ACCT 100 Accounting for Merchandising Operations Chapter 5
Mar 28, 2015
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
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 4
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)
Accounting for Merchandising Operations 7
T-Accounts of Inventory and CGS
Inventory CGS
1,000 250 250
750
Accounts Rec. Sales
500 500
Accounting for Merchandising Operations 8
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.
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 9
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 Merchandise Inventory, Cost of Goods Sold and the Gross Profit 10
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 Merchandise Inventory, Cost of Goods Sold and the Gross Profit 11
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.
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 12
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.
Accounting for Merchandising Operations 13
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.
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 14
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.
Accounting for Merchandising Operations 15
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)
Accounting for Merchandising Operations 18
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.
Accounting for Merchandising Operations 19
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.
Accounting for Merchandising Operations 20
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
Accounting for Merchandising Operations 23
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)
Accounting for Merchandising Operations 24
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
Accounting for Merchandising Operations 25
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
Accounting for Merchandising Operations 27
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.
Accounting for Merchandising Operations 28
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
Accounting for Merchandising Operations 29
Net Purchases of a Periodic Inventory System Net purchases = Purchases – Purchases
Returns and Allowances – Purchases Returns + Freight-in
Accounting for Merchandising Operations 30
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