Module 7 - Reading and Interpreting the Income Statement

Merchandise inventory

Goods held for resale by a merchandiser are called merchandise inventory and are reported as an asset on the balance sheet

Purchase Discounts (Periodic)

Purchase discounts, a Contra expense account, accumulates reductions in the purchase price of merchandise if payment is made within a time period specified in the supplier's invoice - accounts payable is debited and purchase discounts is credited

Purchase Returns and Allowances (Perpetual)

Purchase returns and allowances adjustment is when the supplier agrees to reduce the price because there was an issue with the product sold. Accounts payable is debited by the amount that the product was produced by. merchandise inventory is credited by the same amount.

Sales Discounts

Sales discounts is another Contra revenue account that records reductions in sales amounts when a customer pays within a certain time. Cash and sales discounts are debited, accounts receivable is credited

Sales

Sales is a revenue account so it has a normal credit balance To close sales, it must be debited with a corresponding credit to the income summary

Transactions in a Periodic Inventory System

The merchandise inventory general Ledger account balance should always equal the value of physical inventory on hand at any point in time. The cost of goods sold general Ledger account balance should always equal the total cost of merchandise inventory sold for the accounting period

Purchases (Periodic)

When goods are purchased using the periodic inventory system, the cost of merchandise is recorded in a purchases account in the general Ledger. - Purchases is debited and accounts payable is credited

Skrinkage

any discrepancy to: The costs attached to these inventory items are totaled and compared to the merchandise inventory account and balance in the general Ledger.

Cost of Goods Sold

cost of goods sold has a normal debit balance but it is an expense

The Full disclosure principle

is the generally accepted accounting principle that requires financial statements to report all relevant information about the operations and financial position of the entity

Sales discounts and Sales returns and allowances

sales discounts and sales returns and allowances are both Contra revenue accounts so each has a normal debit balance

Costs of goods sold

the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies

Periodic Inventory System

the purchase of merchandise inventory is debited to a temporary account called purchases. at the end of the accounting. Inventory is counted (psychical count) and the merchandise inventory account is updated, and cost of goods sold is calculated real-time balances in merchandise inventory and costs of goods sold are not known

Differences between a merchandising company and a company that provides services

A merchandiser purchases and then sells goods while a service company sells services. A merchandising company holds merchandise inventory while a service company would not normally have merchandise inventory

Closing Entries (Periodic)

In the perpetual inventory system, the merchandise inventory account is continuously updated and is adjusted at the end of the accounting period based on a physical inventory count at the end of the accounting period, the balance in merchandise inventory in a periodic system is the beginning balance The beginning inventory balance must be removed by crediting merchandise inventory and the ending inventory balance entered by debiting it

There are two types of ways in which inventory is managed:

Perpetual Inventory System Periodic Inventory System

Purchase Discounts (Perpetual)

Purchase discounts affect the purchase price of merchandise if payment is made within a time period specified in the supplier's invoice. So accounts payable is debited. merchandise inventory is credited by the amount of the discount. and the remaining cash paid is credited.

Transportation

When the terms are FOB shipping point ownership transfers at the 'shipping point' so the purchaser is responsible for Transporation costs FOB destination indicated that ownership transfers at the 'destination point' so the seller is responsible for transportation costs.

The Nature and Function of an Expense

The nature of an expense is determined by its basic characteristics while the function of an expense describes the grouping of expenses based on their purpose.

Recording the Sale of Merchandise Inventory (Perpetual)

The sale of merchandise inventory is recorded with two entries. - recording the sale by debiting cash or accounts receivable and crediting sales - recording the cost of the sale by debiting cost of goods sold and crediting merchandise inventory

Transportation (Periodic)

Transportation-in is used to accumulate transportation or freight charges on merchandise purchased for resale. - Transportation-IN is debited and cash or accounts payable is credited

Recording the Purchase of Merchandise Inventory (Perpetual)

When merchandise inventory is purchased, the cost is recorded in a merchandise inventory general Ledger account. (debited) - And then an accounts payable is credited

Sales Return and Allowances

When merchandise inventory that has been sold is returned to the merchandiser by the customer, a sales return and allowances is recorded. - Debit sales returns and allowances, credit accounts receivable for cash the sales returns and allowances account is a Contra revenue account and is therefore deducted from sales when preparing the income statement

Closing Process for Merchandiser

When preparing closing entries for a merchandiser, the income statement accounts unique for merchandisers need to be considered. - sales, sales discount, sales returns and allowances, and cost of goods sold

Gross

a merchandising income statement highlights cost of goods sold by showing the difference between sales revenue and cost of goods sold called gross profit or gross margin. The word gross is used by accountants to indicate that other expenses incurred in running the business must still be deducted from this amount for net income is calculated.

Purchase Returns and Allowances (Periodic)

any purchase returns or purchase allowances are accumulated in a separate account called purchase returns and allowances. - Accounts payable is debited and purchase returns and allowances is credited purchase returns and allowances is a Contra expense account and the balance is deducted from purchases when calculating costs of goods sold on the income statement

Perpetual Inventory System

as merchandise inventory is purchased, it is debited to the merchandise inventory account. as inventory is sold to customers, the cost of the inventory sold is removed from the merchandise inventory account and debited to the cost of goods sold account