

    ACCT 652 Week 3 9

    The example from last week

    A company had accrual basis profits of $95,000 in 2015.

    It had ending 2014 (beginning 2015) A/R of $5,000, and ending 2015 A/R of $10,000.

    It had ending 2014 (beginning 2015) A/P of $3,000, and ending 2015 A/P of $5,000.

    What is the companys cash basis profit for 2015?

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    ACCT 652 Week 3 10

    Last weeks problem answerAccrual basis income 95,000.00

    Minus change in accounts receivable -Ending receivables (10,000.00) +Beginning receivables 5,000.00 (5,000.00)

    Plus change in accounts payable: +Ending payables 5,000.00 -Beginning payables (3,000.00) 2,000.00

    Cash basis income 92,000.00

    ACCT 652 Week 3 11

    Reversing entries When a bookkeeper is keeping books on a

    cash basis, and we convert them to an accrual basis with adjusting entries, there is a chance the bookkeeper will become confused.

    To fix that problem, we do reversing entries which exactly reverse the accrual adjustment. Those are posted the first day of the period.

    ACCT 652 Week 3 12

    Miscellaneous little stuff Remember that, despite the fact that most of

    the examples do not include cents in their answers (for neatness in the book, I suppose), you should include them in your answers: $100 is not written as $100 or even as $100--. It should be written as $100.00.

    ACCT 652 Week 3 12

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    ACCT 652 Week 3 13

    Miscellaneous little stuff Underlines are another little stuff that you

    should be aware of. When you have a column of numbers that is (sub) totalled, you put a single underline under the last number to be totalled. Below the final total you put a double underline.

    ACCT 652 Week 3 13

    ACCT 652 Week 3 14

    Miscellaneous little stuff Finally, you put dollar signs at the top of a

    column of numbers and above the double underline--see the next page for an example.

    ACCT 652 Week 3 14

    ACCT 652 Week 3 15

    Miscellaneous little stuffSales $10,100.00Cost of goods sold 7,520.00Shippi ng 181.22

    Gross profit 2,398.78

    Sales salar ies $800.15Rent 720.00Other stu ff 15.85

    $1,536.00 1,536.00

    Net income $862.78ACCT 652 Week 3 15

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    ACCT 652 Week 3 16

    Miscellaneous little stuff Remember that the balance sheet is, in fact,

    two statements--a statement of assets and a statement of liabilities and owners equity. Therefore, there are two tops of columns. Even though they are on the same page, they are two statements.

    ACCT 652 Week 3 16

    ACCT 652 Week 3 17

    Consider merchandisers

    The difference between merchandisers and service businesses is that merchandisers sell tangible merchandise. That means that they will have inventories.

    But having inventories means they must be accrual basis.

    ACCT 652 Week 3 18

    First, a puff-ball question

    How do you record the entry when a merchandiser makes a sale?

    GENERAL JOURNAL Page

    Date DescriptionPost. Ref. Debit Credit

    M M DD Cash (or Accounts Receivable) 200.00 Sales 200.00

    Record sales

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    ACCT 652 Week 3 19

    Suppose you have returns?

    Both of those items, which cost $100 each, were returned, one because it was not needed, the other because it was a little dirty.

    Because you are a good salesperson, you are able to convince the buyer to accept $5 as a cleaning allowance instead of returning the item.

    How do you record the return and the allowance?

    ACCT 652 Week 3 20

    Handling returns and allowancesGENERAL JOURNAL Page

    Date DescriptionPost. Ref. Debit Credit

    M M DD Cash (or Accounts Receivable) 200.00 Sales 200.00

    Record sales

    M M DD+ Sales returns and allowances 105.00 Cash (or Accounts Receivable) 105.00

    Record the return

    ACCT 652 Week 3 21

    Accounts receivable

    You receive a bill that says TERMS 2/10 net 30.

    What does that mean?You can pay with two 10s, and they send out a net for you at day 30.

    Not.

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    ACCT 652 Week 3 22

    Accounts receivable

    You receive a bill that says TERMS 2/10 net 30.

    What does that mean?You get a 2 percent discount if you pay the bill within 10 days, and you are expected to pay the full bill by day 30.

    ACCT 652 Week 3 23

    Recording discounts How do you record paying a 2/10 net 30 bill

    for $100? It depends on what you want to emphasize.

    ACCT 652 Week 3 24

    Method Ashow opportunities lost If you normally expect to take a discount,

    and want your statements to show when you goofed by not taking one, record as follows:

    GENERAL JOURNAL Page

    Date DescriptionPost. Ref. Debit Credit

    M M DD Purchases 98.00 Accounts payable 98.00

    Record purchase

    M M DD+ Accounts payable 98.00 Cash 98.00

    Record payment on day 10*********OR*********

    M M DD+ Accounts payable 98.00Discounts lost 2.00 Cash 100.00

    Record payment after day 10

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    ACCT 652 Week 3 25

    Method Ashow opportunities lost

    This will lead to an expense item in your Trial Balance showing the amounts of all discounts lost during the year. This is a measure of how well you are following through in taking expected discounts.

    ACCT 652 Week 3 26

    Method Bshow opportunities taken Suppose, instead, that you do not expect to

    take the discount. Then you would enter:GENERAL JOURNAL Page

    Date DescriptionPost. Ref. Debit Credit

    M M DD Purchases 100.00 Accounts payable 100.00

    Record purchase

    M M DD+ Accounts payable 100.00 Cash 98.00 Discounts taken 2.00

    Record payment on day 10*********OR*********

    M M DD+ Accounts payable 100.00 Cash 100.00

    Record payment after day 10

    ACCT 652 Week 3 27

    Method Bshow opportunities taken

    In this method, you end up with a revenue item on your Trial Balance showing discounts taken.

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    ACCT 652 Week 3 28

    Which method shows the higher profits?

    You can prove to yourself with a minimum of effort that both Method A and Method B show exactly the same profits.

    ACCT 652 Week 3 29

    The best method The best method is to mix the methods. When

    you expect to take the discount, use Method A. Then, if you dont take a planned discount, you show the error on the trial balance.

    When you expect not to take the discount (for example, because it isnt worth it), use Method B. Then, if you erroneously take the discount, you show the error on the trial balance.

    ACCT 652 Week 3 30

    Should you always take discounts? Suppose that money cost you 50 percent per

    year, and that you were offered a discount of 1/10, net 100. Would you take that discount?

    The interest rate you earn on your money by taking the discount is given by the formula

    Rate = [(Discount %)/(100 - discount %)] * [365 / (net days - discount days)]

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    ACCT 652 Week 3 31

    Should you always take discounts?

    Using the 1/10 net 100 example, wed have:

    Comparing the approximately 4% annual return you get with the 50% cost of financing it, you dont w

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