accounting for merchandising 2

7/28/2019 Accounting for Merchandising 2

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ACCT 100

Accounting for MerchandisingOperations

Chapter 5


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Objectives:

1. To distinguish a service company froma merchandising company.

2. To learn how to account for inventorypurchase and inventory sale under aperpetual inventory system.

3. To learn how to account for inventorypurchase, inventory sale under aperiodic inventory system.

Accounting for Merchandising operations 2


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Defining Inventory

1. Assets held for resale purpose in a normalcourse of business.

2. Assets used to produce products for resalepurpose.

Examples of Inventory:

Merchandising Firms: merchandise orgoodsManufacturing Firms: raw materials

work-in-process

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


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Service Companies

Providing services (i.e., transportationcompanies, banks, etc.)

Main Revenues: service revenues.

Income measurement:

Service Revenues- Operating Expenses

Operating Income Operating cycle: Cash Providing ServiceAccounts receivables Cash

Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 4


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Merchandising Companies

Buy and sell goods (i.e., retail companiessuch as Wal-Mart, Macys, 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


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Perpetual Inventory System- AnExample

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

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

Accounting for Merchandising Operations 6


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Accounting for Inventory Purchase APerpetual Inventory System

At Purchase:Inventory 1,000

Accounts Payable 1,000(to record goods purchased on account, terms2/10, n/30)

At Sale:Accounts Receivable 500

Sales Revenue 500(to record credit sale, terms 2/10,n/30)

Cost of Goods Sold 250Inventory 250

(to record cost of merchandise sold)Accounting for Merchandising Operations 7


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T-Accounts of Inventory and CGS

Inventory CGS

1,000 250 250

750

Accounts Rec. Sales

500 500



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Perpetual Inventory System

The inventory account is used for thepurchase and sale of inventory.

The balances of inventory is available at

all time. A physical count of inventory is needed

at the end of a period.

Any discrepancy of inventory bookbalance with physical count should beadjusted to a loss or gain account.



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Perpetual Inventory System (contd.)

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

Therefore, the CGS is known at alltime.

The CGS is determined by selecting acost flow assumption (will be discussed

in Chapter 6).



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Purchase, Purchase Returns andAllowance and Purchase Discounts

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

(To record return of goods purchased)Feb. 17 Accounts Payable 800Cash 784Inventory 16

(To record payment with discount taken)Accounting for Merchandising Operations 11


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Purchase Discount Not Taken

March 3 Accounts Payable 800

Cash 800

(To record payment on account without discounttaken)



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Purchase of InventoryFreightCosts

Freight Terms: FOB Shipping PointBuyersare responsible for freight charges.

Feb. 10 Inventory 100

Cash 100

(To record freight charges of $100, terms FOBshipping point)

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



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Purchase Invoice/Sales Invoice (seeIllustration 5-4 of textbook for an example)

Any purchase should be supported by apurchase 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 thebuyer, the goods sold and the total amount,credit terms and freight terms are alsoincluded in the sales invoice.


S l S l R t d All


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Sales, Sales Returns and Allowances,Sales Discounts

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

(To record cost of merchandise sold)

Mar. 5 Sales Return and Allowance 50A/R 50Inventory 25

CGS 25

(To record sales return) 15


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Collection of A/R and SalesDiscounts

Collection of A/R on Mar. 7:

Cash 441

Sales Discount 9A/R 450

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

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

Cash 450

A/R 450Accounting for Merchandising Operations 16


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Net Sales

Net Sales = Sales Sales Returns andAllowances Sales Discount



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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)



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Closing Entries

Sale Revenue 500

Income Summary 500

Income Summary 314Cost of Goods Sold 225

Sales ret. and Allow. 50

Sales Discount 9Freight-out 30



20/28Accrual Accounting and the Financial Statements 20

Income Statement Formats

Net sales revenue $150,000Cost of good sold (80,000)Gross margin 70,000

Operating expensesSelling, 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) :

20


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Income Statement Formats (contd.)

Single-Step Income Statement (See Illus.5-12 oftextbook)

Revenues:Net sales $150,000

Interest revenue 2,000Gain on sale of equipment 3,000

Total revenue $155,000Expenses:

Cost of goods sold 80.000

Selling, administrative and depr. 40,000Interest expense 9,000Income tax expense 10,000

Total expenses 139,000Net Income $ 16,000



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Income Statement Formats (Contd.)

Selling expenses include: salariesexpense (sales related), advertisingexpense, freight-out.

Administrative expenses include:salaries expense (administrationrelated), utility expense, insuranceexpense.



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Periodic Inventory System (usingthe example on page 6)At Purchase:

Purchases 1,000Accounts Payable 1,000

(to record goods purchased on account, terms2/10, n/30)

At Sale:Accounts Receivable 500

Sales Revenue 500(to record credit sale, terms 2/10,n/30)



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Periodic Inv. System: Purchase, PurchaseReturns and Allowance and Purchase Discounts

On Feb. 10, $1,000 inventory was purchased on credit.$200 inv. was returned on Feb. 15. The payment was madeon Feb, 17. The buyer paid freight charge $100 on 2/10.

2/10 Purchases 1,000

Accounts Payable 1,0002/10 Freight-in 100

Cash 1002/15 A/P 200

Purchase R&A 2002/17 A/P 800

Cash 784

Purchase Discounts 16Accounting for Merchandising Operations 24


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Net Purchases of a PeriodicInventory System

Net purchases = Purchases PurchasesReturns and Allowances PurchasesReturns + Freight-in



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Periodic Inv. System: Sales, Sales Returnsand Allowances and Sales Discounts

On March 2, Inventory costing $250 was sold for $500 oncredit with terms, 2/10, n/30 and FOB destination. Shippingcost is $30. On March 5, $50 of inventory sold was returnedand the remaining bal. of A/R was collected on March 7.

3/2 A/R 500

Sales 500Freight-out 30

Cash 303/5 Sales Ret. and Allow. 50

A/R 503/7 Cash 441

Sales Discount 9

A/R 450Accounting for Merchandising Operations 26


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Comparison of Perpetual vs. PeriodicInventory System

Perpetual Inventory Sys.

Pur. Inventory 1,000

A/P 1,000

Freight Inventory 100Cash 100

Pur. R&AA/P 200

Inventory 200

Pur. Dis. A/P 800

Cash 784

Inventory 16

Periodic Inventory Sys.Purchases 1,000

A/P 1,000

Freight-in 100Cash 100

A/P 200

Pur. R&A 200

A/P 800

Cash 784

Pur. Dis. 16



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Comparison of Perpetual vs. PeriodicInventory System (Contd.)

Perpetual Inventory Sys.SalesA/R 500

Sales 500CGS 250

Inventory 250S. Ret. Sales R&A 50

A/R 50Inventory 25

CGS 25

S. Dis. Cash 441Sales Dis. 9

A/R 450

Freight Freight-out 30

Cash 30

Periodic Inventory Sys.

A/R 500

Sales 500

None

Sales R&A 50A/R 50

None

Cash 441Sales Dis. 9

A/R 450

Freight-out 30

Cash 30

accounting for merchandising 2

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