Accounting Chapter 5

Credit Card processing fee would be recorded as:

Credit Card Expense (debit) and Cash (credit)

Account Form

Form of the balance sheet that presents assets on the left-hand side and the liabilities and stockholders' equity on the right-hand side.

Gross Profit

Profit before deducting operating expenses.

Sales

Revenue when merchandise is sold.

Assume that NetSolutions places an order from Alpha Technologies on January 5 with terms of 2/10, n/30. In order to pay the invoice on January 15 (the last day of the discount period), NetSolutions borrows $2,940, which is $3,000 less the discount of $60 ($3,000 × 2%). If an annual interest rate of 6% and a 360-day year is assumed, the interest on the loan of $2,940 for the remaining 20 days of the credit period is:

$9.80 ($2,940 × 6% × 20 ÷ 360)

If company does not take the discount, it pays an estimated interest rate of (%) for using the $ for the remaining (days) of the credit period.

% x 360 days/ (days remaining) = %

Sold Merchandise on account

Accounts Receivable (debit) and Sales (credit); then Cost of Merchandise Sold (debit) and Merchandise Inventory (credit)

Any processing fees charged by the clearinghouse or issuing bank are periodically recorded as an expense. This expense is normally reported on the income statement as an:

Administrative Expense

The physical inventory on hand at the end of the accounting period is usually )___________ than the balance of Merchandise Inventory. This is called ___________________________ or __________________

Less; inventory shrinkage, inventory shortage

Purchases of merchandise on account are recorded as follows:

Merchandise Inventory (debit) and Accounts Payable (credit)

Journal Recording of Merchandise Inventory on account:

Merchandise Inventory (debit) and Accounts Payable (credit); then Accounts Payable (debit) and Cash (credit)

The ratio of sales to assets is computed as follows:

Ratio of Sales to Assets = Sales/Average Total Assets

FOB (free on board) shipping point

This term means that the buyer pays the freight 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 the inventory by debiting Merchandise Inventory.

A high ration, on the ratio of sales to assets, indicates

an effective use of sales

Purchases Discounts is a _________________________ account to Purchases.

contra (or offsetting)

Purchases Returns and Allowances is a ________________ account to purchases

contra (or offsetting)

What is the operating cycle for a merchandising business?

1) Cash 2) Purchases of Merchandise 3) Merchandise is transported by a truck 4) Sales 5) Accounts Receivable 6) Collection

Administrative Expenses (general expenses)

Are incurred in the administration or general operations of the business. Examples: Office salaries, depreciation of office equipment, office supplies used.

On the income statement for a service business, the revenues from services are reported as ____________________.

Fees Earned

The excess of sales over cost of merchandise sold is ___________.

Gross Profit

The adjusting process is the same under the periodic and perpetual inventory systems EXCEPT for the

inventory shrinkage adjustment

If the total of other income exceeds the total of other expense,

the difference is added to income from operations to determine net income

Special Journals

Computerized accounting system that record similar transactions in separate journals. These journals generate purchase, sales, and inventory reports.

Multiple- step income statement

Contains sever sections, subsections, and subtotals, including the following: sales, cost of merchandise sold, gross profit, income from operations, and other income and expense

Under the perpetual inventory system, the merchandise inventory account is _______________ updated for purchase and sales transactions.

Continually

Service Business Financial Statement looks like:

Fees Earned - Operating expenses = Net Income

Report Form

Form of the balance sheet that is presented in a downward sequence in three sections.

Under the periodic inventory system, freight paid when purchasing merchandise FOB shipping point is debited to

Freight in, transportation in, or a similar account

Purchases Returns and Allowances

From a buyers perspective, a buyer may request an allowance for merchandise that is returned (purchases return) or a price allowance (purchases allowance) for damaged or defective merchandise.

Selling Expense

Incurred directly in the selling of merchandise. Examples: Sales Salaries; store supplies used; depreciation of store equipment; delivery expense; advertising

Using the periodic inventory system, purchases of inventory are not recorded in the merchandise inventory account.

Instead, purchases, purchases discounts, and purchases returns and allowances accounts are used.

Physical inventory

Inventory on hand. It is used to determine the cost of merchandise on hand at the end of the period and calculate the cost of merchandise sold during the period.

Income from operations

Is determined by subtracting operating expenses from gross profit; and normally classified as either selling expenses or administrative expenses.

Terms: FOB Destination

Journal entry is under Seller; Seller pays freight

Cash Purchases of Merchandise in a Perpetual inventory system is recorded as follows:

Merchandise Inventory (debit) and Cash (credit)

Merchandise Inventory

Merchandise on hand (not sold) at the end of an accounting period.

The ____________________ incurred in providing the services are subtracted from the fees earned to arrive at net income.

Operating Expenses

Terms are cash or net cash if:

Payment is required on delivery

What are the two systems for accounting for merchandise transactions?

Perpetual and Periodic

Other income

Revenue from sources other than the primary operating activity of a business. Examples: income from interest, rent, gains resulting from the sale of fixed assets.

Revenue from merchandise sales is usually recorded as:

Sales

Merchandising Business Financial Statement looks like:

Sales - Cost of Merchandise Sold = Gross Profit - Operating Expenses = Net Income

Debit Memo

What the buyer normally sends the seller to notify the seller of reasons for the return (purchase return) or to request a price reduction (purchase allowance). It also informs the seller of the amount the buyer proposes to debit to the account payable due the seller and states the reasons for the return or the request for the price allowance.

Single- step income statement

An alternative form of income statement. Deducts the total of all expenses in one step from the total of all revenues, emphasizes total revenues and total expenses in determining net income, and does not report gross profit or income from operations.

Other Expense

An expense that cannot be traced directly to the normal operations of the business. Examples: Interest expense and losses from disposing of fixed assets

2/10, n/30

2% discount if paid within 10 days, net amount due within 30 days.

Customer Discounts

A variety of discounts granted to customers by a seller. It is an incentive to encourage customers to act in a way benefiting the seller.

Return of the merchandise indicated in the debit memo's journal entry:

Accounts Payable (debit) and Merchandise Inventory (credit)

Merchandise Sold with credit terms; then payment by buyer

Accounts Receivable (debit) and Sales (credit); then Cash (debit) and Accounts Receivable (credit)

Estimated returned inventory is a(n) ___________ and customer refunds is a(n) _______________

Asset, liability

Ratio of Sales to Assets

Measures how effectively a business is using its assets to generate sales.

Assume Schafer Co. had sales of $2,000,000 and related cost of merchandise sold of $1,400,000 for its first year of operations ending December 31, 2016. Schafer Co. provides customers a refund for any returned or damaged merchandise. At the end of the year, Schafer Co. estimates that customers will request refunds for 2% of sales and estimates that merchandise costing $25,000 will be returned. On December 31, 2016, the following two adjusting journal entries must be recorded:

Sales (debit) and Customer Refunds Payable (credit); then Estimated Returns Inventory (debit) and Cost of Merchandise Sold (credit)

Trade discounts

Special discounts offered to government agencies or businesses that order large quantities by wholesalers

Credit Period

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

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 is prepared at the end of the accounting period.

General Ledger

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

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.

Credit terms

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

Freight

The terms of a sale indicate when ownership (title and control) of the merchandise passes from the seller to the buyer. This point determines whether the buyer or the seller pays the freight costs.

The periodic inventory system can be used because

a manual perpetual inventory system is time consuming and costly to maintain

Purchases is ___________________ for the invoice amount of a purchase.

debited

Sellers and buyers __________________ record the list prices of merchandise and trade discounts in their accounts

do not normally

An income statement for a merchandising business is normally prepared using a multiple- step __________ single- step format

or

Accounts Payable Subsidiary Ledger

or creditors ledger, lists the individual creditor accounts in alphabetical order.

Purchases of inventory are recorded in a purchases account rather than in the ______________

merchandise inventory account

Under the periodic inventory system, purchases are

normally recorded at their invoice amount.

If the two totals of the trial balance columns are _____________________ an error has occurred that must be found and corrected.

not equal

In a periodic Inventory system the sales of merchandise are

not recorded in the inventory account

Accounts Receivable Subsidiary Ledger

or customers ledger, lists the individual customer accounts in alphabetical order

Inventory Subsidiary Ledger

or inventory ledger, lists individual inventory by item (bar code) number

There is no detailed record of the amount of inventory on hand at any given time under the

periodic inventory system

After the closing entries are posted to the accounts, a ___________________________ is prepared

post- closing trial balance

The ___________ activities of a service business involve providing services to customers.

revenue

Effects on Cost of Merchandise Purchased: 1) Purchases (debit) 2) Purchases Discounts (credit) 3) Purchases Returns and Allowances (credit) 4) Freight In (debit)

1) Increases 2) Decreases 3) Decreases 4) Increases

Invoice

A bill that the seller sends the buyer that indicates the terms of purchases on account.

Subsidiary Ledger

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

Since buyers normally take all purchases discounts, Merchandise Inventory is _________ for the net purchase price under the perpetual inventory system.

Debited

The net savings of taking the discount is computed as follows:

Discount of (%) on $ - Interest for (days) at a rate of (%) on $ = Savings from taking the discount

Purchases Discounts

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

_______ merchandising transaction affects a buyer and a seller

Each

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 (perpetually) updated in the inventory records.

Controlling Account

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

Sales Discount

Encourages customers to pay their invoice early.

Cost of Merchandise Sold is an _______________

Expense

Wholesalers

are companies that sell merchandise to other businesses rather tahn to the public.

Customers Returns and Allowances

sometimes called sales returns and allowances: Merchandise sold may be returned to the seller (returns). The seller may reduce the initial selling price (allowances). This might offer if the merchandise is defective, damaged during shipment, or does not meet the buyer's expectations.

The balance of the merchandise inventory account is the amount of merchandise available for sale at ____________________.

that point in time

If the total of other expense exceeds the total of other income,

the difference is subtracted from income from operations to determine net income

Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are also recorded because

the merchandise inventory account indicates the amount of merchandise on hand (not sold).

How does an operating cycle of a service and merchandising business differ?

A merchandising business must purchase merchandise for sale to customers.

Closing Entries for merchandising business

1) Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary 2) Credit each temporary account with a debit balance, such as the various expenses, and debit income Summary. Since Cost of Merchandise Sold is a temporary account with a debit balance, it is credited for its balance. 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.

Before paying an invoice,

A buyer may return merchandise or be granted a price allowance for an invoice with a purchase discount. The amount of the return is recorded at its invoice amount less the discount.

The only accounts that should appear on the post-closing trial balance are the:

Asset, contra asset, liability, and stockholders' equity accounts with balances. These are the same accounts that appear on the end- of- period balance sheet.

Cash sales are recorded as:

Cash (debit) and Sales (credit)

Sales that are made to customers using credit cards are recorded as:

Cash Sales

Under a periodic inventory system, at the the end of the period, a physical count of merchandise inventory on hand is taken. This physical count is used to determine the ______________________________.

Cost of Merchandise Sold

The entry to record the cost of merchandise sold and the decrease in the merchandise inventory is as follows:

Cost of Merchandise Sold (debit) and Merchandise Inventory (credit)

If a customer is due a refund and has outstanding account receivable balance, then the seller normally sends the buyer a __________________, to indicate its intent to credit the customer's account receivable rather than pay cash.

Credit Memorandum

Recording of a credit memo:

Customer Refunds Payable (debit) and Accounts Receivable (credited)

Terms: FOB shipping Point

Journal entry is under the buyer; buyer pays freight.