Merchandising Companies Chapter 6 from Williams Book Operating Cycle The series of transactions through which a business generates its revenue and its cash receipts from customers is called the operating cycle. Merchandising Activities vs Manufacturing Activities Retailers and Wholesalers The Flow of inventory Costs TWO APPROACHES USED IN ACCOUNTING FOR MERCHANDISE INVENTORIES (1) a perpetual inventory system • In a perpetual inventory system, all transactions involving costs of merchandise are recorded immediately as they occur (2) a periodic inventory system • In a periodic inventory system, no effort is made to keep up-to-date records of either the inventory or the cost of goods sold. Instead, these amounts are determined only periodically—usually at the end of each year Perpetual Inventory System • Sept. 1 Purchased 10 Regent 21-inch computer monitors on account from Okawa Wholesale Co. The monitors cost $600 each, for a total of $6,000; payment is due in 30 days. Perpetual Inventory System • Sept. 7 Sold two monitors on account to RJ Travel Agency at a retail sales price of $1,000 each, for a total of $2,000. Payment is due in 30 days. Perpetual Inventory System • Oct. 1 Paid the $6,000 account payable to Okawa Wholesale Co. Perpetual Inventory System • Oct. 7 Collected the $2,000 account receivable from RJ Travel Agency. TAKING A PHYSICAL INVENTORY • Inventory shrinkage refers to unrecorded decreases in inventory resulting from such factors as breakage, spoilage, employee theft, and shoplifting. • In order to ensure the accuracy of their perpetual inventory records, most corporations are required to take a complete physical count of the merchandise on hand at least once a year. • This procedure is called taking a physical inventory, and it usually is performed near year-end. • Computer City show an inventory with a cost of $72,200. A physical count, however, reveals that some of the merchandise listed in the accounting records is missing; the items actually on hand have a total cost of $70,000. • Computer City would make the following adjusting entry to correct its Inventory control account Practice Question • Pg 266 of Williams book, Demonstration problem. Periodic Inventory System When merchandise is purchased, its cost is debited to an account entitled Purchases, rather than to the Inventory account. When merchandise is sold, an entry is made to recognize the sales revenue, but no entry is made to record the cost of goods sold or to reduce the balance of the Inventory account. Data for an illustration 1.The inventory on hand at the end of 2010 cost $14,000. 2. During 2011, purchases of merchandise for resale to customers totaled $130,000. 3. Inventory on hand at the end of 2011 cost $12,000 Computing the cost of goods sold: CLOSING PROCESS IN A PERIODIC INVENTORY SYSTEM Closing process Perpetual Vs. Periodic Inventory Practice Question • Demo problem Transactions Relating to Purchases CREDIT TERMS AND CASH DISCOUNTS • Perhaps the most common credit terms offered by manufacturers and wholesalers are 2/10, n/30. • This expression is read “2, 10, net 30,” and means that full payment is due in 30 days, but that the buyer may take a 2 percent discount if payment is made within 10 days Cash Discounts • To illustrate, assume that on November 3 Computer City purchases 100 spreadsheet programs from PC Products. The cost of these programs is $100 each, for a total of $10,000. However, PC Products offers credit terms of 2/10, n/30. Cash Discounts • If payment is made within the discount period, Computer City will discharge this $10,000 account payable by paying only $9,800. The entry will be: Purchase Discounts Taken is treated as a reduction in the cost of goods sold. RETURNS OF UNSATISFACTORY MERCHANDISE • On occasion, a buyer may find the purchased merchandise unsatisfactory and want to return it to the seller for a refund. Most sellers permit such returns • To illustrate, assume that on November 9 Computer City returns to PC Products five of the spreadsheet programs purchased on November 3, because these programs were not properly labeled Debit Accounts Payable Credit 500 Inventory Returned five mislabeled spread sheet programs to supplier 500 Transactions Relating to Sales SALES RETURNS AND ALLOWANCES • Under the perpetual inventory system, two entries are needed to record the sale of merchandise: • one to recognize the revenue earned • and the other to transfer the cost of the merchandise from the Inventory account to Cost of Goods Sold. • If some of the merchandise is returned, both of these entries are partially reversed SALES RETURNS AND ALLOWANCES Customer returned merchandise purchased on account for $1000. The cost of the merchandise was 600. SALES DISCOUNT • To illustrate, assume that Computer City sells merchandise to the Highlander Pub for $1,000, offering terms of 2/10, n/30. The sales revenue is recorded at the full invoice price, as follows: ACCOUNTING FOR SALES TAXES Cash of 1070 was received from customer, of which 1000 was the company’s sale and the remaining is sales tax.
