Introductory Accounting


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Introductory Accounting

  1. 1. Introductory Accounting Merchandising Operations
  2. 2. Three Basic Types of Companies <ul><li>Service Organization </li></ul><ul><li>Merchandising Organization </li></ul><ul><li>Manufacturing Organization </li></ul>
  3. 3. Comparison of a Service Business and a Merchandising Business <ul><li>Service </li></ul><ul><ul><li>Revenues </li></ul></ul><ul><ul><li>Less Expenses </li></ul></ul><ul><ul><li>Net Income </li></ul></ul><ul><li>Merchandising </li></ul><ul><ul><li>Net Sales </li></ul></ul><ul><ul><li>Less Cost of Goods Sold </li></ul></ul><ul><ul><li>Gross Profit </li></ul></ul><ul><ul><li>Less Operating Expenses </li></ul></ul><ul><ul><li>Net Operating Income </li></ul></ul><ul><ul><li>Non-Operating Revenues and Expenses </li></ul></ul><ul><ul><li>Net Income </li></ul></ul>
  4. 4. New Accounts Associated With a Merchandising Business
  5. 5. Cost of Goods Sold= Cost of Inventory Sold <ul><li>Perpetual Method </li></ul><ul><ul><li>Detailed records are kept of each purchase and sale of inventory </li></ul></ul><ul><ul><li>Generally computerized </li></ul></ul><ul><li>We will be studying this method in Chapter Five </li></ul><ul><li>Periodic Method </li></ul><ul><ul><li>No detailed records of cost of sales is kept. To know inventory one has to count it. </li></ul></ul><ul><ul><li>Used by smaller companies and companies selling lots of low dollar items </li></ul></ul><ul><li>We will study this method in Chapter Six </li></ul>
  6. 6. Advantages of each Inventory System <ul><li>Advantages of Perpetual </li></ul><ul><ul><li>Know how much you have on hand at all times </li></ul></ul><ul><ul><li>No need to count inventory on a weekly or monthly basis </li></ul></ul><ul><ul><li>No need to estimate inventory </li></ul></ul><ul><li>Advantages of Periodic </li></ul><ul><ul><li>Simple </li></ul></ul><ul><ul><li>Less record-keeping </li></ul></ul>
  7. 7. Purchasing Inventory using Perpetual Method <ul><li>Cost of merchandise taken directly to the Inventory Account </li></ul><ul><li>Example: Buy $1,000 of merchandise for cash </li></ul><ul><ul><li>Debit Inventory for $1,000 </li></ul></ul><ul><ul><li>Credit Cash for $1,000 </li></ul></ul><ul><li>If purchased the merchandise on account </li></ul><ul><ul><li>Debit Inventory for $1,000 </li></ul></ul><ul><ul><li>Credit Accounts Payable for $1,000 </li></ul></ul>
  8. 8. Additional Considerations of Purchasing Merchandise <ul><li>Purchase Returns and Allowances </li></ul><ul><li>Assume returned $100 of the merchandise purchased on account </li></ul><ul><ul><li>Debit Accounts Payable 100 </li></ul></ul><ul><ul><li>Credit Inventory 100 </li></ul></ul>
  9. 9. Additional Considerations of Purchasing Inventory--Maintaining the Records Item: Widgets Date Purchases Sales and Returns Balance Pur. Date 1,000 1,000 Ret. Date 100 900 One must update one of these record for each item or type of inventory one has.
  10. 10. Additional Considerations of Purchasing Inventory- Adjustments to the Purchase Price <ul><li>Trade or Quantity Discounts </li></ul><ul><ul><li>Given to classes of customers </li></ul></ul><ul><ul><li>Given to customers who purchase large quantities </li></ul></ul><ul><ul><li>Terms include a 20% quantity discount </li></ul></ul><ul><ul><li>These are deducted directly from sales without a separate account </li></ul></ul><ul><li>MFX purchased $20,000 of merchandise on account from Eugene subject to a 20% quantity discount. </li></ul><ul><li>Entry </li></ul><ul><ul><li>Debit to Inventory for $16,000 </li></ul></ul><ul><ul><li>Credit to Accounts Payable for $16,000 </li></ul></ul><ul><li>What would the entry be if discount is 20%-10%? (a string of discounts) </li></ul>
  11. 11. Additional Considerations of Purchasing Inventory--Adjustments to the Purchase Price <ul><li>Cash or Purchased Discounts </li></ul><ul><ul><li>Given to customers who buy on credit and pay their accounts promptly </li></ul></ul><ul><ul><li>Recorded in the accounts when paid for </li></ul></ul><ul><ul><li>Normal terminology is 2/10 n/30 </li></ul></ul><ul><li>Example </li></ul><ul><ul><li>Purchased $1,000 of merchandise on 1/1/1, terms 2/10 n/30 </li></ul></ul><ul><ul><li>Entry to record purchase </li></ul></ul><ul><ul><ul><li>Debit Inventory for $1,000 </li></ul></ul></ul><ul><ul><ul><li>Credit Accounts Payable for $1,000 </li></ul></ul></ul>
  12. 12. Additional Considerations of Purchasing Inventory--Adjustment to the Purchase Price <ul><li>Example Continued </li></ul><ul><ul><li>Entry if pay within 10 days </li></ul></ul><ul><ul><ul><li>Debit Accounts Payable for $1,000 </li></ul></ul></ul><ul><ul><ul><li>Credit Cash for $980 </li></ul></ul></ul><ul><ul><ul><li>Credit Inventory for $20 </li></ul></ul></ul><ul><ul><li>What would your entry be if you paid after the 10th day? </li></ul></ul><ul><ul><ul><li>Debit Accounts Payable for $1,000 </li></ul></ul></ul><ul><ul><ul><li>Credit Cash for $1,000 </li></ul></ul></ul>
  13. 13. Putting in all together <ul><li>Buy $5,000 of merchandise subject to a 20% quantity discount---terms 2/10,n/30 </li></ul><ul><ul><li>Debit Inventory 4,000 </li></ul></ul><ul><ul><li>Credit Accounts Payable 4,000 </li></ul></ul><ul><li>Return Merchandise with a list price of $500 purchased above </li></ul><ul><ul><li>Debit Accounts Payable 400 </li></ul></ul><ul><ul><li>Credit Inventory 400 </li></ul></ul>
  14. 14. Putting it all together <ul><li>Paid for the merchandise less return within 10 days </li></ul><ul><ul><li>Debit Accounts Payable 3,600 </li></ul></ul><ul><ul><li>Credit Cash 3,528 </li></ul></ul><ul><ul><li>Credit Inventory 72 </li></ul></ul><ul><li>Paid for the merchandise on the 30th day </li></ul><ul><ul><li>Debit Accounts Payable 3,600 </li></ul></ul><ul><ul><li>Credit Cash 3,600 </li></ul></ul>
  15. 15. Does it pay to worry about a 2% discount? What if you don’t have the cash and have to borrow money at 12% interest?
  16. 16. Handling Freight Costs <ul><li>FOB rules determines who pays the shipping costs and when title or ownership transfers </li></ul><ul><li>This can be extremely complicated in the real world as some suppliers prepay the freight. </li></ul><ul><li>In our simple life-- </li></ul><ul><ul><li>Shipping point--buyer pays </li></ul></ul><ul><ul><li>Destination--seller pays </li></ul></ul>
  17. 17. Handling Freight Costs <ul><li>Basic Entries is you are paying </li></ul><ul><ul><li>For Merchandise coming in </li></ul></ul><ul><ul><ul><li>Debit Inventory </li></ul></ul></ul><ul><ul><ul><li>Credit Cash </li></ul></ul></ul><ul><ul><li>For Merchandise Going out </li></ul></ul><ul><ul><ul><li>Debit Freight out or Delivery Expense </li></ul></ul></ul><ul><ul><ul><li>Credit Cash </li></ul></ul></ul>
  18. 18. Sales of merchandise under the Perpetual Method <ul><li>Sale of merchandise for cash with a selling price of $2,000 and a cost of $800 </li></ul><ul><ul><li>Debit Cash for $2,000 </li></ul></ul><ul><ul><li>Credit Sales of $2,000 </li></ul></ul><ul><ul><li>Debit Cost of Goods Sold for $800 </li></ul></ul><ul><ul><li>Credit Inventory for $800 </li></ul></ul>
  19. 19. Sales of merchandise under the Perpetual Method <ul><li>Sold $2,000 of merchandise on credit. Cost of merchandise was $800. Collected the account receivable. </li></ul><ul><ul><li>Debit Accounts Receivable for $2,000 </li></ul></ul><ul><ul><li>Credit Sales for $2,000 </li></ul></ul><ul><ul><li>Debit Cost of Goods sold for $800 </li></ul></ul><ul><ul><li>Credit Inventory for $800 </li></ul></ul><ul><ul><li>Debit Cash for $2,000 </li></ul></ul><ul><ul><li>Credit Accounts Receivable $2,000 </li></ul></ul>
  20. 20. Sales Returns and Allowances <ul><li>Assume sold $1,000 of merchandise, cost $550 on credit. Returned two days later, clerk granted them credit </li></ul><ul><li>For Sale </li></ul><ul><ul><li>Debit Accounts Receivable 1000 </li></ul></ul><ul><ul><li>Credit Sales 1,000 </li></ul></ul><ul><ul><li>Debit Cost of Goods Sold 550 </li></ul></ul><ul><ul><li>Credit Inventory 550 </li></ul></ul>
  21. 21. Sales Returns Continued <ul><li>For Return on Credit </li></ul><ul><ul><li>Debit Sales Returns 1000 </li></ul></ul><ul><ul><li>Credit Accounts Receivable 1000 </li></ul></ul><ul><ul><li>Debit Inventory 550 </li></ul></ul><ul><ul><li>Credit Cost of Goods Sold 550 </li></ul></ul><ul><li>For Return for Cash </li></ul><ul><ul><li>Debit Sales Returns 1000 </li></ul></ul><ul><ul><li>Credit Cash 1,000 </li></ul></ul><ul><ul><li>Debit Inventory 550 </li></ul></ul><ul><ul><li>Credit Cost of Goods Sold 550 </li></ul></ul>
  22. 22. Sales Discounts--Trade or Quantity and Sales or Cash <ul><li>Sold $5,000 of merchandise costing $2550 subject to a 10% quantity discount with selling terms of 1/10,n/30 on 9/1 </li></ul><ul><ul><li>Debit Accounts Receivable 4,500 </li></ul></ul><ul><ul><li>Credit Sales 4,500 </li></ul></ul><ul><ul><li>Debit Cost of Goods Sold 2,550 </li></ul></ul><ul><ul><li>Credit Inventory 2,550 </li></ul></ul><ul><li>Received Payment on 9/10 </li></ul><ul><ul><li>Debit Cash 4455 </li></ul></ul><ul><ul><li>Debit Sales Discounts 45 </li></ul></ul><ul><ul><li>Credit Accounts Receivable 4,500 </li></ul></ul><ul><li>What would entry be if received on 9/30? </li></ul>
  23. 23. Answers to Class Exercise Debit Inventory 25,000 Credit Accounts Payable 25,000 Debit Inventory 16,200 Credit Accounts Payable 16,200 Debit Inventory 300 Credit Cash 300
  24. 24. Debit Accounts Payable 2000 Credit Inventory 2,000 Debit Accounts Receivable 5,000 Credit Sales 5,000 and Debit Cost of goods Sold 3,000 Credit Inventory 3,000
  25. 25. Debit Accounts Receivable 6,000 Credit Sales 6,000 and Debit Cost of Good Sold 4,000 Credit Inventory 4,000 Debit Freight Out 80 Credit Cash 80
  26. 26. Debit Accounts Payable 23,000 Credit Cash 22,310 Credit Inventory 690 Debit Sales Returns 2,000 Credit Accounts Receivable 2,000 and Debit Inventory 1,300 Credit Cost of Goods Sold 1,300
  27. 27. Debit Inventory 1,000 Credit Cash 1,000 Debit Cash 4,950 Debit Sales Discounts 50 Credit Accounts Receivable 5,000 Debit Accounts Payable 16,200 Credit Cash 16,200 Debit Cash 4,000 Credit Accounts Receivable 4,000
  28. 28. See how you do on an Income Statement <ul><li>Sales 11,000 </li></ul><ul><li>L. Sales R (2,000) </li></ul><ul><li>L. Sales Dis ( 50) </li></ul><ul><li>Net Sales 8,950 </li></ul><ul><li>Cost of GS 5,700 </li></ul><ul><li>Gross Profit 3,250 </li></ul>
  29. 29. The Worksheet for Dalbee is on Excel. Using Network Applications get excel and you can print the solution.
  30. 30. Closing entries for Dalbee <ul><li>Debit Sales 97,400 </li></ul><ul><li>Credit Income Summary 97,400 </li></ul><ul><li>Debit Income Summary 107,679 </li></ul><ul><li>Credit Sales Returns 400 </li></ul><ul><li>Credit Cost of Goods Sold 59,440 </li></ul><ul><li>Credit Salaries Expense 35,000 </li></ul><ul><li>Credit Utilities Expense 8,543 </li></ul><ul><li>Credit Miscellaneous Expense 2,496 </li></ul><ul><li>Credit Insurance Expense 800 </li></ul><ul><li>Credit Depreciation Expense 1,000 </li></ul>
  31. 31. Closing Entries for Dalbee <ul><li>Debit Retained Earnings 10,279 </li></ul><ul><li>Credit Income Summary 10,279 </li></ul><ul><li>Notice how this is a net loss. </li></ul><ul><li>There were no dividends!! </li></ul>