Accounting Chapter 6
What is merchandise inventory reported as on the balance sheet?
A current asset
When the buyer has a purchase return what do they typically send with it back to the seller
A debit memorandum
Define credit memorandum
A document that authorizes a credit (decreases) to the buyer's account receivable with the seller due to defective or damaged merchandise
The form of balance sheet where assets are on the left side and liabilities and owner's equity are on the right side is called what?
Account form
Any processing fee charged by a clearing house or issuing bank are periodically recorded as an expense, what kind of expense are they recorded as?
Administrative expense
Merchandise cost consist of what?
All of the costs of acquiring the merchandise and readying it for sale, such as the actual cost of the merchandise and purchase and freight cost
What is the single step income statement?
An alternate form of income statement where the company deducts the total of all expenses in one step from the total of all revenues
Other expense can be defined as?
An expense that cannot be traced directly to the normal operations of the business
Multiple step income statement
An income statement that contains several sections, subsections, and subtotals
Under the perpetual inventory system, the cost of merchandise sold is reported how?
As a single line on the income statement
Merchandise inventory is reported as what?
Asset
What is the journal entry like for the buyer FOB shipping point?
Buyer pays freight; Debit merchandise inventory (Increasing it)and credit cash (decreasing it)
FOB free on board shipping point means what?
Buyer pays the freight cost from the shipping point to the final destination
How is gross profit calculated in a merchandising company?
By subtracting the cost of merchandise sold from net sales
Credit card sales are recorded as what?
Cash sales
What does the operating cycle consist of?
Cash, Purchase Activity, Products, Sales Activity, Accounts receivable, collection activity and the process is a circle of events
How is it journalized by the seller at the time of a cash sale involving the collection of sales tax?
Debit accounts receivable (increasing it), credit sales (increasing it), and credit sales tax payable (increasing it)
How is a sale of merchandise journalized using a perpetual inventory system?
Debit cash (increasing it), credit sales (increasing it), Debit cost of merchandise sold (contra acct to sales/increasing it), and credit merchandise inventory (decreasing the on hand inventory)
How would the seller journalize the sale of merchandise for 1500 including the sales discount of 30?
Debit cash 1470 Increasing it, debit sales discounts increasing it, and credit accounts receivable for the collection of the amount received on invoice decreasing it
A business may sell merchandise on account, how does the seller record such sale?
Debit to accounts receivable (increasing it) and a credit to sales (increasing it), also on a perpetual inventory system cost of merchandise must also be debited (which is an expense, expenses are an exception to the right left rule therefore it is increased with a debit), and merchandise inventory would be credited (decreasing it)
How does the seller reflect a sales return while journalizing?
Debits sales returns and allowances for the amount of the return and if the sale was on account the seller credits the accounts receivable (decreasing it), if it is a perpetual inventory system then the seller must also debit merchandise inventory (increasing it) and credit cost of merchandise sold (decreasing it)
Perpetual inventory system consist of what?
Each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. As a result, the amounts of merchandise available for sale and sold are continuously updated in the inventory records.
Selling expenses are defined as what?
Expenses incurred directly in the selling of merchandise
Define purchase returns and allowances
From a buyer's perspective when they return sales
What is a criticism of the single step form?
Gross profit and income from operations are not reported
Cost of merchandise sold
In a merchandising business, when the merchandise is sold, the revenue is reported as sales and its cost is recognized as an expense. This expense is the cost of the merchandise sold.
What is an example of an other expense?
Interest expense
What are some examples of other income
Interest income, rent income, and gains from the sale of a fixed asset
What is the relationship of the sales discounts account to the sales account
It is a contra account to sales
Freight cost incurred by the buyer is reflected in the records how?
It is part of the buyers total cost of purchasing inventory and it is added to the cost of the inventory by debiting merchandise inventory
Merchandise inventory
Merchandise on hand (not sold) at the end of the accounting period
What is the journal entry like for the seller for FOB shipping point?
No journal entry
What are some examples of administrative expenses?
Office salaries, depreciation of office equipment, and office supplies
Other income and other expense general do what on the income statement?
Offset each other and then the difference is added to income from operations to determine a net income or loss
What is income from operations?
Operating income
What are the two systems of accounting for recording and reporting the cost of merchandise sold?
Periodic inventory system and the perpetual inventory system
What is a sales discount considered from the buyers perspective?
Purchase discounts
The type of balance sheet that is presented in a downward sequence in three sections is called what?
Report form
Other income can be defined as?
Revenue from sources other than the primary operating activity of a business.
Discounts taken by the buyer for early payment are recorded by the seller as what?
Sales discounts
What is the relationship between sales returns and allowances and sales?
Sales returns and allowances is a contra account of the sales account
What are some examples of selling expenses?
Sales salaries, store supplies used, depreciation of store equipment, delivery expense, and advertising
How is the freight cost reflected on the sellers records when they pay for it?
Seller debits delivery expense (it is a selling expense)
What is the journal entry like for the seller for FOB destination?
Seller pays freight; Debit delivery expense (increasing it) and credit cash (decreasing it)
If the seller issues a cash refund instead of a credit to accounts receivable for returned merchandise than how would the journal entry differ?
Seller would debit Sales returns and allowances(increasing it) and credits cash (decreasing it)
Sales returns and allowances are defined as what?
Something granted by the seller to customers for damaged or defective merchandise
What do you have to do to determine sales in a merchandising company?
Take your sales and subtract your sales returns and allowances and sales discounts
Under the perpetual inventory system as it pertains to sales discounts, a buyer initially debits merchandise inventory for the amount of the invoice then when the buyer pays the discounted amount how is the adjusted amount reflected in the books?
The buyer credits merchandise inventory for the amount of the discount
Periodic inventory system consist of what?
The cost of merchandise sold and merchandise on hand are determined at the end of the period by physically counting the inventory
Gross Profit
The cost of merchandise sold is subtracted from sales to arrive the gross profit. It is gross profit because it is before deducting operating expenses
When a customer receives a sales return or allowance, how is that handled?
The customer may either return the merchandise or accept an allowance from the seller
When is the beginning date of the credit period?
The date of the invoice
Define inventory shrinkage
The difference in the perpetual rolling balance of merchandise in the accounting records and the physical amount usually due to theft or errors
What does n/eom mean?
The net payment amount is due at the end of the month
what does n/30 mean?
The net payment amount is due in 30 days from the invoice date
What does 2/10, n/30 mean?
The seller is offering the buyer a 2% discount if the full payment is made within 10 days if they choose not to take the discount then the full amount is due in 30 days
FOB (free on board) destination means what?
The seller pays the freight cost from the shipping point to the buyer's final destination.
Define credit terms
The terms for when payments for merchandise are to be made
Sales is defined as what?
The total amount charged to customers for merchandise sold
When are sales discounts typically used
They are granted by the seller to customers for early payment of amounts owed.
Define trade discount
Wholesalers that sell to other businesses and government agencies rather than the public at discounted rates
Since the inventory shrinkage cannot be totally eliminated it is considered
a normal cost of operations
If payment is to be made on delivery of merchandise, what is it called?
cash or net cash due
If payment is not to be made on delivery the allowed amount of time is called what?
credit period
The current portion of a note payable is reported on the balance sheet as what?
current liability
How is inventory shrinkage journalized
debit cost of merchandise sold (increasing it) and credit merchandise inventory (decreasing it)
A debit memorandum informs the seller that the buyer proposes to
debit the accounts payable due to the seller
Administrative expenses are defined as?
general expenses that are incurred in the administration or general operations of the business.
How is income from operations calculated?
subtract operating expenses from gross profit
A single step form emphasizes what?
total revenues and total expenses in determining net income
When is the liability of sales tax incurred?
when the sale is made
