What is Accounting VI

8/11/2019 What is Accounting VI

1/45

Page 1

Accounting for Merchandising

Activities


2/45

Page 2

JOIN KHALID AZIZ

COACHING CLASSES OF CA MODULEB & D.

FA, ECONOMICS & COSTACCOUNTING.

CONTACT NOW.

0322-3385752


3/45

Page 3

JOIN KHALID AZIZ

MA ECONOMICS EXTERNAL CRASHCOACHING CLASSES.

MICRO ECONOMICS, STATISTICS &MACRO ECONOMICS.

GUESS PAPERS AND NOTES AREAVAILABLE

0322-3385752


4/45

Page 4

JOIN KHALID AZIZ

FRESH CLASSES OF B.COM 1 & 2

ALL IMPORTANT SUBJECTS

COMPLETION OF SYLLABUS JOIN NOW


5/45

Page 5

JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,B.COM.

FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

COST ACCOUNTING OF ICMAP STAGE 2,3 ICAPMODULE D, BBA, MBA & PIPFA.

CONTACT:

0322-3385752 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,

KARACHI, PAKISTAN


6/45

Page 6

Outline

Merchandising activities

Operating cycle of merchandisingcompanies

Merchandising cost accounts

Inventory systems

Merchandise purchases Sales transactions

Adjusting and closing entries


7/45Page 7

Introduction

Scandals in stock market occur now andthen. Among them, financial frauds orincome manipulation are common. Income

manipulation typically starts from makingup sales revenues as well as purchases.

Why these income statement numbersare so important?

How they are recorded in accountingsystem?


8/45Page 8

Manufacturer Wholesaler Retailer Customer

Merchandising Companies

Merchandising Activities


9/45Page 9

Reporting Financial Performance

Service organizations sell time to earn revenue. Examples: accounting firms, law firms, and plumbing

services

Revenues ExpensesNet

income


10/45Page 10

Reporting Financial Performance

Merchandising companies sell merchandiseto earnrevenue. Examples: sporting goods, clothing, and auto parts stores

Net

Sales

Cost of

Goods Sold

Gross

ProfitExpenses

Net

Income


11/45Page 11

Operating Cycle of Merchandise Companies

Begins with the purchase of merchandise and ends withthe collection of cash from the sale of merchandise.

P

u

r

c

ha

s

e

s

M

e

r

c

ha

n

d

i

s

e

C

r

e

d

i

t

s

a

l

e

A

c

c

o

un

t

r

e

c

C

a

s

h

c

o

l

l

e

ct

P

u

r

c

ha

s

e

s

M

e

r

c

ha

n

d

i

s

e

C

a

s

h

s

a

l

e

s

Cas

hSa

le

Cre

dit

Sa


12/45Page 12

Merchandising Cost Accounts

+

+

Beginning inventoryYear 1

Net cost ofpurchases

Merchandiseavailable for sale

Ending InventoryYear 1

Cost of GoodsSold

=

Income

Statement

Becomes beginninginventory ofYear 2

Balance

Sheet


13/45Page 13

Inventory Systems

Periodic Method

Requires updating the inventory account only at the endof the period. Acquisition of merchandise inventory isrecorded in a temporary Purchasesaccount.

Perpetual MethodGives a continual record of the amount of inventory on

hand. When an item is sold it is recorded in the Cost of

Goods Soldaccount.


14/45Page 14

Inventory Systems

Perpetual provides a continuous record of:

The amount of inventory on hand.

Cost of goods sold to date.

Periodic requires a physical count of goodsto determine:

The amount of inventory on hand.

Cost of goods sold.


15/45Page 15

JOIN KHALID AZIZ




CONTACT:


KARACHI, PAKISTAN


16/45

Page 16

Comparison of Perpetual and PeriodicSystems

Source of Information

Equation Periodic System Perpetual System

Beginning InventoryCarried over from

prior period

Carried over from

prior period

Add: Purchases Accumulated in thePurchases account Accumulated in theInventory account

Equals:

Less: Ending InventoryMeasured at end of

period by physical

inventory count

Perpetual record

updated at every sale

Cost of Goods Sold

Computed as a

residual amount at

end of period

Measured at every

sale based on

perpetual record

Cost of Goods Available for Sale


17/45

Page 17

Purchases XX Inventory XX

Accounts Payable XX Accounts Payable

XX

Accounts Payable XX Accounts Payable XX

Purchases Returns & Allow. XX Inventory

XX

Accounts Receivable XX Accounts Receivable XX

Sales XX Sales XX

Cost of Goods Sold XX

Inventory XX

Merchandise

sold to

customer onaccount.

Merchandise

purchased from

supplier on

account.

Merchandise

returned to

supplier.

Comparison of Periodic andPerpetual Systems


18/45

Page 18

Transaction Periodic PerpetualMerchandise

returned by

customer. Sales Returns and Allow. XX Sales Returns and Allow. XX

Accounts Receivable XX Accounts Receivable XX

Inventory XX


At end of

accounting

period. Cost of Goods Sold XX No entry.

Inventory (beginning) XX

Purchases XX

Inventory (ending) XX


Comparison of Periodic andPerpetual Systems


19/45

Page 19

Oct. 1 Inventory 5,000

Accounts Payable/cash 5,000Purchased inventory.

The operating cycle of merchandise companies

involves the purchase and subsequent sale of

merchandise inventory.

Purchase of inventory can either on account or bycash.

Merchandise Purchases


20/45

Page 20

Trade Discounts

Trade discounts are used by manufacturers andwholesalers to change selling prices without republishingtheir catalogs.

ExampleMarCo, Inc. offers a 20% tradediscount on orders of 100units or more of their popular

product Racer. Each Racerhas a list price of $5.00.

Quantity sold 100Price per unit 5.00$

Total 500

Less 20% discount (100)

Invoice price 400$


21/45

Page 21

Purchase discount is a deduction from the invoiceprice granted to induce early payment of theamount due. Example2/10, n30

Terms

Time

Due

Discount Period= 10 days

(Full amount minus 2%discount) due between

Oct.1 and Oct.11

Credit Period = 30 days

Full amount dueanytime betweenOct.12 and Oct.31

Purchase

Oct.1 Oct.11 Oct.31

Purchase Discounts


22/45

Page 22

2/10,n/30

Purchase Discounts

DiscountPercent

Number ofDays

Discount IsAvailable

Otherwise,Net (or All)

Is DueCreditPeriod


23/45

Page 23

Assume the purchase of $4,000 inventory onOctober 1 was on the terms 2/10,n30.

Case 2-Discount not taken

Oct.31 Accounts Payable 4,000

Cash 4,000

Purchase Discounts

Oct.11 Accounts Payable 4,000Inventory 80

Cash 3,920

2 x (5,000 - 1,000) = 80

Case 1-Discount taken


24/45


25/45

Page 25

Purchase Returns and Allowances

Purchase Return . . . Merchandise returned by the purchaser to the

supplier.

Purchase Allowance . . . A reduction in the cost of defective merchandise

received by a purchaser from a supplier.

Accounts Payable XXX

Inventory XXX

Defective merchandise returned to supplier.



26/45

Page 26


On Nov. 1, Helo Inc. purchased $10,000 of MerchandiseInventory on account, credit terms are 2/10, n/30.

GENERAL JOURNAL Page 29Date Description PR Debit Credit

Nov 1 Merchandise Inventory 10,000

Accounts Payable 10,000


27/45

Page 27


On Nov 5, Helo Inc. returned $250 of defectivemerchandise to the supplier.


Nov 5 Accounts payable 250

Merchandise Inventory 250


28/45

Page 28


On Nov 9, Helo Inc. paid the amount owed for thepurchase of Nov 1.

GENERAL JOURNAL Page 54

Date Description PR Debit CreditNov 9 Accounts payable 9,750

Merchandise inventory 195

Cash 9,555

Purchase 10,000$

Return (250)Amount Due 9,750

Discount (195)

Cash Paid 9,555$


29/45

Page 29

Transportation Costs

Terms

Ownership transfers

to buyer when goods

are passed to

Transportation

costs paid by

FOB shipping point Carrier Buyer FOB destination Buyer Seller

Transportation Charges

Inventory XXX

Accounts Payable XXX

Transportation charges on goods purchased FOBshipping point.


30/45

Page 30

Recording Purchases Information

Invoice cost of merchandise purchases 692,500$

Less: Purchase discounts received (10,388)

Purchase returns and allowances (4,275)

Add:

Cost of transportation-in 4,895

Total cost of merchandise purchases 682,732$

Matrix, Inc.

Total Cost of Merchandise Purchases

For Year Ended May 31, 2002


31/45

Page 31

Sales Transactions

On March 10,TomCom sold$20,000 ofmerchandise onaccount. The

merchandise wascarried in inventoryat a cost of $16,000.


Mar. 10 Accounts Receivable 20,000

Sales 20,000

Cost of Goods Sold 16,000

Merchandise Inventory 16,000

For a business engaged in a merchandising activity, revenue takes the

form of sales.

The entry to record the sale of merchandise on credit under a perpetual

inventory system requires two entries


32/45

Page 32

Sales Discounts

On May 8, Joye Co. sold merchandise costing $3,000 for$5,000 on account. Credit terms were 2/10, n/30.

A sales discount is a cash discount taken by customers

against an amount owed to the seller.


May 8 Accounts Receivable 5,000

Sales 5,000




33/45

Page 33

Sales Discounts

On May 17, Joye Co.received a check for $4,900in full payment of the May 8

sale.


May 17 Cash 4,900

Sales Discounts 100

Accounts Receivable 5,000


34/45

Page 34

Sales Returns and Allowances

On May 12, Joye Co. sold merchandise costing$4,000 for $6,000 on account The credit termswere 2/10, n/30.


May 12 Accounts Receivable 6,000

Sales 6,000




35/45

Page 35


On May 14, merchandise with a sales price of$600 and a cost of $400 was returned to JoyeCo. The return is related to the May 12 sale.


May 14 Sales Returns and Allowance 600

Accounts Receivable 600

Merchandise Inventory 400

Cost of Goods Sold 400


36/45

Page 36


On May 20, Joye received the amount owed toit from the sale of May 12.


May 20 Cash 5,292

Sales Discounts 108

Account Receivable 5,400Sale 6,000$

Return (600)

Amount Due 5,400$

Discount (108)

Cash Received 5,292$


37/45

Page 37

Recording Sales Information

Unix Inc.Computation of Gross Profit

For Year Ended December 31, 2002

Sales 2,451,000$

Less:Sales discounts 29,412$

Sales returns and allowances 18,500 47,912

Net sales 2,403,088$

Cost of goods sold (1,928,600)

Gross profit 474,488$

Sales discounts and returnsand allowances are

Contra Revenue accounts.


38/45

Page 38

Adjustments-Perpetual Inventory

Perpetual inventory systems keep arunning total of inventory levels by

recording sales and purchasetransactions.

Periodic adjustments must be made

to account for shrinkage (loss due totheft or deterioration of inventory).


39/45

Page 39

JOIN KHALID AZIZ




CONTACT:


KARACHI, PAKISTAN


40/45

Page 40

Inventory per accounting records: $198,000

Inventory per physical count: $194,200

Difference (shrinkage) $3,800

Adjustment required:

Adjustments-Perpetual Inventory

Oct.31 Cost of Goods Sold 3,800

Inventory 3,800

To record inventory shrinkage revealed by

physical count.


41/45

Page 41

Closing Entries-Perpetual System

The closing process is similar formerchandising and service companies.

Merchandising companies have additional

temporary accounts that must be closed.These include:

Sales

Sales Returns & Allowances Sales Discounts

Cost of Goods Sold


42/45

Page 42

Discussion Case

CIMCCIMC is the number one stock in China, mainly due to itsexcellent operating performance. However, in early

2005, the operating performance of CIMC waschallenged. Analysts argued that, the surprisingly highoperating performance is questionable. Specifically,abnormal growth was found in the following items,Sales revenue

Gross profitsAccounts receivableInventory

However, no growth was found in cash collected from

customers.


43/45

Page 43

Discussion Case

Required:

How to calculate the growthrates in sales, gross profits,

inventory, accountsreceivables, and cash?

Are there are relationshipsbetween the above items?

How to verify the growth inabove items?


44/45

Page 44

Summary

The operating cycle of merchandise companies begins with thepurchase of merchandise and end with the collection of cash fromthe sale of merchandise.

Perpetual method and period method are two inventory systems.Today perpetual method is more and more adopted.

Accounting for merchandise purchases records purchases, tradediscount, cash discounts, purchase returns and allowance,transportation costs.

Accounting for sales transactions records sales, sales discount,sales returns and allowance, etc.

Under perpetual inventory system, adjustments must be made for

shrinkage at the end of period. Closing entries transfers balances in sales, sales returns and

allowance, sales discounts and cost of goods sold into incomesummary account.


45/45

ATTENTION COMMERCESTUDENTS

ACCOUNTING(FINANCIAL & COST) OF

ICMAP STAGE 1,2,3,4 (NEW CLASSES)CA..MODULE B,C,D

PIPFA (FOUNDATION,INTERMEDIATE,FINAL)ACCA-F1,F2,F3

BBA,MBAB.COM(FRESH),M.COMMA-ECONOMICS..O/A LEVELSKHALID AZIZ..0322-3385752

http://finance.groups.yahoo.com/group/cost-

Documents

What is Accounting VI