Unit 14 the merchandising company
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Unit #14 – The Merchandising Company. Unit #14 – The Merchandising Company. There are 3 types of Businesses A Service Company A Merchandise Company A Manufacturing Company We have covered the Accounting Cycle for a Service Company, now we will learn the differences of a Merchandise company.

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Unit #14 – The Merchandising Company

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Unit 14 the merchandising company

Unit #14 – The Merchandising Company


Unit 14 the merchandising company1

Unit #14 – The Merchandising Company

  • There are 3 types of Businesses

    • A Service Company

    • A Merchandise Company

    • A Manufacturing Company

  • We have covered the Accounting Cycle for a Service Company, now we will learn the differences of a Merchandise company


Unit 14 the merchandising company2

Unit #14 – The Merchandising Company

Merchandising Company

Retailer

Wholesaler

Customer

Manufacturing Company

Retailer

Service Company


Unit 14 the merchandising company3

Unit #14 – The Merchandising Company

  • Business that sell Merchandise are known as Merchandising companies

  • Since they sell products, we now must track the purchase, cost, and sale of these goods

  • This is done through tracking the MerchandiseInventory Account

  • This is the only essential difference between a Service & Merchandise Company


Unit 14 supplies versus inventory

Unit #14 – Supplies Versus Inventory

  • The first thing we have to clear up is the difference between supplies and merchandise.

  • Supplies are purchased for use in running a business (i.e. office supplies, cleaning supplies).


Unit 14 supplies versus inventory1

Unit #14 – Supplies Versus Inventory

  • Merchandise Inventory is purchased for RE-SALE. This idea is you buy goods, and re-sell them for a higher price in order to make money.

  • Note: this doesn’t mean that pencils and paper can’t be inventory. If you are a stationary store, then these items ARE inventory. The key concept is “goods for re-sale”.


Unit 14 tracking inventory

Unit #14 – Tracking Inventory

  • The Periodic Inventory Method

    • Adjustments are made at the end of the accounting period to track the inventory

  • The Perpetual Inventory Method

    • Adjustments are continually made and updated to keep track of the inventory


Unit 14 the periodic inventory method

Unit #14 – The Periodic Inventory Method

  • In the days before computerized accounting and inventory systems, larger companies would sell goods out of inventory with no intention of trying to keep inventory records up to date, especially with a high volume of sales.

  • Instead, much like a supplies adjustment, an inventory count would be made at the end of the period (periodically). This will show how much inventory was missing, all of which is assumed to have been sold.


Unit 14 the perpetual inventory method

Unit #14 – The Perpetual Inventory Method

  • Now thanks to technology, inventory systems can tell you exactly how much inventory (and what kind) is in the storeroom or on the floor (inventory is kept perpetually up to date).

  • Every time a cashier scans a product, it records the sale, but also reduces the inventory level.

  • Now inventory counts are done much less frequently, and are usually just to catch discrepancies in the records and to account for theft.


Unit 14 why inventory is important

Unit #14 – Why Inventory is Important!

  • Inventory adds an entirely new dimension to running and evaluating a business.

  • Inventory can become obsolete (summer clothing not sold by fall, too many of the hottest toys from last Christmas).

  • Inventory also takes up space for which you pay rent, needs to be stored, stocked, and counted - which takes labour and inventory soaks up cash to sit there on the floor and do nothing, instead of paying the business’ bills. Not the least of which, inventory can be stolen.


Unit 14 why inventory is important1

Unit #14 – Why Inventory is Important!

  • Inventory values can also be “played” with to alter a business’ reported Net Income. How? This is because the cost of inventory eventually makes it to the income statement as an expense called Cost of Goods Sold. The more you sell, the higher your cost of goods sold expense.

  • The reason all this is significant, is because inventory is usually significant. The single largest expense for a merchandise business is usually the Cost of Goods Sold expense


Unit 14 the merchandising company4

Unit #14 – The Merchandising Company

The concept of Cost of Goods Sold (COGS)

  • Since now we are selling goods, part of the cost of generating revenue is the cost of the items we are selling.

  • It is calculated like this:


Unit 14 the merchandising company5

Unit #14 – The Merchandising Company

  • COGS is calculated like this:

Value of what’s left in Inventory

Cost of Goods Available for Sales during period

Beginning Inventory

- Purchase Returns & Purchase Discounts

+ Freight In

- Ending Inventory

+ Purchases

= COGS Expense

This is the cost of having the merchandise shipped to us. It is deemed to be part of the cost of obtaining the goods, so it goes in Inventory.

Value of goods sold during the period

We will learn about these next

Net Purchases


Unit 14 the merchandising company6

Unit #14 – The Merchandising Company

How it fits into the Income Statement

Revenue is now referred to as Sales

Sales

-COGS

= Gross Profit

This is also known as the ‘mark up’ on your goods

- Operating Expenses

These are the ‘expenses’ you are use to (Salaries, Rent, Amortization etc)

= Net Income


Unit 14 the merchandising company7

Unit #14 – The Merchandising Company

A Class Example

  • A business with $20,000 worth of inventory on January 1st makes the following purchases

    • Jan. 10 - $7,500, Jan. 17 - $1,500

    • Jan. 21 – Return for $900

  • When Inventory was counted on Jan. 31st the business had $14,000 worth of Inventory left

  • Sales in January were $40,000, Operating Expenses were $17,000

  • Find the COGS

  • Calculate the Net Income


Unit 14 the merchandising company8

Unit #14 – The Merchandising Company

#1 - COGS

Beginning Inventory $20,000

Add: Purchases 9,000

Less: Purchase Returns (900)

Total Available 28,100

Less: Ending Inventory (14,000)

Cost of Goods Sold 14,100  


Unit 14 the merchandising company9

Unit #14 – The Merchandising Company

#2 – Net Income

Sales $40,000

Less: Cost of Goods Sold (14,100)

Gross Profit 25,900

Less: Operating Expenses (17,000)

Net Income $8,900


Unit 14 discounts

Unit #14 – Discounts

  • Discounts are offered to people who buy on account

    • either from you – Sales Discounts

    • Or from someone else – Purchase Discounts

  • The purpose is to encourage people to pay sooner

  • Think about it: an Accounts Receivable is your money in the hands of someone else – you want your money now!


Unit 14 discount rules

Rule

Discounts only occur when cash changes hands

Discounts always appear on the same side as cash

Reason

This is the only time you know for sure that someone has paid within the discount period

This is because you are accepting less cash for the discount

Unit #14 – Discount Rules


Unit 14 discount rules cont

Rule

3. The Discount only affects Cash

4. Discounts are calculated on total amount owing

Reason

3. Same as previous

4. Because Tarantino said so

Unit #14 – Discount Rules cont.


Unit 14 discounts1

Unit #14 – Discounts

  • There are 2 new accounts we will be using for recording Discounts

  • Purchase Discount (When you buy)

    • This is a Contra–Expense Account

  • Sales Discount (When you sell)

    • This is a Contra–Revenue Account

Therefore this has a Credit Balance

Therefore this has a Debit Balance


Unit 14 discounts2

Unit #14 – Discounts

  • One last thing about Discounts

    • What are “Terms”? How do we ‘read’ them?

  • What does 2/10, n30 mean?

With 30 Days to pay without penalty

2% Discount

If paid within 10 Days


Unit 14 discounts3

Unit #14 – Discounts

An Example

  • Jan. 10 – We bought a $1000 worth of supplies on account. Terms are 2/10, n30.

    • Write this information down!

Jan 10 Supplies 1000

Accounts Payable 1000

Bought supplies, Terms 2/10, n30.


Unit 14 purchase discounts

Unit #14 – Purchase Discounts

  • Let’s now say that we want to take advantage of the “Discount” and pay within the allotted time period (in this case it is 10 Days to receive a 2% Discount)

Jan 18 Accounts Payable 1000

Cash 980

Purchase Discounts 20


Unit 14 sales discounts

Unit #14 – Sales Discounts

  • Let’s take the same question, only now we sold instead or bought

    • Jan. 10 – We sold $1000 worth of Supplies on account. Terms are 2/10, n30.

Jan 10 Accounts Receivable 1000

Sales Revenue 1000

Sold $1000 to J. Doe


Unit 14 sales discounts1

Unit #14 – Sales Discounts

  • Again, it is now within the 10 Days and our customer has chosen to take advantage of the Discount

Jan 18 Cash 980

Sales Discount 20

Accounts Receivable 1000


Unit 14 purchase discounts1

Unit #14 - Purchase Discounts

  • If the transaction was for cash (when you bought supplies) and the discount was taken right away, it would look like this

Jan 10 Supplies 1000

Cash 980

Purchase Discount 20


Unit 14 sales discounts2

Unit #14 - Sales Discounts

  • If the transaction was for cash (when you sold supplies) and the discount was taken right away, it would look like this

Jan 10 Cash 980

Sales Discount 20

Sales Revenue 1000


Unit 14 the merchandising company10

Unit #14 – The Merchandising Company

  • To track the purchase, cost, and shipment of merchandise new accounts are needed.

    • They are as follows:


Unit 14 the merchandising company11

Unit #14 – The Merchandising Company


Unit 14 the merchandising company12

Unit #14 – The Merchandising Company

  • Updated Chart of Accounts

    • Assets 100-199

    • Liabilities 200-299

    • Capital (including Drawings) 300-399

    • Revenues 400-499

    • COGS Expenses 500-599

    • Operating Expenses 600-699


Unit 14 the merchandising company the periodic inventory method

Unit #14 – The Merchandising Company: The Periodic Inventory Method

  • Merchandising Inventory is our new Current Asset, under the Periodic method of Accounting, it is only touched during the Closing Entries

  • If you have bought inventory, instead of going to the Merchandise Inventory account it goes to the Purchases account


Unit 14 the merchandising company the periodic inventory method1

Unit #14 – The Merchandising Company: The Periodic Inventory Method

New Account Type of Account

  • Merchandise Inventory Current Asset

    (Beginning Accounting Period Value)

    2. Sales Revenue

    3. Sales Discounts Contra-Revenue

    4. Sales Returns & AllowancesContra-Revenue

    5. Purchases COGS (expense)

    6. Purchase Discounts COGS (Contra-Expense)

    7. Purchase Returns & Allowances COGS (Contra-Expense)

    8. Freight In COGS (expense)

    9. Freight Out (Delivery Expense) Operating Expense


Unit 14 the merchandising company the periodic inventory method2

Unit #14 – The Merchandising Company: The Periodic Inventory Method

Cash Purchase of Merchandise (Page 300)

  • Jun. 8 – Purchases sports equipment from Schwinn, $500, Cheque 86

Jun 8 Purchases 500

Cash 500

Purchase Sports Equipment, Cheque 86


Unit 14 the merchandising company the periodic inventory method3

Unit #14 – The Merchandising Company: The Periodic Inventory Method

Credit Purchase of Merchandise

  • Jun. 9 – Purchases sports equipment from Spalding, invoice 2974, $200 on account

Jun 9 Purchases 200

A/P Spalding 200

Purchased Equipment, invoice 2974


Unit 14 the merchandising company the periodic inventory method4

Unit #14 – The Merchandising Company: The Periodic Inventory Method

Goods Returned for Cash Refund (Purchase Return & Allowances)

  • Jun. 10 – Received refund Cheque for $100 from Schwinn for goods returned.

Jun 10 Cash 100

Purchases Ret. & Allow. 100

Cash Refund from Schwinn


Unit 14 the merchandising company the periodic inventory method5

Unit #14 – The Merchandising Company: The Periodic Inventory Method

Goods returned for Credit (Purchase Returns & Allowances)

  • Jun. 11 – Received Credit Invoice 981 for $200 from Spalding Ltd. for returned tennis equipment.

Jun 11 A/P Spalding Ltd 200

Purchases Ret. & Allow 200

Returned Defective Equipment, invoice 981


Unit 14 the merchandising company the periodic inventory method6

Unit #14 – The Merchandising Company: The Periodic Inventory Method

Sales Returns & Allowances

  • Jun 14 - J. Doe returned $100 worth of hockey sticks

Jun 14 Sales Returns & Allowances 100

Cash 100

Refund for J. Doe


Unit 14 the merchandising company the periodic inventory method7

Unit #14 – The Merchandising Company: The Periodic Inventory Method

Freight In

  • Freight In is part of the Cost Of Goods Sold Account (Freight Out is not)

Jun 16 Freight In 200

Cash 200


Unit 14 the merchandising company the periodic inventory method8

Unit #14 – The Merchandising Company: The Periodic Inventory Method

Freight out (An Operating Expense)

  • It would be recorded like this

Jun 18 Freight Out 150

Cash 150


Unit 14 the merchandising company the periodic inventory method9

Unit #14 – The Merchandising Company: The Periodic Inventory Method

  • The previous examples along with the Purchase & Sales Discount examples are the new entries you may have to make into the General Journal for a Merchandising Company using the Periodic Inventory Method.


Unit 14 the merchandising company the periodic inventory method10

Unit #14 – The Merchandising Company: The Periodic Inventory Method

  • Each of these new accounts also have to shown on the Trial Balance and either the Income Statement or Balance Sheet!

  • Also note that all of these transactions can include taxes! (HST Recoverable (When Buying) or HST Payable (When Selling)) with them, but we have already covered that!


Unit 14 the merchandising company the perpetual inventory method

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

  • The name perpetual is a reference to the fact that the merchandise inventory account always shows us the value of inventory that should be on hand (i.e. it is perpetually kept up to date).

  • As technology becomes more and more widespread and affordable, most businesses have acquired computerized inventory and accounting systems. In fact, some computerized accounting software programs do not even support the periodic method of accounting anymore – only the perpetual!


Unit 14 the merchandising company the perpetual inventory method1

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

  • Recall!!!

    New Account Type of Account

    1. Merchandise Inventory Current Asset

    2. Sales Revenue

    3. Sales Discounts Contra-Revenue

    4. Sales Returns & AllowancesContra-Revenue

    5. Purchases COGS (expense)

    6. Purchase Discounts COGS (Contra-Expense)

    7. Purchase Returns & Allowances COGS (Contra-Expense)

    8. Freight In COGS (expense)

    9. Freight Out (Delivery Expense) Operating Expense

    10. Inventory Shortage Operating Expense

We use the Cost of Goods Sold Account to track the items we’re selling - as we sell them.


Unit 14 the merchandising company the perpetual inventory method2

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

Notice, we now use the Merch. Inventory Account instead of the Purchases Account

Cash Purchase of Inventory

  • Jun. 8 – Purchases sports equipment from Schwinn, $500, Cheque 86

Jun 8 Merchandise Inventory 500

Cash 500

Purchased Sports Equipment, Cheque 86


Unit 14 the merchandising company the perpetual inventory method3

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

Credit Purchase of Merchandise

  • Jun. 9 – Purchases sports equipment from Spalding, invoice 2974, $200 on account

Jun 9 Merchandise Inventory 200

A/P Spalding Ltd. 200

Purchases Equipment, Invoice 2974


Unit 14 the merchandising company the perpetual inventory method4

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

Goods Returned for Cash Refund (Purchase Return & Allowances)

  • Jun. 10 – Received refund Cheque for $100 from Schwinn for goods returned.

Jun 10 Cash 100

Merchandise Inventory 100

Cash Refund received from Schwinn


Unit 14 the merchandising company the perpetual inventory method5

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

Goods returned for Credit (Purchase Returns & Allowances)

  • Jun. 11 – Received Credit Invoice 981 for $200 from Spalding Ltd. for returned tennis equipment.

Jun 11 A/P Spalding Ltd 200

Merchandise Inventory 200

Merchandise return, credit invoice 981


Unit 14 the merchandising company the perpetual inventory method6

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

Recording a Purchase Discount

  • Jun 12 - Sent Cheque for $490 to Spalding Ltd. In payment of invoice 4918, terms 2/10, n30

Notice that instead of using the Purchase Discount Account, we used the Merchandise Inventory Account

Jun 27 A/P Spalding 500

Cash 490

Merchandise Inventory 10

Paid invoice 4918, less 2% discount


Unit 14 the merchandising company the perpetual inventory method7

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

Freight In

  • Freight In is part of the Cost Of Goods Sold Account, so we now use Merchandise Inventory instead

Jun 16 Merchandise Inventory 200

Cash 200


Unit 14 the merchandising company the perpetual inventory method8

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

  • To Recap the differences in Journal Entries from the Periodic Method!

    • Anytime you would use the following accounts in the Periodic Inventory Method, you use Merchandise Inventory in the Perpetual Inventory Method – Merch Inventory is a Current Asset!

      5. Purchases COGS (expense)

      6. Purchase Discounts COGS (Contra-Expense)

      7. Purchase Returns & Allowances COGS (Contra-Expense)

      8. Freight In COGS (expense)


Unit 14 the merchandising company the perpetual inventory method9

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

  • Every time we make a Sale and/or give a Sales Discount, or make a Sales Return the original entry is the same, but we have to “update” our Merchandise Inventory Account

  • So let’s assume we made of sale of $1000 plus HST. How would we record this?


Unit 14 the merchandising company the perpetual inventory method10

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

Jan 10 Cash 1130

HST Payable 130

Sales Revenue 1000

Cost of Goods Sold 700

Merchandise Inventory 700

This is to keep our inventory “up-to-date” with every sale, sales discount, or sales return


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