Chapter 11 Accounting for a Merchandising Business Merchandise

Chapter 11 Accounting for a Merchandising Business

Merchandise Inventory An account that stores the value of goods not yet resold l Periodic System: count merchandise not sold at the end of the period to determine cost of goods sold l Perpetual System: record inventory and cost of goods sold when sales made l

Inventory Cycle Cost of beginning inventory + cost of merchandise purchased – cost of merchandise sold = cost of ending inventory i. e. 42500 + 143000 (=total goods avail. for sale) – 149100 = $36400 l If periodic system used have to take a physical inventory at statement time

Physical Inventory l This ending inventory figure is important: l It is the current asset on the balance sheet (as it will normally be sold within one year) l Needed to calculate the cost of goods sold figure for the income statement l It is used as beginning inventory figure for the next accounting period

COGS on the Income Statement Inventory that is not sold goes on the balance sheet (Merchandise Inventory) l Cost of the inventory that WAS sold goes on the income statement (Cost of Goods Sold) l

COGS Cost of beginning inventory + cost of merchandise purchased – cost of ending inventory = cost of goods sold l i. e. 42500+143000 -36400 = 149100 COGS l

Gross Profit The difference between the selling price and the cost price of the goods sold l Revenue – Cost of Goods Sold = Gross Profit l Gross Profit – Expenses = Net Income l

RECAP Final inventory figure recorded on balance sheets as Current Asset l Cost of Goods Sold recorded on income statement l Neither inventory figure or COGS known during accounting period l

New accounts

Merchandise Inventory counted at fiscal year-end l It becomes the beginning inventory figure for the next fiscal period l The periodic inventory adjustment is the only accounting entry made to this account l

Purchases Account Short form for “purchases of merchandise for resale” l Found in expense section l Not the same as purchasing office supplies for use in company, would be recorded in Office Supplies, however a stationary store purchases paper to sell to customers would be recorded in Purchases account l

Journal Entry June 27 Purchases 100 HST Recoverable 13 Bank 113 -to record purchase of merchandise

Sales Account Revenue account for a merchandising business Journal Entry Bank (or Accounts Rec) 169. 50 HST Payable 19. 50 Sales 150 -sale of merchandise l

Freight-in Account l l l Considered part of COGS Used to accumulate any transportation charges on incoming goods Kept separate from transportation charges on outgoing goods (recorded in Delivery Expense) Usually placed right after Purchases account in ledger Duty – special charges imposed by the government on certain goods imported from a foreign country

Journal Entry June 27 Freight-In 200 HST Recoverable 26 Bank 226 -to record freight charges on purchases

Adjustment to Formula Beg. Inv + (Purchases + Freight-in) – Ending Inventory = Cost of Goods Sold

Figure 11. 5 in text

Closing Entries Closing entry process automatically updates the inventory account at the end of the fiscal period l Close Merch. Inv (credit) with Sales to Income Summary l Close Merch Inv. (debit) with Expenses to Income Summary l Close Capital and Drawings as before l See fig 11. 8 and 11. 9 in text l

Merchandise Returns & Allowances l Credit invoices used to adjust, correct or cancel a charge to a customer’s account for: l Defective goods l Goods less than satisfactory but kept by customer (given an allowance or reduction) off the invoice price l Error made on sales invoice

Journal Entry For books of the vendor: Remember for sales DR AR and CR Sales and HST payable l Credit invoice has opposite effect l l DR Sales and HST Payable and CR AR

Journal Entry l For books of purchaser: l DR AP and CR purchases and HST recoverable

Cash Refunds When a cash sale was made, no credit invoice is issued l Cash handed back or a cheque is issued l l DR Sales l DR HST Payable l CR Bank

Returns and Allowances l l Some businesses (i. e. large department stores) have a separate account for returns called Sales Returns and Allowances so they can see what proportion of merchandise has been returned DR Sales Returns and Allowances account instead of Sales Account See Fig. 11. 13 in text Same concept is used for purchases returns and allowances

COGS Formula Revised Cost of beg. Inv + Net Cost of goods purchased – cost of ending inv. = Cost of goods sold

Sales Discounts A reduction of the amount of a bill if payment is made on or before discount date stated on the bill l Purpose is to encourage customer to pay promptly l

Terms of Sale l l l Refers to the arrangements made with customers as to when the goods or services are to be paid COD: customer pays when goods delivered Net 30/Net 60: full amount due in 30/60 days EOM: full amount due at end of the month 2/10, n/30: receive 2% discount if paid within 10 days after invoice received otherwise full in 30 days

Journal Entry l Books of buyer Terms 2/10, n/30 Purchases 411. 90 HST Recoverable 53. 55 Accounts Payable 465. 45 -purchase of goods Accounts Payable 465. 45 Discounts Earned 9. 31 Bank 456. 14 -payment of purch inv. With discount

Journal Entry In books of seller Accounts Receivable 465. 45 Sales 411. 90 HST Payable 53. 55 -sale of goods on account Bank 456. 14 Discounts Allowed 9. 31 Accounts Receivable 465. 45 -payment of account with discount earned l

Called Net Purchases = = Income Statement

Perpetual Inventory l l Detailed record of items in stock is kept up to date on an ongoing basis As items sold info, is transferred directly to store’s central computer which is programmed to make the appropriate deductions from the inventory and make accounting entries Sales returns are generally handled by separate department System cannot automatically know when goods are lost, stolen or broken; therefore have to do manual check of inventory

Journal Entry Perpetual System 1. Bank 169. 50 Sales HST Payable 2. Cost of Goods Sold 100 Merchandise Inventory 150 19. 50 100 For comparison of two systems see p. 463464 in text

Cost Accounting l A specialized area of accounting that concentrates on determining, controlling and reporting the costs of doing business l i. e. l in a manufacturing business To calculate cost of goods manufactured (account similar to purchases in merchandise business) look at raw materials, direct labour and factory overhead

Raw materials – essential components that become part of the finished product Direct labour – wages for employees who have specific role in the making the finished goods Factory overhead – a range of expenses that support the manufacturing process

Manufacturing Business Balance Sheet On the balance sheet instead of reporting on inventory you will report on the “goods” which include Finished Goods Inventory (similar to Merchandise Inventory), Raw Materials Inventory and Goods in Process Inventory

Schedule of Cost of Goods Sold

Invoices Sales Invoice: dr A/R cr Sales l Credit Invoice: dr Sales Returns cr A/R l Purchase Invoice: dr Purchases or Inventory cr A/P l

Journal Entries l Credit Sale dr A/R cr Sales 300 1/10, net 30, invoice #45 • Return dr Sales Returns and Allowance 100 cr A/R 100

Journal Entries (periodic) l Payment within discount period dr Cash dr Sales Discounts cr A/R 297 3 300 • Payment beyond discount dr Cash cr A/R 300

Journal Entries (periodic) l Purchase goods for resale (periodic) dr Purchases 400 cr Cash or A/P 400 2/15, n/30, invoice #P 398 • Payment within discount period* dr A/P cr Purchase Discounts cr Cash Cheque #26 for invoice #P 398 * Otherwise A/P and Cash 400 8 392

Journal Entries l Transportation (for goods for resale) dr Transportation-In 50 cr A/P or Cash 50 • Delivery Charge (for goods sold to customers) dr Delivery Expense cr A/P or Cash 25 25

Journal Entries (perpetual) • Purchase good for resale: dr Inventory 300 cr A/P or Cash 300 l Sale: dr A/R or Cash 400 cr Sales 400 and dr Cost of Goods Sold cr Inventory 300

Worksheet Original NEW Close all

Journal Entries (perpetual) l Inventory shortage (count at end of period) dr Inventory Shortage 20 cr Inventory 20 Charge shortage to expense

Sales Taxes HST: Harmonized Sales Tax 13% l Typical Sale: l dr Cash or A/R cr Sales cr HST Payable 113 100 13

Sales Taxes l HST on Purchases: dr Purchases (or Inventory, etc. ) 200 dr HST Recoverable 16 cr Cash or A/P 216 • “Remit” HST if owing: dr HST Payable 500 cr HST Recoverable cr Cash • Refund of HST is owed: 450 50 dr HST Payable 450 dr Cash 50 cr HST Recoverable 500

Credit Cards l l Increases sales Typical Sale: dr Cash dr Visa Discount Expense cr Sales cr HST Payable $600 x 3% visa charge 660 18 600 78

Complete Income Statement