Chapter 5 Part 1

 Businesses that sell a product to customers  Inventory ◦ Merchandise held for sale ◦ Asset account Copyright (c) 2009 Prentice Hall. All rights reserved.2

Describe and illustrate merchandising operations and the two types of inventory systems 3Copyright (c) 2009 Prentice Hall. All rights reserved.

Balance SheetIncome Statement  Inventory ◦ Asset  Sales revenue  Cost of goods sold ◦ Expense Copyright (c) 2009 Prentice Hall. All rights reserved.4

5 Purchase inventory Collect cash from customers Sell inventory Accounts receivable Inventory Cash

PERIODICPERPETUAL  Goods counted periodically to determine quantity  Used by small businesses  Less popular now because of computerized inventory systems  Record of quantity of goods is constantly updated  Better control of inventory  Popular now due to bar codes and computer scanning Copyright (c) 2009 Prentice Hall. All rights reserved.6

PeriodicPerpetual  calculate inventory that was used based on the following equation  Beginning Balance Add: Purchases Goods Available for Sale Less: Cost of Goods Sold ?????? Ending Balance  Goods Available for Sale – Ending Balance =COST OF GOODS SOLD  Record reduction in inventory each time a good is sold ◦ Cost of Goods Sold DR  Inventory CR Copyright (c) 2009 Prentice Hall. All rights reserved.7

8 Income Statement Comparison Service Revenue$150,000 Operating expenses120,000 Net income$ 30,000 Service Business Sales revenue$600,000 Cost of goods sold450,000 Gross profit$150,000 Operating expenses120,000 Net income$ 30,000 Merchandising Business 20% of revenues 5% of revenues

9 A. Purchased 10 lap tops for $5,000 to be held for resale.

10 Perpetual Inventory System General Journal DescriptionDebitCredit General Ledger Inventory5,000 Accts. Payable5,000 Inventory 5,000A Cost of goods SoldA In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Purchase on account Return of merchandiseA B

11 B. Returned 2 laptops that were damaged during shipment.

12 Reductions in purchases, resulting from merchandise being returned to the seller or from the seller’s reduction in the original price.

13 The form issued by a buyer to inform a seller that a debt has been posted to the seller’s accounts payable.

14 Perpetual Inventory System General Journal DescriptionDebitCredit General Ledger Inventory5,000 Accts. Payable5,000 Accts. Payable 1,000 Inventory 1,000 Inventory 5,000A Cost of goods Sold 1,000A B B 4,000Bal In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Purchase on account Return of merchandise Sale of merchandiseA B C

15 C. Sold 5 of the laptops for $3,250. Cost of Goods Sold $2,500.

16 Perpetual Inventory System General Journal DescriptionDebitCredit General Ledger Inventory5,000 Accts. Payable5,000 Accts. Payable 1,000 Inventory 1,000 Accts. Receivable3,250 Sales3,250 Cost of goods Sold2,500 Inventory2,500 Inventory 5,000A Cost of goods Sold 2,500 Purchase on account Return of merchandise Sale of merchandise 1,000A B B C C 2,500 1,500C Bal A B C In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur.

17 Perpetual Inventory System General Journal DescriptionDebitCredit General Ledger Inventory 5,000A Cost of goods Sold 2,500 Purchase on account Return of merchandise Sale of merchandise 1,000A B B C C 2,500 1,500C Bal A B C In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Inventory5,000 Inventory5,000 Accts. Payable5,000 Accts. Payable 1,000 Inventory 1,000 Accts. Receivable3,250 Sales3,250 Cost of goods Sold2,500 Inventory2,500

18 D. Collected the balance owed by the customer who purchased the laptops.

19 Perpetual Inventory System General Journal DescriptionDebitCredit General Ledger Cash 3,250D Accounts Receivable 3,250 D C Bal D Cash3,250 Accts. Receivable3,250 3,250

20 E. Paid the creditor the amount owed on the purchase of the lap tops.

21 Perpetual Inventory System General Journal DescriptionDebitCredit General Ledger CashE Accounts Payable 1,000 5,000 4,000 Bal. 4,000 D.D. E 3,250 4,000 3,250B Bal A E Accounts Payable4,000 Accounts Payable4,000 Cash4,000

Account for the purchase of inventory using a perpetual system 22Copyright (c) 2009 Prentice Hall. All rights reserved.

 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 Copyright (c) 2009 Prentice Hall. All rights reserved.23

GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 24 Inventory$$$$ Accounts payable$$$$ Purchased inventory on account Copyright (c) Prentice Hall. All rights reserved.

25 June. 3. Smart Touch purchases $700 of inventory on account. Terms 3/15, n/30.

26 Post. DateDescriptionRef.DebitCredit 6/3 Inventory Acct. Payable General Journal

 Discount for early payment  Expressed as follows: Other terms: 27Copyright (c) 2009 Prentice Hall. All rights reserved. 2/10, n/30 2% discount if paid within 10 days Full amount due within 30 days n/30 No discount, full amount due in 30 days eom Full amount due by the end of month

GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 28 Accounts payable$$$$ Cash$$$$ Inventory$$$ Paid within discount period Copyright (c) Prentice Hall. All rights reserved. REMEMBER: When you purchase, record at full value. When you pay, adjust the inventory for any discount you took

29 June. 15. Smart Touch paid the amount owed on the June 3 purchase.

30 Credit Terms, Cash Discounts Credit Terms: 3/15, n/30 Is invoice paid within 15 days of invoice date? Full amount is due within 30 days of invoice date. No

31 3% of invoice amount is allowed as a cash discount. Credit Terms, Cash Discounts Credit Terms: 3/15, n/30 Is invoice paid within 15 days of invoice date? Yes Full amount is due within 30 days of invoice date. No

32 3% of invoice amount is allowed as a cash discount. Credit Terms, Cash Discounts Credit Terms: 3/15, n/30 Is invoice paid within 15 days of invoice date? Yes Full amount is due within 30 days of invoice date. No Example: Merchandise was purchased for $700 with credit terms of 3/15, n/30. Payment within 15 days is calculated as: Invoice$700 Less 3% discount21 Net cost paid$679

33 Post. DateDescriptionRef.DebitCredit 6/15Acct. Payable Cash Inventory General Journal

 Purchase return ◦ Merchandise returned by the purchaser to the supplier  Purchase allowance ◦ Seller reduces amount owed ◦ Incentive for purchaser to keep goods 34Copyright (c) 2009 Prentice Hall. All rights reserved.

GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 35 Accounts payable$$$$ Inventory$$$$ Returned damaged goods Reverse of purchase entry Decreases both accounts payable and inventory Copyright (c) Prentice Hall. All rights reserved.

36 June. 3. Smart Touch purchases $700 of inventory on account. Terms 3/15, n/30.

37 Post. DateDescriptionRef.DebitCredit 6/3 Inventory Acct. Payable General Journal

38 June 4. Smart Touch returned $100 of damaged inventory.

39 Post. DateDescriptionRef.DebitCredit 6/4Acct. Payable Inventory General Journal Page 2 Recording and Posting an Entry

40 June. 15. Smart Touch paid the amount owed on 6/3 purchase.

41 3% of invoice amount is allowed as a cash discount. Credit Terms, Cash Discounts Credit Terms: 3/15, n/30 Is invoice paid within 15 days of invoice date? Yes Full amount is due within 30 days of invoice date. No

42 3% of invoice amount is allowed as a cash discount. Credit Terms, Cash Discounts Credit Terms: 3/15, n/30 Is invoice paid within 15 days of invoice date? Yes Full amount is due within 30 days of invoice date. No Example: Merchandise was purchased for $700 with credit terms of 3/15, n/30. Payment within 15 days is calculated as: Invoice ( )$600 Less 3% discount18 Net cost paid$582

43 Post. DateDescriptionRef.DebitCredit 6/15Acct. Payable Cash Inventory General Journal

 FOB Shipping Point ◦ Buyer takes ownership of inventory when goods leave seller’s place of business ◦ Purchaser normally pays freight charges  Freight-in  Increases cost of inventory  FOB Destination ◦ Buyer takes ownership of inventory when goods arrive ◦ Seller normally pays freight  Freight-out  Selling expense 44 Copyright (c) Prentice Hall. All rights reserved.

45 Terms of agreement between buyer and seller whereby ownership passes when merchandise is delivered to the freight carrier, and the buyer pays the transportation costs.

46 Seller Buyer Copyright (c) 2009 Prentice Hall. All rights reserved. Title transfers to buyer Buyer pays freight charges Increases cost of inventory Goods

47 Jul. 18 Burton Company purchased $12,000 of inventory on account from Scully Company. Terms FOB Shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500 which were added to the invoice. HINT!!!! Think through the transaction and what is happening. Burton is responsible for paying the shipping. But in this case, Scully paid it as a convenience to Burton. So, Burton now owes Scully for shipping fees. For Burton, the shipping fees increase the cost of the inventory. For Scully, the fees are simply a debt (an account receivable) that Burton will owe them.

48 Accounting for Merchandise Transactions Inventory12,500 Accts. Payable12,500 Burton Co. (Buyer) DescriptionDebitCredit

49 Jul. 28. Burton Company paid Scully the balance owed on the 7/18 purchase less discount.

50 Accounting for Merchandise Transactions Inventory12,500 Accts. Payable12,500 Accts. Payable12,500 Inventory240 Cash12,260 Burton Co. (Buyer) DescriptionDebitCredit

Account for the sale of inventory using a perpetual system 51Copyright (c) 2009 Prentice Hall. All rights reserved.

 Sales revenue ◦ Amount earned from selling inventory ◦ Revenue account  Cost of goods sold ◦ Cost of inventory that has been sold to customers ◦ Expense account 52Copyright (c) 2009 Prentice Hall. All rights reserved.

53 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Accounts receivable (or Cash)$$$$$ Sales revenue$$$$$ To record sales on account Cost of goods sold$$$$$ Inventory$$$$$ To record cost of sales Copyright (c) 2009 Prentice Hall. All rights reserved.

54 June 9 Smart Touch sold 20 CPA exam prep. Receiving cash of $3,000. Cost of goods Sold $1,900.

55 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT June9Cash3,000 Sales Revenue3,000 To record cash sales 9Cost of Goods Sold1,900 Inventory1,900 To record cost of sales

56 June.11 Smart Touch sold $5,000 of inventory on account. Cost of goods Sold $2,900.

57 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT June11Accounts Receivable5,000 Sales Revenue5,000 To record sales on account 11Cost of Goods Sold2,900 Inventory2,900 To record cost of sales

58 June.19 Smart Touch received the balance owed on the June 11 sale.

59 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT June19Cash5,000 Accounts Receivable5,000 To record sales on account

 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)  Freight-out ◦ Delivery expense ◦ If terms are FOB shipping point 60Copyright (c) 2009 Prentice Hall. All rights reserved.

61 July 7 Groovy Tunes sold Smart Touch CD’s for $7,200 on account. Terms: 2/10,n/30. Cost of goods sold $4,700.

62 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT July7Accounts Receivable7,200 Sales Revenue7,200 To record sales on account 7Cost of Goods Sold4,700 Inventory4,700 To record cost of sales

63 Reductions in sales, resulting from merchandise being returned by customers or from the seller’s reduction in the original sales price; a contra account to Sales.

64 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Inventory$$$$ Cost of goods sold $$$$ Customer returned merchandise Sales returns and allowances$$$$ Accounts receivable$$$$ Copyright (c) 2009 Prentice Hall. All rights reserved. Only if goods returned does the entry to Inventory and Cost of Goods sold get made

65 July 12 The customer returned $600 worth of the Cd’s. The cost of the returned Cd’s to Groovy was $400.

66 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jul 12 Jul 12 Inventory400 Cost of goods sold 400 Customer returned merchandise Sales returns and allowances600 Accounts receivable600 Copyright (c) 2009 Prentice Hall. All rights reserved. Point: Just reverse the entries!

67 July 15 Groovy Tunes grants a $100 sales allowance for goods damaged in transit.

68 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jul 15 Sales returns and allowances100 Accounts receivable100 Copyright (c) 2009 Prentice Hall. All rights reserved.

69 An available discount granted by a seller for early payment of an invoice; a contra account to Sales.

70 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cash$$$$$ Sales discounts$$$$ Accounts receivable$$$$$ Collected on account within discount period Copyright (c) 2009 Prentice Hall. All rights reserved.

71 Jul.17 Groovy Tunes received payment for 7/7 sale less return/allowance and discount.

72 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jul 17Cash6,370 Sales discounts130 Accounts receivable6,500 Collected on account within discount period Copyright (c) 2009 Prentice Hall. All rights reserved.

73 Seller Buyer Copyright (c) 2009 Prentice Hall. All rights reserved. Title transfers to buyer Seller pays freight charges Increases expenses Goods

74 Terms of agreement between buyer and seller whereby ownership passes when merchandise is received by the buyer, and the seller pays the transportation costs.

75 Jul. 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB Destination, n/30. The Cost of goods Sold was $3,500

76 Accounting for Merchandise Transactions DescriptionDebitCredit Accts. Receivable5,000 Sales5,000 Cost of goods Sold3,500 Inventory3,500 Scully Company (Seller) July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the goods sold was $3,500.

77 Jul. 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Co. on July 5.

78 Accounting for Merchandise Transactions DescriptionDebitCredit Freight Out250 Cash250 Scully Company (Seller) July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Co. on July 5. Accts. Receivable5,000 Sales5,000 Cost of goods Sold3,500 Inventory3,500 Note: If it was FOB Shipping, then the debit would be to Accounts Receivable (a debt of Burton) and not Freight-Out (an expense of Scully)

79 Terms of agreement between buyer and seller whereby ownership passes when merchandise is delivered to the freight carrier, and the buyer pays the transportation costs.

80 Seller Buyer Copyright (c) 2009 Prentice Hall. All rights reserved. Title transfers to buyer Buyer pays freight charges Increases cost of inventory Goods

81 Jul. 18 Scully Company sold Merchandise on account to Burton Co., $12,000, terms FOB Shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500 which were added to the invoice. The cost of the goods sold was $7,200.

82 DescriptionDebitCredit Accts. Receivable12,500 Sale s 12,000 Cash 500 Cost of goods Sold7,200 Inventory7,200 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of goods sold was $7,200.

83 Accts. Receivable12,500 Sales12,000 Cash500 Cost of goods Sold7,200 Inventory7,200 Accounting for Merchandise Transactions DescriptionDebitCredit Inventory12,500 Accts. Payable12,500 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit

84 Jul. 28. Scully Company received payment from Burton Co. for purchase of July 18, less discount.

85 Accts. Receivable12,500 Sales12,000 Cash500 Cost of goods Sold7,200 Inventory7,200 Accounting for Merchandise Transactions DescriptionDebitCredit Inventory12,500 Accts. Payable12,500 Accts. Payable12,500 Inventory240 Cash12,260 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit FOR BURTON! July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

86 Accts. Receivable12,500 Sales12,000 Cash500 Cost of goods Sold7,200 Mdse. Inventory7,200 Accounting for Merchandise Transactions DescriptionDebitCredit Cash12,260 Sales Discounts240 Accts. Receivable 12,500 Inventory12,500 Accts. Payable12,500 Accts. Payable12,500 Inventory240 Cash12,260 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit FOR SCULLY: July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

Copyright (c) 2009 Prentice Hall. All rights reserved.87