merchandising companies

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Chapter 5



Purchases of the merchandise

Sales of the merchandise, often on account

Collection of the account receivable fromcustomers



Revenue from Sales $900,000

Less: Cost of Goods Sold 540,000

Gross Profit $360,000

Less: Expenses 270,000

Net Income $90,000

Fast Forward

Condensed Income StatementFor the Year Ended December 31, 2001



Information in the financial statements is verycondensed. Managers an other employees needmore information.

Subsidiary ledgers: A source of detailed needs◦ Accounts receivable subsidiary ledger

◦ Accounts payable subsidiary ledger

◦ Inventory subsidiary ledger

Controlling Account-A general ledger account that

summarizes the content of a subsidiary ledger



Perpetual Inventory System-transactions arerecorded as they occur

Periodic Inventory System-transactions are

recorded periodically-usually at the end of the year

Today most large business use computers to assist

In maintaining perpetual systems



Purchases of merchandise are recorded by debitingan asset account entitled Inventory

When merchandise is sold two entries are

necessary:◦ The revenue earned is recognized

◦ Cost of goods sold is recorded



Sep 1- Purchased 10 Regent computer monitors on account from Okawa Wholesale Co. The monitors cost $600 each, for a total of $6,000; payment is due in 3o days

Inventory 6,000

Accounts Payable 6,000

Purchased 10 Regent computer monitors for $600

Each; payment due in 30 days



Sep 7- Sold two monitors on account to RJ Travel agency at a retail sales price of $1000 each, for a total of $2000. Payment is due in 30 days.

Accounts Receivable(RJ Travel Agency) 2,000Sales 2,000

Matching Principle

Cost of Goods Sold 1,200

Inventory 1,200



Oct 1- Paid the $6,000 account payable to Okawa Wholesale Co.

Accounts Payable( Okawa Wholesale Co.) 6,000

Cash 6,000Paid account payable



Oct 7- Collected the $2000 account receivable from RJ Travel Agency

Cash 2,000

Accounts Receivable(RJ Travel Agency) 2,000Collected an account receivable from a credit

customer



Taking a physical inventory is a complete physical countof the merchandise on hand at least once a year

Inventory shrinkage

Example: Computer barn shows an inventory with a cost of $72,200. The items actually on hand have a total cost

of $70,000.

Cost of Goods Sold 2,200Inventory 2,200



The purchase of merchandise is debited to anaccount called Purchases rather than Inventory

When merchandise is sold an entry is made to

recognize the sales revenue, but no entry is madeto record Cost of Goods Sold or to reduce theinventory account

There is no inventory subsidiary ledger



Jan 6- Purchased merchandise for resale to customers worth $2,000

Purchases 2,000

Accounts Payable( Paper Products Co.) 2,000Purchased inventory on account; payment due in 30

days



At Dec 31, 2001 the following information is available: 1. The inventory on hand at the end of 2000 cost $14,000

2. During 2001, purchases of merchandise for resale to customers totaled $130,000.

3. Inventory on hand at the end of 2001 cost $12,000

Inventory (beginning of the year)

(1)

$14,000

Add: Purchases(2) 130,000

Cost of Goods available for sale $144,000

Less: Inventory( end of the year) (3) 12,000

Cost of goods sold $132,000



A Cost of Goods Sold Account is created by two closingentries

Dec 31 Cost of Goods Sold 144,000Inventory(beginning balance) 14,000

Purchases 130,000

To close the temporary accounts contributing to the costof

goods sold for the year



Special Occasions’ COGS account now includes the costof all goods available for sale during the year. Not all of the goods were sold and merchandising costing $12000is still on hand at the end of the year.

Dec 31 Inventory( year end balance) 12,000

Cost of Goods Sold 12,o00

To reduce the balance of the COGS account by the cost of

merchandise still on hand at year end

With this entry the inventory on hand has been broughtup

to date



The company will make the usual four closingentries

1. Revenue accounts

2. Expense accounts( including COGS)

3. Income summary account

4. Drawings account



A special journal is an accounting record or device designed torecord a specific type of routine transactions quickly andefficiently

Advantages:

1. Transactions are recorded faster and more efficiently

2. Many special journals may be in operation at one time, furtherincreasing the company’s ability to handle a large volume of transactions

3. Automation may reduce the risk of errors

4. Employees maintaining special journals generally do not need

expertise in accounting5. The recording of transactions may be an automatic side effect

of other basic business activities, such as collecting cash fromcustomers



Credit terms“net 30 days”-payment due in 30 days

“n/30”- payment due in 30 days

“10 eom”-pymt is due 10 days after the end of the

mth in which the purchase occurred

“2/10, n/30”- read as “ 2, 10, net 30

The period in which the discount is available istermed the discount period



Example: Fast Forward purchases 100 spreadsheet programs from PC products.The cost of these

programs is

$100 each, for a total of $10,000. However, PC

products offers credit terms of 2/10, n/30.

Inventory 9,800

Accounts Payable 9,800To record purchase of 100 spreadsheet programs at

net cost( $100*98%*100 units)



If the invoice is paid within the time period the following

entry will be made to record the transaction:

Accounts Payable 9,800Cash 9,800

To record payment of invoice

If Fast Forward forgets to make the payment within thediscount period, the following entry will be made

Accounts Payable 9,800Purchase Discounts Lost 200Cash 10,000

To record the payment of invoice after expiration of discount

period



Example: Fast Forward purchases 100 spreadsheet programs from PC products.The cost of these

programs is

$100 each, for a total of $10,000. However, PC products

offers credit terms of 2/10, n/30

Inventory 10,000


To record purchase of 100 spreadsheet programs atgross

invoice price( $100*100 units)



If the invoice is paid within the time period the following entry

will be made to record the transaction


Cash 9,800

Purchase Discount Taken 200

Paid a $10,000 invoice within the discount period; taking a 2%

purchase discount

If the invoice is not paid on time the following entry is made:


Cash 10,000

To record the payment of invoice after expiration of discount

period



Example: Fast Forward returns to PC Products 5 of the

spreadsheet programs purchased on November 3( Gross

price $500). Fast Forward has not yet paid for the merchandise, and it recorded the purchases at net

cost.

Accounts Payable 490Inventory 490

Returned five defective spreadsheet programs tosupplier.

Net cost of the returned items, $490($100*98%*5



Example: The customer returns merchandise purchased on account for $200. The following entry will be made:

Sales Returns and Allowances 200Accounts Receivable( or Cash) 200

Customer returned merchandise purchased on accountfor$200. Allowed customer full credit for returnedmerchandise.

Inventory 160Cost of Goods Sold 160To restore in the inventory account the cost of

merchandisereturned by a customer



Example: Fast Forward sells merchandise to Susan Hall

for $1000, offering terms of 2/10, n/30. The sales revenue

is recorded at the full invoice price, as follows:

Accounts Receivable 1,000

Sales 1,000

Sold merchandise on account, invoice price,$1,000;terms,

2/10,n/30



If Susan Hall pays after the discount period the

followingentry will be made:

Cash 1,000


Collected a $1,000 account receivable from acustomer

If Hall makes the payment within the discount

period:Cash 980

Sales Discount 20


Collected a $1,000 account receivable from a



Revenue:

Sales 912,000

Less: Sales Returns and

Allowances 8,000

Sales Discounts 4,000 12,000

Net Sales $900,000



The liability to the governmental unit for sales taxesmay

be recorded at the time the sale is made, as shown inthe

following journal entry

Cash 1,07o

Sales Tax Payable 70

Sales 1,000To record sales of $1,000 subject to 7% sales



Gross profit margin= Gross Profit *100Net Sales revenue

= 100,000 *100

400,000

= 25%

Gross profit margins can be calculated for thebusiness as a whole, for specific departments or

for individual products



Exercise 5.10 and Exercise 5.11

merchandising companies

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