BMGT220 Chelsea Katz Chapter 5 Notes Accounting for Merchandising Businesses Revenue activities of a service business providing service to customers revenue reported on income statement as fees earned Revenue activities of a merchandising business buying and selling merchandise Merchandise business first purchases merchandise to sell to customers When merchandise is sold revenue reported as sales cost recognized as an expense this expense cost of merchandise sold cost of merchandise sold subtract end merchandise inventory from cost of merchandise available for sale arrive gross profit BEFORE deducting operating expenses gross profit sales cost of merchandise sold merchandise inventory merchandise on hand NOT SOLD end of accounting period reported as current assent on balance sheet sales activitity collection accounts receivable collection activity purchasing activity CASH Operations of merchandising business purchase of merchandise for sale purchasing sale of product to customers sales receipt of cash from customers collection ALL OF IS KNOWN AS THE OPERATING CYCLE operating cycle begins with spending cash and ends with receiving cash from customers a business with a longer operating cycle higher profit margins ex Jewelry Store vs Grocery Store accounting system should be designed to provide information on amounts due from customers acct receivable and amounts owed to creditors accounts payable separate account for each customer creditor could be added to ledger too big at one point though subsidiary ledger characteristic general ledger primary ledger when used in conjunction with subsidiary ledgers that contains all of balance sheet and income statement accounts controlling account account in general ledger that summarizes balances of the accounts in a subsidiary ledger ledger containing individual accounts with a common sum of balances of accounts in subsidiary ledger MUST equal balance of related controlling account account receivable subsidiary ledger customer ledger lists individual customer accounts in alphabetical order Controlling account acct receivable Account payable subsidiary ledger creditor ledger lists individual creditor accounts in alphabetical order Controlling account account payable Inventory subsidiary ledger inventory ledger lists individual inventory by item bar code controlling account inventory Inventory subsidiary ledger is used in perpetual inventory system Special journals computerized accounting systems that record similar transactions in separate journals which generate purchase sales and inventory reports 2 systems for merchandise transaction accounting perpetual inventory system each purchase and sales of merchandise is recorded in inventory account and related to subsidiary ledger Amount of merchandise available for sale and amount sold is continuously perpetually updates in inventory records Periodic inventory system merchandise available for sale and amount sold Lists inventory on hand physical inventory prepared at END of accounting period inventory does NOT show amount of Physical inventory used to determine cost of merchandise on hand and end of period and determine cost of merchandise sold during period invoice bill a seller sends to buyer credit terms terms for when payments for merchandise are to be made if payment is required on delivery terms CASH or NET CASH credit period allowed amount of time buyer has to pay seller if payment due in stated 30 days net 30 days n 30 2 if payment due at end of month n eom Purchase discount discounts taken by buyer for early payment of an purchase discount 2 discount if buyer pays within 10 days 2 10 or n 30 if it s due in 30 days and buyer does NOT take discount invoice returned defective purchases allowed for merchandise that s damaged or buyer requests an allowance for merchandise that s Purchases return Price allowance IN BOTH CASES OF purchase return buyers send seller debit memo randum to notify seller of reasons for return or request price reduction debit memorandum aka debit memo informs seller of amount buyer proposes to DEBIT account payable due the seller Also states reason of request sales discounts revenue sales account debited cash sales CONTRA business sells merchandise for cash offset buyer offers discount for early payment reduce sales sales on account receivable credit sales business sells merchandise on account debit acct FOB free on board shipping point point final destination buyer pays freight costs from shipping FOB free on board destination point buyer s final destination seller pays freight costs from shipping you CAN prepay freight net sales incurred directly in selling of merchandise ex sales subtract operating expenses from gross profit cost of merchandise sold to customers total sales sales return discount allowances excess of net sales merchandise sold sales tax liability trade discounts wholesalers sell merchandise to other companies vs public and give discounted price bulk product ex beauty supply stores gross profit income from operations cost of merchandise sold selling expenses salaries store supply used depreciation of store equipment delivery expense and advertising administrative expenses general expenses general administrative operations of business ex office salaries depreciation of office equipment and office supplies used other income of a business ex income from interest rent other expenses operations of business ex interest expense OTHER INCOME AND OTHER EXPENSES OFFSET EACH OTHER ON INCOME STATEMENT Single from total of all revenue emphasizes TR TE net income Inventory shrinkage accounting period less than balance of merchandise inventory assets to generate sales Net sales average total assets expenses that cannot be traced directly to normal shortage physical inventory on hand end of go in purchases account not merchandise step income statement deducts total of all expenses in ONE step incurred in revenue from sources other than primary operating activity measures how effectively business is using it s Ratio of net sales to assets Purchases
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