Operating cycles
The operating cycle of a merchandising company ordinarily is longer than that of a service company. The purchase of inventory and its eventual sale lengthen the cycle.
Operating cycle of a Merchandising company
Cash->buy inventory->merchandize inventory->Sell inventory->Accounts Receivable->Cash-> repeat.
Operating cycle of a service company
Cash->Perform services->Accounts receivable->cash->repeat
perpetual inventory system
- In a perpetual inventory system, companies maintain detailed records of the cost of each inventory purchase and sale.
- These records continuously—perpetually—show the inventory that should be on hand for every item.
- Under a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs.
- Even under perpetual inventory systems, companies perform physical inventory counts. This is done as a control procedure to verify inventory levels, in order to detect theft or “shrinkage.”
Determine cost of goods under periodic inventory system
- Determine the cost of goods on hand at the beginning of the accounting period.
- Add to it the cost of goods purchased.
- Subtract the cost of goods on hand as determined by the physical inventory count at the end of the accounting period.
periodic inventory system
- companies do not keep detailed inventory records of the goods on hand throughout the period.
- They determine the cost of goods sold only at the end of the accounting period—that is, periodically.
- At that point, the company takes a physical inventory count to determine the cost of goods on hand.
- Under a periodic system, separate accounts are used to record purchases, freight costs, returns, and discounts.
- A running account of changes in inventory is not maintained. Instead, the balance in ending inventory, as well as the cost of goods sold for the period, is calculated at the end of the period.
Determine costs of goods at a perpetual inventory system
- inventory purchased-record purchase of inventory
- Item sold-Record Revenue and COMPUTE AND RECORD COST OF GOODS SOLD.
- No entry under end of period
if someone had bought on account, then you would have two entries, debit accounts receivables, credit sales revenue. AND then debit cost of goods sold and credit inventory
Freight Costs incurred from purchaser
When the purchaser directly incurs the freight costs, the account Merchandise Inventory is debited and Cash is credited.
sales agreement
The sales agreement should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of business.
FOB Shipping point
FOB Shipping Point
Goods placed free on board the carrier by seller.
Buyer pays freight costs.
FOB Destination
Goods placed free on board at buyer’s business.
Seller pays freight costs.
Freight Costs incurred by seller
Freight costs incurred by the seller on outgoing merchandise are debited to Freight-out (or Delivery Expense) and Cash is credited.
purchase allowance.
the purchaser may choose to keep the merchandise if the seller grants an allowance
For purchases returns and allowances, Accounts Payable is debited and Merchandise Inventory is credited.
purchase discount
- Credit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due.
- A purchase discount is based on the invoice cost less returns and allowances, if any.
- If payment is made within the discount period, Accounts Payable is debited, Cash is credited, and Merchandise Inventory is credited for the discount taken.
sales of goods held for resale
The merchandiser credits the Sales Revenue account only for sales of goods held for resale. Sales of assets not held for resale, such as equipment or land, are credited directly to the asset account.
Sales revenues
- happens at the point of purchase
- Each sales transaction should be supported by a business document which provides written evidence of the sale.
- Cash register tapes provide evidence of cash sales.
- A sales invoice provides written evidence of a credit sale.
- Cash sales are recorded by increasing Cash and increasing Sales.
- Debits Accounts receivable credits sales
- Debits cost of goods sold, credits merchandise invendory
Sales Returns and Allowances
Sales Returns and Allowances, a contra revenue account to Sales, may be used to record credit for returned goods.
Sales Discount
- A sales discount is recorded by increasing Cash for the amount received from the customer, decreasing Accounts Receivable for the amount owed by the customer, and increasing Sales Discounts by the amount of the discount.
- Sales Discounts is a contra revenue account to Sales.
When customer return goods, the seller debits
debit merchandise inventory
Single-Step income statement
one step is required in determining
net income—subtract total expenses from total revenues.
In a single-step statement, all data are classified into two categories: (1) revenues, which include both operating revenues and nonoperating revenues and gains (for example, interest revenue and gain on sale of equipment); and (2) expenses, which include cost of goods sold, operating expenses, and nonoperating expenses and losses (for example, interest expense, loss on sale of equipment, or income tax expense)
Multiple step income statement
- Highlights the components of net income.
- Distinguishes between operating and non-operating activities.
- Step process= Sales - Cost of Goods sold=Gross Profit -Operating expenses =income from operations = net profit or net loss
gross profit
- Cost of goods sold is deducted from net sales to determine gross profit
- Gross profit is the merchandising profit of the company but not an overall
- The excess of net sales over cost of goods sold is gross profit.
- It is determined by deducting cost of goods sold from net sales.
- This computation uses net sales, which takes into account sales returns and allowances and sales discounts.
Operating expenses
are subtracted from gross profit in order to determine income from operations.
non-operating expenses
Unrelated to the company’s primary line of operations.
Are presented after Income from operations
Other revenues and gains
Other expenses and losses
