Ch05 lecture notes students

CHAPTER 5: ACCOUNTING FOR MERCHANDISING OPERATIONS truongthihanhdung@uel.edu.vn 096.672.4386 Merchandising Operations Merchandising Companies Buy and Sell Goods Retailer Wholesaler Consumer The primary source of revenues is referred to as sales revenue or sales LO Merchandising Operations Income Measurement Sales Revenue Less Cost of Goods Sold Not used in a Service business Equals Gross Profit Cost of goods sold is the total cost of merchandise sold during the period Illustration 5-1 Income measurement process for a merchandising company Less Operating Expenses Equals Net Income (Loss) LO Operating Cycles The operating Illustration 5-2 cycle of a merchandising company ordinarily is longer than that of a service company Illustration 5-3 LO Flow of Costs Illustration 5-4 Companies use either a perpetual inventory system or a periodic inventory system to account for inventory LO Learning objectives Documents used in sales cycle and purchasing cycle Accounting treatment for merchandising operations under Perpetual inventory system and Periodic inventory system Agenda Documents used Accounting treatment SALES CYCLE PURCHASING CYCLE 7 PART I: Sales cycle Operating Depts involved in Sales cycle Sales Credit control Distribution (dispatch and receiving) Stores Production control Purchasing Accounting Documents used in Sales Transactions Customer Sales Order Internal Sales Order Credit Approval (Phê duyệt tín dụng) Purchase Order/Production Order Dispatch Advice/ Delivery Docket/Shipping Advices Cartage Manifest/ Cargo List (List of contents of a shipment) Bill of Lading Invoice Credit/ Debit Note (memorandum) 10 Some typical Credit terms  n/10 EOM:  n/30:  2/10, n/60:  2/15, n/30 ROG: 29 Ownership and Transportation Costs – FOB term  Incoterm 2010: - FOB (name port of shipment) – sea and inland waterway transport  North America: - FOB shipping point - FOB destination 30 Ownership and Transportation Costs – FOB term 31 Ownership and Transportation Costs – FOB term Buyer Seller FOB shipping point (buyer pays) Terms FOB shipping point FOB destination Merchandise FOB destination (seller pays) Ownership transfers to buyer when goods are passed to Transportation costs paid by Carrier Buyer Buyer Seller 32 ACCOUNTING TREATMENT PERPETUAL SYSTEM    Updates accounting records for Merchadising transactions during the period, esp for Inventory Available for Sale and Inventory Sold Records COGS immediately Used for merchandise with high unit values PERIODIC SYSTEM    Updates Inventory and determines COGS only at the end of the accounting period During the period, Inventory account remains unchanged Used for merchandise with low unit values 33 PERPETUAL SYSTEM  Maintain detailed records of the cost of each inventory purchase and sale  Records continuously show inventory that should be on hand for every item  Company determines cost of goods sold each time a sale occurs LO PERIODIC SYSTEM  Do not keep detailed records of the goods on hand  Cost of goods sold determined by count at the end of the accounting period  Calculation of Cost of Goods Sold: Beginning inventory Add: Purchases, net Goods available for sale Less: Ending inventory Cost of goods sold € 100,000 800,000 900,000 125,000 € 775,000 LO ADVANTAGES OF THE PERPETUAL SYSTEM  Traditionally used for merchandise with high unit values  Shows the quantity and cost of the inventory that should be on hand at any time  Provides better control over inventories than a periodic system LO ACCOUNTING TREATMENT – PERPETUAL SYSTEM PURCHASER SUPPLIER  Sales  Purchases  Due date – No discounts  Due date – No discounts  Due date – With purchases discounts  Due date – with Sales discounts 37 ACCOUNTING TREATMENT – PERPETUAL SYSTEM PURCHASER  Purchases returns and allowances SUPPLIER  Sales returns: In case defective Goods:  Sales Allowances only: 38 ACCOUNTING TREATMENT – PERPETUAL SYSTEM SUPPLIER PURCHASER  Freight cost on purchases (FOB shipping point)  Freight cost on sales (FOB destination) 39 ACCOUNTING TREATMENT – PERPETUAL SYSTEM Adjusting entries: Closing entries: 40 ACCOUNTING TREATMENT – PERIODIC SYSTEM PURCHASER SUPPLIER  Purchases:  Sales:  Purchases discounts (in discount period):  Sales discounts: 41 ACCOUNTING TREATMENT – PERIODIC SYSTEM PURCHASER   Purchases returns and allowances Freight cost on purchases (FOB shipping point) SUPPLIER  Sales returns:  Sales allowances:  Freight cost on sales (FOB destination) 42 ACCOUNTING TREATMENT – PERIODIC SYSTEM Adjusting entries: Closing entries: 43 ... 27,000 27,000  16 Debit Notes (Memos/ Memorandum) Invoices and debit/credit notes are closed friends, always side by side! 17 Debit Notes (Memos/ Memorandum) Who issue Debit notes?  BUYER/PURCHASER... AP/Dr AP) 19 Credit Notes (Memos/ Memorandum) Invoices and debit/credit notes are closed friends, always side by side! 20 Credit Notes (Memos/ Memorandum) Who issue Credit notes?  SELLER/SUPPLIER... for issuing Debit notes: ‐ Buyer wants a return of goods; ‐ he has been overcharged by the supplier; or ‐ he wants a settlement for damaged goods sent by the supplier  18 Debit Notes (Memos/ Memorandum)