Principles of Accounting Asst.Prof.Dr. Panchat Akarak p.thipnew1@hotmail.com School of Accounting Chiang Rai Rajabhat University Accounting I

Merchandising Company 1. Sales revenues 2. Cost of Goods sold

Sales revenues 1. Sales revenues Recording Gross Sales Trade discounts Cash discounts Sales returns and Allowances

Cost of Goods sold 2.Cost of Goods sold Two Procedures for Accounting for Inventories Periodic Inventory System Perpetual Inventory System Purchases of Merchandise Deduction From Purchases Purchase Discounts Purchase Returns and Allowances Transportation Cost Inventories

Sales revenues Recording Gross Sales Dr. Cash xx Cr. Sales revenues xx Or Dr. Accounts Receivable xx Cr. Sales revenues xx

Discounts Sale discounts two type as: 1. Trade discounts: as 5% 10% 20% Trade discounts are deductions from the list or catalog price of merchandise to arrive at gross invoice price. Trade discounts may be shown on the seller’s invoice, but they are not recorded in the buyer or seller’s books.

Discounts Sale discounts two type as: 1. Trade discounts: as 5%, 10%, 20%, 5%&10% Trade discounts are used to reduce the cost of catalog publications because separate discount lists can be distributed at less cost than reprinting a catalog. Trade discounts facilitate the quotation of different prices to different types of customers, such as retailers and wholesalers.

Discounts Sale discounts two type as: 2. Cash Discounts or Sale Discounts such as: 2/10, n/30 2/E.O.M., n/60 The terms of the cash discount vary between industries but all cash discounts are offered as an incentive for early payment and are a deduction from the gross invoice price to arrive at actual cost of the purchase.

Discounts Sale discounts two type as: 2. Cash Discounts or Sale Discounts To the seller, a cash discount is a sales discount. To the buyer, a cash discount is a purchase discount.

Discounts Sale discounts two type as: 2. Cash Discounts or Sale Discounts Cash discount terms of 2/10, n/30 Cash discount mean that a discount of 2 Percent of the gross invoice price of the merchandise may be taken of payment is made within ten days following the invoice date, Otherwise, the gross invoice price is due 30 days from the invoice date.

Discounts Sale discounts two type as: 2. Cash Discounts or Sale Discounts Cash Discounts 2/E.O.M., n/60 mean a 2 percent discount may be deducted if the invoice is paid by the end of the month. The gross invoice a mount is due 60 days from the date of the invoice.

Discounts Sale discounts two type as: 2. Cash Discounts or Sale Discounts cash discount 2/10/E.O.M., n/60 mean a 2 percent discount may be deducted if the invoice is paid by the 10th of the month following the date of sale. The gross invoice a mount is due 60 days from the date of the invoice.

Discounts Sale discounts two type as: 2. Cash Discounts or Sale Discounts The sales Discount account is a contra revenue account to sales and is shown as a deduction from gross sales in the income statement.

Sales returns and Allowances Merchandise returned by the buyer is recorded in a Sales Returns and Allowances account which is a contra revenue account to Sales. Dr. Sales Return and Allowances xx Cr. Cash xx Or Dr. Sales Return and Allowances xx Cr. Accounts Receivable xx

Merchandising Company Cost of Goods Sold Cost of goods sold indicates the cost to the seller of the goods sold to the byer of the merchandise, This is a section of the classified income statement. Merchandise inventory is the quantity of goods on hand and available for sale at any given time.

Merchandising Company Cost of Goods Sold Cost of goods sold is determined by computing the cost of beginning inventory plus the cost of goods purchased less the ending inventory

Merchandising Company Purchases of Merchandise Two procedures for accounting for inventories The Perpetual Inventory procedure and Periodic inventory procedure for accounting for inventory.

Merchandising Company Purchases of Merchandise: Periodic inventory Dr. Purchase account xx Cr. Cash xx payment is made Or Cr. Accounts Payable xx Payment will be made later

Merchandising Company Purchases of Merchandise The Purchases account is shown income Statement debit column of the work sheet and as part of the Cost of Goods Sold section of the classified income statement.

Merchandising Company Deduction from Purchases Deductions from purchases to arrive at net purchases include purchase discounts and purchase returns and allowance which are recorded in contra accounts to the Purchases account. Dr. Cash/Accounts Payable xx Cr. Purchase returns and allowance xx

Merchandising Company Purchase Discounts The byer may be able to take a purchase discount on the merchandise bought of the credit terms specify that a discount can deducted if the invoice is paid within a stated time period.

Merchandising Company Purchase Discounts The purchase Discount account is a contra account to Purchases which reduced the recorded gross invoice cost of the purchase to price actually paid The entry to record purchase discounts is to debit Accounts Payable and to credit Cash and Purchase Discounts

Merchandising Company Purchase Returns and Allowances The Purchase Return and Allowance account is a contra account to the Purchase account and is shown on the Income Statement as a deduction from Purchase The Purchase Returns and Allowance account normally has a credit balance

Merchandising Company Transportation Costs The term f.o.b. shipping point means free on board at shipping point and the buyer incurs all transportation costs after the merchandise is loaded at the point of shipment.

Merchandising Company Transportation Costs The term f.o.b. destination means the seller bears the transportation charges and the goods are shipped to their destination without the buyer paying the delivery charge.

Merchandising Company Transportation Costs Passage of title is a legal term used to indicate transfer of legal ownership of goods. The term freight prepaid is used when the seller pays the freight at the time of shipment. The term freight collect is used then the buyer pays the freight bill upon arrival of the goods.

Merchandising Company Transportation Costs Dr. Transportation-in XX Cr. Cash XX Dr. Transportation-out XX

Cost of Goods Sold The Relationship between the items used in determining cost of goods sold is as follows: Beginning + Net cost of = Cost of Goods Inventory Purchase available for Sale Cost of goods - Ending = Cost of goods available for sale Inventory sale

Relationships in the Income Statement Summarized Net sales = Gross sales-Sales returns and allowance - Sales discounts. Net purchases = Purchases + Transportation-in – Purchase returns and allowances - Purchase discounts Cost of goods sold = Beginning inventory + Net cost of purchases - Ending inventory.

Relationships in the Income Statement Summarized (Cont.) 4. Gross margin = Net sales - Cost of goods sold. 5. Net income from operations = Gross margin- Operating (Selling and Administrative) Expense. 6. Net Income = Net income from operations + Nonoperating revenues – Non-operation expenses.

Vocabulary Sales Revenues Gross Sales Net Sales Trade Discount Cash Discount Sale Discount Sale Returns and Allowances Inventories Purchases of Merchandise Purchases Returns and Allowances Purchases Discount

Vocabulary Cost of Goods Sold Transportation Costs Transportation-In Transportation-Out Beginning Inventory Net cost of purchases Cost of goods available for sale Ending Inventory

Vocabulary Operating Expense Gross margin Gross Profit Other revenues Other expense Selling expense Administrative expense

Exercise The following condensed trial balance was taken from the ledger of the Sun shop at the end of its annual accounting period: The sun shop Trial Balance December 31, 2015

Cash 1,440 Inventory (Merchandise Inventory) 6,400 Land Property and Equipment 9,600 Notes Payable 3,520 Sun Capital 12,960 Sun Drawing 4,800 Sales 41,840 Sales Returns and Allowances 400 Purchases 24,000 Purchases Returns and Allowances 480 Transportation-In 160 Selling Expenses 8,000 Administrative Expenses 4,000 Total = 58,800

Exercise (Cont.) Required: 1. copy the trial balance onto a work sheet from and complete the work sheet under the assumptions that there are no adjustments. The ending inventory is $7,200. 2. Prepare compound closing entries from the work sheet. 3. Prepare Income Statement Answer Cost of goods Sole = 22,880 Net Income = 6,560

Cash 1,440 Inventory 6,400 Land Property and Equipment 9,600 Notes Payable 3,520 Sun Capital 12,960 Sun Drawing 4,800 Sales 41,840 Sales Returns and Allowances 400 Purchases 24,000 Purchases Returns and Allowances 480 Transportation-In 160 Selling Expenses 8,000 Administrative Expenses 4,000 Total = 58,800 58,800

Account Name Trial Balance Income Statement Financial Position Dr. Cr. Cash 1,440 Inventory 6,400 7,200 Land Property &Equipment 9,600 Notes Payable 3,520 Sun Capital 12,960 Sun Drawing 4,800 Sales 41,840 Sales Returns 400 Purchases 24,000 Purchases Returns 480 Transportation-In 160 Selling Expenses 8,000 Administrative Expenses 4,000 Total = 58,800 58,800 42,960 49,520 23,040 16,480 Net Income 6,560

The sun shop Income Statement For year end December 31, 2015 Sale 41,840 Less Sale Returns 400 Net Sale 41,080 Cost of Good Sold.- Inventory Beginning 6,400 Added Purchases 24,000 Transportation-In 160 total 24,160 Less Purchases returns 480 23,680 Cost of goods available for sale 30,080 Less Inventory ending 7,200 22,880 Gross margin 18,200

The sun shop Income Statement For year end December 31, 2015 Sale 41,840 Less Sale Returns 400 Net Sale 41,440 Cost of goods sold 22,880 Gross margin 18,560 Operating Expense.- Selling Expense 8,000 Administrative Expense 4,000 12,000 Net Income 6,560

Closing Entry 2015 Dec.31 Dr. Inventory Ending 7,200 Sale 41,840 Purchase Returns & Allowance 480 Income Summary 49,520 To close credit account balance

Closing Entry 2015 Dec.31 Dr. Income Summary 42,960 Cr. Inventory Beginning 6,400 Sales Returns &Allowance 400 Purchases 24,000 Transportation-In 160 Selling Expense 8,000 Administrative Expenses 4,000 To close debit account balance

Closing Entry 2015 Dec.31 Dr. Income Summary 6,560 Cr. Sum Capital 6,560 To close Income Summary to Capital account

Closing Entry 2015 Dec.31 Dr. Sun Capital 6,560 Cr. Sun Drawing 6,560 To close Drawing to Capital

Accounting Cycle 1 Adjusting Journal Entries Post Entries to Ledger Accounts Prepare Unadjusted Trial Balance Adjusting Journal Entries Prepare Adjusted Trial Balance 1 Record Journal Entries Prepare Financial Statement Record Reversing Entries/ Opening Entries Prepare Post. Closing Trial Balance Record Closing Entries

Step of booking Step 1 Recorded 1. General Journal Step 2 Posting 2. Ledger/ GL Step 3 Balance Accounts 3. Trial Balance Step 4 Recorded Adjusted 4. General Journal Step 5 Prepare worksheet 5. Working Paper Step 6 Prepare F/S 6. Financial Statement Step 7 Prepare Closing 7. General Journal Step 8 Recorded Opening/ 8. General Journal Reversing entries

The Accounting Cycle Summarized The Work Sheet 10 Columns The Trial Balance Columns The Adjustments Columns The Adjusted Trial Balance Columns The Income Statement Columns The Financial Position Statement Columns

The Accounting Cycle Summarized Preparing Financial Statements from the work sheet (or Working paper) Income Statement Financial Position Statement

The Accounting Cycle Summarized Journalizing Adjusting Entries the Closing Process Closing the Revenue Account(s) Closing the Expense Account(s) Closing the Profit and Loss Summary Account Closing the Owner’s Drawing Account Closing Process Summarized Post-Closing Trial Balance

Financial Statement Financial Position Statement -Liabilities -Assets -Liabilities -Owner’s Equity

Financial Position Statement Assets Liabilities & Equity Current Assets Current Liabilities Cash Xx Bank overdraft xx Accounts Receivable Accounts Payable Inventory Short term loan Note Receivable Note Payable Supplies other Liabilities Noncurrent Assets Noncurrent Liabilities Land Loan Building-net Owner’s Equity Equipment-net Capital-John Total Assets Total Liabilities & Equity

The classified Financial Position Statement Current Assets such as; -Cash and Cash Equivalent -Accounts Receivable, -Inventory -Note Receivable, -Prepaid Expenses -Accrued Revenue -Supplies on hand

The classified Financial Position Statement Noncurrent Assets such as; -Long term Investment -Land -Buildings -Machinery -Equipment -Accumulated Depreciation

The classified Financial Position Statement Current Liabilities such as; -Bank Overdraft -Accounts Payable, -Note Payable, -Accrued Expenses -Deferred Revenue -Shot term loan -Shot term other liabilities

The classified Financial Position Statement Noncurrent Liabilities such as; -Long term Loan -Note Payable-long term -Bond

Financial Statement Income Statement:- -Revenues -Expenses -Profit/Loss

Income Statement Expenses Revenues Cost of goods sold** Xx Sale revenues xx Salaries Other revenues Rent expense Selling expense Advertising Expenses Transportation-Out Depreciation Expense Utilities Expenses Bad debt Net Income Total

Cost of Good Sold** Cost of Good Sold.- Inventory Beginning xx Added Purchases-net Purchase Xx Transportation-In total Less Purchases returns Purchases discount Cost of goods available for sale Less Inventory ending Cost of Goods Sold

Thank you for your Attention Q & A The End Thank you for your Attention Q & A