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This document discusses accounting for merchandising activities. It describes the operating cycle of a merchandising company as purchasing inventory, selling inventory on credit, and collecting receivables. It compares merchandising companies, which purchase ready inventory, to manufacturing companies, which have a longer operating cycle producing inventory. The document also discusses accounting entries and methods for perpetual and periodic inventory systems.

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© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin ACCOUNTING FOR MERCHANDISING ACTIVITIES Chapter 6
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Operating Cycle of a Merchandising Company Operating Cycle of a Merchandising Company 1.Purchase of m erchandise 3.C ollection ofthe receivables 2. Sale of merchandise on account Cash Inventory Accounts Receivable
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Comparing Merchandising Activities with Manufacturing Activities Comparing Merchandising Activities with Manufacturing Activities Merchandising Company Purchase inventory in ready-to-sell condition. Manufacturing Company Manufacture inventory and have a longer and more complex operating cycle
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Retailers and WholesalersRetailers and Wholesalers Retailers sell merchandise directly to the public. Wholesalers buy merchandise from several different manufacturers and then sell this merchandise to several retailers.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Income Statement of a Merchandising Company Income Statement of a Merchandising Company Computer Barn Condensed Income Statement For the Year Ended December 31, 2002 Revenue from sales 900,000$ Less: Cost of goods sold 540,000 Gross profit 360,000$ Less: Expenses 270,000 Net income 90,000$ Cost of goods sold represents the expense of goods that are sold to customers. Gross profit is a useful means of measuring the profitability of sales transactions.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin What Accounting Information Does a Merchandising Company Need? What Accounting Information Does a Merchandising Company Need? Financial Reporting Requirements Daily Business Operating Requirements Special Reporting Requirements Examples • Revenues • Expenses • Customer Ledgers •Tax Reports
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin General Ledger AccountsGeneral Ledger Accounts General Ledger Accounts Receivable Date Debit Credit Balance 2001 June 1 10,000 10,000 15 3,000 7,000 Although general ledger accounts provide useful information, they do not provide much of the detailed information needed in the daily business operations. Who owes us money? Who owes us money?
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Subsidiary Ledgers: A Source of Needed Details Subsidiary Ledgers: A Source of Needed Details Subsidiary Ledger Heather Jacobs Date Debit Credit Balance 2001 June 1 7,000 7,000 15 2,000 5,000 General Ledger Accounts Receivable Date Debit Credit Balance 2001 June 1 10,000 10,000 15 3,000 7,000Subsidiary Ledger Jake Sparks Date Debit Credit Balance 2001 June 1 3,000 3,000 15 1,000 2,000 Controlling Account
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Two Approaches Used in Accounting for Merchandise Transactions Two Approaches Used in Accounting for Merchandise Transactions Perpetual Inventory System Periodic Inventory System
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System The inventory account is continuously updated to reflect items on hand. Let’s look at some entries!
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System On September 5, Worley Co. purchased 100 laser lights for resale for $30 per unit from Electronic City on account .
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios. 10 × $30 = $30010 × $30 = $300
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System Cost Retail On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System On September 15, Worley Co. paid Electronic City $3,000 for the September 5 purchase.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System On September 22, Worley Co. received $500 from ABC Radios as payment in full for their purchase on September 10.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin The Inventory Subsidiary LedgerThe Inventory Subsidiary Ledger At the end of the period, management compares the physical inventory count with the inventory ledger to determine inventory shrinkage.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Taking a Physical InventoryTaking a Physical Inventory In order to ensure the accuracy of their perpetual records, most businesses take a complete physical count of the merchandise on hand at least once a year.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Taking a Physical InventoryTaking a Physical Inventory Reasonable amounts of inventory shrinkage are viewed as a normal cost of doing business. Examples include breakage, spoilage and theft. On December 31, Worley Co. counts its inventory. An inventory shortage of $2,000 is discovered.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Closing Entries in a Perpetual Inventory System Closing Entries in a Perpetual Inventory System Close Revenue accounts (including Sales) to Income Summary. Close Expense accounts (including Cost of Goods Sold) to Income Summary.  Close Income Summary account to Retained Earnings. Close Dividends to Retained Earnings. The closing entries are the same!
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Next is the periodic inventory system!
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Periodic Inventory SystemPeriodic Inventory System No effort is made to keep up-to-date records of either inventory or cost of goods sold. Let’s look at some entries!
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Periodic Inventory SystemPeriodic Inventory System On September 5, Worley Co. purchased 100 laser lights for resale for $30 per unit from Electronic City on account . Notice that no entry is made to Inventory. Notice that no entry is made to Inventory.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Periodic Inventory SystemPeriodic Inventory System On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios. Retail
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Periodic Inventory SystemPeriodic Inventory System On September 15, Worley Co. paid Electronic City $3,000 for the September 5 purchase.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Periodic Inventory SystemPeriodic Inventory System On September 22, Worley Co. received $500 from ABC Radios as payment in full for their purchase on September 10.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Computing Cost of Goods Sold in a Periodic Inventory System Computing Cost of Goods Sold in a Periodic Inventory System The accounting records of Party Supply show the following: Inventory, Jan. 1, 2003 $ 14,000 Purchases (during 2003) 130,000 The accounting records of Party Supply show the following: Inventory, Jan. 1, 2003 $ 14,000 Purchases (during 2003) 130,000 At December 31, 2003, Party Supply counted the merchandise on hand at $12,000. At December 31, 2003, Party Supply counted the merchandise on hand at $12,000. Calculate Party Supply’s cost of goods sold for 2003.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Computing Cost of Goods Sold in a Periodic Inventory System Computing Cost of Goods Sold in a Periodic Inventory System Inventory (beginning of the year) 14,000$ Add: Purchases 130,000 Cost of goods available for sale 144,000 Less: Inventory (end of year) 12,000 Cost of goods sold 132,000$ Cost of Goods Sold can be calculated as follows:
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Creating Cost of Goods Sold in a Periodic Inventory System Creating Cost of Goods Sold in a Periodic Inventory System Now, Party Supply must create the Cost of Goods Sold account.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Creating Cost of Goods Sold in a Periodic Inventory System Creating Cost of Goods Sold in a Periodic Inventory System Now, Party Supply must record the ending inventory amount.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Completing the Closing ProcessCompleting the Closing Process Close Revenue accounts (including Sales) to Income Summary. Close Expense accounts (including Cost of Goods Sold) to Income Summary.  Close Income Summary account to Retained Earnings. Close Dividends to Retained Earnings. The closing entries are the same!
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Comparison of Perpetual and Periodic Inventory Systems Comparison of Perpetual and Periodic Inventory Systems Periodic Inventory System Jo’s Dress Shop Perpetual Inventory System Large Department Stores
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Modifying an Accounting SystemModifying an Accounting System Most businesses use special journals rather than a general journal to record routine transactions that occur frequently.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts 2/10, n/30Read as: “Two ten, net thirty” When manufacturers and wholesalers sell their products on account, the credit terms are stated in the invoice.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts 2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts Purchases are recorded at their net amounts. Purchase discounts lost are recorded when payment is made outside the discount period. Net Method
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts $4,000 × 98% =$4,000 × 98% = On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts Now, assume that Play Clothes waited until July 20 to pay the amount due in full to Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts Nonoperating ExpenseNonoperating Expense Now, assume that Play Clothes waited until July 20 to pay the amount due in full to Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price Purchases are recorded at their gross amounts. Purchase discounts taken are recorded when payment is made inside the discount period. Gross Method
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price Reduces Cost of Goods Sold Reduces Cost of Goods Sold $4,000 × 98% = $3,920 $4,000 × 98% = $3,920 On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price Now, assume that Play Clothes waited until July 20 to pay the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price Now, assume that Play Clothes waited until July 20 to pay the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Returns of Unsatisfactory Merchandise Returns of Unsatisfactory Merchandise On August 5, Play Clothes returned $500 of unsatisfactory merchandise purchased from Kid’s Clothes on credit terms of 2/10, n/30. The purchase was originally recorded at net cost. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Returns of Unsatisfactory Merchandise Returns of Unsatisfactory Merchandise $500 × 98% = $490$500 × 98% = $490 On August 5, Play Clothes returned $500 of unsatisfactory merchandise purchased from Kid’s Clothes on credit terms of 2/10, n/30. The purchase was originally recorded at net cost. Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Transportation Costs on PurchasesTransportation Costs on Purchases Transportation costs related to the acquisition of assets are part of the cost of the asset being acquired. Transportation costs related to the acquisition of assets are part of the cost of the asset being acquired.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Now, let’s talk about sales!
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Transactions Relating to SalesTransactions Relating to Sales Computer Barn Partial Income Statement For the Year Ended December 31, 2002 Revenue Sales 912,000$ Less: Sales returns and allowances 8,000$ Sales discounts 4,000 12,000 Net sales 900,000$ Credit terms and merchandise returns affect the amount of revenue earned by the seller.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Sales Returns and AllowancesSales Returns and Allowances On August 2, Kid’s Clothes sold $2,000 of merchandise to Play Clothes on credit terms 2/10, n/30. Kid’s Clothes originally paid $1,000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Sales Returns and AllowancesSales Returns and Allowances On August 2, Kid’s Clothes sold $2,000 of merchandise to Play Clothes on credit terms 2/10, n/30. Kid’s Clothes originally paid $1,000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Sales Returns and AllowancesSales Returns and Allowances On August 5, Play Clothes returned $500 of unsatisfactory merchandise to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this merchandise was $250. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Contra-revenueContra-revenue
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin On August 5, Play Clothes returned $500 of unsatisfactory merchandise to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this merchandise was $250. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Sales Returns and AllowancesSales Returns and Allowances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts On July 6, Kid’s Clothes sold $4,000 of merchandise to Play Clothes on credit with terms of 2/10, n/30. The merchandise originally cost Kid’s Clothes $2,000. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts On July 6, Kid’s Clothes sold $4,000 of merchandise to Play Clothes on credit with terms of 2/10, n/30. The merchandise originally cost Kid’s Clothes $2,000. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts On July 15, Kid’s Clothes receives the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts $4,000 × 98% = $3,920 $4,000 × 98% = $3,920 Contra-revenueContra-revenue On July 15, Kid’s Clothes receives the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts Now, assume that it wasn’t until July 20 that Kid’s Clothes received the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts Now, assume that it wasn’t until July 20 that Kid’s Clothes received the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Delivery ExpensesDelivery Expenses Delivery costs incurred by sellers are debited to Delivery Expense, an operating expense. Delivery costs incurred by sellers are debited to Delivery Expense, an operating expense.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Accounting for Sales TaxesAccounting for Sales Taxes Businesses collect sales tax at the point of sale. Then, they remit the tax to the appropriate governmental agency at times specified by law. $1,000 sale × 7% tax = $70 sales tax$1,000 sale × 7% tax = $70 sales tax
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Evaluating the Performance of a Merchandising Company Evaluating the Performance of a Merchandising Company Net Sales Gross Profit Margins • Trends overtime • Comparable store sales • Sales per square foot of selling space • Trends overtime • Comparable store sales • Sales per square foot of selling space • Gross Profit ÷ Net Sales •Overall Gross Profit Margin •Gross Profit Margins by Department and Products • Gross Profit ÷ Net Sales •Overall Gross Profit Margin •Gross Profit Margins by Department and Products
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin End of Chapter 6End of Chapter 6

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Whbm06

  • 1.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin ACCOUNTING FOR MERCHANDISING ACTIVITIES Chapter 6
  • 2.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Operating Cycle of a Merchandising Company Operating Cycle of a Merchandising Company 1.Purchase of m erchandise 3.C ollection ofthe receivables 2. Sale of merchandise on account Cash Inventory Accounts Receivable
  • 3.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Comparing Merchandising Activities with Manufacturing Activities Comparing Merchandising Activities with Manufacturing Activities Merchandising Company Purchase inventory in ready-to-sell condition. Manufacturing Company Manufacture inventory and have a longer and more complex operating cycle
  • 4.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Retailers and WholesalersRetailers and Wholesalers Retailers sell merchandise directly to the public. Wholesalers buy merchandise from several different manufacturers and then sell this merchandise to several retailers.
  • 5.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Income Statement of a Merchandising Company Income Statement of a Merchandising Company Computer Barn Condensed Income Statement For the Year Ended December 31, 2002 Revenue from sales 900,000$ Less: Cost of goods sold 540,000 Gross profit 360,000$ Less: Expenses 270,000 Net income 90,000$ Cost of goods sold represents the expense of goods that are sold to customers. Gross profit is a useful means of measuring the profitability of sales transactions.
  • 6.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin What Accounting Information Does a Merchandising Company Need? What Accounting Information Does a Merchandising Company Need? Financial Reporting Requirements Daily Business Operating Requirements Special Reporting Requirements Examples • Revenues • Expenses • Customer Ledgers •Tax Reports
  • 7.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin General Ledger AccountsGeneral Ledger Accounts General Ledger Accounts Receivable Date Debit Credit Balance 2001 June 1 10,000 10,000 15 3,000 7,000 Although general ledger accounts provide useful information, they do not provide much of the detailed information needed in the daily business operations. Who owes us money? Who owes us money?
  • 8.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Subsidiary Ledgers: A Source of Needed Details Subsidiary Ledgers: A Source of Needed Details Subsidiary Ledger Heather Jacobs Date Debit Credit Balance 2001 June 1 7,000 7,000 15 2,000 5,000 General Ledger Accounts Receivable Date Debit Credit Balance 2001 June 1 10,000 10,000 15 3,000 7,000Subsidiary Ledger Jake Sparks Date Debit Credit Balance 2001 June 1 3,000 3,000 15 1,000 2,000 Controlling Account
  • 9.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin
  • 10.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Two Approaches Used in Accounting for Merchandise Transactions Two Approaches Used in Accounting for Merchandise Transactions Perpetual Inventory System Periodic Inventory System
  • 11.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System The inventory account is continuously updated to reflect items on hand. Let’s look at some entries!
  • 12.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System On September 5, Worley Co. purchased 100 laser lights for resale for $30 per unit from Electronic City on account .
  • 13.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios. 10 × $30 = $30010 × $30 = $300
  • 14.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System Cost Retail On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios.
  • 15.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System On September 15, Worley Co. paid Electronic City $3,000 for the September 5 purchase.
  • 16.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Perpetual Inventory SystemPerpetual Inventory System On September 22, Worley Co. received $500 from ABC Radios as payment in full for their purchase on September 10.
  • 17.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin The Inventory Subsidiary LedgerThe Inventory Subsidiary Ledger At the end of the period, management compares the physical inventory count with the inventory ledger to determine inventory shrinkage.
  • 18.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Taking a Physical InventoryTaking a Physical Inventory In order to ensure the accuracy of their perpetual records, most businesses take a complete physical count of the merchandise on hand at least once a year.
  • 19.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Taking a Physical InventoryTaking a Physical Inventory Reasonable amounts of inventory shrinkage are viewed as a normal cost of doing business. Examples include breakage, spoilage and theft. On December 31, Worley Co. counts its inventory. An inventory shortage of $2,000 is discovered.
  • 20.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Closing Entries in a Perpetual Inventory System Closing Entries in a Perpetual Inventory System Close Revenue accounts (including Sales) to Income Summary. Close Expense accounts (including Cost of Goods Sold) to Income Summary.  Close Income Summary account to Retained Earnings. Close Dividends to Retained Earnings. The closing entries are the same!
  • 21.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Next is the periodic inventory system!
  • 22.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Periodic Inventory SystemPeriodic Inventory System No effort is made to keep up-to-date records of either inventory or cost of goods sold. Let’s look at some entries!
  • 23.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Periodic Inventory SystemPeriodic Inventory System On September 5, Worley Co. purchased 100 laser lights for resale for $30 per unit from Electronic City on account . Notice that no entry is made to Inventory. Notice that no entry is made to Inventory.
  • 24.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Periodic Inventory SystemPeriodic Inventory System On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios. Retail
  • 25.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Periodic Inventory SystemPeriodic Inventory System On September 15, Worley Co. paid Electronic City $3,000 for the September 5 purchase.
  • 26.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Periodic Inventory SystemPeriodic Inventory System On September 22, Worley Co. received $500 from ABC Radios as payment in full for their purchase on September 10.
  • 27.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Computing Cost of Goods Sold in a Periodic Inventory System Computing Cost of Goods Sold in a Periodic Inventory System The accounting records of Party Supply show the following: Inventory, Jan. 1, 2003 $ 14,000 Purchases (during 2003) 130,000 The accounting records of Party Supply show the following: Inventory, Jan. 1, 2003 $ 14,000 Purchases (during 2003) 130,000 At December 31, 2003, Party Supply counted the merchandise on hand at $12,000. At December 31, 2003, Party Supply counted the merchandise on hand at $12,000. Calculate Party Supply’s cost of goods sold for 2003.
  • 28.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Computing Cost of Goods Sold in a Periodic Inventory System Computing Cost of Goods Sold in a Periodic Inventory System Inventory (beginning of the year) 14,000$ Add: Purchases 130,000 Cost of goods available for sale 144,000 Less: Inventory (end of year) 12,000 Cost of goods sold 132,000$ Cost of Goods Sold can be calculated as follows:
  • 29.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Creating Cost of Goods Sold in a Periodic Inventory System Creating Cost of Goods Sold in a Periodic Inventory System Now, Party Supply must create the Cost of Goods Sold account.
  • 30.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Creating Cost of Goods Sold in a Periodic Inventory System Creating Cost of Goods Sold in a Periodic Inventory System Now, Party Supply must record the ending inventory amount.
  • 31.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Completing the Closing ProcessCompleting the Closing Process Close Revenue accounts (including Sales) to Income Summary. Close Expense accounts (including Cost of Goods Sold) to Income Summary.  Close Income Summary account to Retained Earnings. Close Dividends to Retained Earnings. The closing entries are the same!
  • 32.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Comparison of Perpetual and Periodic Inventory Systems Comparison of Perpetual and Periodic Inventory Systems Periodic Inventory System Jo’s Dress Shop Perpetual Inventory System Large Department Stores
  • 33.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Modifying an Accounting SystemModifying an Accounting System Most businesses use special journals rather than a general journal to record routine transactions that occur frequently.
  • 34.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts 2/10, n/30Read as: “Two ten, net thirty” When manufacturers and wholesalers sell their products on account, the credit terms are stated in the invoice.
  • 35.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts 2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due
  • 36.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts Purchases are recorded at their net amounts. Purchase discounts lost are recorded when payment is made outside the discount period. Net Method
  • 37.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 38.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts $4,000 × 98% =$4,000 × 98% = On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 39.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 40.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 41.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts Now, assume that Play Clothes waited until July 20 to pay the amount due in full to Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 42.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Credit Terms and Cash DiscountsCredit Terms and Cash Discounts Nonoperating ExpenseNonoperating Expense Now, assume that Play Clothes waited until July 20 to pay the amount due in full to Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 43.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price Purchases are recorded at their gross amounts. Purchase discounts taken are recorded when payment is made inside the discount period. Gross Method
  • 44.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 45.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 46.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 47.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price Reduces Cost of Goods Sold Reduces Cost of Goods Sold $4,000 × 98% = $3,920 $4,000 × 98% = $3,920 On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 48.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price Now, assume that Play Clothes waited until July 20 to pay the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 49.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Recording Purchases at Gross Invoice Price Recording Purchases at Gross Invoice Price Now, assume that Play Clothes waited until July 20 to pay the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 50.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Returns of Unsatisfactory Merchandise Returns of Unsatisfactory Merchandise On August 5, Play Clothes returned $500 of unsatisfactory merchandise purchased from Kid’s Clothes on credit terms of 2/10, n/30. The purchase was originally recorded at net cost. Prepare the journal entry for Play Clothes.
  • 51.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Returns of Unsatisfactory Merchandise Returns of Unsatisfactory Merchandise $500 × 98% = $490$500 × 98% = $490 On August 5, Play Clothes returned $500 of unsatisfactory merchandise purchased from Kid’s Clothes on credit terms of 2/10, n/30. The purchase was originally recorded at net cost. Prepare the journal entry for Play Clothes.
  • 52.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Transportation Costs on PurchasesTransportation Costs on Purchases Transportation costs related to the acquisition of assets are part of the cost of the asset being acquired. Transportation costs related to the acquisition of assets are part of the cost of the asset being acquired.
  • 53.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Now, let’s talk about sales!
  • 54.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Transactions Relating to SalesTransactions Relating to Sales Computer Barn Partial Income Statement For the Year Ended December 31, 2002 Revenue Sales 912,000$ Less: Sales returns and allowances 8,000$ Sales discounts 4,000 12,000 Net sales 900,000$ Credit terms and merchandise returns affect the amount of revenue earned by the seller.
  • 55.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Sales Returns and AllowancesSales Returns and Allowances On August 2, Kid’s Clothes sold $2,000 of merchandise to Play Clothes on credit terms 2/10, n/30. Kid’s Clothes originally paid $1,000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries.
  • 56.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Sales Returns and AllowancesSales Returns and Allowances On August 2, Kid’s Clothes sold $2,000 of merchandise to Play Clothes on credit terms 2/10, n/30. Kid’s Clothes originally paid $1,000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries.
  • 57.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Sales Returns and AllowancesSales Returns and Allowances On August 5, Play Clothes returned $500 of unsatisfactory merchandise to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this merchandise was $250. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Contra-revenueContra-revenue
  • 58.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin On August 5, Play Clothes returned $500 of unsatisfactory merchandise to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this merchandise was $250. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Sales Returns and AllowancesSales Returns and Allowances
  • 59.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts On July 6, Kid’s Clothes sold $4,000 of merchandise to Play Clothes on credit with terms of 2/10, n/30. The merchandise originally cost Kid’s Clothes $2,000. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries.
  • 60.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts On July 6, Kid’s Clothes sold $4,000 of merchandise to Play Clothes on credit with terms of 2/10, n/30. The merchandise originally cost Kid’s Clothes $2,000. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries.
  • 61.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts On July 15, Kid’s Clothes receives the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes.
  • 62.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts $4,000 × 98% = $3,920 $4,000 × 98% = $3,920 Contra-revenueContra-revenue On July 15, Kid’s Clothes receives the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes.
  • 63.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts Now, assume that it wasn’t until July 20 that Kid’s Clothes received the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes.
  • 64.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Sales DiscountsSales Discounts Now, assume that it wasn’t until July 20 that Kid’s Clothes received the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes.
  • 65.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Delivery ExpensesDelivery Expenses Delivery costs incurred by sellers are debited to Delivery Expense, an operating expense. Delivery costs incurred by sellers are debited to Delivery Expense, an operating expense.
  • 66.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Accounting for Sales TaxesAccounting for Sales Taxes Businesses collect sales tax at the point of sale. Then, they remit the tax to the appropriate governmental agency at times specified by law. $1,000 sale × 7% tax = $70 sales tax$1,000 sale × 7% tax = $70 sales tax
  • 67.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Evaluating the Performance of a Merchandising Company Evaluating the Performance of a Merchandising Company Net Sales Gross Profit Margins • Trends overtime • Comparable store sales • Sales per square foot of selling space • Trends overtime • Comparable store sales • Sales per square foot of selling space • Gross Profit ÷ Net Sales •Overall Gross Profit Margin •Gross Profit Margins by Department and Products • Gross Profit ÷ Net Sales •Overall Gross Profit Margin •Gross Profit Margins by Department and Products
  • 68.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin End of Chapter 6End of Chapter 6