chapter 6
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
