5-1 Quest will occur on Thursday October 9 2 Unit 2: Chapter 5
Dec 31, 2015
5-2
Revised Cost of Goods sold• Remember from Unit 1 that COGS• COGS =BI + Purchase – EI• COGS = BI + Net cost of Purchase – EI• BI = Beginning Inventory• EI = Ending Inventory• COGS = Cost of Goods sold• Net cost of Purchase = Purchase account –
Purchase Returns and allowance account
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Sales Discounts1.Cash discounts is a reduction of the amount
of an invoice if payment is made on or before the discount date, (which is stated on the invoice.)
• Every businesses arranges with their customers as to
• when the goods of service are to be paid for
• Whether a cash discount is offered. • This arrangement is called “Terms of
Sale”.
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Sales Discounts• Common Examples of Terms of Sale in business are:
1. COD = Cash on Delivery
2. Net 30
3. Net 60
4. 2/10, n/30
5. 1/15, n/30
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Sales Discounts• Common Examples of Terms of Sale in business
are:
1. COD = Cash on Delivery : The goods must be paid for at the time they are delivered. This is the most common example of Terms of Sale. COD is common in retail business such as Tim Horton, Dollarama and Wal-mart.
2. Net 30 : The full amount of the invoice is due 30 days after the date of the invoice.
3. Net 60 : The full amount of the invoice is due 60 days after the date of the invoice. Sixty day terms are becoming less common.
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Sales Discounts• Common Examples of Terms of Sale in business
are:
1. 2/10, n/30 = Two ten net thirty = If the bill is paid within 10 days of the invoice date, a cash discount of 2% is taken. Otherwise, the full amount of the invoice is due 30 days after the invoice date.
2. 1/15, n/30 = One fifteen net thirty = If the bill is paid within 15 days of the invoice date, a cash discount of 1% is taken. Otherwise, the full amount of the invoice is due 30 days after the invoice date.
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RECORDING PROCESS (PERIODIC Inventory System)
Record all purchases – During the period the purchase cost of all goods bought is accumulated in an account called Purchases. (IS)
Record all sales – During the period, the sales price for all goods sold is accumulated in a Sales Revenue account.
Count the number of units on hand – At the end of the period, the Inventory Account Balance still reflects the inventory amount carried over from the prior period since no entries are made to the Inventory account during the current period.
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RECORDING OUTLINE (PERPETUAL)
Record all purchases – During the period, the purchase cost of each type of goods bought is entered in the Inventory ledger account (Asset) as an increase (debit entry)
Record all sales – During the period, each sales is recorded by means of two companion entries. One entry is to record the Sales Revenue at sales price, and the other entry is to record the Cost of Goods Sold at purchase cost.
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Perpetual Inventory System
Record all returns – During the period, Purchase Returns are recorded in the Inventory account (credit) and on the perpetual inventory record at cost.
Use Cost of Goods Sold and Inventory Amounts – At the end of the period, the ending balance in the Cost of Goods Sold (IS) accounts (debit) provides the total amount of that expense that is reported on the income statement.
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Price Allowance (buyer) for
Perpetual Inventory System
On May 2, NetSolutions (buyer) purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.
3
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NetSolutions (buyer) returned $3,000 of the merchandise purchased from Delta Data Link on May 4. (Purchase Return)
3
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•If ownership (responsibility) of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, it is said to be FOB (free on board) shipping point. (reponsibility changes at the shipping point)
•Buyer must pay for the freight charge.
Freight (transportation charge)3
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•To record FOB shipping point, let’s say the buyer paid $150 for freight charge. What is the journal entry?
May 4
Merchandise Inventory $150
Bank$150
Freight (transportation charge)3
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If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB (free on board) destination.
Seller must pay for the freight charge.
3Freight (transportation charge)
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Quantity discounts are different from purchase discounts which arise from 2/10, n/30.
Chelsea video pays the balance owing to Highpoint Electronic of $3500 (gross invoice of 3800 minus purchase return of 300) on May 14 the last days of the discount period.
2% of 3500 = 70
How would you make the journal entry?
3Discount
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Summary of Purchase transactions for buyer (Perpetual system)
•Purchase discount, purchase return, purchase and freight are recorded on Merchandise Inventory ledger account.
•P228 T account
2Summary of Purchase entries