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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.

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Chapter 5

Chapter 5

Accounting for Merchandising Operations


Objectives
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


Defining inventory
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


Service companies
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


Merchandising companies
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


Perpetual vs periodic inventory system an example
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


Accounting for inventory a perpetual inventory system example on p6
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


T accounts of inventory and cgs
T-Accounts of Inventory and CGS (Example on p6)

Inventory CGS

1,000 250 250

750

Accounts Rec. Sales

500 500

Accounting for Merchandising Operations


Perpetual inventory system
Perpetual Inventory System (Example on p6)

  • 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


Perpetual inventory system contd
Perpetual Inventory System (contd.) (Example on p6)

  • 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


Accounting for inventory a periodic inventory system example on p6
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


Accounting for inventory a periodic inventory system contd
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


An example of perpetual vs periodic at purchase with freight purchase returns and discounts
An Example of Perpetual Vs. Periodic (Contd.)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


An example of perpetual vs periodic at purchase with freight purchase returns and discounts contd
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


An example of perpetual vs periodic at sale with sales returns sales discounts and freights
An Example of Perpetual Vs. Periodic Freight, Purchase Returns and Discounts (Contd.) 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


An example of perpetual vs periodic at sale with sales returns sales discounts and freights contd
An Example of Perpetual Vs. Periodic Freight, Purchase Returns and Discounts (Contd.) 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


Accounting for merchandising operations
Perpetual Inventory Freight, Purchase Returns and Discounts (Contd.) 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


Purchase discounts not taken
Purchase Discounts Not Taken Freight, Purchase Returns and Discounts (Contd.)

March 3 Accounts Payable 800

Cash 800

(To record payment on account without discounts taken)

Accounting for Merchandising Operations


Purchase of inventory freight costs
Purchase of Inventory –Freight Costs Freight, Purchase Returns and Discounts (Contd.)

  • 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


Purchase invoice sales invoice see illustration 5 4 of textbook for an example
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


Perpetual inventory system with sales sales returns and allowances sales discounts
Perpetual Inventory textbook for an example)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)


Collection of a r and sales discounts
Collection of A/R and Sales Discounts textbook for an example)

  • 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


Net sales
Net Sales textbook for an example)

  • Net Sales = Sales – Sales Returns and Allowances – Sales Discount

Accounting for Merchandising Operations


Sale of inventory freight costs
Sale of Inventory – Freight Costs textbook for an example)

  • 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


Closing entries perpetual inventory system
Closing Entries (Perpetual Inventory System) textbook for an example)

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


Income statement formats
Income Statement Formats textbook for an example)

  • Multiple -Step Income Statement (see illustration 5-11 of textbook for an Example) :

Accrual Accounting and the Financial Statements

26


Income statement formats contd
Income Statement Formats (contd.) textbook for an example)

  • 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


Income statement formats contd1
Income Statement Formats (Contd.) textbook for an example)

  • 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


Accounting for merchandising operations
Periodic textbook for an example) 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


Net purchases of a periodic inventory system
Net Purchases of a Periodic Inventory System textbook for an example)

  • Net purchases = Purchases – Purchases Returns and Allowances – Purchases Returns + Freight-in

Accounting for Merchandising Operations


Periodic inv system at sale with sales sales returns and allowances and sales discounts
Periodic textbook for an example) 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