Chapter 5.  Businesses that sell a product to customers  Inventory ◦ Merchandise held for sale ◦ Asset account Copyright (c) 2009 Prentice Hall. All.

Chapter 5

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

7 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

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

9 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

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

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

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

13 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

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

15 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.

16 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

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

18 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

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

20 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

 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.22

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

25 Post. DateDescriptionRef.DebitCredit 6/3 Inventory115700 Acct. Payable210700 General Journal

 Discount for early payment  Expressed as follows: Other terms: 26Copyright (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

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

29 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

30 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

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 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

32 Post. DateDescriptionRef.DebitCredit 6/15Acct. Payable210700 Cash110679 Inventory 115 21 General Journal

 Purchase return ◦ Merchandise returned by the purchaser to the supplier  Purchase allowance ◦ Seller reduces amount owed ◦ Incentive for purchaser to keep goods 33Copyright (c) 2009 Prentice Hall. All rights reserved.

GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 34 Accounts payable$$$$ Inventory$$$$ Returned damaged goods Reverse of purchase entry Decreases both accounts payable and inventory Copyright (c) 2009. Prentice Hall. All rights reserved.

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

36 Post. DateDescriptionRef.DebitCredit 6/3 Inventory115700 Acct. Payable210700 General Journal

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

38 Post. DateDescriptionRef.DebitCredit 6/4Acct. Payable 210 100 Inventory115100 General Journal Page 2 Recording and Posting an Entry

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

40 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

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 Example: Merchandise was purchased for $700 with credit terms of 3/15, n/30. Payment within 15 days is calculated as: Invoice (700-100)$600 Less 3% discount18 Net cost paid$582

42 Post. DateDescriptionRef.DebitCredit 6/15Acct. Payable210600 Cash110582 Inventory 115 18 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 43 Copyright (c) 2009. Prentice Hall. All rights reserved.

44 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 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.

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

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

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

 Sales revenue ◦ Amount earned from selling inventory ◦ Revenue account  Cost of goods sold ◦ Cost of inventory that has been sold to customers ◦ Expense account 51Copyright (c) 2009 Prentice Hall. All rights reserved.

52 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.

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

54 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

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

56 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

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

58 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 59Copyright (c) 2009 Prentice Hall. All rights reserved.

60 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.

61 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

62 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.

63 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.

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

65 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.

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

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

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

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

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

74 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

75 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.

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

77 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

78 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 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.

81 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.

82 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

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

84 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 July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

85 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 July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

 Businesses take actual count of inventory at least once per year  Actual count of inventory may differ from amount on the books due to: ◦ Theft or Damage – Inventory Shrinkage ◦ Errors 86Copyright (c) 2009 Prentice Hall. All rights reserved. GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cost of goods sold Inventory To adjust for shrinkage

87 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cost of Goods Sold300 Inventory300 Adjustment for shrinkage $40,500 (per books) -40,200 (physical count) $300 (shrinkage)

Multi-stepSingle-step  Lists several important subtotals ◦ Gross profit ◦ Operating income  More popular  Groups all revenue and all expenses together ◦ No subtotals  Works well for service companies Copyright (c) 2009 Prentice Hall. All rights reserved.89

90 Step 1 – Net Sales Revenue Sales Revenue – Sales Discounts – Sales Returns and Allowances Net Sales Revenue

91 Step 2: Gross Profit Net sales -Cost of goods sold Gross profit

92 Step 3: Operating Income  Operating Expenses

93 Step 3: Operating Income Net sales Cost of goods sold Gross profit -Operating expenses Operating income

94 Step 4: Net Income (Loss) + Other revenues - Other expenses

95 Net sales Cost of goods sold Gross profit -Operating expenses Operating income Other revenue and expense Net income (loss)

96 Greg’s Groovy Tunes Income Statement Year Ended December 31, 2011 Sales Revenue $169,300 Less: Sales Ret. & Allowances (2,000) Sales Discounts (1,400) (3,400) Net Sales Revenue $165,900 Cost of Goods Sold (90,800) Gross Profit 75,100 Operating Expenses: Wages expense $10,200 Rent expense 8,400 Insurance expense 1,000 Depreciation expense 600 Supplies expense 500 20,700 Operating Income 54,400 Other revenue and (expenses): Interest expense (1,300) Net Income $53,100

Multi-stepSingle-step  Lists several important subtotals ◦ Gross profit ◦ Operating income  More popular  Groups all revenue and all expenses together ◦ No subtotals  Works well for service companies Copyright (c) 2009 Prentice Hall. All rights reserved.97

98 Net sales Cost of goods sold Expenses Net income (loss)

99 Greg’s Groovy Tunes Income Statement Year Ended December 31, 2011 Sales Revenue $169,300 Less: Sales Ret. & Allowances (2,000) Sales Discounts (1,400) (3,400) Net Sales Revenue $165,900 Operating Expenses: Cost of goods sold $90,800 Wages expense 10,200 Rent expense 8,400 Interest expense 1,300 Insurance expense 1,000 Depreciation expense 600 Supplies expense 500 Total expense (112,800) Net Income $53,100

100  Shows relationship of each item to a base amount on financial statements  Income statement – each item expressed as percentage of net sales  Balance sheet – each item expressed as percentage of total assets

101 Percentages based on total revenues: Cost of goods sold: 2010: 90,000/150,000 = 60% 2011: 90,800/165,900 = 54.7% Wages Expenses: 2010: 7,500/150,000 = 5% 2011: 10,200/165,900 = 6.1%

102 Percentages based on total revenues: Rent Expense: 2010: 8,400/150,000 = 5.6% 2011: 8,400/165,900 = 5.1% Interest Expense: 2010: 1,500/150,000 = 1% 2011: 1,300/165,900 =.8%

103 Percentages based on total revenues: Insurance Expense: 2010: 1,500/150,000 1% 2011: 1,000/165,900 =.6% Depreciation Expense: 2010: 3,000/150,000 = 2% 2011: 1,600/165,900 =.4%

104 Percentages based on total revenues: Supplies Expense: 2010: 600/ 150,000 =.4% 2011: 500/165,900 =.3%

105 Greg’s Groovy tunes Comparative Vertical Analysis Income Statement Years Ended December 31, 2011 and 2010 2011 2010 Net Sales $165,900 100.0% $150,000 100.0% Cogs 90,800 54.7% 90,000 60% Wages Expense 10,200 6.1 7,500 5 Rent Expense 8,400 5.1 8,400 5.6 Interest Expense 1,300.8 1,500 1 Insurance Expense 1,000.6 1,500 1 Depreciation Expense 600.4 3,000 2 Supplies Expense 500.3 600.4 Total Expenses 112,800 68% 112,500 75% Net Income $53,100 32% 37,500 25%

106 Greg’s Groovy Tunes Statement of Owner’s Equity Year Ended December 31, 2011 Amy Toms, Capital, Dec. 31, 2010$25,900 Net Income53,100 Subtotal$88,550 Greg Moore, Withdrawals(54,100) Greg Moore, Capital, Dec. 31, 2011$24,900

107 Assets Current Assets Cash$2,800 Accounts Receivable4,600 Inventory40,200 Prepaid Insurance200 Supplies 100 Total Current Assets $47,900 Furniture$33,200 Accumulated depreciation(3,000)30,200 Total Assets $78.100 Liabilities Current Liabilities Accounts Payable$39,500 Unearned Serv. Revenue700 Wages payable400 Total Current Liabilities $40,600 Long-term Liabilities: Notes payable 12,600 Total Liabilities 53,200 Owner’s Equity Greg Moore, Capital24,900 Total Liabilities & Owner’s Equity$78,100 Greg’s Groovy Tunes Balance Sheet December 31, 2011

110 Carefully watched measure Gross Profit-$75,100 Net Sales- $165,900 45.3% Copyright (c) 2009 Prentice Hall. All rights reserved. Small increase may indicate rise in income Small decrease may indicate trouble

112 Compute the Rate of Inventory turnover assuming that Groovy Tunes had a 12/31/10 Inventory of $38,600 and a $40,200 Inventory on 12/31/11

113 Inventory Turnover: = $90,800 $(38,600+40,200)/2 = 2.3 times Cost of goods sold Average inventory

115 Greg’s Groovy Tunes Income Statement Year Ended December 31, 2011 Sales Revenue $169,300 Less: Sales Ret. & Allowances (2,000) Sales Discounts (1,400) (3,400) Net Sales Revenue $165,900 Cost of Goods Sold (90,800) Gross Profit 75,100 Operating Expenses: Wages expense $10,200 Rent expense 8,400 Insurance expense 1,000 Depreciation expense 600 Supplies expense 500 20,700 Operating Income 54,400 Other revenue and (expenses): Interest expense (1,300) Net Income $53,100

116 1. Close all income statement accounts with credit balances to Income Summary 2. Close all income statement accounts with debit balances to Income Summary 3. Close Income Summary to Capital 4. Close Withdrawals to Capital

117 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Dec31Sales Revenue169,300 Income Summary169,300

119 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Dec31Income Summary116,200 Sales Ret. & Allowances2,000 Sales Discounts 1,400 Cost of goods sold 90,800 Wages Expense 10,200 Rent Expense8,400 Depreciation Expense 600 Insurance Expense1,000 Supplies Expense500 Interest Expense1,300

121 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Dec31Income Summary53,100 Greg Moore, Capital53,100 (169,300 – 116,200)

123 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Dec31Income Summary53,100 Greg Moore, Capital53,100 (169,300 – 116,200) 31Greg Moore Capital54,100 Greg Moore, Withdrawals54,100

Chapter 5.  Businesses that sell a product to customers  Inventory ◦ Merchandise held for sale ◦ Asset account Copyright (c) 2009 Prentice Hall. All.

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Chapter 5.  Businesses that sell a product to customers  Inventory ◦ Merchandise held for sale ◦ Asset account Copyright (c) 2009 Prentice Hall. All.

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Presentation on theme: "Chapter 5.  Businesses that sell a product to customers  Inventory ◦ Merchandise held for sale ◦ Asset account Copyright (c) 2009 Prentice Hall. All."— Presentation transcript:

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