ACCOUNTING FOR MERCHANDISING BUSINESS (TERMS)

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Sales Discount

A cash discount on the point of view of the seller.

Sales discount

A contra-revenue account used when a buyer avails of the cash discount from the seller due to early payment of his account.

Periodic Inventory System

A method of inventory valuation for financial reporting purposes in which a physical count of the inventory is performed at specific intervals.

Purchase discount

Account to record the cash discount availed by the company.

Purchase Account

Account which Periodicl Inventory System utilizes.

Merchandise Inventory Account

Account which Perpetual Inventory System utilizes.

Cost of Goods Sold and Inventory

Accounts which the perpetual inventory system provides continuous record.

Trade Discounts

Are a reduction granted by a supplier of goods/services on the list or catalogue prices of the goods supplied. It is provided due to business considerations such as trade practices, large quantity orders, market competitions, etc.

Revenue from sales

Arise from the sale of goods.

Invoice Price

Basis for invoicing and recording after discount is deducted from the published list price.

Freight Collect

Buyer agrees to pay the transportation cost upon receipt of goods at destination point.

Free on Board (FOB) Shipping Point

Buyer agrees to shoulder transportation cost from shipping point up to destination.

Periodic Inventory System

Company determines the quantity of inventory on hand only periodically by having physical count.

Periodic Inventory System

Company determines the quantity of inventory on hand only periodically.

Perpetual Inventory System

Continuously tracks changes in the inventory account. Directly record purchases to the inventory account.

Sales returns and allowances

Customers return merchandise because it is damaged or defective, of inferior quality and not in accordance with their specifications, the seller.

Returns

Defective, poor quality or erroneous merchandise returned and delivered to source.

Operating Expenses

Expenses other than the cost of goods sold incurred to run the business.

Cost of Goods Sold Available for Sale=Net Purchases+Beginning Inventory

Formula for Cost of Goods Sold Available

Gross Profit=Net Sales-Cost of Goods Sold

Formula for Gross Profit

Net Income=Gross Profit-Expenses

Formula for Net Income

Net Purchases= Purchases+Freight-in-(Purchase returns and allowances-Purchase Discount)

Formula for Net Purchases

Cost of Goods Sold= Cost of Goods Sold Available for Sale-Ending Inventory

Formula for cost of goods sold

Net Sales= Sales-(Sales returns and allowances)-(Sales Discount)

Formula for net sales

Discount

Given to encourage early payment of accounts.

Refund or replacement of product

If the payment is made through cash, the seller will issue this to the buyer when there is a return of sale.

Cost of Goods Sold

In perpetual inventory system, it is recorded (debit) every sale.

Perpetual Inventory System

Inventory management that provides detailed records of real-time transactions of received or sold stock and continuously shows the cost of goods on hand.

Purchase Discount

Is a cash discount on the point of view of the buyer

Sales returns and allowances

Is a contra revenue account used when customers return merchandise.

Chain Discount

Is a series of trade discounts.

Purchases

Is an account used to record all acquisitions of inventory during the accounting period.

Sales or sales revenue

Is the account which represents the revenue of the merchandising business.

List Price

Is the stated value of the merchandise. It is also known as tag price or catalogue price.

Transportation-in or Freight-in

Is used to record the transportation cost borne by the buyer.

Gross Sales

It consists of total sales for cash and on account/credit during an accounting period.

Credit Terms

It is the agreement between a seller and buyer that lists the timing and amount of payments the buyer will make in the future.

Operating Cycle of Merchandising Business

It refers to the number of days a company takes in converting its inventories to cash.

Cost of Goods Sold

Known as the cost of sales. It is the highest single expense of a merchandising business. Represents the cost of a merchandise sold to a customer.

Allowance

Merchandise with some defects accepted by customer provided a reduction in the invoice price.

Periodic Inventory System

Records all acquisitions of inventory during the accounting period by debiting purchase accounts and for transportation cost by debiting freight in. Purchase returns and allowances and purchase discounts are recorded.

Freight Prepaid

Seller agrees to pay the transportation cost at shipping point.

Free on Board (FOB) Destination

Seller agrees to shoulder all transportation cost from shipping point up to destination point.

Cost of Goods Sold

Tells how much the business paid for the goods or merchandise sold.

Gross Margin from Sales

Tells the difference between the revenue from sales and cost of goods sold.

Free on Board (FOB) Shipping Point

The buyer shoulders the shipping cost. Ownership of the goods passes to the buyer when the inventory leaves the seller's place. The buyer already owns the goods while in transit.

Freight Collect

The freight company collects the freight cost from the buyer.

Free on Board (FOB) Destination

The seller bears the shipping cost. The title passes when the goods are received by the buyer. The seller still owns the goods while in transit.

Freight Prepaid

The seller pays the transportation cost before shipping the goods.

Credit memorandum

The seller usually issues this to the customer which acknowledges that the seller has reduced the amount owed by the customer.

Merchandising Business

These are businesses that buy the products that they sell.

Invoice Price

To account for sales, the amount is represented to this account title which is equal to the list price less any trade discount.

Discount

To encourage customers to pay their accounts promptly or earlier, sellers offer a cash discount.

Net Income

What is left after deducting operating expense from gross margin.

Purchase returns and allowances

account is maintained for return of merchandise purchase.


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