ĐH MỞ BÀI GIẢNG Accounting for Trading Business TRƯỜNG ĐẠI HỌC MỞ BÀI GIẢNG GIÁO TRÌNH

10/10/2020 Chapter Accounting for Trading Business Vũ Quốc Thông (PhD.) Objectives  Distinguish the activities of a service business from those of a trading business  Journalise the entries for trading transactions  Prepare a profit and loss statement for a trading business 10/10/2020 Contents Nature of Trading Businesses Accounting for Purchases Accounting for Sales Trade Discounts Transportation Costs Profit and loss statement for a trading business Nature of Trading Businesses  Would you please tell me three most common type of businesses? Manufacturing Trading Services 10/10/2020 Nature of Trading Businesses  Which type of business has the most complex accounting system? Why? Manufacturing Nature of Trading Businesses Service Business Fees Trading Business X Sales X Expenses (X) COGS (X) Net Profit X Gross Profit X Operate Expenses (X) Net Profit X COGS in a manufacturing business: Material, Labour and Overhead 10/10/2020 Nature of Trading Businesses COGS Purchase Goods Re-sale Goods on hand at the end of the month or the year (Inventory) Accounting for Purchases Perpetual Inventory System Periodic Inventory System Purchase Purchases discounts Purchases Returns and Allowances 10/10/2020 Accounting for Purchases Perpetual Inventory System Each purchase and sale of goods is recorded in an Inventory Account The amount of goods available for sale and the amount sold are continuously (perpetually) shown in the inventory records Closing Balance Purchase - Sale = Opening Balance + Accounting for Purchases Periodic Inventory System Inventory is accounted for at the end of the period COGS = Opening Balance + Purchase – Closing Balance Stocktaking 10 10/10/2020 Accounting for Purchases Purchase  Could be made: - By Cash - On Credit - By Mixture (Cash + Credit) 11 Accounting for Purchases  Purchase by Cash  Debit Purchases  Credit Cash  Purchase on Credit  Debit Purchase  Credit Account Payable  Purchase on Mixture  Debit Purchase  12  Credit Cash Credit Account Payable E.g.? 10/10/2020 Accounting for Purchases  Purchase discounts: reduced amount when making early payment  Credit terms: Terms for when payments for goods are to be made  Not allowed an amount of time to pay: Cash or Net Cash  Allowed an amount of time to pay: Credit  Credit period: Amount of time allowed before a payment is required (begin with the date of the sale as shown on the invoice) (30 days, 45 days, 90 days, etc) 13 Accounting for Purchases Credit terms: Cash or Credit Could be express: n/30 n/eom 2/10 Could use more than term together 2/10, n/30 14 E.g.? 10/10/2020 Accounting for Purchases Purchases discounts Purchase good (assume on credit) Debit Purchase Credit Account Payable When making early payment (enjoy purchases discounts) Debit Account Payable Credit Cash/Bank Account Credit Purchases Discounts Note: These discounts reduce the cost of the goods purchased E.g.? 15 Accounting for Purchases Purchases Returns and Allowances Debit Account Payable Credit Purchases Returns and Allowances  When goods are returned or price is adjusted, buyer usually sends the seller a letter – called debit note or debit memorandum 16 10/10/2020 Accounting for Sales Sales Sales Discounts Sales Returns and Allowances Goods and Services Tax Trade Discounts 17 Accounting for Sales Sales:  Could be made: - By Cash - On Account - By Mixture (Cash + Credit) 18 10/10/2020 Accounting for Sales  Sales by Cash  Debit Cash  Credit Sales/Sales Revenue  Sales on Account  Debit Account Receivable  Credit Sales/Sales Revenue  Sales on Mixture  Debit Account Receivable  Debit Cash 19  E.g.? Credit Sales/Sales Revenue Accounting for Sales  Sales made with the use of credit cards? (Master cards, VISA, etc)  Will create a receivable with the card companies These companies will charge a service fee 20 Sales on credit cards: Debit Account Receivable (card company) Credit Sales Receive money from card company: Debit Cash E.g.? Debit Credit Card Expenses Credit Account Receivable (card company) 10 10/10/2020 Accounting for Sales Sales Discounts Seller may offer the buyer credit terms that include a discount for early payment In theory, discount for early payment will reduce Sales/Sales Revenues (Debit it!!!) However, managers may want to know the amount of sales discount for the period  Open Sales Discounts Account (Contra Sales Account) 21 Accounting for Sales Sales Discount Debit Cash Debit Sales Discounts Credit Account Receivable 22 11 10/10/2020 Accounting for Sales Sales Returns and Allowances Goods sold be returned to seller (sales return) The seller may reduce the initial price because of defects (sales allowance) The seller usually issues the buyer a credit note or credit memorandum This will reduce sales However, manager may want to know the amount of returns and allowances for a month or a year  open contra sales accounts 23 Accounting for Sales Goods and Services Tax (GST) In some countries, this type of tax could be also known under the name Value Added Tax (VAT) Businesses are authorised to charge and collect GST (or VAT) on behalf of the Controller of GST (Tax Authority) 24 12 10/10/2020 Accounting for Sales Goods and Services Tax (GST) In some countries, this type of tax could be also known under the name Value Added Tax (VAT) GST Payable (When sale is made) GST Receivable (When purchase is made) At the end of each quarter, business pays the net amount of tax (GST Payable – GST Receivable) E.g.? 25 Trade Discount  Businesses may offer special discounts for large quantities It is called Trade discount 26 13 10/10/2020 Trade Discounts  Sellers and buyers not normally record the list prices of goods and the related trade discounts in their accounts  In order words, the recorded amount is already reflected the trade discount E.g.? 27 Transportation Costs  Sale is determined when ownership (title) of the good passes to the buyer  This point determines which party (buyer or seller) must pay the transportation costs 28 14 10/10/2020 Transportation Costs Buyer Pays Shipping Point FOB (Free On Board) Destination Seller Pays 29 Transportation Costs  FOB Shipping point Debit Transportation In Credit Cash Buyer  FOB Destination Debit Transportation Out Credit Cash Seller E.g.? 30 15 10/10/2020 Profit and loss statement for a trading business Revenue from Sales X Cost of Goods Sold (X) Gross Profit X Other Revenue X Operating Expenses Net Profit (X) X 31 Homework for Ch.5  Illustrative Problem (p 207)  Matching (p 208 - 209)  Multiple choice (p 209) 32 16