1 / 31

Chapter 5

Chapter 5. Accounting for Merchandising Operations. Objectives:. To distinguish a service company from a merchandising company. To learn how to account for inventory purchase and inventory sale under a perpetual inventory system.

aquarius
Download Presentation

Chapter 5

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 5 Accounting for Merchandising Operations

  2. Objectives: • To distinguish a service company from a merchandising company. • To learn how to account for inventory purchase and inventory sale under a perpetual inventory system. • To learn how to account for inventory purchase, inventory sale under a periodic inventory system. Accounting for Merchandising operations

  3. 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 materials work-in-process finished Goods Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit

  4. 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

  5. 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 Cash Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit

  6. 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

  7. 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 250 Inventory 250 (to record cost of merchandise sold) Accounting for Merchandising Operations

  8. T-Accounts of Inventory and CGS Inventory CGS 1,000 250 250 750 Accounts Rec. Sales 500 500 Accounting for Merchandising Operations

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. An Example of Perpetual Vs. Periodic at Purchase - with Freight, Purchase Returns and Discounts (Contd.) Perpetual Inventory Sys. 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. 16 Net Pur.= 1,000+100-200-16 = 884. 2/10Inventory 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 16 Inv. = 1,000+100-200-16=884. Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit

  15. 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

  16. An Example of Perpetual Vs. Periodic at Sale - with Sales Returns, Sales Discounts and Freights (contd.) Perpetual Inventory Sys. Periodic Inventory Sys. A/R 500 Sales 500 None Sales R&A 50 A/R 50 None Cash 441 Sales Dis. 9 A/R 450 Freight-out 30 Cash 30 3/2A/R 500 Sales 500 CGS 250 Inventory 250 3/5 Sales R&A 50 (S. Ret.) A/R 50 Inventory 25 CGS 25 3/7Cash 441 Sales Dis. 9 A/R 450 Freight Freight-out 30 Cash 30

  17. 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

  18. Purchase Discounts Not Taken March 3 Accounts Payable 800 Cash 800 (To record payment on account without discounts taken) Accounting for Merchandising Operations

  19. 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

  20. 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

  21. 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)

  22. 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 450 Accounting for Merchandising Operations

  23. Net Sales • Net Sales = Sales – Sales Returns and Allowances – Sales Discount Accounting for Merchandising Operations

  24. 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

  25. 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

  26. Income Statement Formats • Multiple -Step Income Statement (see illustration 5-11 of textbook for an Example) : Accrual Accounting and the Financial Statements 26

  27. Income Statement Formats (contd.) • Single-Step Income Statement (See Illus.5-12 of textbook) Revenues: Net sales $150,000 Interest revenue 2,000 Gain on sale of equipment 3,000 Total revenue $155,000 Expenses: Cost of goods sold 80.000 Selling, administrative and depr. 40,000 Interest expense 9,000 Income tax expense 10,000 Total expenses 139,000 Net Income $ 16,000 Accounting for Merchandising Operations

  28. 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

  29. 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 100 2/15 A/P 200 Purchase R&A 200 2/17 A/P 800 Cash 784 Purchase Discounts 16 Accounting for Merchandising Operations

  30. Net Purchases of a Periodic Inventory System • Net purchases = Purchases – Purchases Returns and Allowances – Purchases Returns + Freight-in Accounting for Merchandising Operations

  31. 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 30 3/5 Sales Ret. and Allow. 50 A/R 50 3/7 Cash 441 Sales Discount 9 A/R 450 Accounting for Merchandising Operations

More Related