recognize the differences in between a service enterprise and a merchandising company. Define the recording of purchase under a perpetual inventory system. Explain the recording of sales revenues under a perpetual inventory system. Distinguish in between a single-step and a multiple-step income statement. Determine the price of items sold under a regular inventory system. Explain the factors affecting the profitability. (Appendix) describe the recording of purchases and also sales of list under a routine inventory system.

Chapter overview

Study objective 1 - identify the Differences in between a service Enterprise and also a Merchandising Company

In a merchandising company, the primary source of profits is the sale of merchandise, described as sales revenue or sales. Unlike expenses for a organization company, costs for a merchandising company are split into two categories: cost of goods sold - the full cost of merchandise sold during the period. Operating prices - selling and administrative expenses.

Examples of organization companies include: flower shops, hair salons, banks, service stations, funeral homes, etc. The yellow pages that the phone publication can be a an excellent resource.

The operating cycle that a merchandising agency ordinarily is much longer than the of a company company.

You are watching: Two categories of expenses for merchandising companies are

The purchase of goods inventory and also its ultimate sale lengthen the cycle.

Steps in the operation cycles because that a service agency and a merchandising company:

Service agency

Merchandising agency

Perform Services

Buy inventory (Cash or julianum.net Payable)

Bill customers (julianum.net Receivable)

Sell inventory

Collect Cash from account Receivable

Bill customers (julianum.net Receivable)

Collect Cash from julianum.net Receivable

Merchandising service providers use one of two solution to account for inventory

Perpetual –

detailed records the the expense of every inventory purchase and sale are maintained and the documents continuously present the inventory that should be on hand because that every item. For control purposes, companies take a physics inventory counting to verify the accuracy that the inventory records.

Periodic –

in-depth records of the goods on hand are not preserved throughout the period. A physical inventory is taken in ~ the finish of the accounting periods come determine expense of items on hand and also cost of items sold.

Even with sophisticated computer systems, scanners, and also software, no all service providers use a perpetual mechanism to keep up with inventory costs. Many companies will use a perpetual device to store up through inventory quantities and a periodic system to keep up with costs.

Study target 2 -Explain the recording of to buy under a Perpetual Inventory system

The purchase of merchandise because that resale is generally recorded through the merchandiser when the goods are got from the seller.

Every purchase have to be supported by business documents that carry out written proof of the transaction. Every cash purchase should be sustained by a canceled inspect or a cash register receipt indicating the items purchased and also the amounts paid. Each credit purchase have to be supported by a purchase invoice, which indicates the complete purchase price and also other appropriate information. Cash purchase are videotaped by rise in merchandise Inventory and a decrease in Cash. Credit purchases are tape-recorded by an increase in Merchandise inventory and boost in julianum.net Payable. For example, the entry to record the might 4 purchase merchandise inventory by Sauk native PW Audio, 2/10, n/30 (as presented in the text) is:

May 4 ........Merchandise Inventory.......... 3,800 .........................julianum.net Payable..........................3,800


products that are damaged, defective, or of worse quality might be returned to the seller for credit if the sale to be made on credit, or because that a cash refund if the acquisition was because that cash. The transaction explained is a purchase return and also is videotaped by decreasing julianum.net Payable and also decreasing Merchandise Inventory. The purchaser may pick to keep the items that space damaged, defective, or of inferior quality detailed the seller will provide a discount described as a purchase allowance. Freight costs space the expense of moving the goods to the buyer"s place of business. If the freight costs are to by payment by the buyer, the costs are considered part of the price of to buy inventory. In this instance, Merchandise Inventory is increased and also Cash is decreased. For example, if upon shipment of products on may 9, Sauk stereotype (the buyer pays Haul-It Freight company $150 for freight charges, the entry on Sauk’s books is:

May 9 ........Merchandise inventory .......150 ................................ Cash ...................................150 (To record payment the freight on goods purchased)

Freight costs occurs by the seller on outgoing merchandise space an operating cost to the seller and also labeled freight-out. Freight-out is videotaped by raising Freight-out and decreasing Cash. For example, if the freight terms call for that the seller salary $150 freight charges, the entry would be:

Freight-out................ 150

*
..........Cash ........................150 (To record payment of freight on items sold)

The credit regards to a acquisition on account may enable the the person who lives to claim a discount if payment is made within a certain time. A common credit hatchet is 2/10, n/30 which means a 2 percent purchase discount may be bring away if the invoice is paid within 10 job of the invoice date. Network amount that the invoice is due in ~ 30 days. Once payment is made within the discount period, the quantity of Merchandise inventory decreases. The entry to document a payment would call for the purchaser to decrease julianum.net Payable, decrease Cash, and also decrease merchandise Inventory. For example, assume Sauk stereotype pays the balance early of $3,500 on might 14, the critical day of the discount period, and also takes the $70 discount. The credit transaction term is 2/10, n/30.

May 14 ....julianum.net Payable 3,500 ...............................................Cash ...................3,430 ...............................................Merchandise Inv. .....70

If Sauk stereotype failed to take it the discount and also instead made full payment that $3,500 on June 3, Sauk would certainly debit julianum.net Payable and also credit Cash for $3,500.

June 3 ......julianum.net Payable 3,500 ................................................ Cash ................3,500

Not all purchases constitute purchase of goods Inventory. Rather, a purchase of a cash it is registered to be offered in a clothing organization would not be a purchase of merchandise because that resale. However, if Dixie Cash register purchased a cash it is registered for resale the transaction would certainly be thought about a acquisition of merchandise Inventory.

Examples of purchases on account that would not be considered merchandise inventory and the proper bookkeeping treatment because that each.

Item purchased

Accounting treatment

Supplies

Record as a current asset. Do an ad justing entry on the last day that the accounting period to record supplies expense for the amount that was used throughout the accounting period.

Buildings, Equipment,

Furniture, Computers, Autos right now used in company operations

Record together property, plant, and equipment. Document depreciation expense.

Land

Record together a property, plant, and equipment. No depreciation is recorded.

Assets got for future use

Record as irreversible investments.

Study objective 3 -Explain the record of Sales profits under a Perpetual Inventory system

Sales revenues are videotaped when products are transferred from the seller to the buyer. This exercise is in accordance with the revenue recognition principle. Sales might be do on credit transaction or because that cash. Every sales transaction have to be sustained by a business document that provides written evidence of the sale. Cash register tapes carry out evidence of cash sales. A sales invoice gives written proof of a credit transaction sale. Cash sales are tape-recorded by raising Cash and increasing Sales. Credit sales are recorded by enhancing julianum.net Receivable and increasing Sales.

For example, the newspaper entry to document the may 4 PW Audio Supply revenue to Sauk stereo is (the merchandise price to PW is $2,400), state 2/10, n/30:

May 4 .......julianum.net unification .....3,800 .................................................Sales..........................3,800

.................Cost of items Sold .........2,400 ...................................... Merchandise.Inventory.........2,400

Sales Returns and Allowances, a contra revenue account come Sales, might be supplied to document credit for reverted goods. 2 entries are forced to record the credit for Sales Returns and also Allowances. The very first entry is rise in Sales Returns and also Allowances and also a diminish in account Receivable. The 2nd entry is rise in Merchandise perform and a decrease in Cost of products Sold. Because that example, the entrance by PW Audio to document a return on might 8 because that which the marketing price was $300 and the merchandise expense to PW was $140 is:

May 8 .......Sales Returns and Allowances ...........300 ................................... julianum.net Receivable.....................300

...................Merchandise Inventory...................... 140 ................................... Cost of goods Sold.....................140

The seller might offer the customer a sales discount because that the note payment of the balance due. A sales discount, i m sorry is based on the invoice price less any type of returns and also allowances, is recorded by increasing cash because that the amount got from the customer, to decrease julianum.net Receivable because that the amount owed by the customer, and increasing Sales Discounts by the lot of the discount. For example, the entry by PW Audio it is provided to document the cash receipt on might 14 from Sauk stereo within the discount period is:

May 14 ........Cash ......................3,430 .....................Sales Discounts ..........70 ...................................julianum.net receivable .............3,500 (To document collection within 2/10,n/30 discount duration from Sauk Stereo)

Sales Discounts is a contra revenue account to sales.

It is crucial to have actually the network sales figure and also the amounts in the contra heritage julianum.net--sales returns and also allowances and sales discounts.

A Sales Returns and Allowances account is supplied rather 보다 decreasing sales directly because the agency will want to know around the quantity of merchandise being returned. Likewise, a Sales Discounts account is used in order disclose the quantity of cash discounts take away by customers. Also, it is good to reinforce the concept that both the Sales Returns and also Allowances account and also the Sales Discounts julianum.net space contra revenue julianum.net to the Sales account. Due to the fact that they are contra revenue julianum.net, lock will have normal debit balances.

Study objective 4 - Distinguish between a Single-Step and a Multiple-Step income Statement

There space two creates of earnings statements supplied by companies:

Single-step income statement - one action is compelled in determining network income--subtract complete expenses from total revenues. Revenues--includes both operating revenues and other revenues and also gains. Expenses--includes expense of items sold, operation expenses, as well as other expenses and also losses. Multiple-step revenue statement Highlights the materials of net income. Distinguishes in between operating and also non-operating activities. Sales revenues--The revenue statement for a merchandising concern commonly presents gross sales revenues for the period and deducts the contra revenue julianum.net(sales returns and allowances and sales discounts) to come at network sales. Cost of products sold is the cost of the goods sold during the period. Gross profit--Cost of products sold is deductedfrom net sales to recognize gross profit.Gross profit is the merchandising profit of the company.

For a merchandising firm the expense of items sold is an price and, traditionally, the largest expense item the agency will have.

The gross margin is the amount a merchandising firm has left after the pays because that the merchandise it sold.

Operating costs - are subtracted native gross benefit in bespeak to identify income from operations Operating expenses include- Selling expenses--all that the expenses connected with selling the merchandise indigenous the solicitation the the sale until the product is in the hands of the buyer. Administrativeexpenses--general expenses relating to general operating activities, human resources, accounting, clerical, security, etc. Non-operating activities--unrelated come the company"s primary line that operations. Other revenues and also gains--Interest, dividend, rental revenue, and gain from sale of property. Other expenses and also losses--Interest expense; accident losses; ns from revenue or abandonment the property, plant, and equipment; and loss indigenous strikes by employees and also suppliers

Study target 5 - Determine expense of items Sold under a regular Inventory device

To determine price of items sold:

Beginning perform (amount of finishing inventory because that the ahead period)

Add: price of goods Purchased to buy ... Less: purchase Returns and Allowances ... Purchase Discounts Add: Freight-in

This results in price of Goods obtainable for sale (total amount that might have to be sold throughout the accounting period)

Subtract: ending inventory (determined through a physical count on the last day the the bookkeeping period)

This outcomes in price of products Sold (subtract this amount from net Sales to come a pistol Profit)

Study objective 6 -Explain the factors Affecting Profitability

Gross profit rate, calculated by splitting the amount of gross benefit by network sales, is generally thought about to be an ext informative 보다 the gross benefit amount because it expresses a more meaningful (qualitative) relationship between gross profit and net sales.

Profit margin ratio, calculated by dividing net income by network sales, actions the portion of each dollar that sales that results in network income.

The profit margin ratio measures the extent by which selling cover all expenses and the gross profit rate measure the margin by which selling price exceeds price of goods sold.

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A firm can boost its benefit margin proportion by either raising its gun profit price and/or by regulating its operation expenses and other costs.

Study target Appendix –Explain the record of purchases and also sales of inventory under a regular inventory system.

To document purchases, entries are forced for (a) cash and also credit purchases, (b) acquisition returns and also allowances, (c) acquisition discounts and (d) freight costs. To document sales, entries are required for (a) cash and also credit sales, (b) sales returns and allowances, and (c) sales discounts.