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Accounting for a Merchandising Business

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1 Accounting for a Merchandising Business
Chapter 11 Accounting for a Merchandising Business

2 Merchandise Inventory
An account that stores the value of goods not yet resold Periodic System: count merchandise not sold at the end of the period to determine cost of goods sold Perpetual System: record inventory and cost of goods sold when sales made

3 Inventory Cycle Cost of beginning inventory + cost of merchandise purchased – cost of merchandise sold = cost of ending inventory i.e (=total goods avail. for sale) – = $36400 If periodic system used have to take a physical inventory at statement time

4 Physical Inventory This ending inventory figure is important:
It is the current asset on the balance sheet (as it will normally be sold within one year) Needed to calculate the cost of goods sold figure for the income statement It is used as beginning inventory figure for the next accounting period

5 COGS on the Income Statement
Inventory that is not sold goes on the balance sheet (Merchandise Inventory) Cost of the inventory that WAS sold goes on the income statement (Cost of Goods Sold)

6 COGS Cost of beginning inventory + cost of merchandise purchased – cost of ending inventory = cost of goods sold i.e = COGS

7 Gross Profit The difference between the selling price and the cost price of the goods sold Revenue – Cost of Goods Sold = Gross Profit Gross Profit – Expenses = Net Income

8 RECAP Final inventory figure recorded on balance sheets as Current Asset Cost of Goods Sold recorded on income statement Neither inventory figure or COGS known during accounting period

9 New accounts

10 Merchandise Inventory
Inventory counted at fiscal year-end It becomes the beginning inventory figure for the next fiscal period The periodic inventory adjustment is the only accounting entry made to this account

11 Purchases Account Short form for “purchases of merchandise for resale”
Found in expense section Not the same as purchasing office supplies for use in company, would be recorded in Office Supplies, however a stationary store purchases paper to sell to customers would be recorded in Purchases account

12 Journal Entry June 27 Purchases 100 HST Recoverable 13 Bank 113
-to record purchase of merchandise

13 Sales Account Revenue account for a merchandising business
Journal Entry Bank (or Accounts Rec) HST Payable Sales -sale of merchandise

14 Freight-in Account Considered part of COGS
Used to accumulate any transportation charges on incoming goods Kept separate from transportation charges on outgoing goods (recorded in Delivery Expense) Usually placed right after Purchases account in ledger Duty – special charges imposed by the government on certain goods imported from a foreign country

15 Journal Entry June 27 Freight-In 200 HST Recoverable 26 Bank 226
-to record freight charges on purchases

16 Adjustment to Formula Beg. Inv + (Purchases + Freight-in) – Ending Inventory = Cost of Goods Sold

17 Figure 11.5 in text

18 Closing Entries Closing entry process automatically updates the inventory account at the end of the fiscal period Close Merch. Inv (credit) with Sales to Income Summary Close Merch Inv. (debit) with Expenses to Income Summary Close Capital and Drawings as before See fig 11.8 and 11.9 in text

19 Merchandise Returns & Allowances
Credit invoices used to adjust, correct or cancel a charge to a customer’s account for: Defective goods Goods less than satisfactory but kept by customer (given an allowance or reduction) off the invoice price Error made on sales invoice

20 Journal Entry For books of the vendor: Remember for sales DR AR and CR Sales and HST payable Credit invoice has opposite effect DR Sales and HST Payable and CR AR

21 Journal Entry For books of purchaser:
DR AP and CR purchases and HST recoverable

22 Cash Refunds When a cash sale was made, no credit invoice is issued
Cash handed back or a cheque is issued DR Sales DR HST Payable CR Bank

23 Returns and Allowances
Some businesses (i.e. large department stores) have a separate account for returns called Sales Returns and Allowances so they can see what proportion of merchandise has been returned DR Sales Returns and Allowances account instead of Sales Account See Fig in text Same concept is used for purchases returns and allowances

24 COGS Formula Revised Cost of beg. Inv + Net Cost of goods purchased – cost of ending inv. = Cost of goods sold

25 Sales Discounts A reduction of the amount of a bill if payment is made on or before discount date stated on the bill Purpose is to encourage customer to pay promptly

26 Terms of Sale Refers to the arrangements made with customers as to when the goods or services are to be paid COD: customer pays when goods delivered Net 30/Net 60: full amount due in 30/60 days EOM: full amount due at end of the month 2/10, n/30: receive 2% discount if paid within 10 days after invoice received otherwise full in 30 days

27 Journal Entry Books of buyer Terms 2/10, n/30 Purchases 411.90
HST Recoverable Accounts Payable -purchase of goods Accounts Payable Discounts Earned 9.31 Bank -payment of purch inv. With discount

28 Journal Entry In books of seller Accounts Receivable 465.45
Sales HST Payable -sale of goods on account Bank Discounts Allowed 9.31 Accounts Receivable -payment of account with discount earned


30 = Called Net Purchases = Income Statement

31 Perpetual Inventory Detailed record of items in stock is kept up to date on an ongoing basis As items sold info, is transferred directly to store’s central computer which is programmed to make the appropriate deductions from the inventory and make accounting entries Sales returns are generally handled by separate department System cannot automatically know when goods are lost, stolen or broken; therefore have to do manual check of inventory

32 Journal Entry Perpetual System
1. Bank Sales HST Payable 2. Cost of Goods Sold 100 Merchandise Inventory 100 For comparison of two systems see p in text

33 Cost Accounting A specialized area of accounting that concentrates on determining, controlling and reporting the costs of doing business i.e. in a manufacturing business To calculate cost of goods manufactured (account similar to purchases in merchandise business) look at raw materials, direct labour and factory overhead

34 Raw materials – essential components that become part of the finished product
Direct labour – wages for employees who have specific role in the making the finished goods Factory overhead – a range of expenses that support the manufacturing process

35 Manufacturing Business Balance Sheet
On the balance sheet instead of reporting on inventory you will report on the “goods” which include Finished Goods Inventory (similar to Merchandise Inventory), Raw Materials Inventory and Goods in Process Inventory

36 Schedule of Cost of Goods Sold

37 Invoices Sales Invoice: dr A/R cr Sales
Credit Invoice: dr Sales Returns cr A/R Purchase Invoice: dr Purchases or Inventory cr A/P

38 Journal Entries Credit Sale
dr A/R cr Sales /10, net 30, invoice #45 Return dr Sales Returns and Allowance cr A/R

39 Journal Entries (periodic)
Payment within discount period dr Cash dr Sales Discounts cr A/R Payment beyond discount dr Cash cr A/R

40 Journal Entries (periodic)
Purchase goods for resale (periodic) dr Purchases cr Cash or A/P /15, n/30, invoice #P398 Payment within discount period* dr A/P cr Purchase Discounts cr Cash Cheque #26 for invoice #P398 * Otherwise A/P and Cash

41 Journal Entries Transportation (for goods for resale)
dr Transportation-In cr A/P or Cash Delivery Charge (for goods sold to customers) dr Delivery Expense cr A/P or Cash

42 Journal Entries (perpetual)
Purchase good for resale: dr Inventory cr A/P or Cash Sale: dr A/R or Cash cr Sales and dr Cost of Goods Sold cr Inventory

43 Worksheet Original NEW Close all Close all

44 Journal Entries (perpetual)
Inventory shortage (count at end of period) dr Inventory Shortage cr Inventory Charge shortage to expense

45 Sales Taxes HST: Harmonized Sales Tax 13% Typical Sale:
dr Cash or A/R cr Sales cr HST Payable

46 Sales Taxes HST on Purchases:
dr Purchases (or Inventory, etc.) dr HST Recoverable cr Cash or A/P “Remit” HST if owing: Refund of HST is owed: dr HST Payable 500 cr HST Recoverable 450 cr Cash dr HST Payable dr Cash cr HST Recoverable 500

47 Credit Cards Increases sales Typical Sale: dr Cash dr Visa Discount Expense cr Sales cr HST Payable $600 x 3% visa charge

48 Complete Income Statement

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