Accounting Notes Chapter 6

Sales

When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense. This expense is called COGS.

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 updated

sales discount

encourages customers to pay their invoice early

income from operations (operating income)

gross profit - operating expenses

trade discounts

wholesalers often offer special discounts to government agencies or businesses that order large quantities

estimated returns inventory

A current asset that is reported on the balance sheet after inventory. It represents an estimate of merchandise that will be returned by customers. Recorded at the end of the accounting period as part of the adjusting process

multiple-step income statement

A form of income statement that contains several sections, subsections, and subtotals.

credit memorandum (credit memo)

A form used by a seller to inform the buyer of the amount the seller proposes to credit to the account receivable due from the buyer.

customer refunds payable

A liability account for estimated refunds and allowances that will be paid or granted customers in the future. Granted at the end of the accounting period as part of the adjusting process

customer discounts

A seller may grant customers a variety of discounts as incentives to encourage customers to act in a way benefiting the seller

purchases discounts

Discounts taken by the buyer for early payment of an invoice.

administrative expenses (general expenses)

Expenses incurred in the administration or general operations of the business. Ex- office salaries, depreciation of office equipment, etc.

selling expenses

Expenses of promoting sales, such as displaying and advertising merchandise, making sales, and delivering goods to customers.

Merchandise Inventory

Merchandise on hand (not sold) at the end of an accounting period. Reported as a current asset on the balance sheet.

invoice

The bill that the seller sends to the buyer. Where the terms of purchases on account are normally indicated

Gross Profit

The COGS is subtracted from sales. Called gross profit b/c it is the profit before deducting operating expenses.

FOB (free on board) destination

The ownership of the merchandise may pass to the buyer when the buyer receives the merchandise. Freight terms in which the seller pays the transportation costs from the shipping point to the final destination.

FOB (free on board) shipping point

The ownership of the merchandise may pass to the buyer when the seller delivers the merchandise to the freight carrier. Freight terms in which the buyer pays the transportation costs from the shipping point to the final destination. Such costs are part of the buyer's total cost of purchasing inventory and are added to the cost of inventory by debiting Inventory

Operating Cycle

The process by 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. The operating cycle of a service business differs from a merchandising business in that a merchandising business must purchase merchandise for sale to customers

purchases returns and allowances

a buyer may request an allowance for merchandise that is returned (purchases return) or a price allowance (purchases allowance) for damaged or defective merchandise. From the buyer's perspective, returns and allowances are called purchases returns and allowances. In both cases, the buyer normally sends the seller a debit memorandum to notify the seller of reasons for the return (purchase return) or to request a price reduction (purchases allowance)

physical inventory

a listing of inventory on hand prepared at the end of the accounting period. Used to determine the cost of merchandise on hand at the end of the period and the COGS during the period.

single-step income statement

an income statement in which all expenses are added together and subtracted from all revenues

wholesalers

companies that sell merchandise to other businesses rather than to the public

debit memorandum (debit memo)

informs the seller of the amount the buyer proposes to debit to the account payable due the seller. Also states the reasons for the return or the request for the price allowance

credit terms

terms for when payments for merchandise are to be made. If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time (the credit period) in which to pay

credit period

the credit period usually begins with the date of the sale as shown on the invoice. If the payment is due within a stated number of days after the invoice date

periodic inventory system

the inventory does not show the amount of merchandise available for sale and the amount sold

inventory shrinkage (inventory shortage)

the physical inventory on hand at the end of the accounting period is usually less than the balance of merchandise inventory