Chapter 5: Accounting

sales taxes

becomes a liability when the sale is made. the seller charges the tax to the buyer by debiting accounts receivable. sellers credits Sales account for the amount of the sale and credits Sales tax payable

invoice

bill that the seller sends the buyer

other expense

cannot be traced directly to the normal operations of the business ex: interest expense and losses from disposing of fixed assets

revenue from sales

consists of sales, sales returns and allowances, sales discounts, and net sales. the total amount of sales to customers fir cash and on account is reported in this section.

cost of merchandise sold

cost is recognized as an expense. subtracted from sales to arrive at gross profit. debit. credit when merchandise is returned from customer. on the income statement

accounts payable subsidiary ledger

creditors ledger, lists individual creditors accounts in alphabetical order

accounts receivable subsidiary ledger

customers ledger, lists the individual customer accounts in alphabetical order

sales on account

debit to accounts receivable. credit to sales. credit to cogs. debit to merchandise inventory

income from operations

determined by subtracting operating expenses from gross profit

purchases discounts

discounts taken by the buyer for early payment of an invoice. buyers should always take this opportunity. accounts payable is debited. cash and merchandise inventory is credited

perpetual inventory system

each purchase and sale of merchandise is recorded in the inventory account and related subsidiary ledger. the amount of merchandise available for sale and the amount sold are continuously updated in the inventory records. most merchandise companies use these. use bar codes or radio frequency identification codes embedded in a product

service business

fees earned-operating expenses=net income

administrative expenses

general expenses. incurred in the administration or general operations of the business. ex: office salaries, depreciation of office equipment, and office supplies used

special journals

generate purchase, sales, and inventory reports

credit memorandum

if the return allowance is for a sale on account, the seller usually issues the buyer. authorizes a credit to the buyer's account recievable. indicates the amount and reason for the credit. debit sales returns and allowances

selling expenses

incurred directly in the selling of merchandise ex: sales salaries, store supplies used, depreciation of store equipment, delivery expense, and advertising

debit memorandum

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

the operating cycle

involve the purchase of merchandise for sale(purchasing), the sale of the products to customers(sales), and the receipt of cash from customers(collection). business that are longer have higher profit margins on their products, ex: automobile dealer

inventory subsidiary ledger

lists individual inventory by item(bar code) number

merchandise inventory

merchandise on hand at the end of an accounting period. reported as a current asset on the balance sheet. purchases of merchandise, freight for merchandise purchased, merchandised returned can debit this account. purchases discounts, purchases returns and allowances, and cost of merchandise sold can credit it. on the balance sheet

sales

merchandise that is sold

cash sales

normally entered on a cash register and recorded in the accounts. cash would be debited. sales would be credited. cost of merchandise sold is debited. merchandise inventory is credited. when a customer uses a credit card, credit card expense is debited and cash is credited. on the income statement

trade discounts

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

delivery expense

on the income statement. for FOB.

other income

revenue from sources other than the primary operating activity of a business ex: interest, rent, and gains resulting from the sale of fixed assets

merchandising business

sales-cost of merchandise sold=gross profit-operating expenses= net income

credit period

the buyer is allowed an amount of time in which to pay. usually begins with the date of the sale as shown on the invoice

free on board shipping point

the buyer pays the freight costs from the shipping point to the final destination. the ownership of the merchandise may pass to the buyer when the sellers delivers the merchandise to the freight carrier

purchases returns and allowances

a buyer may request an allowance for merchandise that is returned or a price allowance for damaged or defective merchandise. debits accounts payable and credits merchandise inventory.

subsidiary ledger

a large number of individual accounts with a common characteristic can be grouped together in a separate ledger

physical inventory

a listing of inventory on hand. used to determine the cost of merchandise on hand at the end of the period and the cost of merchandise sold during the period

sales discounts

a seller may offer the buyer credit terms that include a discount for early payment. reduce sales revenue. recorded as a contra account to sales which is an asset so normal balance is debit. cash would be debited. accounts receivable credited. on the income statement

periodic inventory system

the inventory does not show the amount of merchandise available for sale and the amount sold. instead a physical inventory is prepared at the end of the accounting period

free on board destination

the ownership of the merchandise may pass to the buyer receives the merchandise. the seller pays the freight costs from the shipping point to the buyer's final destination

general ledger

the primary ledger, which contains all the balance sheet and income statement accounts

gross profit

the profit before deducting operating expenses. net income declines if this declines. this happens in a company's purchasing activities or problems selling its goods at an acceptable price.

gross profit percentage

the rate at which company earns gross profit on its sales revenue. gross profit on sales/net sales. A higher ratio suggests the company has market power to command higher retail prices. A lower ration suggests competitive pressures on price setting

sales returns and allowances

the seller may reduce the initial selling price. this might occur if the merchandise is defective, damaged during shipment, or does not meet the buyer's expectations/ result in additional shipping and handling expenses. contra account. debit merchandise inventory. credit cost of merchandise sold. if cash is refunded, the seller debits this account and credits cash. on the income statement

credit terms

the terms for when payments for merchandise are to be made

inventory shrinkage

when the physical inventory on hand at the end of the accounting period is usually less than the balance of merchandise inventory. an adjusting entry, cost of merchandise sold debited and merchandise inventory is credited. recorded as loss of merchandise inventory shrinkage

controlling account

where each subsidiary ledger is represented in the general ledger by a summarizing account.

report form

where the balance sheet may also be presented in a downward sequence in 3 sections