Acct 2301 Chapter 5

Customer discount

A seller may grant customers a variety of discount, called customer discounts, as incentives to encourage customers to act in a way benefiting the seller.

Customer Returns and Allowance

Merchandise sold may be returned to the seller (returns). In other cases, the seller may reduce the initial selling price (allowances)

The ratio of sales to assets (formula)

Ratio of sales to assets=Sales/Average Total Assets

Credit

The terms for when payments for merchandise are to be made.

Invoice or Bill

The terms of purchases on account that the seller sends to the buyer.

Sales

The total amount of sales to customers for cash and on account is reported in this section

Purchase discount

To encourage the buyer to pay before the end of the credit period, the seller may offer a discount. Example 2/10, n/30

Selling expenses

are incurred directly in the selling of merchandise. Examples of selling expenses include salaries, store supplies used, depreciation of store equipment, delivery expense, and advertising.

Special journals

are separated journals made by computerized accounting systems that record similar transaction and generates purchase, sales, and inventory reports

Operating expenses

are the expenses incurred in providing the services

In a perpetual inventory system

each purchase and sale of merchandise is recorded in the inventory account and related subsidiary ledger. In this way, the amount of merchandise available for sale and the amount sold are continuously (perpetually) updated in the inventory records

A debit memorandun or debit memo

informs the seller of the amount the buyer proposes to debit the account payable due to the seller.

Subsidiary ledger

is a large number of individual accounts with a common characteristic that can be grouped together in a separated ledger

Controlling account

is a summarizing account that represents subsidiary ledgers in the general ledger

Other Expense

is an expense that cannot be traced directly to the normal operations of the business. Examples of other expenses include interest expense and losses from disposing of fixed assets.

Cost of Merchandise sold

is an expense to recognize the cost from selling merchandise

Income from operations

is determined by subtracting operating expenses from gross profit

A credit memorandum or credit memo

is issued when the seller intends to credit the customer's accounts receivable.

Merchandise Inventory

is merchandise on hand (not sold) at the end of an accounting period. It is reported as a current asset on the balance sheet

Other Income

is revenue from sources other than the primary operating activity of the business. Examples include income from interest, rent and gains resulting from the sale of fixed assets

Gross Profit

is the difference from subtracting COGS from Sales

Net income

is the difference of subtracting operating expenses from fees earned.

General ledger

is the primary ledger which contains all of the balance sheet and income statement accounts.

Sales

is the revenue reported from selling merchandise

Other Income and Expenses

items are not related to the business.

What is accounts receivable subsidiary ledger, or customer ledger?

list the customer accounts in alphabetical order. The controlling account in the general ledger is Accounts Receivable.

What is accounts payable subsidiary ledger, or creditors ledger?

lists individual creditor accounts in alphabetical order. The controlling account in the general ledger is Accounts Payable

What is inventory subsidiary ledger, or inventory ledger?

lists individual inventory by item (bar code) number. The controlling account in the general ledger is inventory. An inventory subsidiary ledger is used in a perpetual inventory system.

Cost of Merchandise Sold

may also be reported as cost of goods sold or cost of sales

The ratio of sales to assets

measures how effectively a business is using its assets to generate sales. A high ratio indicates an effective use of assets. The assets used in computing the ratio may be the total assets at the end of the year, or the average of the monthly assets.

Fees earned

revenues reported from services.

Administrative expenses

sometimes called general expenses, are incurred in the administration or general operations of the business. Examples of administrative expenses include office salaries, depreciation of office equipment, and office supplies used.

Sales on Account

A business may sale merchandise on account. The seller records such sales as a debit to Accounts Receivable and a credit to Sales.

Cash Sales

A business may sell merchandise for cash. Cash sales are normally entered on a cash register and recorded in the accounts. • Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are also recorded.

Purchase returns and allowances

A buyer may request an allowance for merchandise that is returned (purchases return) or a price allowance (purchases allowance, aka price reduction) for damaged or defective merchandise.

Sales Taxes

Almost all states levy a tax on sales of merchandise. The liability for the sales tax is incurred when the sale is made.

Balance Sheet: Account form

Assets on the left and liabilities and Stockholders' Equity on the Right side

Inventory shrinkage or shortage

Difference from perpetual inventory and physical inventory. Even when perpetual inventory is mostly accurate, shoplifting, employee theft or errors.

Balance Sheet: Report Form

Downward sequence of three sections

Dual Nature of Merchandise Transactions

Each transaction affects a buyer and a seller.

Operating Cycle

Is the process which a company spends cash, generates revenues, and receives cash either at the time the revenues are generated or later by collecting an accounts receivable

Single Step Income

The single-step form emphasizes total revenues and total expenses in determining net income. A criticism of the single-step form is that gross profit and income from operations are not reported

Gross Profit

The excess of sales over cost of merchandise sold

FOB (free on board) destination

The ownership of the merchandise may pass to the buyer when the buyer receives the merchandise. This term means that the seller pays the freight costs from the shipping point to the buyer's destination o When the seller pays the delivery charges, the seller debits Delivery Expense or Freight Out

FOB (Free on board) shipping point

The ownership of the merchandise pass to the buyer when the seller delivers the merchandise to the freight carrier. This term means that the buyer pays the freight costs from the shipping point to the final destination.

Trade discounts

Wholesalers are companies that sell merchandise to other businesses rather than to the public. Many wholesalers publish sales catalogs. Rather than updating their catalogs, wholesalers may publish price updates. These updates may include large discount from catalog list prices

Sales discount

a common discount that encourages customers to pay their invoice early

In a periodic inventory system

the inventory does not show the amount of merchandise available for sale and the amount sold. Instead, a listing of inventory on hand, called a physical inventory, is prepared at the end of the accounting period.

Credit period

the time period the buyer is allowed to pay.

Cash terms or net cash

when payment is required on delivery