Merchandising accounting procedures

The Classified Income Statement Subtotals used to provide more specific information to the reader as to the different components involved in calculating net income

New “Sales” Section of Income Statement 250,000 $ Less: Sales Discounts 3,000 Sales Ret. & Allow. 1,500 4,500 Net Sales 245,500

Cost of Goods Sold Section from Last Class Beginning Inventory 55,000 $ Purchases 176,500 Cost of Goods Avail. for Sale 231,500 Less: Ending Inventory 64,000 Cost of Goods Sold 167,500

Eventual Cost of Goods Sold section Beginning Inventory 55,000 $ Purchases 175,000 Less: Purchase Discounts 6,000 Purchase Ret. & Allow. 2,500 8,500 Net Purchases 166,500 Add: Transportation-in 10,000 Net Cost of Purchases 176,500 Cost of Goods Avail. for Sale 231,500 Ending Inventory 64,000 Cost of Goods Sold 167,500

Income from operations Gross margin 78,000 $ Operating expenses: Selling expenses: Sales salaries 26,000 Delivery expense 3,000 Advertising expense 2,000 Rent - store building 4,000 Depreciation - store equip. 2,500 37,500 Administrative expenses: Executive salaries 29,000 Rent - office building 1,600 Insurance expense 1,500 Supplies expense 1,100 33,200 Total operating expenses 70,700 Income from operations 7,300

NON-Operating Section Income from operations $ 7,300 Non-operating revenues and expenses Non-operating revenues: Interest revenue 400 Rent Revenue 2,000 Non-operating expenses: Interest expense (700) Safe deposit box rental 100 Net income $ 9,100

Our Scope We will focus most of our attention in this Unit on the “Gross Profit” section Net sales COGS

Returns & Allowances Of course, we might: Have unhappy customers returning bad, incorrect or unwanted products Return our own purchased product for similar reasons Let’s look at how we as accountants are to deal with these scenarios…

Cash Refunds Cash refund – return of money to the buyer from the seller when merchandise is returned. We may want to instead be able to quickly find exact “Cancelled Sales” rather than only a single “Sales” account DR CR Sales $$$$ HST Payable Bank

Sales Returns and Allowances DR CR Sales Returns and Allowances $$$$ HST Payable Accounts Receivable/ Cash Returns: Entire order is reversed Allowance: Some portion of original cost is returned to customer

Sales Returns and Allowances Much easier to identify “Bad” Sales

Purchase Returns AND Allowances Likewise we could return our own purchase, again we would like to separate this from the rest of the Purchase account: DR CR Accounts Payable $$$$ HST Recoverable Purchases Returns & Allowances

Purchase Returns and Allowances or

The Freight-in Account The freight-in account is for the expense of shipping in goods for sale (from suppliers). Freight in is considered a cost of a goods sold account. Used to accumulate transportation charges on incoming goods. The delivery expense account is for the expense of shipping out goods that have been sold to customers. Appears with the rest of the “Operating Expenses”

Gross Profit Section

Revised Cost of Goods Formula