Accounting Chapter 5

periodic inventory system FOB shipping point

debited to freight in

purchases discounts

discounts taken by the buyer for early payment of an invoice

Perpetual inventory system

each purchase and sale of merchandise is recorded in the inventory account and related subsidiary ledger

sales discount

encourages customers to pay their invoice early

perpetual inventory system adjusting process

ending inventory physical count is compared to balance of inventory, the difference of amount is inventory shrinkage -recorded as a debit to cost of goods sold and a credit to inventory

How operating cycles differ

grocery store- short operating cycle jewelry store- long operating cycle

other revenue

revenue from sources other than the primary operating activity of a business (income from interest, rent)

Free on board destination

seller pays the freight costs -seller debits delivery expense (selling expense) -buyer debits inventory including the freight

post-closing trial balance

-asset, contra asset, liability, and stockholders equity accounts with balances.

purchases returns and allowance

-buyer sends seller a debit memo to notify the seller the reasons of return or to request a price reduction -buyer debits AP and credits inventory

estimated returns inventory

-current asset that is reported on balance sheet after inventory -part of adjusting process

single-step income statement

-deducts total of all expenses in one step from total of all revenues -doesn't report gross profit and income from operations

Income from operations

-either selling expense or administrative expense -selling expense is incurred directly in the selling of the merchandise. Ex: sales salaries, delivery expense, store supplies used -administrative expense is incurred in the administration or the general operations of the business. Ex: office salaries, office supplies used.

merchandising business

-first purchases merchandise to sell to its customers -when merch is sold, revenue is reported as sales, and its cost is recognized as an expense called cost of goods sold.

customer refunds payable

-liability account for estimated refunds -recorded at end of accounting period in adjusting process

how do closing entries differ periodic to perpetual

-periodic has no cost of goods sold account to close the income summary, but instead purchases, freight in accounts, and purchase discounts are closed to income summary -also, the inventory account is adjusted to the end-of-period physical inventory count during the closing process.

Sales transactions

-revenue from sales merchandise is recorded as sales

multiple step income statement

-sales- total amount of sales to customers for cash and on account -cost of goods sold- amount of cost of goods sold -gross profit- excess of sales over cost of goods sold -income from operations- subtract operating expenses from gross profit -other revenue and expense

invoice

-seller sends buyer -terms of purchases on account

accounting system for merchandising business

-subsidiary ledger: large number of individual accounts with a common characteristic -general ledger: primary ledger that contains income statement and balance sheet -controlling account: summarizing account that represents each subsidiary ledger in the general ledger

operating income

-subtracted from fees earned -incurred in providing the services

credit terms

-when payments for merchandise are to be made -to encourage the buyer to pay before the end of the credit period, the seller often offers a discount

periodic closing entries

1. Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary. Since Purchases Discounts and Purchases Returns and Allowances are temporary accounts with credit balances, they are debited for their balances. In addition, debit the estimated returns inventory account for the cost of the future estimated returns of the current period's sales. Finally, Inventory is debited for its end-of-period balance based on the end-of-period physical inventory. 2. Credit each temporary account with a debit balance, such as the various expenses, and debit Income Summary. Since Freight In is a temporary account with a debit balance, it is credited for its balance. In addition, Inventory is credited for its balance as of the beginning of the period. 3. Debit Income Summary for the amount of its balance (net income) and credit the retained earnings account. The accounts debited and credited are reversed if there is a net loss. 4. Debit the retained earnings account for the balance of the dividends account and credit the dividends account.

4 closing entries for a merchandising business

1. debit each temporary account with a credit balance, such as sales, and credit Income Summary 2. credit each temporary account with a debit balance, such as various expenses, and debit income summary. Cost of goods sold is credited. 3. debit income summary for amount of its balance (net income) and credit retained earnings account. reversed if their is a net loss 4. debit retained earnings account for its balance of the dividends account and credit dividends

adjusting entries for customer allowances and returns

1. first adjusting entry reduces sale account and creates customer refund liability account 2. second entry creates an estimated returns inventory account for merchandise that is expected to be returned and reduces cost of goods sold

Free on board shipping point

buyer pays the freight cost from the shipping point to the final destination -debit inventory

other expense

can't be traced directly to the normal operations of the business (interest expense, losses from disposing of fixed assets)

Periodic inventory system

inventory doesn't show the amount of merchandise available for sale and the amount sold, instead physical inventory is prepared at the end of the accounting period

periodic inventory system adjusting process

inventory shrinkage is included indirectly in computation of cost of goods sold

sales tax

liability is incurred when the sale is made -at time of cash sale, seller collects tax -when sale is made on account, seller charges tax to buyer by debiting A R -seller credits sales account for the amount of the sale and credits the tax to Sales Tax Payable

Accounts payable subsidiary ledger

lists individual creditor accounts in alphabetical order -controlling account is Accounts Payable

Accounts receivable subsidiary ledger

lists individual customer accounts in alphabetical order -controlling account in general ledger is Accounts Receivable

asset turnover ratio

measures how effectively a business is using its assets to generate sales. you want a high ratio. - sales divided by average total assets

inventory

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

inventory shrinkage

physical inventory on hand at end of accounting period is usually less than the balance of the inventory due to theft, errors, etc.

Operating cycle

process by which a company spends cash, generates revenues, and receives cash -service and merchandise operating cycles are different because a merchandise business must purchase merchandise

periodic inventory system is used for

small merchandise businesses such as a local hardware store -physical count of inventory -purchases of inventory are recorded in a purchases account instead of an inventory account

cost of goods sold

subtracted from sales to arrive at gross profit