Lesson 6
Accounting for
Merchandising Activities
Task Team of
FUNDAMENTAL ACCOUNTING
School of Business,Sun Yat-sen University
2
Outline
? Merchandising activities
? Operating cycle of merchandising
companies
? Merchandising cost accounts
? Inventory systems
? Merchandise purchases
? Sales transactions
? Adjusting and closing entries
3
Introduction
?Scandals in stock market occur now and then,
Among them,financial frauds or income
manipulation are common,Income manipulation
typically starts from making up sales revenues as
well as purchases,for example,GuangXia
(Yinchuan),
?In this lesson you are required to think about,
?Why these income statement numbers are so
important?
?How they are recorded in accounting system?
4
Manufacturer Wholesaler Retailer Customer
Merchandising Companies
Merchandising Activities
5
Reporting Financial Performance
?Service organizations sell time to earn revenue.
?Examples,accounting firms,law firms,and plumbing
services
Revenues Expenses Netincome＝－
6
Reporting Financial Performance
? Merchandising companies sell merchandise to earn revenue,
?Examples,sporting goods,clothing,and auto parts stores
Net
Sales
Cost of
Goods Sold
Gross
Profit Expenses
Net
Income
－ ＝ － ＝
7
Operating Cycle of Merchandise
Companies
?Begins with the purchase of merchandise and ends with the
collection of cash from the sale of merchandise.
Purchases
Merchandise
inventory
Credit sales
Account
receivable
Cash
collectionPurchases
Merchandise
inventory
Cash
sales
Cash Sale Credit Sale
8
Merchandising Cost Accounts
+
+
Beginning inventory
Year 1
Net cost of
purchases
Merchandise
available for sale
Ending Inventory
Year 1
Cost of Goods
Sold
=
Income
Statement
Becomes beginning
inventory of Year 2
Balance
Sheet
9
Inventory Systems
?Periodic Method
Requires updating the inventory account only at the end of
the period,Acquisition of merchandise inventory is
recorded in a temporary Purchases account.
?Perpetual Method
Gives a continual record of the amount of inventory on
hand,When an item is sold it is recorded in the Cost of
Goods Sold account.
10
Inventory Systems
?Perpetual provides a continuous record of:
?The amount of inventory on hand.
?Cost of goods sold to date.
?Periodic requires a physical count of goods
to determine:
?The amount of inventory on hand.
?Cost of goods sold.
11
Comparison of Perpetual and
Periodic Systems
So u r c e o f I n fo r m a ti o n
E q u a ti o n Pe r i o d i c Sy s te m Pe r p e tu a l Sy s te m
B e g i n n i n g I n v e n to r y
C a r r i e d o v e r fr o m
p r i o r p e r i o d
C a r r i e d o v e r fr o m
p r i o r p e r i o d
A d d, Pu r c h a s e s
A c c u m u l a te d i n th e
Pu r c h a s e s a c c o u n t
A c c u m u l a te d i n th e
I n v e n to r y a c c o u n t
E q u a l s,
L e s s, E n d i n g I n v e n to r y
Me a s u r e d a t e n d o f
p e r i o d b y p h y s i c a l
i n v e n to r y c o u n t
Pe r p e tu a l r e c o r d
u p d a te d a t e v e r y s a l e
C o s t o f G o o d s So l d
C o m p u te d a s a
r e s i d u a l a m o u n t a t
e n d o f p e r i o d
Me a s u r e d a t e v e r y
s a l e b a s e d o n
p e r p e tu a l r e c o r d
C o s t o f G o o d s A v a i l a b l e fo r Sa l e
12
P u r c h a s e s XX I n v e n to r y XX
A c c o u n ts P a y a b l e X X A c c o u n ts P a y a b l e
X X
A c c o u n ts P a y a b l e XX A c c o u n ts P a y a b l e XX
P u r c h a s e s R e tu r n s & A l l o w, X X I n v e n to r y
X X
A c c o u n ts R e c e i v a b l e XX A c c o u n ts R e c e i v a b l e XX
S a l e s X X S a l e s X X
C o s t o f G o o d s S o l d XX
I n v e n to r y X X
M e r c h a n d i s e
s o l d to
c u s to m e r o n
a c c o u n t.
M e r c h a n d i s e
p u r c h a s e d fr o m
s u p p l i e r o n
a c c o u n t.
M e r c h a n d i s e
r e tu r n e d to
s u p p l i e r,
Comparison of Periodic and
Perpetual Systems
13
T r a n s a c t i o n P e r i o d i c P e r p e t u a l
M e r c h a n d i s e
r e tu r n e d b y
c u s to m e r, Sa l e s R e tu r n s a n d A l l o w, XX Sa l e s R e tu r n s a n d A l l o w, XX
A c c o u n ts R e c e i v a b l e XX A c c o u n ts R e c e i v a b l e XX
I n v e n to r y XX
C o s t o f G o o d s So l d XX
A t e n d o f
a c c o u n ti n g
p e r i o d, C o s t o f G o o d s So l d XX N o e n tr y,
I n v e n to r y (b e g i n n i n g ) XX
Pu r c h a s e s XX
I n v e n to r y (e n d i n g ) XX
C o s t o f G o o d s So l d XX
Comparison of Periodic and
Perpetual Systems
14
Oct,1 Inventory 5,000
Accounts Payable /cash 5,000
Purchased inventory.
?The operating cycle of merchandise companies
involves the purchase and subsequent sale of
merchandise inventory,
?Purchase of inventory can either on account or by
cash.
Merchandise Purchases
15
Trade Discounts
Trade discounts are used by manufacturers and wholesalers
to change selling prices without republishing their catalogs.
Example
MarCo,Inc,offers a 20% trade
discount on orders of 100
units or more of their popular
product Racer,Each Racer
has a list price of $5.00.
Q ua nt i t y s ol d 100
P r i c e pe r un i t 5, 0 0$
To t a l 500
Le s s 2 0 % di s c ou nt ( 1 0 0 )
I nv oi c e pri c e 400$
16
?Purchase discount is a deduction from the invoice
price granted to induce early payment of the
amount due,Example – 2/10,n30
Terms
Time
Due
Discount Period
= 10 days
(Full amount minus 2%
discount) due between
Oct.1 and Oct.11
Credit Period = 30 days
Full amount due
anytime between
Oct.12 and Oct.31
Purchase
Oct.1 Oct.11 Oct.31
Purchase Discounts
17
2/10,n/30
Purchase Discounts
Discount
Percent
Number of
Days
Discount Is
Available
Otherwise,
Net (or All)
Is Due
Credit
Period
18
?Assume the purchase of $4,000 inventory on
October 1 was on the terms 2/10,n30.
Case 2-Discount not taken
Oct.31 Accounts Payable 4,000
Cash 4,000
Purchase Discounts
Oct.11 Accounts Payable 4,000
Inventory 80
Cash 3,920
2% x (5,000 - 1,000) = 80
Case 1-Discount taken
19
Managing Discounts
?Failing to take a 2/10,n/30 discount is really
expensive!
365 days ÷ 20 days × 2% = 36.5% annual rate
Days
in a
year
Number
of additional
days before
payment
Percent
paid to
keep
money
20
Purchase Returns and Allowances
?Purchase Return,,,
?Merchandise returned by the purchaser to the supplier.
?Purchase Allowance,,,
?A reduction in the cost of defective merchandise
received by a purchaser from a supplier.
Accounts Payable XXX
Inventory XXX
Defective merchandise returned to supplier.
Purchase Returns and Allowances
21
Purchase Returns and Allowances
On Nov,1,Helo Inc,purchased $10,000 of Merchandise
Inventory on account,credit terms are 2/10,n/30.
G E N E R A L J O U R N A L Pa g e 2 9
D a t e D e s c r i pt i on PR D e bi t C r e di t
N ov 1 M e r c ha nd i s e I nv e nt or y 1 0,0 0 0
A c c ou nt s P a y a bl e 1 0,0 0 0
22
Purchase Returns and Allowances
? On Nov 5,Helo Inc,returned $250 of defective
merchandise to the supplier.
G E N E R A L J O U R N A L Pa g e 3 1
D a t e D e s c r i pt i on PR D e bi t C r e di t
N ov 5 A c c ou nt s pa y a bl e 250
M e r c ha nd i s e I nv e nt or y 250
23
Purchase Returns and Allowances
? On Nov 9,Helo Inc,paid the amount owed for the
purchase of Nov 1,G E N E R A L J O U R N A L Pa g e 5 4
D a t e D e s c r i pt i on PR D e bi t C r e di t
N ov 9 A c c ou nt s pa y a bl e 9,7 5 0
M e r c ha nd i s e i nv e nt or y 195
C a s h 9,5 5 5
P ur c ha s e 1 0,0 0 0$
R e t ur n ( 2 5 0 )
A m ount D ue 9,7 5 0
D i s c ount ( 1 9 5 )
C a s h P a i d 9,5 5 5$
24
Transportation Costs
T e r m s
O w n e r s h i p tr a n s fe r s
to b u y e r w h e n g o o d s
a r e p a s s e d to
T r a n s p o r ta ti o n
c o s ts p a i d b y
F O B s h i p p i n g p o i n t C a r r i e r B u y e r
F O B d e s t i n a t i o n B u y e r S e l l e r
Transportation Charges
Inventory XXX
Accounts Payable XXX
Transportation charges on goods purchased FOB
shipping point,
25
Recording Purchases Information
I n v o i c e c o s t o f m e r c h a n d i s e p u r c h a s e s 6 9 2,5 0 0$
L e s s,
P u r c h a s e d i s c o u n t s r e c e i v e d ( 1 0,3 8 8 )
P u r c h a s e r e t u r n s a n d a l l o w a n c e s ( 4,2 7 5 )
A d d,
C o s t o f t r a n s p o r t a t i o n - i n 4,8 9 5
T o t a l c o s t o f m e r c h a n d i s e p u r c h a s e s 6 8 2,7 3 2$
M a t r i x,I n c,
T o t a l C o s t o f M e r c h a n d i s e P u r c h a s e s
F o r Y e a r E n d e d M a y 3 1,2 0 0 2
26
Sales Transactions
? On March 10,
TomCom sold
$20,000 of
merchandise on
account,The
merchandise was
carried in inventory
at a cost of $16,000.
G E N E R A L J O U R N A L Pa g e 3
D a t e D e s c r i p t i o n PR D e b i t C r e d i t
M a r, 10 A c c o u n t s R e c e i v a b l e 2 0,0 0 0
S a l e s 2 0,0 0 0
C o s t o f G o o d s S o l d 1 6,0 0 0
M e r c h a n d i s e I n v e n t o r y 1 6,0 0 0
? For a business engaged in a merchandising activity,revenue takes the
form of sales,
? The entry to record the sale of merchandise on credit under a perpetual
inventory system requires two entries
27
Sales Discounts
? On May 8,Joye Co,sold merchandise costing $3,000 for
$5,000 on account,Credit terms were 2/10,n/30,
?A sales discount is a cash discount taken by customers
against an amount owed to the seller,
G E N E R A L J O U R N A L Pa g e 5
D a t e D e s c r i p t i o n PR D e b i t C r e d i t
M a y 8 A c c o u n t s R e c e i v a b l e 5,0 0 0
S a l e s 5,0 0 0
C o s t o f G o o d s S o l d 3,0 0 0
M e r c h a n d i s e I n v e n t o r y 3,0 0 0
28
Sales Discounts
? On May 17,Joye Co,received
a check for $4,900 in full
payment of the May 8 sale.
G E N E R A L J O U R N A L Pa g e 7
D a t e D e s c r i pt i on PR D e bi t C r e di t
M a y 17 C a s h 4,9 0 0
S a l e s D i s c ou nt s 100
A c c ou nt s R e c e i v a bl e 5,0 0 0
29
Sales Returns and Allowances
?On May 12,Joye Co,sold merchandise costing
$4,000 for $6,000 on account The credit terms
were 2/10,n/30.
G E N E R A L J O U R N A L Pa g e 6
D a t e D e s c r i p t i o n PR D e b i t C r e d i t
M a y 12 A c c o u n t s R e c e i v a b l e 6,0 0 0
S a l e s 6,0 0 0
C o s t o f G o o d s S o l d 4,0 0 0
M e r c h a n d i s e I n v e n t o r y 4,0 0 0
30
Sales Returns and Allowances
?On May 14,merchandise with a sales price of
$600 and a cost of $400 was returned to Joye Co,
The return is related to the May 12 sale.
G E N E R A L J O U R N A L Pa g e 7
D a t e D e s c r i p t i o n PR D e b i t C r e d i t
M a y 14 S a l e s R e t u r n s a n d A l l o w a n c e 600
A c c o u n t s R e c e i v a b l e 600
M e r c h a n d i s e I n v e n t o r y 400
C o s t o f G o o d s S o l d 400
31
Sales Returns and Allowances
?On May 20,Joye received the amount owed to it
from the sale of May 12,G E N E R A L J O U R N A L Pa g e 7
D a t e D e s c r i pt i on PR D e bi t C r e di t
M a y 20 C a s h 5,2 9 2
S a l e s D i s c ou nt s 108
A c c ou nt R e c e i v a bl e 5,4 0 0
S a l e 6,0 0 0$
R e t ur n ( 6 0 0 )
A m ount D ue 5,4 0 0$
D i s c ount ( 1 0 8 )
C a s h R e c e i v e d 5,2 9 2$
32
Recording Sales Information
U n i x I n c,
C o m p u t a t i o n o f G r o s s P r o f i t
F o r Y e a r E n d e d D e c e m b e r 3 1,2 0 0 2
S a l e s 2,4 5 1,0 0 0$
L e s s,
S a l e s d i s c o u n t s 2 9,4 1 2$
S a l e s r e t u r n s a n d a l l o w a n c e s 1 8,5 0 0 4 7,9 1 2
N e t s a l e s 2,4 0 3,0 8 8$
C o s t o f g o o d s s o l d ( 1,9 2 8,6 0 0 )
G r o s s p r o f i t 4 7 4,4 8 8$
Sales discounts and returns
and allowances are
Contra Revenue accounts.
33
Adjustments-Perpetual Inventory
?Perpetual inventory systems keep a
running total of inventory levels by
recording sales and purchase
transactions.
?Periodic adjustments must be made to
account for shrinkage (loss due to theft
or deterioration of inventory).
34
Inventory per accounting records,$198,000
Inventory per physical count,$194,200
Difference (shrinkage) $3,800
Adjustment required:
Adjustments-Perpetual Inventory
Oct.31 Cost of Goods Sold 3,800
Inventory 3,800
To record inventory shrinkage revealed by
physical count.
35
Closing Entries-Perpetual System
?The closing process is similar for
merchandising and service companies.
Merchandising companies have additional
temporary accounts that must be closed,
These include:
?Sales
?Sales Returns & Allowances
?Sales Discounts
?Cost of Goods Sold
36
Discussion Case
CIMC
CIMC is the number one stock in China,mainly due to its
“excellent” operating performance,However,in early
2005,the operating performance of CIMC was
challenged,Analysts argued that,the surprisingly high
operating performance is questionable,Specifically,
abnormal growth was found in the following items,
?Sales revenue
?Gross profits
?Accounts receivable
?Inventory
However,no growth was found in cash collected from
customers.
37
Discussion Case
?Required:
?How to calculate the growth
rates in sales,gross profits,
inventory,accounts
receivables,and cash?
?Are there are relationships
between the above items?
?How to verify the growth in
above items?
38
Summary
? The operating cycle of merchandise companies begins with the
purchase of merchandise and end with the collection of cash from
the sale of merchandise.
? Perpetual method and period method are two inventory systems,
Today perpetual method is more and more adopted.
? Accounting for merchandise purchases records purchases,trade
discount,cash discounts,purchase returns and allowance,
transportation costs.
? Accounting for sales transactions records sales,sales discount,sales
returns and allowance,etc.
? Under perpetual inventory system,adjustments must be made for
shrinkage at the end of period.
? Closing entries transfers balances in sales,sales returns and
allowance,sales discounts and cost of goods sold into income
summary account.
The End of Lesson 6
Accounting for
Merchandising Activities
Task Team of
FUNDAMENTAL ACCOUNTING
School of Business,Sun Yat-sen University
2
Outline
? Merchandising activities
? Operating cycle of merchandising
companies
? Merchandising cost accounts
? Inventory systems
? Merchandise purchases
? Sales transactions
? Adjusting and closing entries
3
Introduction
?Scandals in stock market occur now and then,
Among them,financial frauds or income
manipulation are common,Income manipulation
typically starts from making up sales revenues as
well as purchases,for example,GuangXia
(Yinchuan),
?In this lesson you are required to think about,
?Why these income statement numbers are so
important?
?How they are recorded in accounting system?
4
Manufacturer Wholesaler Retailer Customer
Merchandising Companies
Merchandising Activities
5
Reporting Financial Performance
?Service organizations sell time to earn revenue.
?Examples,accounting firms,law firms,and plumbing
services
Revenues Expenses Netincome＝－
6
Reporting Financial Performance
? Merchandising companies sell merchandise to earn revenue,
?Examples,sporting goods,clothing,and auto parts stores
Net
Sales
Cost of
Goods Sold
Gross
Profit Expenses
Net
Income
－ ＝ － ＝
7
Operating Cycle of Merchandise
Companies
?Begins with the purchase of merchandise and ends with the
collection of cash from the sale of merchandise.
Purchases
Merchandise
inventory
Credit sales
Account
receivable
Cash
collectionPurchases
Merchandise
inventory
Cash
sales
Cash Sale Credit Sale
8
Merchandising Cost Accounts
+
+
Beginning inventory
Year 1
Net cost of
purchases
Merchandise
available for sale
Ending Inventory
Year 1
Cost of Goods
Sold
=
Income
Statement
Becomes beginning
inventory of Year 2
Balance
Sheet
9
Inventory Systems
?Periodic Method
Requires updating the inventory account only at the end of
the period,Acquisition of merchandise inventory is
recorded in a temporary Purchases account.
?Perpetual Method
Gives a continual record of the amount of inventory on
hand,When an item is sold it is recorded in the Cost of
Goods Sold account.
10
Inventory Systems
?Perpetual provides a continuous record of:
?The amount of inventory on hand.
?Cost of goods sold to date.
?Periodic requires a physical count of goods
to determine:
?The amount of inventory on hand.
?Cost of goods sold.
11
Comparison of Perpetual and
Periodic Systems
So u r c e o f I n fo r m a ti o n
E q u a ti o n Pe r i o d i c Sy s te m Pe r p e tu a l Sy s te m
B e g i n n i n g I n v e n to r y
C a r r i e d o v e r fr o m
p r i o r p e r i o d
C a r r i e d o v e r fr o m
p r i o r p e r i o d
A d d, Pu r c h a s e s
A c c u m u l a te d i n th e
Pu r c h a s e s a c c o u n t
A c c u m u l a te d i n th e
I n v e n to r y a c c o u n t
E q u a l s,
L e s s, E n d i n g I n v e n to r y
Me a s u r e d a t e n d o f
p e r i o d b y p h y s i c a l
i n v e n to r y c o u n t
Pe r p e tu a l r e c o r d
u p d a te d a t e v e r y s a l e
C o s t o f G o o d s So l d
C o m p u te d a s a
r e s i d u a l a m o u n t a t
e n d o f p e r i o d
Me a s u r e d a t e v e r y
s a l e b a s e d o n
p e r p e tu a l r e c o r d
C o s t o f G o o d s A v a i l a b l e fo r Sa l e
12
P u r c h a s e s XX I n v e n to r y XX
A c c o u n ts P a y a b l e X X A c c o u n ts P a y a b l e
X X
A c c o u n ts P a y a b l e XX A c c o u n ts P a y a b l e XX
P u r c h a s e s R e tu r n s & A l l o w, X X I n v e n to r y
X X
A c c o u n ts R e c e i v a b l e XX A c c o u n ts R e c e i v a b l e XX
S a l e s X X S a l e s X X
C o s t o f G o o d s S o l d XX
I n v e n to r y X X
M e r c h a n d i s e
s o l d to
c u s to m e r o n
a c c o u n t.
M e r c h a n d i s e
p u r c h a s e d fr o m
s u p p l i e r o n
a c c o u n t.
M e r c h a n d i s e
r e tu r n e d to
s u p p l i e r,
Comparison of Periodic and
Perpetual Systems
13
T r a n s a c t i o n P e r i o d i c P e r p e t u a l
M e r c h a n d i s e
r e tu r n e d b y
c u s to m e r, Sa l e s R e tu r n s a n d A l l o w, XX Sa l e s R e tu r n s a n d A l l o w, XX
A c c o u n ts R e c e i v a b l e XX A c c o u n ts R e c e i v a b l e XX
I n v e n to r y XX
C o s t o f G o o d s So l d XX
A t e n d o f
a c c o u n ti n g
p e r i o d, C o s t o f G o o d s So l d XX N o e n tr y,
I n v e n to r y (b e g i n n i n g ) XX
Pu r c h a s e s XX
I n v e n to r y (e n d i n g ) XX
C o s t o f G o o d s So l d XX
Comparison of Periodic and
Perpetual Systems
14
Oct,1 Inventory 5,000
Accounts Payable /cash 5,000
Purchased inventory.
?The operating cycle of merchandise companies
involves the purchase and subsequent sale of
merchandise inventory,
?Purchase of inventory can either on account or by
cash.
Merchandise Purchases
15
Trade Discounts
Trade discounts are used by manufacturers and wholesalers
to change selling prices without republishing their catalogs.
Example
MarCo,Inc,offers a 20% trade
discount on orders of 100
units or more of their popular
product Racer,Each Racer
has a list price of $5.00.
Q ua nt i t y s ol d 100
P r i c e pe r un i t 5, 0 0$
To t a l 500
Le s s 2 0 % di s c ou nt ( 1 0 0 )
I nv oi c e pri c e 400$
16
?Purchase discount is a deduction from the invoice
price granted to induce early payment of the
amount due,Example – 2/10,n30
Terms
Time
Due
Discount Period
= 10 days
(Full amount minus 2%
discount) due between
Oct.1 and Oct.11
Credit Period = 30 days
Full amount due
anytime between
Oct.12 and Oct.31
Purchase
Oct.1 Oct.11 Oct.31
Purchase Discounts
17
2/10,n/30
Purchase Discounts
Discount
Percent
Number of
Days
Discount Is
Available
Otherwise,
Net (or All)
Is Due
Credit
Period
18
?Assume the purchase of $4,000 inventory on
October 1 was on the terms 2/10,n30.
Case 2-Discount not taken
Oct.31 Accounts Payable 4,000
Cash 4,000
Purchase Discounts
Oct.11 Accounts Payable 4,000
Inventory 80
Cash 3,920
2% x (5,000 - 1,000) = 80
Case 1-Discount taken
19
Managing Discounts
?Failing to take a 2/10,n/30 discount is really
expensive!
365 days ÷ 20 days × 2% = 36.5% annual rate
Days
in a
year
Number
of additional
days before
payment
Percent
paid to
keep
money
20
Purchase Returns and Allowances
?Purchase Return,,,
?Merchandise returned by the purchaser to the supplier.
?Purchase Allowance,,,
?A reduction in the cost of defective merchandise
received by a purchaser from a supplier.
Accounts Payable XXX
Inventory XXX
Defective merchandise returned to supplier.
Purchase Returns and Allowances
21
Purchase Returns and Allowances
On Nov,1,Helo Inc,purchased $10,000 of Merchandise
Inventory on account,credit terms are 2/10,n/30.
G E N E R A L J O U R N A L Pa g e 2 9
D a t e D e s c r i pt i on PR D e bi t C r e di t
N ov 1 M e r c ha nd i s e I nv e nt or y 1 0,0 0 0
A c c ou nt s P a y a bl e 1 0,0 0 0
22
Purchase Returns and Allowances
? On Nov 5,Helo Inc,returned $250 of defective
merchandise to the supplier.
G E N E R A L J O U R N A L Pa g e 3 1
D a t e D e s c r i pt i on PR D e bi t C r e di t
N ov 5 A c c ou nt s pa y a bl e 250
M e r c ha nd i s e I nv e nt or y 250
23
Purchase Returns and Allowances
? On Nov 9,Helo Inc,paid the amount owed for the
purchase of Nov 1,G E N E R A L J O U R N A L Pa g e 5 4
D a t e D e s c r i pt i on PR D e bi t C r e di t
N ov 9 A c c ou nt s pa y a bl e 9,7 5 0
M e r c ha nd i s e i nv e nt or y 195
C a s h 9,5 5 5
P ur c ha s e 1 0,0 0 0$
R e t ur n ( 2 5 0 )
A m ount D ue 9,7 5 0
D i s c ount ( 1 9 5 )
C a s h P a i d 9,5 5 5$
24
Transportation Costs
T e r m s
O w n e r s h i p tr a n s fe r s
to b u y e r w h e n g o o d s
a r e p a s s e d to
T r a n s p o r ta ti o n
c o s ts p a i d b y
F O B s h i p p i n g p o i n t C a r r i e r B u y e r
F O B d e s t i n a t i o n B u y e r S e l l e r
Transportation Charges
Inventory XXX
Accounts Payable XXX
Transportation charges on goods purchased FOB
shipping point,
25
Recording Purchases Information
I n v o i c e c o s t o f m e r c h a n d i s e p u r c h a s e s 6 9 2,5 0 0$
L e s s,
P u r c h a s e d i s c o u n t s r e c e i v e d ( 1 0,3 8 8 )
P u r c h a s e r e t u r n s a n d a l l o w a n c e s ( 4,2 7 5 )
A d d,
C o s t o f t r a n s p o r t a t i o n - i n 4,8 9 5
T o t a l c o s t o f m e r c h a n d i s e p u r c h a s e s 6 8 2,7 3 2$
M a t r i x,I n c,
T o t a l C o s t o f M e r c h a n d i s e P u r c h a s e s
F o r Y e a r E n d e d M a y 3 1,2 0 0 2
26
Sales Transactions
? On March 10,
TomCom sold
$20,000 of
merchandise on
account,The
merchandise was
carried in inventory
at a cost of $16,000.
G E N E R A L J O U R N A L Pa g e 3
D a t e D e s c r i p t i o n PR D e b i t C r e d i t
M a r, 10 A c c o u n t s R e c e i v a b l e 2 0,0 0 0
S a l e s 2 0,0 0 0
C o s t o f G o o d s S o l d 1 6,0 0 0
M e r c h a n d i s e I n v e n t o r y 1 6,0 0 0
? For a business engaged in a merchandising activity,revenue takes the
form of sales,
? The entry to record the sale of merchandise on credit under a perpetual
inventory system requires two entries
27
Sales Discounts
? On May 8,Joye Co,sold merchandise costing $3,000 for
$5,000 on account,Credit terms were 2/10,n/30,
?A sales discount is a cash discount taken by customers
against an amount owed to the seller,
G E N E R A L J O U R N A L Pa g e 5
D a t e D e s c r i p t i o n PR D e b i t C r e d i t
M a y 8 A c c o u n t s R e c e i v a b l e 5,0 0 0
S a l e s 5,0 0 0
C o s t o f G o o d s S o l d 3,0 0 0
M e r c h a n d i s e I n v e n t o r y 3,0 0 0
28
Sales Discounts
? On May 17,Joye Co,received
a check for $4,900 in full
payment of the May 8 sale.
G E N E R A L J O U R N A L Pa g e 7
D a t e D e s c r i pt i on PR D e bi t C r e di t
M a y 17 C a s h 4,9 0 0
S a l e s D i s c ou nt s 100
A c c ou nt s R e c e i v a bl e 5,0 0 0
29
Sales Returns and Allowances
?On May 12,Joye Co,sold merchandise costing
$4,000 for $6,000 on account The credit terms
were 2/10,n/30.
G E N E R A L J O U R N A L Pa g e 6
D a t e D e s c r i p t i o n PR D e b i t C r e d i t
M a y 12 A c c o u n t s R e c e i v a b l e 6,0 0 0
S a l e s 6,0 0 0
C o s t o f G o o d s S o l d 4,0 0 0
M e r c h a n d i s e I n v e n t o r y 4,0 0 0
30
Sales Returns and Allowances
?On May 14,merchandise with a sales price of
$600 and a cost of $400 was returned to Joye Co,
The return is related to the May 12 sale.
G E N E R A L J O U R N A L Pa g e 7
D a t e D e s c r i p t i o n PR D e b i t C r e d i t
M a y 14 S a l e s R e t u r n s a n d A l l o w a n c e 600
A c c o u n t s R e c e i v a b l e 600
M e r c h a n d i s e I n v e n t o r y 400
C o s t o f G o o d s S o l d 400
31
Sales Returns and Allowances
?On May 20,Joye received the amount owed to it
from the sale of May 12,G E N E R A L J O U R N A L Pa g e 7
D a t e D e s c r i pt i on PR D e bi t C r e di t
M a y 20 C a s h 5,2 9 2
S a l e s D i s c ou nt s 108
A c c ou nt R e c e i v a bl e 5,4 0 0
S a l e 6,0 0 0$
R e t ur n ( 6 0 0 )
A m ount D ue 5,4 0 0$
D i s c ount ( 1 0 8 )
C a s h R e c e i v e d 5,2 9 2$
32
Recording Sales Information
U n i x I n c,
C o m p u t a t i o n o f G r o s s P r o f i t
F o r Y e a r E n d e d D e c e m b e r 3 1,2 0 0 2
S a l e s 2,4 5 1,0 0 0$
L e s s,
S a l e s d i s c o u n t s 2 9,4 1 2$
S a l e s r e t u r n s a n d a l l o w a n c e s 1 8,5 0 0 4 7,9 1 2
N e t s a l e s 2,4 0 3,0 8 8$
C o s t o f g o o d s s o l d ( 1,9 2 8,6 0 0 )
G r o s s p r o f i t 4 7 4,4 8 8$
Sales discounts and returns
and allowances are
Contra Revenue accounts.
33
Adjustments-Perpetual Inventory
?Perpetual inventory systems keep a
running total of inventory levels by
recording sales and purchase
transactions.
?Periodic adjustments must be made to
account for shrinkage (loss due to theft
or deterioration of inventory).
34
Inventory per accounting records,$198,000
Inventory per physical count,$194,200
Difference (shrinkage) $3,800
Adjustment required:
Adjustments-Perpetual Inventory
Oct.31 Cost of Goods Sold 3,800
Inventory 3,800
To record inventory shrinkage revealed by
physical count.
35
Closing Entries-Perpetual System
?The closing process is similar for
merchandising and service companies.
Merchandising companies have additional
temporary accounts that must be closed,
These include:
?Sales
?Sales Returns & Allowances
?Sales Discounts
?Cost of Goods Sold
36
Discussion Case
CIMC
CIMC is the number one stock in China,mainly due to its
“excellent” operating performance,However,in early
2005,the operating performance of CIMC was
challenged,Analysts argued that,the surprisingly high
operating performance is questionable,Specifically,
abnormal growth was found in the following items,
?Sales revenue
?Gross profits
?Accounts receivable
?Inventory
However,no growth was found in cash collected from
customers.
37
Discussion Case
?Required:
?How to calculate the growth
rates in sales,gross profits,
inventory,accounts
receivables,and cash?
?Are there are relationships
between the above items?
?How to verify the growth in
above items?
38
Summary
? The operating cycle of merchandise companies begins with the
purchase of merchandise and end with the collection of cash from
the sale of merchandise.
? Perpetual method and period method are two inventory systems,
Today perpetual method is more and more adopted.
? Accounting for merchandise purchases records purchases,trade
discount,cash discounts,purchase returns and allowance,
transportation costs.
? Accounting for sales transactions records sales,sales discount,sales
returns and allowance,etc.
? Under perpetual inventory system,adjustments must be made for
shrinkage at the end of period.
? Closing entries transfers balances in sales,sales returns and
allowance,sales discounts and cost of goods sold into income
summary account.
The End of Lesson 6
