Part four
Objective 1
Account for the purchase of
inventory
2
Purchase of Inventory
Merchant
prepares
purchase
order
Compares
3
Suppliers
send
merchandise
and a bill
Operating Cycle of a
Merchandising Business
Accounts
Receivable
Cash
Inventory
4
Inventory Systems
• Periodic – used by business that sell relatively
inexpensive goods. Inventory is counted
periodically, but the level of inventory between
inventory counts is not maintained.
• Perpetual– maintains a running count of amount
of inventory on hand. Often combined with
computerized system.
• In past, both systems were widely used. Today,
most large and many small businesses use
perpetual
5
PERIODIC
• Goods counted
periodically to
determine quantity
• Used by small
businesses
• Less popular now
because of
computerized
inventory systems
PERPETUAL
• Record of quantity of
goods is constantly
updated
• Better control of
inventory
• Popular now due to
bar codes and
computer scanning
6
Copyright (c) 2009 Prentice Hall. All rights reserved.
6
• The periodic inventory system is normally used for relatively
inexpensive goods. A convenience store without optical-scanning cash
registers doesn’t keep a running record of every loaf of bread and every
key chain that it sells. Instead, the business counts its inventory
periodically to determine the quantities on hand. Restaurants and small
retail stores also use the periodic system. Appendix 5B covers the
periodic system, which is becoming less and less popular because of
increased reliance on computers.
• The perpetual inventory system keeps a running record of inventory
and cost of goods sold---that is, the inventory is perpetually (constantly)
updated. This system achieves better control over the inventory. Even in
a perpetual system, the business must count inventory at least once a
year. The physical count captures inventory transactions that are not
captured by the electronic system (such as misplaced, stolen, or
damaged inventory). The count establishes the correct amount of
ending inventory for the financial statements and also serves as a check
against the perpetual records.
7
• The inventory account is increased each
time merchandise is purchased
• The vendor provides an invoice showing
the quantity and cost of the items
• Inventory cost is also impacted by:
–Shipping costs
–Return of purchased items
–Discounts for early payment
8
Copyright (c) 2009 Prentice Hall. All rights reserved.
8
Purchase of Inventory Example
• On May 1, the Sporting Store acquired
on account $2,000 of various items for
resale.
• The supplier sent the merchandise
along with a bill stating the quantity,
price, and terms of sale.
• What is the journal entry?
9
Purchase of Inventory Example
May 1
Inventory
2,000
Accounts Payable
2,000
Purchased inventory on account
Inventory
Accounts Payable
2,000
2,000
10
Purchase of Inventory
S4-1
GENERAL JOURNAL
DATE
DESCRIPTION
Inventory
Accounts Payable
Purchased inventory
11
REF
DEBIT
CREDIT
2,000
2,000
Recording Purchase Returns
and Allowances Example
• Assume that on May 4 a $100 item was
returned prior to payment of the invoice.
• What is the journal entry?
May 4
Accounts Payable
100
Inventory
100
Merchandise was returned
12
Recording Purchase Returns
and Allowances Example
• Assume that one of the items of
merchandise is slightly damaged, and the
store was given a $10 allowance.
• What is the journal entry?
May 4
Accounts Payable
10
Inventory
10
Received a purchase allowance
13
Recording Purchase Returns
and Allowances Example
Inventory
2,000 100
10
Bal. 1,890
14
Accounts Payable
100 2,000
10
Bal. 1,890
Purchase Discounts
• A deduction from the invoice price granted
to encourage early payment of the amount
due
– 2/10, n/30
– n/30
– eom (End of Month)
15
Purchase Discounts
• 2/10, N/30, meaning that a discount of 2%
is allowed if the invoice is paid within 10
days; otherwise the full (net) amount is
due within 30 days.
16
Purchase Discounts Example
• Assume the Sporting Store purchased
merchandise for $1,000 with terms of
2/10, N/30.
• The store paid within the discount period.
• The 2% discount ($20) is deducted from
the amount due ($1,000) and $980 is
remitted.
17
Purchase Discounts Example
• What is the journal entry?
Accounts Payable 1,000
Cash
980
Inventory
20
To record payment of invoice within the
discount period
18
Recording Transportation Costs
• Transportation costs are the cost of
moving inventory from seller to buyer.
• FOB stands for Free on Board and
governs the passing of title of the goods.
• Selling/buying agreements usually specify
FOB terms.
19
Recording Transportation Costs
FOB Shipping Point
FOB Destination
20
Freight Charges Example
• Assume that on May 9 the Sporting Store
paid $60 for freight.
• What is the journal entry?
May 9
Inventory
60
Cash
Paid a freight bill
21
60
Purchase Discounts
• A deduction from the invoice price granted
to encourage early payment of the amount
due
– 2/10, n/30
– n/30
– eom (End of Month)
22
Purchase of Inventory
S4-2
GENERAL JOURNAL
DATE
DESCRIPTION
Accounts Payable
Cash
Inventory
Paid within discount period
Inventory
10,000
Bal
23
9,800
200
REF
DEBIT
CREDIT
10,000
9,800
200
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
24
Purchase Returns and
Allowances – S4-2
GENERAL JOURNAL
DATE
DESCRIPTION
Inventory
Accounts Payable
Purchased inventory
25
REF
DEBIT
CREDIT
100,000
100,000
Purchase Returns and
Allowances – S4-2
GENERAL JOURNAL
DATE
DESCRIPTION
Accounts Payable
Inventory
Returned damaged goods
Inventory
100,000
Bal
26
90,000
10,000
REF
DEBIT
CREDIT
10,000
10,000
Accounts Payable
10,000
100,000
Bal
90,000
Purchase Returns and
Allowances – S4-2
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Accounts Payable
Cash
Paid after the discount period
Inventory
100,000
Bal
90,000
27
10,000
DEBIT
CREDIT
90,000
90,000
Accounts Payable
10,000
90,000
100,000
Bal
0
Purchase Returns and
Allowances – S4-2
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Accounts Payable
Cash
Inventory
Paid within discount period
Inventory
100,000
Bal
87,300
28
10,000
2,700
DEBIT
CREDIT
90,000
87,300
2,700
Accounts Payable
10,000
90,000
100,000
Bal
0
Transportation Costs
Seller
Buyer
Goods
FOB Shipping Point
(Buyer Pays)
29
FOB Destination
(Seller Pays)
Transportation Costs
• Freight in
– Transportation cost on purchased goods
– Debit inventory
• Freight-out
– Transportation cost on goods sold
– Debit an expense (delivery expense)
30
E4-15
GENERAL JOURNAL
DATE
DESCRIPTION
Apr 30 Inventory
Accounts Payable
Purchased inventory
31
REF
DEBIT
CREDIT
6,000
6,000
E5-15
GENERAL JOURNAL
DATE
DESCRIPTION
Apr 30 Inventory
Cash
Paid freight charges
Inventory
6,000
300
Bal
32
6,300
REF
DEBIT
CREDIT
300
300
Accounts Payable
6,000
E5-15
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Apr 30 Accounts Payable
Inventory
Returned unsuitable goods
Inventory
6,000
300
Bal
33
5,300
1,000
DEBIT
CREDIT
1,000
1,000
Accounts Payable
1,000
6,000
Bal
5,000
E4-15
GENERAL JOURNAL
DATE
DESCRIPTION
REF
May 14 Accounts Payable
Cash
Inventory
Paid within discount period
Inventory
6,000
300
Bal
34
5,150
1,000
150
DEBIT
CREDIT
5,000
4,850
150
Accounts Payable
1,000
5,000
6,000
Bal
0
Objective 2
Account for the sale of inventory
35
Sale of Inventory
• Sales Revenue
– Amount earned from selling inventory
– Revenue account
• Cost of Goods Sold
– Cost of inventory that has been sold to
customers
– Expense account
36
Sale of Inventory
• Sales Returns & Allowances
– When customer returns goods or the seller
grants a reduction in price to customer
– Contra-revenue account (debit balance)
• Sales Discounts
– If customer pays within the discount period
allowed by the seller
– Contra-revenue account (debit balance)
• Delivery Expense (Freight Out)
37
Sales Transactions
S4-5
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT
Accounts Receivable
Sales Revenue
To record sales on account
60,000
Cost of Goods Sold
32,000
Inventory
To record cost of sales
38
REF
CREDIT
60,000
32,000
Sales Transactions
S4-5
GENERAL JOURNAL
DATE
DESCRIPTION
Cash
Accounts Receivable
Collected on account
39
REF
DEBIT
CREDIT
60,000
60,000
Sales Transactions
S4-5
GENERAL JOURNAL
DATE
DESCRIPTION
Cash
Sales Discount
Accounts Receivable
Collected on account
40
REF
DEBIT
CREDIT
58,800
1,200
60,000
Sales Transactions
S5-5
Sales
Sales Discount
Net Sales
41
$60,000
(1,200)
$58,800
S4-6
GENERAL JOURNAL
DATE
DESCRIPTION
Accounts Receivable
Sales Revenue
To record sales on account
Cost of Goods Sold
Inventory
To record cost of sales
42
REF
DEBIT
CREDIT
10,000
10,000
6,000
6,000
S4-6
GENERAL JOURNAL
DATE
DESCRIPTION
Sales Returns & Allowances
Accounts Receivable
To record 100 books returned
Inventory
Cost of Goods Sold
Returned books to inventory
43
REF
DEBIT
CREDIT
1,000
1,000
600
600
S4-6
Accounts Receivable
10,000
Bal
1,000
1,000
44
10,000
9,000
Sales Returns & Allowances
Bal
Sales
1,000
Sales Discounts
S4-6
GENERAL JOURNAL
DATE
DESCRIPTION
Cash
Sales Discount
Accounts Receivable
Collected on account
45
REF
DEBIT
CREDIT
8,820
180
9,000
S4-6
Accounts Receivable
10,000
Bal
Sales
1,000
9,000
10,000
0
Sales Discounts
Sales Returns & Allowances
180
1,000
Bal
1,000
Bal
Cost of Goods Sold
6,000
Bal
46
5,400
600
180
S4-7
Sales
Sales Returns & Allowances
Sales Discounts
Net Sales
Cost of Goods Sold
Gross Profit
47
$10,000
(1,000)
(180)
$8,820
(5,400)
$3,420
Objective 3
Adjust and close the accounts of a
merchandising business
48
Adjusting Inventory
• If physical count of inventory is different
from amount on the books – Inventory
Shrinkage
• Debit Cost of Goods Sold
• Credit Inventory
49
S4-8
$65,000 (per books)
- 63,900 (physical count)
$1,100 (shrinkage)
GENERAL JOURNAL
DATE
DESCRIPTION
Cost of Goods Sold
Inventory
Adjustment for shrinkage
50
REF
DEBIT
CREDIT
1,100
1,100
Closing Entries
1. Close all income statement accounts
with credit balances to Income Summary
2. Close all income statement accounts
with debit balances to Income Summary
3. Close Income Summary to Capital
4. Close Withdrawals to Capital
51
S4-9
GENERAL JOURNAL
DATE
DESCRIPTION
Dec 31 Sales Revenue
Income Summary
31 Income Summary
Cost of Goods Sold
Rent Expense
Depreciation Expense
Sales Discounts
52
REF
DEBIT
CREDIT
700,000
700,000
424,000
385,000
20,000
10,000
9,000
S4-9
GENERAL JOURNAL
DATE
DESCRIPTION
Dec 31 Income Summary
J. Hayes, Capital
(700,000 – 424,000)
31 J. Hayes, Capital
J. Hayes, Withdrawals
53
REF
DEBIT
CREDIT
276,000
276,000
60,000
60,000
Objective 4
Prepare a merchandiser’s
financial statements
54
Income Statement
Net sales
- Cost of goods sold
Gross profit
- Operating expenses:
Selling expenses – related to selling and
marketing the inventory
General expense – office expenses
Operating income
+ Other revenue and expense
Net income
55
Income Statement Formats
• Multiple-Step – see previous slide
– Contains key subtotals
• Single-Step
– Total revenues minus total expenses
56
S4-10
Carolina Communications
Income Statement
For the Year Ended January 31, 2009
Net Sales Revenue
$25,000
Cost of Goods Sold
20,000
Gross Profit
$5,000
Operating Expenses
3,500
Net Income
$1,500
57
S4-10
Carolina Communications
Income Statement
For the Year Ended January 31, 2009
Net Sales Revenue
$25,000
Cost of Goods Sold $20,000
Operating Expenses
3,500 23,500
Net Income
$1,500
58
Objective 6
Compute cost of goods sold in a
periodic inventory system
59
Cost of Goods Sold – Periodic
Inventory System
Beginning Inventory
Goods Available for Sale
+ Purchases
60
Cost of Goods Sold – Periodic
Inventory System
Goods Available for Sale
Cost of Goods Sold
- Ending Inventory
61
Cost of Goods Sold – Periodic
Inventory System
Beginning Inventory
+ Purchases
Goods Available for Sale
- Ending Inventory
Cost of Goods Sold
62
E4-26
a. Sales
Sales discounts
Sales returns
Net sales
63
$170,000
(3,000)
(15,000)
$152,000
E4-26
b. Inventory, May 31, 20X6
$19,000
Purchases
$82,000
Purchases discounts
(2,000)
Purchases returns
(8,000)
Freight in
4,000
Net purchases
76,000
Goods available for sale
$95,000
Inventory, May 31, 20X7
(21,000)
Cost of goods sold
$74,000
64
E4-26
c. Net sales
Cost of goods sold
Gross profit
65
$152,000
(74,000)
$78,000