BMGT220 EXAM 2 STUDY GUIDE Chelsea Katz Chapter 5 Accounting for Merchandising Businesses Vocabulary Account form the form of a balance sheet that resembles the basic format of the accounting equation assets on left liabilities SE on right Accounts payable subsidiary ledger the subsidiary ledger containing the individual creditor accounts in alphabetical order Accounts receivable subsidiary ledger the subsidiary ledger containing the individual customer accounts in alphabetical order Administrative expenses general expenses expenses incurred in the administration or general operations of the business ex office salaries depreciation of office equipment and office supplies used Controlling account the account in the general ledger that summarizes the balances of the accounts in a subsidiary ledger Cost of merchandise sold the cost that is reported as an expense when merchandise is sold determined by subtracting the ending merchandise inventory from the cost of merchandise available for sale Credit memorandum credit memo a form used by a seller to inform the buyer of the amount the seller authorizes to credit to the buyer s account receivable Credit period the amount of time the buyer is allowed in which to pay the seller Credit terms terms for payment on account by the buyer to the seller Debit memorandum debit memo a form used by a buyer to inform the seller of the amount the buyer proposes to debit to the account payable due the seller FOB free on board destination freight terms in which the seller pays the freight costs from the shipping point to the buyer s final destination FOB free on board shipping point freight costs from the shipping point to the final destination General ledger the primary ledger when used in conjunction with subsidiary ledgers that contains all of the balance sheet and income statement accounts Gross profit sales minus the cost of merchandise sold Income from operations operating income gross profit less operating expenses which are normally classified as either selling or administrative expenses Inventory shrinkage inventory shortage the amount by which the merchandise for sale as indicated by the balance of the merchandise inventory account is larger than the total amount of merchandise counted during the physical inventory Inventory subsidiary ledger a ledger containing individual accounts with a common characteristic Invoice the bill that the seller sends to the buyer freight terms in which the buyer pays the Merchandise inventory merchandise on hand not sold at the end of an accounting period Multiple step income statement a form of income statement that contains several sections subsections and subtotals Net sales revenue received for merchandise sold to customers less any sales returns and allowances and sales discounts Other expense an expense that cannot be traced directly to the normal operations of the business ex interest expense and losses from disposing of fixed assets Other income revenue from sources other than the primary operating activity of a business ex income from interest rent and gains from result of selling fixed assets Periodic inventory system the inventory system in which the inventory records do not show the amount available for sale or sold during the period Perpetual inventory system the inventory system in which each purchase and sale of merchandise is recorded in an inventory account Physical inventory a detailed listing of merchandise on hand Purchases discounts discounts taken by the buyer for early payment of an invoice Purchases returns and allowances from the buyer s perspective returned merchandise or an adjustment for defective merchandise Ratio of net sales to assets ratio that measures how effectively a company uses it s assets to generate sales computed as net sales divided by average total assets Report form the form of balance sheet presented in a downward sequence with liabilities and SE sections BELOW assets section Sales sales and sales on account Sales discounts buyer for early payment Sales returns and allowances from seller s perspective returned merchandise or an adjustment for defective or damaged merchandise Selling expenses expenses that are incurred directly in the selling of merchandise Single step income statement a form of income statement in which the total of all expenses is deducted in one step from total of all revenues Special journals journals designed to be used for recording similar types of transactions Subsidiary ledger a ledger containing individual accounts with a common characteristic Trade discounts discounts from the list prices in published catalogs or special discounts offered to certain classes of buyers the total amount charged customers for merchandise Sold including cash from the seller s perspective discounts that a seller may offer the CHAPTER 5 NOTES Service business fees earned operating expenses net income Merchandising business sales cost of merch Sold gross profit Gross profit operating expenses net income merchandise inventory merchandise not sold is reported as a current asset on bal sheet sum of balances of accounts in subsidiary ledger MUST balance of related controlling account accounts receivable subsidiary ledger AKA customers ledger accounts payable subsidiary ledger AKA creditors ledger inventory subsidiary ledger AKA inventory ledger perpetual inventory system is most commonly used n 30 means due in 30 days n eom means due at the end of the month 2 10 n 30 means a 2 discount if paid within 10 days or fully within 30 for sales discounts debit merchandise inventory for amount then credit merchandise inventory for amount of discount credit merchandise inventory for recorded return seller debits sales returns allowances for amt of return if a buyer pays for merchandise a seller has 2 options 1 issue credit that s applied against buyer s other receivables 2 issue a cash refund Multi step income statement multiple types of revenues expenses Revenue from sales sales sales returns allowances sales discounts net sales Cost of merchandise sold cost of goods sold cost of sales cost of merchandise sold to customers Gross profit excess of net sales over cost of merchandise sold Income from operations income from operations selling expenses administrative expenses Other income expenses Single step income statement total of all expenses from total of all revenues in one step TR TE net income gross profit and operating income NOT reported ratio of net sales to assets
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