Chapter 6 Accounting for retailing
Nov 16, 2014
Chapter 6Accounting for retailing
Chapter 6Accounting for retailing
Learning Objectives
1. Understand the nature of inventory and retailing operations
2. Describe the basic format of an income statement for retail businesses
3. Understand the impact of GST legislation on retail businesses
Learning Objectives (cont’d)
4. Account for sales transactions of retail businesses registered for the GST, including the treatment of sales returns, cash discounts, trade discounts and freight costs
5. Account for purchases of inventory and cost of goods sold under both the perpetual and periodic inventory systems by retail businesses registered for the GST
Learning Objectives (cont’d)
6. Prepare worksheets and close the accounts for retail businesses for both the perpetual and periodic inventory systems
7. Prepare a detailed income statement for a retail business
8. Perform a brief analysis of profitability in a retail business for decision-making purposes
Lecture References
• Hoggett, Edwards & Medlin, 6th edition, Chapter 6
• IAS 2/AASB 102 – Inventories
Inventory
• Goods or property held for sale in the ordinary course of business
• Does not include assets acquired to operate the business (e.g. plant and equipment)
• Also referred to as ‘stock’ or ‘stock in trade’
Retail Business Operations (cont’d)
• Condensed Income Statement– Income referred to as ‘sales’– ‘Cost of sales’ (COS) used to show total cost of
inventory sold during the period– Sales — COS (Gross Profit) determined to show
profit from buying and on-selling inventory– Expenses classified by type
Retail Business Operations (cont’d)
SUNRISE CD SALES LTDIncome Statement
for the year ended 31 December 2006
INCOME Net sales revenue $692 890 Less: Cost of sales 470 490GROSS PROFIT 222 400 Other income 5 260
227 660EXPENSES Selling expenses $100 270 Administrative expenses 78 850 Financial expenses 4 260 183 380PROFIT (before tax) $ 44 280
INCOME Net sales revenue $692 890 Less: Cost of sales 470 490GROSS PROFIT 222 400 Other income 5 260
227 660EXPENSES Selling expenses $100 270 Administrative expenses 78 850 Financial expenses 4 260 183 380PROFIT (before tax) $ 44 280
Retailing and the Goods and Services Tax
• Registration for an Australian Business Number (ABN)
• Registration for GST• Input credits• GST collections• GST outlays• Need adequate records!
Retailing and the GST (cont’d)
• Tax invoices– Required for all sales over $50– Common requirements
• ‘tax invoice’
• ABN of issuing entity
• date of issue
• supplier name
• brief description of the items supplied
Retailing and the GST (cont’d)
• Adjustment notes– All or part of the goods are returned– An allowance (e.g. discount) is made– The price of a supply is changed– All or part of the amount owing has to be
written off– The retailer cannot pay the debt
Accounting for Sales Transactions
Date Accounts receivable 1980Sales 1800GST Collections 180
Sold merchandise to Ray Stevens on credit
Date Accounts receivable 1980Sales 1800GST Collections 180
Sold merchandise to Ray Stevens on credit
Date Cash 1980Sales
1800GST Collections
180 Sold merchandise for cash
Date Cash 1980Sales
1800GST Collections
180 Sold merchandise for cash
Accounting for Sales Transactions (cont’d)
• Sales returns and allowances– Goods sold for $300 plus GST of $30 returned as
unsuitable
Date Sales Returns & Allowances 300GST Collections 30
Accounts Receivable 330return of unsatisfactory merchandise sold on credit
Date Sales Returns & Allowances 300GST Collections 30
Accounts Receivable 330return of unsatisfactory merchandise sold on credit
Accounting for Sales Transactions (cont’d)
• Cash (settlement) discounts– Goods sold for $1000 plus GST of $100
Date Cash at Bank 1078Discount Allowed 20GST Collections 2
Accounts Receivable – A Jones1100payment of account within the discount period
Date Cash at Bank 1078Discount Allowed 20GST Collections 2
Accounts Receivable – A Jones1100payment of account within the discount period
Accounting for Sales Transactions (cont’d)
• Sales return and settlement discount– Credit terms 2/10, n/30– Return of $330
Date Cash at Bank 1078Discount Allowed ($1500 x 2%) 30GST Collections ($150 x 2%) 3
Accounts Receivable ($1980 – $330)1650
payment of a/c Ray Stevens within the discount period
Date Cash at Bank 1078Discount Allowed ($1500 x 2%) 30GST Collections ($150 x 2%) 3
Accounts Receivable ($1980 – $330)1650
payment of a/c Ray Stevens within the discount period
Accounting for Sales Transactions (cont’d)
• Trade discounts– Percentage reduction on list price– 10 units of $200, 30% trade discount
Date Accounts Receivable 1540Sales ($200 x 10 x 70%)
1400GST Collections
140Sale of inventory on credit, subject to 30% trade discount
Date Accounts Receivable 1540Sales ($200 x 10 x 70%)
1400GST Collections
140Sale of inventory on credit, subject to 30% trade discount
Retail Transactions
• Freight outwards– Who is responsible for freight costs?– FOB shipping point/FOB destination– Recorded as a selling cost if seller responsible
Accounting for Purchases and Cost of Goods Sold
• Perpetual inventory system• Periodic inventory system
Perpetual Inventory System
• Involves keeping current and continuous records of all inventory transactions
• Separate card or computer file kept for each inventory item– Quantity and unit cost for each sale/purchase– Running inventory balance
Perpetual System — Stock Card
Location1 unit showroom
Remainder - WarehouseMinimum Stock 4Maximum Stock 17
Item RefrigeratorCode C350
Purchases Sales Balance Unit Total Unit Total Unit Total
Date Explanation Units cost cost Units cost cost Units cost cost
1/1 Beginning bal 4 650 2600 15/1 Purchases 10 650 6500 14 650 910021/1 Sales 3 650 1950 11 650 715023/1 Purch. Return (1) 650 (650) 10 650 650024/1 Sales Return (1) 650 (650) 11 650 7150
Perpetual Inventory System (cont’d)
• Single general ledger account for all inventory transactions
• Details maintained on inventory cards
Inventory
Increases (debits)
Purchases
Sales Returns
Decreases (credits)
Sales
Purchase returns
Perpetual System — Transactions
Purchases on credit
Jan 15 Inventory 6 500GST Outlays 650
Accounts Payable 7150purchased 10 refrigerators from ….
Jan 15 Inventory 6 500GST Outlays 650
Accounts Payable 7150purchased 10 refrigerators from ….
Freight inwards (FOB shipping point)
Jan 17 Freight Inwards 420GST Outlays 42
Cash at Bank 462paid freight on merchandise
Jan 17 Freight Inwards 420GST Outlays 42
Cash at Bank 462paid freight on merchandise
Perpetual System — Transactions (cont’d)
Sales on credit
Jan 21 Accounts Receivable 3 465Sales 3 150GST Collections 315
sold 3 fridges on credit ([$1050 + $105 ] x 3 units = $3 456)
Jan 21 Accounts Receivable 3 465Sales 3 150GST Collections 315
sold 3 fridges on credit ([$1050 + $105 ] x 3 units = $3 456)
Jan 21 Cost of Goods Sold 1950Inventory 1950
to remove the cost of inventory sold ($650 x 3 units) from the inventory account
Jan 21 Cost of Goods Sold 1950Inventory 1950
to remove the cost of inventory sold ($650 x 3 units) from the inventory account
Perpetual System — Transactions (cont’d)
Purchase returns
Jan 24 Accounts payable 715Inventory 650GST Outlays 65
Defective unit returned to Fridge King Ltd for credit on account
Jan 24 Accounts payable 715Inventory 650GST Outlays 65
Defective unit returned to Fridge King Ltd for credit on account
Perpetual System — Transactions (cont’d)
Payment of creditor within discount period
Jan 24 Accounts Payable ($7150 – $715) 6435Cash at bank 6306Discount Rec’d (5850 x 2%) 117GST Outlays ($6435 x 2% x 1/11) 12
payment for inventory purchases
Jan 24 Accounts Payable ($7150 – $715) 6435Cash at bank 6306Discount Rec’d (5850 x 2%) 117GST Outlays ($6435 x 2% x 1/11) 12
payment for inventory purchases
IncomeSaving in outflow!IncomeSaving in outflow!
Perpetual System — Transactions (cont’d)
Sales returns and allowances
Jan 24 Sales returns & allowances 1 050GST Collections 105
Accounts Receivable 1 155fridge sold on 21 Jan. returned
Jan 24 Sales returns & allowances 1 050GST Collections 105
Accounts Receivable 1 155fridge sold on 21 Jan. returned
Jan 24 Inventory 650Cost of Goods Sold 650
returned fridge placed back into inventory
Jan 24 Inventory 650Cost of Goods Sold 650
returned fridge placed back into inventory
Periodic Inventory System
• Beginning balance of inventory not changed until the end of the period
• Purchases recorded in a ‘purchases’ account
• Only one entry is made for sales to record the selling price of the goods sold
• Ending balance determined by stock count
Periodic System — Transactions
Purchases on credit
Jan 15 Purchases 6 500GST Outlays 650
Accounts Payable 7150purchase of fridges on credit from...
Jan 15 Purchases 6 500GST Outlays 650
Accounts Payable 7150purchase of fridges on credit from...
Freight inwards (FOB shipping point)
Jan 17 Freight Inwards 420GST Outlays 42
Cash at Bank 462paid freight cost on merchandise
Jan 17 Freight Inwards 420GST Outlays 42
Cash at Bank 462paid freight cost on merchandise
Periodic System — Transactions (cont’d)
Sales on credit
Jan 21 Accounts Receivable 3 465Sales 3 150GST Collections 315
sold inventory on credit
Jan 21 Accounts Receivable 3 465Sales 3 150GST Collections 315
sold inventory on credit
Purchase returns
Jan 24 Accounts Payable 715Purchase Returns & Allowances 650GST Outlays 65
defective unit returned for credit
Jan 24 Accounts Payable 715Purchase Returns & Allowances 650GST Outlays 65
defective unit returned for credit
Periodic System — Transactions (cont’d)
Payment of creditor within discount period
Jan 24 Accounts Payable ($7150 – $715) 6435Cash at Bank 6306Discount Rec’d (5850 x 2%) 117GST Outlays ($6435 x 2% x1/11) 12
payment for inventory purchases
Jan 24 Accounts Payable ($7150 – $715) 6435Cash at Bank 6306Discount Rec’d (5850 x 2%) 117GST Outlays ($6435 x 2% x1/11) 12
payment for inventory purchases
IncomeSaving in outflow!IncomeSaving in outflow!
Periodic System — Transactions (cont’d)
Sales returns and allowances
Jan 24 Sales Returns & Allowances 1 050GST Collections 105
Accounts Receivable 1 155fridge sold on 21 January returned
Jan 24 Sales Returns & Allowances 1 050GST Collections 105
Accounts Receivable 1 155fridge sold on 21 January returned
FRIDGE TOWNIncome Statement
for the period ended 31 January
Perpetual Inventory System
Sales revenue $3150 Less: Sales returns & allowances 1050Net sales revenue 2100Cost of sales* 1720GROSS PROFIT $380
* $1720 = $1950 – $650 + $420
Perpetual Inventory System
Sales revenue $3150 Less: Sales returns & allowances 1050Net sales revenue 2100Cost of sales* 1720GROSS PROFIT $380
* $1720 = $1950 – $650 + $420
FRIDGE TOWNIncome Statement
for the period ended 31 January
Periodic Inventory System
Sales revenue $3150 Less: Sales returns & allowances 1050Net sales revenue 2100Cost of sales Cost of beginning inventory $2600 Add: Cost of purchases $6500
Freight inwards 4206920
Less: Purchase returns 650Net cost of purchases 6270 Cost of goods available for sale 8870
Less: Cost of ending inventory 7150Cost of sales 1720GROSS PROFIT $ 380
Periodic Inventory System
Sales revenue $3150 Less: Sales returns & allowances 1050Net sales revenue 2100Cost of sales Cost of beginning inventory $2600 Add: Cost of purchases $6500
Freight inwards 4206920
Less: Purchase returns 650Net cost of purchases 6270 Cost of goods available for sale 8870
Less: Cost of ending inventory 7150Cost of sales 1720GROSS PROFIT $ 380
Perpetual System — Transactions
Updating of Inventory account at the end of the accounting period
June 30 Inventory (ending balance) 10 000P & L Summary 10 000inventory balance as per stock count
June 30 Inventory (ending balance) 10 000P & L Summary 10 000inventory balance as per stock count
June 30 P & L Summary 12 000Inventory (beginning balance) 12 000
inventory balance as per stock count
June 30 P & L Summary 12 000Inventory (beginning balance) 12 000
inventory balance as per stock count
Periodic Inventory System
Inventory
Beginning balance 12 000
Ending balance 10 000
22 000
balance b/d 10 000
P & L summary 12 000
balance c/d 10 000
22 000
Ending inventory from the previous period becomes the beginning inventory for the next period
Detailed Income Statement
• Expenses classified as– Selling expenses– Administrative expenses– Financial expenses
• Sales activities and other operating activities separated to highlight gross vs. net profit
SUNRISE CD SALES LTD Income Statement
for the period ended 31 December 2006
INCOMERevenue:Sales revenue $714 280 Less: Sales returns & allowances 21 390Net sales revenue 692 890Cost of sales Inventory 1/1/06 $ 58 400 Add: Purchases $472 620
Freight inwards 6 210 478 830
Less: Purchase returns & allowances 13 480Net cost of purchases 465 350 Cost of goods available for sale 523 750
Less: Inventory 31/12/06 53 260 Cost of sales 470 490GROSS PROFIT (continued next page) $222 400
INCOMERevenue:Sales revenue $714 280 Less: Sales returns & allowances 21 390Net sales revenue 692 890Cost of sales Inventory 1/1/06 $ 58 400 Add: Purchases $472 620
Freight inwards 6 210 478 830
Less: Purchase returns & allowances 13 480Net cost of purchases 465 350 Cost of goods available for sale 523 750
Less: Inventory 31/12/06 53 260 Cost of sales 470 490GROSS PROFIT (continued next page) $222 400
SUNRISE CD SALES LTD Income Statement
for the period ended 31 December 2006
GROSS PROFIT (from previous page) 222 400
Other incomeRent revenue 2 400Discount received 2860
227 660EXPENSESSelling & distribution expenses:
Sales salaries & commission 61 040Freight outwards 6 210Advertising expense 8 420Rent expense - store space 17 000Depn. expense - store equip. 7 600 100 270
SUNRISE CD SALES LTD Income Statement
for the period ended 31 December 2007
EXPENSES cont’d….Administrative expenses:
Office salaries expense 63 040Rent expense - office space 12 000Depn. expense - office equip. 3 200Insurance expense 610 78 850
Finance & other expenses:Interest expense 1 000Discount allowed 3 260 4 260
183 380NET PROFIT BEFORE INCOME TAX 44 280
Less: Income tax expense 10 470NET PROFIT $ 33 810
Profitability Analysis for Decision Making
Gross profit ratio Gross Profit Net Sales x 100%Gross Profit Net Sales x 100%
Profit margin Operating Profit Net Sales x 100%Operating Profit Net Sales x 100%
Expenses to sales ratio
Operating Expenses Net Sales x 100%Operating Expenses Net Sales x 100%
Inventory turnover Cost of Sales Average Turnover
Cost of Sales Average Turnover
Where to get more information
• Insert details of additional resources here