chapter 6

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cost of goods sold

beginning inventory + purchases - ending inventory used under periodic inventory system

merchandise available for sale

cost of merchandise available for sale to customers calculated by adding the beginning merchandise inventory to net purchases

sales

cost of merchandise sold = gross profit total amount charged to customers for merchandise sold including cash sales and sales on account

cost of merchandise purchased

cost of net purchases plus transportation costs

freight in

cost of transportation

revenue

derived from selling merchandise is known as Sales.

net purchases

determined when purchases returns and allowance and the purchases discounts are deducted from the total purchases

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 an inventory account. -normally computerized, ex bar codes, amount of merchandise available for sale and amount sold are perpetually disclosed

report form

form of balance sheet presents the owner's equity and liabilities sections below the assets section.

account form

form of balance sheet the resembles the basic format of accounting equation with assets on the left side and liabilities and owner's equity section on the right side

FOB - free on board shipping point

freight terms in which the buyer pays transportation costs from the shipping point to the final destination

FOB - (free on board) destination

freight terms in which the seller pays for the transportation costs from shipping point to final destination

sales discount

from a sellers perspective, discounts that a seller may offer the buyer for early payment, Reduction in the amount of cash received from a customer for early payment. Offered by the seller as an incentive for the purchasers to pay early. A contra account to Sales Revenue

merchandising business

revenue activities involve buying and selling merchandise. merchandise business purchase merchandise to sell to customers

net sales

revenue received from merchandise sold to customers less any returns and allowances and sales discounts

net income from service business

revenues - operating expenses

accounts receivable 2200 sales cr 2200

sale of merchandise that was sold for 2200 on credit

net sales

sales minus sales returns and allowances minus sales discounts.

revenue is reported as sales

when merchandise is sold and its expense called COST OF MERCHANDISE SOLD

accounting systems

must be designed to record the receipt of goods for resale, keep track of goods available for sale and record the sale and cost of goods sold

net income from a merchandising business

net sales - cost of goods sold - operating expenses

merchandise on hand

not sold, called merchandise inventory at the end of the period

administrative expenses (general expenses)

expenses incurred in the administration or general operations of the business

selling expenses

expenses that are incurred directly in the selling of merchandise.

other expense

expenses that cannot be traced directly to operations, expenses incurred that are not the direct result of regular trading activities of a business

merchandise inventory

-merchandise on hand, not sold, at the end of the account period. -current asset on the balance sheet -has a normal debit balance, debit increases the account, credit decreases it

perpetual inventory system

A detailed inventory system in which a company maintains the cost of each inventory item and the records continuously show the inventory that should be on hand.

trade discounts

Discounts from the list prices in published catalogs or special discounts offered to certain classes of buyers.

net income

Excess of total revenues over total expenses. Also called net earnings or net profit

purchase return or allowance

From the buyer's perspective, returned merchandise or an adjustment for defective merchandise.

periodic inventory system

Method that records the cost of inventory purchased but does not continuously track the quantity available or sold to customers; records are updated at the end of each period to reflect the physical count and costs of goods available.

merchandise inventory 4120 accounts payable 4120 perpetual inventory acc for merchandising business

PERPETUAL INVENTORY SYSTEM. may 3.Purchased merchandise on account from Floyd co terms FOB shipping point 2/10, n/30. with prepaid freight of 120.00 added to the invoice (4000+120)

FOB shipping point

The buyer is then responsible for paying shipping costs, and bears ownership and risks of damage/loss when the goods are in transit or in transport. The goods also become a part of the buyer's merchandise inventory at the shipping point.

other income

Revenue from sources other than the primary operating activity of a business.

multiple step income statement

a form of income statement that contains several sections subsections and subtotals, An income statement that shows classifications of revenues and expenses as well as important subtotals

credit memorandum

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

sales returns and allowances

a temporary owner's equity contra account used to record credit given to a customer for shortages or damaged goods. from sellers perspective ,returned merchandise or adjustment for defective merchandise

fixed costs

amortization, depreciation, insurance, interest expense,property taxes, rent

single step income statement

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

buyers advantage

borrowing money to make a payment

perpetual inventory system journal entries

cash purchase of merchandise inventory. debit - merchandise inventory. credit- cash. purchases of merchandise inventory on account. debit - merchandise inventory. credit - accounts payable -name of company

debit memorandum

includes reason for return/request for price adjustment, used as a basis for recording the return or price adjustment. debit accounts payable-name of comp, credit merchandise inventory. form used by buyer to inform seller of the amount the buyer proposes to debit the account payable due to the seller.

periodic inventory system

inventory records do not show the amount available for sale or sold during the period PHYSICAL INVENTORY-detailed listing of merchandise for sale at the end of the accounting period is prepared

inventory shrinkage

inventory shortage. the amount by which merchandise for sale as indicated by the balance of the merchandise inventory account is larger than the total amount of merchandise counted during the physical inventory

accounts payable Kramer co 1300 Merchandise inventory 1300

may 10.returned merchandise purchased on may 5 from Kramer co 1300

accounts payable floyd co 4120dr merchandise inventory 80 cr..2/100x4000 cash 4040........4120-80

may 13.paid Floyd co on account for purchase on may 3 less discount ,may purchase price is 4120 (2/100x4000)=80.... 4120-80=4040

Merchandise inventory 10500 cash 10500

may 14.purchased merchandise for cash 10,500

accounts payable-Kramer co dr 7200......(8500-1300) merchandise inventory cr 72......7200x1/100 cash cr 7128...............7200-72

may 15. Paid Kramer co on account for purchase of may 5,less return of may 10 discount

Cash dr 2744...............2800 less 2% sales discount dr 56.......2800x2/100 accounts receivable cr 2800

may 16. received cash on account from a sale of may 6 to CF Howell Co, less discount.

cash 2450 sales 2450 cost of merchandise sold 980 merchandise inventory 980

may 19. sold merchandise on master card credit cards 2450.the cost of merchandise sold was 980

accounts receivable 3480 sales 3480 cost of merchandise sold 1400 merchandise inventory 1400

may 22. sold merchandise on account to comer co.3480.00 terms 2/10,n/30 the cost of merchandise sold was 1400

cash 4350 sales 4350 cost of merchandise sold 1750 merchandise inventory 1750

may 24. sold merchandise for cash 4350, the cost of merchandise sold 1750

sales returns and allowance 1480 accounts receivable 1480 merchandise inventory 600 cost of merchandise sold 600

may 25.received merchandise returned by comer co from sale of may 22,1480, the cost of merchandise returned was 600

credit card expense 140 cash 140

may 31. paid a service processing fee of 140 for master card sales

cost of merchandise sold 3750 merchandise inventory 3750

may 31.journalizing the adjusting entry for merchandise inventory shrinkage 3850

merchandise inventory 8500 accounts payable Kramer co 8500

may 5.purchased merchandise on account from Kramer co 8500 terms FOB destination 1/10, n/30

accounts receivable cf howell 2800 sales 2800

may 6.sold merchandise on account to CF Howell co, list price of 4000,trade discount 30% terms 2/10, n/30. the cost of merchandise sold was 1125. (4000x 30/100)=1200, 4000-1200

office supplies 150 cash 150

may 8.purchased office supplies for cash 150.00

gross profit

merchandise sold + on account sales minus cost of merchandise sold

two systems of accounting merchandise

merchandising transactions -perpetual inventory system -periodic inventory system

income from operations

operating income. - revenues less operating expenses and service department charges for a profit or an investment center

dr- accounts payable, cr- cash(total amount) and merchandise inventory (1% discount of total amount)

paid amount owed on invoice within the invoice period

purchase allowance

price adjustment is requested for damaged/defective merchandise by buyer sending seller debit memorandum

gross profit

profit before deducting operating expenses -sales minus cost of merchandise sold

service business

providing services to customers (fees earned) operating expenses incurred in providing services are subtracted from fees earned to calculate net income

dr- merchandise inventory 38000, cr acc payable 38000

purchased 38,000 of merchandise from sierra co ON ACCOUNT, terms 1/30, n /30

cash dr 1470 sales discount dr 30 accounts receivable cr 1500 (2/100 x 1500)

sold merchandise to a customer where they took a 2% discount for 60 days, discount is paid within the 60 day period.

purchase discount

taken by buyer for early payment of an invoice reduces the cost of merchandise purchased

credit terms

term of purchases on account normally indicated on the INVOICE or bill that SELLER sends to BUYER. terms for when payments for merchandise are to be made by buyer to seller

credit period

the amount of time a buyer is normally allowed to make payment to seller. credit period begins with a date of sale as seen on the invoice such as n/30. seller may offer discount to encourage buyer to pay before the end of the credit period example 2/10, n/30

invoice

the bill that the seller sends to the buyer

cost of merchandise sold

the cost that is reported as an expense when merchandise is sold

FOB destination

the seller is responsible for paying shipping costs and bears the risk of damage/loss while in transit/transport. The seller also does not record revenue from this sale until the goods arrive at the destination because this transaction is not complete before that point.

physical inventory

used to determine the cost of merchandise on hand at the end of the period and the cost of merchandise sold during the period


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