Download - ACCT 100 Accounting for Merchandising Operations Chapter 5

ACCT 100

Accounting for Merchandising Operations

Chapter 5

Objectives:

1. To distinguish a service company from a merchandising company.

2. To learn how to account for inventory purchase and inventory sale under a perpetual inventory system.

3. To learn how to account for inventory purchase, inventory sale under a periodic inventory system.

Accounting for Merchandising operations 2

Defining Inventory

1. Assets held for resale purpose in a normal course of business.

2. Assets used to produce products for resale purpose.

Examples of Inventory:

Merchandising Firms: merchandise or goods

Manufacturing Firms: raw materialswork-in-processfinished Goods

Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 3

Service Companies

Providing services (i.e., transportation companies, banks, etc.)

Main Revenues: service revenues. Income measurement: Service Revenues - Operating Expenses Operating Income Operating cycle: Cash Providing Service Accounts receivables Cash


Merchandising Companies

Buy and sell goods (i.e., retail companies such as Wal-Mart, Macy’s, etc.).

Main revenues: Sales revenues. Income measurement: Sales Revenues- Cost of Goods Sold (cost of total merchandise sold during the period)

Gross Profit- Operating Expenses Operating Income Operating cycle: Cash Buy Inventory Sell

Inventory Accounts Receivable CashAccounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 5

Perpetual vs. Periodic Inventory System- An Example On February 10, inventory Costing $1,000

was purchased on credit, terms, 2/10 and n/30.

On March 2, Inventory costing $250 was sold for $500 on credit.

Accounting for Merchandising Operations 6

Accounting for Inventory – A Perpetual Inventory System (Example on p6)

At Purchase: Inventory 1,000

Accounts Payable 1,000(to record goods purchased on account)

At Sale:Accounts Receivable 500

Sales Revenue 500(to record credit sale)

Cost of Goods Sold 250Inventory 250

(to record cost of merchandise sold)


T-Accounts of Inventory and CGS

Inventory CGS

1,000 250 250

750

Accounts Rec. Sales

500 500


Perpetual Inventory System

The inventory account is used for the purchase and sale of inventory.

The balances of inventory is available at all time.

A physical count of inventory is still needed at the end of a period.

Any discrepancy of inventory book balance with physical count should be adjusted to a loss or gain account.


Perpetual Inventory System (contd.)

The cost of goods sold (CGS) account is used to record the CGS of a sale.

Therefore, the CGS is known at all time. The CGS is determined by selecting a

cost flow assumption (will be discussed in Chapter 6).


Accounting for Inventory – A Periodic Inventory System (Example on P6)

At Purchase: Purchases 1,000

Accounts Payable 1,000(to record goods purchased on account)

At Sale:Accounts Receivable 500

Sales Revenue 500

(to record credit sale)


Accounting for Inventory – A Periodic Inventory System (Contd.)

The inventory account is not updated under the periodic inventory system.

The balance of CGS is unknown as CGS was not determined and recorded at sale.

Under the periodic inventory system, the cost of ending inventory will be determined after a physical inventory count and the CGS will be derived at the end of a period.

The details of this process will be discussed in chapter 6.


An Example of Perpetual Vs. Periodic at Purchase - with Freight, Purchase Returns and Discounts

On February 10, inventory Costing $1,000 was purchased on credit, terms, 2/10 and n/30.

Freight Terms: FOB Shipping Point—Buyers are responsible for freight charges.

$100 Freight was paid on Feb. 10. $200 inv. was returned on Feb. 15. The payment for the bal. of accounts

payable was made on Feb, 17.


An Example of Perpetual Vs. Periodic at Purchase - with Freight, Purchase Returns and Discounts (Contd.)

Perpetual Inventory Sys. 2/10 Inventory 1,000

A/P 1,000

(Freight)Inventory 100

Cash 100

2/15 A/P 200

(Pur. Ret) Inventory 200

2/17. A/P 800

Cash 784

Inventory 16Inv. = 1,000+100-200-16=884.

Periodic Inventory Sys.Purchases 1,000

A/P 1,000

Freight-in 100

Cash 100

A/P 200

Pur. R&A 200

A/P 800

Cash 784

Pur. Dis. 16Net Pur.= 1,000+100-200-16 = 884.


An Example of Perpetual Vs. Periodic at Sale - with Sales Returns, Sales Discounts and Freights

On March 2, Inventory costing $250 was sold for $500 on credit.

On March 5, $50 of inventory sold was returned.

Collection of the remaining balance of A/R on Mar. 7.

Sale terms: FOB Destination - Seller are responsible for the freight. The seller paid $30 for the shipping.


An Example of Perpetual Vs. Periodic at Sale - with Sales Returns, Sales Discounts and Freights (contd.)

Perpetual Inventory Sys. 3/2 A/R 500 Sales 500 CGS 250 Inventory 2503/5 Sales R&A 50(S. Ret.) A/R 50 Inventory 25 CGS 253/7 Cash 441 Sales Dis. 9 A/R 450

Freight Freight-out 30

Cash 30

Periodic Inventory Sys.A/R 500

Sales 500

None

Sales R&A 50 A/R 50 None

Cash 441Sales Dis. 9 A/R 450

Freight-out 30

Cash 30 16

Perpetual Inventory System with Purchase, Purchase Returns and Allowance and Purchase Discounts (skip pp17-25)

On Feb. 10, $1,000 inventory was purchased on credit. $200 inv. was returned on Feb. 15. The payment was made on Feb, 17.

Feb. 10 Inventory 1,000 Accounts Payable 1,000

(To record goods purchased, terms 2/10, n/30) Feb. 15 Accounts Payable 200 Inventory 200(To record return of goods purchased) Feb. 17 Accounts Payable 800 Cash 784 Inventory 16 (To record payment with discount taken) Accounting for Merchandising Operations 17

Purchase Discounts Not Taken

March 3 Accounts Payable 800

Cash 800

(To record payment on account without discounts taken)


Purchase of Inventory –Freight Costs Freight Terms: FOB Shipping Point—Buyers

are responsible for freight charges.

Feb. 10 Inventory 100

Cash 100

(To record freight charges of $100, terms: FOB shipping point)

Note: If freight terms were FOB destination, the seller will be responsible for the payment of the freights.


Purchase Invoice/Sales Invoice (see Illustration 5-4 of textbook for an example) Any purchase should be supported by a

purchase invoice. Companies usually record purchases when

receiving goods from the seller. A purchaser uses the sales invoice of the

seller as its purchase invoice. In addition to the names of the seller and the

buyer, the goods sold and the total amount, credit terms and freight terms are also included in the sales invoice.


Perpetual Inventory System with Sales, Sales Returns and Allowances, Sales Discounts

On March 2, Inventory costing $250 was sold for $500 on credit. On March 5, $50 of inventory sold was returned: Mar. 2 A/R 500

Sales 500(To record credit sale, terms 2/10,n/30) CGS 250

Inventory 250(To record cost of merchandise sold)Mar. 5 Sales Return and Allowance 50 A/R 50 Inventory 25 CGS 25 (To record sales return)

21

Collection of A/R and Sales Discounts Collection of A/R on Mar. 7:

Cash 441

Sales Discount 9

A/R 450(To record collection of A/R within discount period)

If the discount is not taken (i.e., collection after discount period:

Cash 450

A/R 450Accounting for Merchandising Operations 22

Net Sales

Net Sales = Sales – Sales Returns and Allowances – Sales Discount


Sale of Inventory – Freight Costs

FOB Shipping Point:

Buyers are responsible for the freight. FOB Destination:

Seller are responsible for the freight.

The seller paid $30 for the shipping:

Freight-out 30

Cash 30

(Note: Freight-out is an expense account)


Closing Entries (Perpetual Inventory System)

Sale Revenue 500

Income Summary 500

Income Summary 314

Cost of Goods Sold 225

Sales ret. and Allow. 50

Sales Discount 9

Freight-out 30


Accrual Accounting and the Financial Statements 26

Income Statement Formats

Net sales revenue $150,000Cost of good sold (80,000)Gross margin 70,000Operating expenses Selling, Administration and Depreciation (40,000)Income form operations 30,000Other icome (expense): Interest revenue $2,000 Interest expense (9,000) Gain on sale of equipment 3,000 (4,000)Income before income tax 26,000Income tax expense (10,000)Net income $16,000

Multiple -Step Income Statement (see illustration 5-11 of textbook for an Example) :

26

Income Statement Formats (contd.) Single-Step Income Statement (See Illus.5-12 of

textbook)Revenues:Net sales $150,000Interest revenue 2,000Gain on sale of equipment 3,000 Total revenue $155,000 Expenses:Cost of goods sold 80.000Selling, administrative and depr. 40,000Interest expense 9,000Income tax expense 10,000 Total expenses 139,000Net Income $ 16,000


Income Statement Formats (Contd.)

Selling expenses include: salaries expense (sales related), advertising expense, freight-out.

Administrative expenses include: salaries expense (administration related), utility expense, insurance expense.


Periodic Inv. System at Purchase with Purchase, Purchase Returns and Allowance and Purchase Discounts (Skip pp29-31) On Feb. 10, $1,000 inventory was purchased on credit. $200 inv.

was returned on Feb. 15. The payment was made on Feb, 17. The buyer paid freight charge $100 on 2/10.

2/10 Purchases 1,000 Accounts Payable 1,000

2/10 Freight-in 100 Cash 1002/15 A/P 200 Purchase R&A 2002/17 A/P 800 Cash 784 Purchase Discounts 16


Net Purchases of a Periodic Inventory System Net purchases = Purchases – Purchases

Returns and Allowances – Purchases Returns + Freight-in


Periodic Inv. System at Sale with Sales, Sales Returns and Allowances and Sales Discounts

On March 2, Inventory costing $250 was sold for $500 on credit with terms, 2/10, n/30 and FOB destination. Shipping cost is $30. On March 5, $50 of inventory sold was returned and the remaining bal. of A/R was collected on March 7. 3/2 A/R 500 Sales 500 Freight-out 30 Cash 303/5 Sales Ret. and Allow. 50 A/R 50 3/7 Cash 441

Sales Discount 9

A/R 450Accounting for Merchandising Operations 31

Download - ACCT 100 Accounting for Merchandising Operations Chapter 5

Top Related