Retailing

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Retailing

  1. 1. Chapter 5 Accounting for retail operations PowerPoint presentation by Dr Anne Abraham University of Western Sydney ©2009 John Wiley & Sons Australia, Ltd
  2. 2. RETAIL OPERATIONS <ul><li>Income for a retailer </li></ul><ul><ul><li>The primary source of source is the sale of inventory </li></ul></ul><ul><ul><li>Often known as sales revenue or sales </li></ul></ul><ul><li>Expenses for a retailer </li></ul><ul><ul><li>1. cost of sales (COS) = total cost of inventory sold during the period </li></ul></ul><ul><ul><li>2. Other expenses = expenses incurred in the process of earning sales revenue </li></ul></ul><ul><li>Gross profit is sales revenue less COS </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney LO1
  3. 3. RETAIL OPERATIONS continued <ul><li>Revenue management process </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Sales revenue Cost of sales Gross profit Operating expenses Profit (loss) Equals Less Less Equals
  4. 4. Operating cycles <ul><li>The operating cycle of a retailer is usually longer than that of a service business because they must purchase and sell inventory </li></ul><ul><li>A retail business has a current asset account called Inventory or Stock </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  5. 5. Inventory systems <ul><li>1. Perpetual inventory system </li></ul><ul><ul><li>Maintains detailed records of cost of each inventory purchase and sale </li></ul></ul><ul><ul><li>Made easier with use of bar codes and optical scanners </li></ul></ul><ul><ul><li>COS is determined at time a sale occurs </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Illustrated in this chapter
  6. 6. Inventory systems continued <ul><li>To determine cost of sales under periodic system: </li></ul><ul><ul><li>1. Determine cost of goods on hand at beginning of period </li></ul></ul><ul><ul><li>2. Add the cost of goods purchased </li></ul></ul><ul><ul><li>3. Subtract cost of goods on hand at end of period </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  7. 7. Inventory systems continued <ul><li>2. Periodic inventory system </li></ul><ul><ul><li>Detailed inventory records of goods on hand not kept throughout the period </li></ul></ul><ul><ul><li>Physical count of inventory at the end of the period to determine cost of goods on hand (inventory) </li></ul></ul><ul><ul><li>COS determined only at end of accounting period </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Described in Appendix
  8. 8. RECORDING PURCHASES OF INVENTORY <ul><li>Purchases of inventory may be made for cash or on account </li></ul><ul><li>The purchase is normally recorded by the purchaser when the goods are received from the seller </li></ul><ul><li>Each credit purchase should be supported by a purchase invoice </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney LO2
  9. 9. Purchases continued <ul><li>Example </li></ul><ul><ul><li>Purchase of inventory on credit from Sellers Electrics </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 5 Inventory 3 800 Accounts Payable 3 800 (To record goods purchased on account from Sellers Electrics)
  10. 10. Purchases returns and allowances <ul><li>A purchase return is the return of goods by the customer because … </li></ul><ul><ul><li>Goods are damaged or defective </li></ul></ul><ul><ul><li>Goods are of inferior quality </li></ul></ul><ul><ul><li>Goods do not meet purchaser’s specifications </li></ul></ul><ul><li>The customer will receive a refund in the form of either credit or cash </li></ul><ul><li>A purchase allowance occurs where the sell keeps the goods and a reduction in price is granted </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  11. 11. <ul><li>Example </li></ul><ul><ul><li>Goods costing $300 are returned to Sellers Electrics </li></ul></ul>Purchases returns and allowances continued PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 8 Accounts Payable 300 Inventory 300 (To record return of goods received from Sellers Electrics)
  12. 12. Freight costs <ul><li>Sales agreement should indicate whether the seller or the buyer is to pay freight charges </li></ul><ul><li>FOB delivery means that goods are placed free on board the carrier by the seller and the purchaser pays the freight </li></ul><ul><li>FOB destination means that goods are placed free on board to the buyer’s place of business, and the seller pays the freight </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  13. 13. Freight costs continued <ul><li>Cost of freight is added to the cost of inventory where cost is charged to the buyer </li></ul><ul><li>Cost is allocated to Freight-in account </li></ul><ul><li>Example </li></ul><ul><ul><li>Beyer Video pays Acme Freight Company $150 for freight charges </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 6 Freight-in 150 Cash 150 (To record payment of freight on goods purchased)
  14. 14. Freight costs continued <ul><li>Freight costs incurred by the seller are an operating expense to the seller </li></ul><ul><li>These costs are included as part of delivery or freight-out expenses </li></ul><ul><li>Example </li></ul><ul><ul><li>Sellers Electrics paid freight charges $150 for goods sold </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney May 4 Freight-out 150 Cash 150 (To record payment of freight on goods sold)
  15. 15. Purchase discounts <ul><li>The credit terms of a purchase may allow a buyer to claim a cash discount for prompt payment of an account </li></ul><ul><li>Example </li></ul><ul><ul><li>Beyer Video settles account outstanding of $3500 and receives a 2% discount (or $70) </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 15 Accounts Payable 3 500 Cash 3 430 Discount Received 70 (To record payment within the discount period)
  16. 16. Purchase discounts continued <ul><li>Trade discounts (or quantity discounts) are a percentage reduction in the list price of inventory sold </li></ul><ul><li>Example </li></ul><ul><ul><li>List price quoted is $400 per item with a trade discount 10% if 10 or more items purchased (as in this case) </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney May 16 Inventory 3 600 Accounts Payable 3 600 (To record purchase of inventory on account with a trade discount of $400)
  17. 17. RECORDING SALES OF INVENTORY <ul><li>Sales revenues are recorded when earned (revenue recognition principle) </li></ul><ul><li>Evidence of sales is provided by: </li></ul><ul><ul><li>A sales invoice for a credit sale </li></ul></ul><ul><ul><li>A cash register receipt for a cash sale </li></ul></ul><ul><li>Two journal entries are made for each sale: </li></ul><ul><ul><li>1. To record the sale of goods </li></ul></ul><ul><ul><li>2. To record the cost of sales </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  18. 18. Sales continued <ul><li>Example </li></ul><ul><ul><li>Sellers Electrics sold $3800 to Beyer Video on credit. COS was $2400 </li></ul></ul><ul><ul><ul><li>1. Sale of the goods on credit for $3800 </li></ul></ul></ul><ul><ul><ul><li>2. cost of sales was $2400 </li></ul></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 4 cost of sales 2 400 Inventory 2 400 (To record cost of inventories sold on invoice #731 to Beyer Video) Apr 4 Accounts Receivable 3 800 Sales 3 800 (To record credit sale to Beyer Video per invoice #731)
  19. 19. Sales returns and allowances <ul><li>When a customer returns goods, the seller may give </li></ul><ul><ul><li>a cash refund, or </li></ul></ul><ul><ul><li>a credit note </li></ul></ul><ul><li>Two journal entries are required for each return of goods: </li></ul><ul><ul><li>1. To record sales return at selling price </li></ul></ul><ul><ul><li>2. To record return to inventory at cost price </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  20. 20. Sales returns and allowances continued <ul><li>Example 1 </li></ul><ul><ul><li>Goods are returned to seller (not damaged or defective) </li></ul></ul><ul><ul><ul><li>1. Sales return at selling price of $300 </li></ul></ul></ul><ul><ul><ul><li>2. Return (increase) to inventory at cost price of $140 </li></ul></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 8 Inventory 140 cost of sales 140 (To record cost of goods returned) Apr 8 Sales Returns and Allowances 300 Accounts Receivable 300 (To record credit granted to Beyer Video for returned goods)
  21. 21. Sales returns and allowances continued <ul><li>Example 2 </li></ul><ul><ul><li>Faulty goods are returned to seller </li></ul></ul><ul><ul><ul><li>1. Sales return at selling price of $300 </li></ul></ul></ul><ul><ul><ul><li>2. Increase in expense account of $140 </li></ul></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 8 Sales Returns and Allowances 300 Accounts Receivable 300 (To record credit granted to Beyer Video for returned goods) Apr 5 Inventory Write-down 140 Cost of sales 140 (To record cost of faulty goods returned)
  22. 22. Sales discounts <ul><li>A seller may offer the invoice amount less a discount for prompt payment by a customer </li></ul><ul><li>Example </li></ul><ul><ul><li>Beyer Video pays Sellers Electrics and receives a discount </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 14 Cash 3 430 Discount Allowed 70 Accounts Receivable 3 500 (To record collection within 2/7 n/30 discount period from Beyer Video)
  23. 23. COMPLETING THE ACCOUNTING CYCLE <ul><li>Adjusting entries </li></ul><ul><li>Same as those for service firms with one additional adjustment </li></ul><ul><li>A retailer using a perpetual inventory system will need to make sure the records agree with the stock on hand </li></ul><ul><li>Records may be incorrect due to recording errors, theft or waste </li></ul><ul><li>This requires determining extra stock on hand – to be covered in Chapter 6 </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney LO4
  24. 24. COMPLETING THE ACCOUNTING CYCLE continued <ul><li>Closing Entries </li></ul><ul><li>All accounts affecting profit determination are closed to Profit and Loss Summary </li></ul><ul><li>Cost of sales must be closed to Profit and Loss Summary </li></ul><ul><li>After closing entries are posted, all temporary accounts have zero balances </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  25. 25. Closing entries illustrated PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Dec 31 Sales 480 000 Profit and Loss Summary 480 000 (To close income statement account with credit balances) 31 Profit and Loss Summary 450 000 Sales Returns and Allowances 12 000 Sales Discounts 8 000 Cost of sales 316 000 Store Salaries Expense 45 000 Administrative Salaries Expense 19 000 Freight-out 7 000 Advertising Expense 16 000 Utilities Expense 17 000 Depreciation Expenses 8 000 Insurance Expense 2 000 (To close income statement accounts with debit balances) 31 Profit and Loss Summary 30 000 RA Lewis, Capital 30 000 (To close profit to capital) 31 RA Lewis, Capital 15 000 RA Lewis, Drawings 15 000 (To close drawings to capital)
  26. 26. FORMS OF FINANCIAL STATEMENTS <ul><li>IAS 1 provides information on presentation of financial statements </li></ul><ul><li>Profit is regarded as the net change in equity after excluding transactions with the owners </li></ul><ul><li>Total comprehensive income reflects a net-equity view of determining profit </li></ul><ul><li>Two components </li></ul><ul><ul><li>Profit or loss, and </li></ul></ul><ul><ul><li>Other comprehensive income </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney LO5
  27. 27. FORMS OF FINANCIAL STATEMENTS continued <ul><li>IAS 1 provides entities with option to present income and expenses as either a single statement or two statements </li></ul><ul><ul><li>Single statement of comprehensive income </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Income XX Less Expenses XX Profit or Loss XX Other comprehensive income XX Total comprehensive income $ XX STATEMENT OF COMPREHENSIVE INCOME For the month ended 30 September 2010
  28. 28. FORMS OF FINANCIAL STATEMENTS continued <ul><ul><li>Two statement approach to presenting a statement of comprehensive income </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Income XX Less Expenses XX Profit or Loss $ XX INCOME STATEMENT For the month ended 30 September 2010 Profit or Loss XX Other comprehensive income XX Total comprehensive income $ XX STATEMENT OF COMPREHENSIVE INCOME For the month ended 30 September 2010
  29. 29. FORMS OF FINANCIAL STATEMENTS continued <ul><li>Classified income statement presentation of sales </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Income Sales revenue Sales $480 000 Less: Sales returns and allowances $12 000 Sales discounts 8 000 20 000 Net Sales $ 460 000 SELLERS ELECTRICS Income Statement (partial)
  30. 30. FORMS OF FINANCIAL STATEMENTS continued <ul><li>Gross profit </li></ul><ul><li>Other revenue </li></ul><ul><li>Other expenses and profit </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney LO6 Net sales $460 000 Less:Ccost of sales 316 000 Gross Profit $ 144 000 Interest revenue $ 3 000 Rent revenue 600 Gross profit $144 000 Other operating income 3 600 147 600 Operating expenses 116 000 Profit $ 31 600
  31. 31. FORMS OF FINANCIAL STATEMENTS continued <ul><li>Subgrouping of expenses </li></ul><ul><ul><li>Selling or distribution expenses </li></ul></ul><ul><ul><ul><li>cost of making the sale </li></ul></ul></ul><ul><ul><ul><li>e.g., advertising, delivery expenses </li></ul></ul></ul><ul><ul><li>Administration expenses </li></ul></ul><ul><ul><ul><li>cost of operating activities of the general, accounting and personnel offices </li></ul></ul></ul><ul><ul><ul><li>e.g., salaries, rent </li></ul></ul></ul><ul><ul><li>Finance costs </li></ul></ul><ul><ul><ul><li>costs of financing the business </li></ul></ul></ul><ul><ul><ul><li>e.g., interest expense, discounts allowed </li></ul></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  32. 32. <ul><li>Operating expenses </li></ul><ul><li> Selling expenses </li></ul><ul><li> Shop salaries expense $45 000 </li></ul><ul><li> Advertising expense 16 000 </li></ul><ul><li> Depreciation expense – equipment 8 000 </li></ul><ul><li> Freight-out 7 000 </li></ul><ul><li> Total selling expenses $76 000 </li></ul><ul><li> Administration expenses </li></ul><ul><li> Salaries expense 19 000 </li></ul><ul><li> Utilities expense 17 000 </li></ul><ul><li> Insurance expense 2 000 </li></ul><ul><li> Total administrative expenses 38 000 </li></ul><ul><li> Financial expenses </li></ul><ul><li> Interest expense 2 000 </li></ul><ul><li> Total finance expenses 2 000 </li></ul><ul><li> Total expenses $116 000 </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney SELLERS ELECTRICS Income Statement for the year ended 31 December 2010 (partial)
  33. 33. Simpler ‘nature of expense’ income statement PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Income Net sales $460 000 Interest revenue 3 000 Rent revenue 400 Discount received 200 Total income 463 600 Expenses cost of sales $316 000 Selling expenses 76 000 Administrative expenses 38 000 Finance expenses 2 000 Total expenses 432 000 profit $ 31 600 SELLERS ELECTRICS Income Statement for the year ended 31 December 2010
  34. 34. Classified statement of financial position PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Assets Current assets Cash $ 9 500 Accounts Receivable 16 100 Inventory 40 000 Prepaid insurance 1 800 Total current assets 67 400 Property, plant and equipment Shop equipment $80 000 Less: Accum. depreciation – shop equipment 24 000 56 000 Total assets $123 000 SELLERS ELECTRICS Statement of Financial Position (Partial) as at 31 December 2010
  35. 35. DETERMINING cost of sales UNDER A PERIODIC SYSTEM PowerPoint presentation by Dr Anne Abraham, University of Western Sydney LO7 Cost of sales Inventory, 1 January $ 36 000 Purchases $325 000 Less: Purchases returns & allowances $10 400 Discount received 6 800 17 200 Net purchases 307 800 Add: Freight-in 12 200 Cost of goods produced 320 000 Cost of goods available for sale 356 000 Inventory, 31 December 40 000 cost of sales $316 000 SELLERS ELECTRICS Cost of sales for the year ended 31 December 2010
  36. 36. APPENDIX 5A PERIODIC INVENTORY SYSTEM <ul><li>Revenues from the sale of merchandise are recorded when sales are made in the same way as in a perpetual system </li></ul><ul><li>No attempt is made on the date of sale to record the cost of merchandise sold </li></ul><ul><li>Physical inventories are taken at end of period to determine: </li></ul><ul><ul><li>The cost of merchandise on hand </li></ul></ul><ul><ul><li>The cost of the goods sold during the period </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney LO8
  37. 37. Recording purchases of inventory <ul><li>1. Purchase of inventory </li></ul><ul><li>Purchases account used to record cost of all inventory purchased </li></ul><ul><li>Example: </li></ul><ul><ul><li>Beyer Video purchases inventory for $3800 from Sellers Electrics </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 5 Purchases 3 800 Accounts Payable 3 800 (To record goods purchased on account, terms 2/10, n/30)
  38. 38. Recording purchases of inventory continued <ul><li>2. Purchase returns and allowances </li></ul><ul><li>Example: </li></ul><ul><ul><li>Beyer Video returns goods valued at $300 to Sellers Electrics as they are defective </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 8 Accounts Payable 300 Purchase Returns and Allowances 300 (To record return of defective goods purchased from Sellers Electrics)
  39. 39. Recording purchases of inventory continued <ul><li>3. Freight costs </li></ul><ul><li>Freight costs incurred by purchaser </li></ul><ul><li>Example: </li></ul><ul><ul><li>Beyer Video pays Acme Freight Company $150 for freight charges on purchases </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 9 Freight-in 150 Cash 150 (To record payment of freight, terms FOB delivery point)
  40. 40. Recording purchases of inventory continued <ul><li>4. Purchase discounts </li></ul><ul><li>Example: </li></ul><ul><ul><li>Beyer Video pays Sellers Electrics balance outstanding and receives a 2% discount </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 14 Accounts Payable ($3800 - $300) 3 500 Discount Received ($3500 x 0.02) 70 Cash 3 430 (To record payment to Sellers Electrics within the discount period)
  41. 41. Recording sales of inventory <ul><li>1. Sale of inventory </li></ul><ul><li>Example: </li></ul><ul><ul><li>Sale of inventory to Beyer Video by Seller Electrics </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 4 Accounts Receivable 3 800 Sales 3 800 (To record credit sales per invoice no. 731 to Beyer Video)
  42. 42. Recording sales of inventory continued <ul><li>2. Sales returns and allowances </li></ul><ul><li>Example: </li></ul><ul><ul><li>Goods returned to Sellers Electrics by Beyer Video </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 8 Sales Returns & Allowances 300 Accounts Receivable 300 (To record return of goods from Beyer Video)
  43. 43. Recording sales of inventory continued <ul><li>3. Sales discounts </li></ul><ul><li>Example: </li></ul><ul><ul><li>PW Audio Supply Ltd receives cash of $3430 from Sauk Stereo after allowing 2% discount </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Apr 15 Cash 3 430 Sales Discounts ($3500 x 0.02) 70 Accounts Receivable ($3800 - $300) 3 500 (To record collection from Sellers Electrics within discount period)
  44. 44. Comparison of entries: perpetual vs periodic PowerPoint presentation by Dr Anne Abraham, University of Western Sydney TRANSACTION PERPETUAL SYSTEM PERIODIC SYSTEM Apr 4 Purchase of Inventory 3800 Purchases 3800 inventory on A/C A/Cs Payable 3800 A/Cs Payable 3800 Apr 8 Purchases A/Cs Payable 300 A/Cs Payable 300 returns and Inventory 300 Purchase allowances Ret. & Allow. 300 Apr 9 Freight costs on Freight-in/Inventory 150 Freight-in 150 purchases Cash 150 Cash 150 Apr 14 Payment on A/Cs Payable 3500 A/Cs Payable 3500 account with a Cash 3430 Cash 3430 discount COS 70 Discount rec ’ d 70 ENTRIES IN BEYER VIDEO’S BOOKS
  45. 45. Comparison of entries: perpetual vs periodic continued PowerPoint presentation by Dr Anne Abraham, University of Western Sydney TRANSACTION PERPETUAL SYSTEM PERIODIC SYSTEM Apr 5 Sales of A/Cs Receivable 3800 A/Cs Receivable 3800 inventory on A/C Sales 3800 Sales 3800 COS 2400 No entry for COS Inventory 2400 Apr 8 Return of Sales Returns Sales Returns inventory sold and Allowances 300 and Allowances 300 A/Cs Receivable 300 A/Cs Receivable 300 Inventory 140 No entry for COS COS 140 Apr 15 Cash received Cash 3430 Cash 3430 on account Sales Discounts 70 Sales Discounts 70 with a discount A/Cs Receivable 3500 A/Cs Receivable 3500 ENTRIES IN SELLERS ELECTRICS BOOKS
  46. 46. APPENDIX 5B WORKSHEET FOR A RETAIL BUSINESS <ul><li>Trial balance columns </li></ul><ul><li>Data from the trial balance are obtained from the ledger balances at the end of the period </li></ul><ul><li>The amount shown for Inventory is the year-end inventory amount which results from the application of a perpetual inventory system </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney LO9
  47. 47. WORKSHEET FOR A RETAIL BUSINESS continued <ul><li>Adjustments columns </li></ul><ul><li>A merchandising company usually has the same types of adjustments as a service company </li></ul><ul><li>Adjusted trial balance </li></ul><ul><li>The adjusted trial balance shows the balance of all accounts after adjustment at the end of the accounting period </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  48. 48. <ul><li>Income statement columns </li></ul><ul><li>The accounts and balances that affect the income statement are transferred from adjusted trial balance columns to income statement columns </li></ul><ul><li>All amounts in the income statement credit column should be totalled and compared to the total of amounts in the income statement debit column </li></ul>WORKSHEET FOR A RETAIL BUSINESS continued PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  49. 49. WORKSHEET FOR A RETAIL BUSINESS continued <ul><li>Statement of financial position columns </li></ul><ul><li>The major difference between statements of financial position of a service company and a merchandising company is inventory </li></ul><ul><li>The ending Inventory amount is shown in the statement of financial position debit column </li></ul><ul><li>The information to prepare the owner’s equity statement is also found in these columns </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  50. 50. APPENDIX 5C THE GOODS AND SERVICES TAX (GST) <ul><li>The GST is a value-added tax </li></ul><ul><ul><li>i.e., tax is levied on the valued added by a business at each stage of production and distribution chain </li></ul></ul><ul><li>Taxable supplies are goods and services subject to the GST </li></ul><ul><li>GST rates: </li></ul><ul><ul><li>Australia: 10% </li></ul></ul><ul><ul><li>New Zealand: 12.5% </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney LO10
  51. 51. GST continued <ul><li>Two exceptions: </li></ul><ul><ul><li>i.e., no GST charged </li></ul></ul><ul><li>(1) GST-free supplies </li></ul><ul><ul><li>e.g., basic food, education, health services, exports </li></ul></ul><ul><li>(2) Input taxed supplies </li></ul><ul><ul><li>e.g., financial services and residential rents </li></ul></ul><ul><li>Supplier can obtain an input tax credit for (1) but not for (2) </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  52. 52. GST continued PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  53. 53. GST example PowerPoint presentation by Dr Anne Abraham, University of Western Sydney
  54. 54. Accounting for GST <ul><li>1. Purchasing inventory </li></ul><ul><li>Example </li></ul><ul><ul><li>Retailer purchases a table on credit from manufacturer for $440 (includes $40 GST) </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Inventory 400 GST Paid (an asset account) 40 Accounts Payable 440 (To record purchase of furniture from the manufacturer)
  55. 55. Accounting for GST continued <ul><li>2. Selling inventory </li></ul><ul><li>Example </li></ul><ul><ul><li>Retailer sells a table for cash $550 (includes $50 GST) </li></ul></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Cash 550 GST Collected (a liability account) 50 Sales 500 (To record sale of furniture to a customer)
  56. 56. Accounting for GST continued <ul><li>3. Remitting GST to the taxation authority </li></ul><ul><li>Where GST amount collected is greater than GST paid the difference is to be remitted to ATO </li></ul><ul><li>Journal entry: </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney GST Collected (a liability account) 50 GST Paid (an asset account) 40 Cash 10 (To record payment of GST owing to taxation authority)
  57. 57. Accounting for GST continued <ul><li>Where GST collected is less than GST paid, the difference is to be remitted to ATO </li></ul><ul><li>Journal entry: </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Cash 60 GST Collected (a liability account) 100 GST Paid (an asset account) 160 (To record refund of GST paid from taxation authority)
  58. 58. Accounting for GST continued <ul><li>Where one account is used to account for GST collected and paid to ATO </li></ul>PowerPoint presentation by Dr Anne Abraham, University of Western Sydney Inventory 400 GST Clearing (GST paid) 40 Accounts payable 440 (To record purchase of furniture from the manufacturer) Cash 550 GST Clearing (GST collected) 50 Sales 500 (To record sale of furniture to a customer) GST Clearing 10 Cash 10 (To record payment of GST owing to taxation authority)
  59. 59. PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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