Accounting Chapter 5

Sales Revenue

Revenues obtained from the sale of merchandise.

Cost of goods sold

Cost of merchandise sold during the period.

Gross Profit

Sales Revenue - Cost of goods (For merchandise company)

Net income(or Loss)

Gross Profit - Operating Expenses

Operating Cycles

Longer for merchandising companies. Flow from cash to service or inventory and then back to cash.

Merchandising companies

Have an inventory account.

Flow of costs:

Beginning inventory plus the cost of goods pssurchased = cost of goods available for sale.
Model:
Beginning Inventory-Cost of goods available for sale-Ending inventory
Cost of goods purchased- cost of goods available for sale- Costof goods sold.

ending inventory

Goods not sold. as goods are sold, they are assigned to cost of goods sold.

Systems of inventory accounting

Perpetual inventory system
Periodic inventory system.

Perpetual inventory system

Detailed inventory records of the cost of each inventory purchase and sale. Purchases are recorded under the inventory account (purchases of inventory). Items purchased that are not for resale are not recorded (supplies, equipment and the like are debited

Periodic inventory system

Determine cost of goods sold only at the end of the accounting period (periodically). Created different accounts for, purchases,freight costs, returns, and discounts.

Steps to Periodic inventory system

Determine cost of goods on hand at beginning of the accounting period.
Add to it the cost of goods purchased.
Subtract the cost of goods on hand at the end of the accounting period.

recording purchases

Items purchased should have a receipt (Purchase invoice), items decrease cash, increase inventory.

Freight costs

Specified on an invoice indicates who pays for transportation of goods to the buyers destination.
Expressed as FOB shipping point or FOB destination.
point means buyer pays costs. Destination means seller pays freight.

FOB Shipping point

Cost incurred by buyer. Inventory is increased.

FOB Destination

Cost incurred by Seller.
Operating Expense.

Freight Cost

expenses incurred by the seller in a FOB destination. Retail price is usually higher to cover the cost of freight.

Purchase Return

Return by the purchaser to the seller. Cash is returned for cash; credit for credit. acct by: Debit to accts payable (decrease), cr to inventory.

Purchase Allowance

Purchaser chooses to keep merchandise if seller wiling to grant reduction in purchase price. acct by: dr accts/p and cr inventory by 50

Purchase Discount

Credit terms of purchase permit buyer to claim a cash discount for promt payment.

Credit Terms

Specification of the amount of a cash discount and time period during which it is offered. Indicates length of time which purchaser is expected to pay the full invoice price.

1/10 EOM

1% discount if paid by end of month.

2/10, n/30

2/10, n/30
two-ten,net thrity
2% cash discount taken on the invoice price less ("net of") any returns or allowances, if payment is made within 10 day of the invoice date (discount period). Otherwise, invoice price, less any returns or allowances, is due 3

No cash discount from seller

credit terms will only specify max time period for paying balacne: n/30 n/60.

(When) Invoice (is) paid within discount period

credit inventory; merchandiser records inventory at its cost.

Adjusting for a cash discount

dr A/P cr Inv cr cash by net amount owed.

Summary of Purchasing Transactions

T account. 3,800

Seller Returns and allowances:

Debit sales returns and allowances (contra account to Sales Revenue) and credit in a/r.
Also: debit inventory (at a discount) and credit cost of goods sold

Contra revenue account

Sales returns and allowances.

Sales Discounts

cash discount for prompt payment. NB Dr
invoiceprice - returns and allowances.
dr sales discounts and cr a/r.

Single step income statement

basic income statement

Multistep income statement

Gross profit, income from operations, and net income
1. Subtract cost of goods sole from net sales to determine gross profit
2.Deduct operating expenses from gross profit to determine income from operations.
3. Add or subtract the results of activities no

Net sales

amount after sales returns and allowances and sales discounts are subtracted from sales revenue on the income statement.

Gross Profit

same as other definition however remember that net sales are used in gross profit. (Merchandising profit).
NOT a measure of overall profit.
Measure of overall profit effectiveness of a companies purchasing and pricing policies.

Net income

Gross profit - Operating expenses.

Other Revenue

Interest, Dividend, Rent(subleasing, Gain(sale of PPE).

Other expenses and losses

Interest expense (notes/loans payable)
Casualty losses (vandalism and accidents)
Loss (from sale or abandonment of PPE)
Loss (strikes by employees or suppliers)