Presentation explaining some simple basic concepts of accounting

1. Accounting Project
For
Miss Hina Samdani
Group Members:
 Ahmad Muhamamd Masood Niazi
 Khalil ur Rehman Maar
 Mirza Umar Baig
 Muhammad Awais Munawar
 Aeysha Akram
 Hania Ahmad

2. Contents
 Merchandising Activities:
• Operating Cycle of Merchandising Companies
• Income statement of Merchandising Companies
• Perpetual and Periodic Inventory Systems
 Inventories And The Cost Of Goods Sold:
• Specific Identification
• Average Cost Method
• FIFO
• LIFO

3.  What is Inventory?
“Goods that are purchased for the purpose to resale
to customers ”
 Operating cycle of a Merchandising Company:
“The series of transactions through which a
business generate its revenue and its
cash receipts from consumer.”
 What is Cost of Goods Sold?
“It is the cost which a company pays for making
a product or for inventory purchased”
 What is Goods Available for sale?
“ It is the total goods which you could have
sold in your interim period
of company”

4. Cash
Account
Inventory
Receivables
Sale of Merchandise on Account

5. Whole Seller & Retailer:
 Wholesaler buy large quantity of merchandise from
several different manufactures and then resell this
merchandise to many different retailers.
 A retailer is a business that sells merchandise
directly to the public.

6.  Other Company Merchandising Company
Sales
Revenue
minus
Cost of goods
minus
sold
equals
Expenses
Gross Profit
minus
equals
Other
Expenses
equals
Net Income
Net Income

7. Sales - Cost of goods sold = Gross profit
Gross Profit - Other Expenses = Net Income
Example
Sales $15,000
Less : Cost of goods sold (3500)
Gross profit $11,500
Operating Expenses:
Wages Exp 620
Adv Exp 150
Depreciation Exp 430 (1200)
Net Income $10,300

8.  Perpetual System:
All Transaction including Costs of merchandise are
recorded immediately as they occur. Record is up-to-
date all the time.
 Periodic System:
No effort is made to keep records up-to-date neither
inventory nor Cost of goods sold and are only updated
at the end of interim period.

9. The following example contains several journal entries used to
account for transactions in a perpetual inventory system:
Purchase of Merchandise:
Purchase of inventory is recorded at cost.
To record a purchase of $5,000 of 5 items that are stored in inventory
each item has cost $1,000.
Account Title Debit Credit
Inventory $5000
Cash $5000

10. Sales of Merchandise:
Sold 3 items $1200 each, for $3,600. for which the cost is 3,000.
Debit Credit
Cash $3600
Revenue $3600
Cost of Goods $3000
Sold
$3000
Inventory
Gross Profit: 3600 – 3000 = $600
Let Expenses are $200. Then,
Net Income = 600 – 200 = $400

11. If inventory is purchased and sold on account, Then
entries will be:
Purchase of Inventory: (On Account)
Account Title Debit Credit
Inventory $5000
A/C Payable $5000
Selling of Inventory: (On Account)
Debit Credit
A/C Receivables $3600
Revenue $3600
Inventory Record:
Debit Credit
Cost of Goods Sold $3000
Inventory $3000

12. Payment of A/C Payables to Suppliers:
Debit Credit
A/C Payables $5000
Cash $5000
Collection of Accounts Receivable from Customers:
Debit Credit
Cash $3600
A/C Receivable $3600

13. Its an alternative to a perpetual inventory system
When merchandise is purchased, its cost is
debited to an account entitled Purchases.

14.  The inventory on hand at the end of 2011 cost
$20000.
 During 2012, purchases of merchandise for
resale of customers totaled $100000
 Inventory on hand at the end of 2012 cost
$15000.

15. Recording Purchases of Merchandises:
Suppose from total purchases of $100,000 the first
purchase was of $10,000 so purchase entry will
be:
Debit Credit
Purchases 10000
Cash 10000

16. Computing the cost of goods sold:
Inventory(beginning of the year 2012)………… $20000
Add : Purchases……………………....................100000
Cost of goods available for sale………………..$120000
Less : Inventory (end of the year 2012)………….15000
Cost of goods sold…………………………….$105000

17. The Cost of Goods Sold is determined using 4 methods
1. Specific Identification
2. Average Cost
3. FIFO (First-in-First-out)
4. LIFO (Last-in-First-out)

18. Specific Identification Method:
This method can only be used if the actual costs of individual
units of inventory are known.
In Perpetual System the cost of goods sold is determined by
calculating the cost of each merchandise from invoices
While in Periodic System we calculate the cost of each
merchandise which we have on hand and deduct it from Cost
of goods available for sale in that time period

19. A company bought 5 units of goods in which 2 @ $500 and
3@ $600. And sold 2 units which costed us 1@ $500 and
1@ $600.
IF Beginning Inventory is zero. Then,
B.I= 0, Goods Available for Sale = $1000 + $1800
= $2800
Goods on Hand = $500 + $ 1200 = $1700
In Perpetual System:
Cost of Goods Sold = 500 + 600
= $1100
In Periodic System:
Cost of Goods Sold = 2800 – 1700
= $1100

20. “The average cost of all units is taken”
Example:
A Company bought 5 identical generators at two different
rates
2 @ $1000 per unit (10th March, 2010)
3 @ $1200 per unit (9th May, 2010)
Therefore, the generators in inventory, acquired at a total
cost of (2000 + 3600)=$5600.
Thus the average cost of each generator is 5600/5 = $1120
The company sold a generator at $1800 on June 1
Let the Beginning entry level of Inventory is zero and
interim period of comp. is semi-annually starting from Jan.

21. In Perpetual Inventory System:
Entries will be of:
Purchase:
There will be two entries
Date A/C Title Debit Credit
10th Mar Inventory $2000
2010 Cash $2000
9th May Inventory $3600
2010 Cash $3600
Sale:
Debit Credit
Cash 1800
Revenue/Sale 1800
Cost of Goods Sold 1120
Inventory 1120

22. Purchase Sold Balance
Date Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost
10th 2 $1000 $2000 2 $1000 $2000
Mar
9th 3 $1200 $3600 5 $1120 $5600
May
1st 1 $1120 $1120 4 $1120 $4480
June

23. In Periodic System:
Cost of Goods Sold= Goods Available for sale – Cost of
goods on hand
Cost of Goods on hand = Average cost x Remaining units goods
= 1120 x 4
= $4480
COGS = $5600 - $4480
= $1120

24. First-In, First-Out Method (FIFO):
 First merchandise purchased is the first merchandise
sold..
Last-In, First-Out Method (LIFO)
Most recently purchased merchandise (the last in) is
assumed to be sold first.

25. In Perpetual System:
Example:
A Company bought 5 identical generators at two different rates
2 @ $1000 per unit (10th March, 2010)
3 @ $1200 per unit (9th May, 2010)
Therefore, the generators in inventory, acquired at a total cost of
(2000 + 3600)=$5600.
The company sold a generator at $1800 on June 1
Let the Beginning entry level of Inventory is zero and
interim period of comp. is semi-annually starting from Jan.

26. In FIFO:
We will assume generator which was sold was from
purchase of 10th March.
And Entry of COGS will be:
Date A/C Title Debit Credit
10th COGS $1000
Mar Inventory $1000
Date Purchase Sold Total
Units Units Total Unit Unit Total Units Unit Total
Cost s Cost Cost
10th Mar 2 $1000 $2000 2 $1000 $2000
9th May 3 $1200 $3600 2+3 2 x $1000
(5) 3 x $1200 $5600
1st Jun 1 $1000 $1000 1+3 1 x $1000
(4)
3 x $1200 $4600

27. In LIFO:
We will assume generator which was sold was
from purchase of 9th May.
And Entry of COGS will be:
Date A/C Title Debit Credit
10th COGS $1200
Mar Inventory $1200
Date Purchase Sold Total
Units Units Total Units Unit Total Units Unit Cost Total
Cost Cost
10th Mar 2 $1000 $2000 2 $1000 $2000
9th May 3 $1200 $3600 2+3 2 x $1000
(5) 3 x $1200 $5600
1st Jun 1 $1200 $1200 2+2 2 x $1000
(4)
2 x $1200 $4400