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INVENTORY

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					ACCTG 1A                                                                Chapter 9 v10E




ACCOUNTING FOR A MERCHANDISER
WHAT IS A MERCHANDISER?
 Distinguish a Merchandiser from a Service Business from a Manufacturer
 Distinguish Wholesaler from a Retailer

       Large Merchandisers: Wallmart, Sears, Costco, Circuit City


PERPETUAL V PERIODIC INVENTORY SYSTEM
PERPETUAL SYSTEM
(Perpetual means Ongoing)
      The Merchandise Inventory Account in the General Ledger is kept up to date for
      all purchases and sales of inventory. At any point during the period, my GL will
      tell me how much Inventory I have in the warehouse and how much Cost of
      Goods Sold has been incurred.

       Most common system today. Computers have made this possible.

PERIODIC SYSTEM
     Gets its name because we don't constantly update the general ledger for
     increases and decreases in inventory. Periodically we have to go out to the
     warehouse and count it. If there is less there than we had available, then we
     must have sold it. Can't know Inventory balance or Cost of Goods Sold until I
     count it.

       Still in use. The concept is still applied to Perpetual Systems, at least once a
       year.

INVENTORY
PHYSICAL INVENTORY
   Often the largest Current Asset for a merchandiser.
   Internal Controls required to:
     Protect it from theft and damage
     Ensure accurate reporting in financial statements

A Periodic Inventory count and valuation must be taken
    Regularly if under the Periodic Inventory system
    Annually if on the Perpetual Inventory system

A count of the inventory and comparison to the general ledger is a detective control
that may uncover surprising facts about your inventory.
    Missing Inventory (Shrinkage)
    Damaged Inventory
    Obsolete Inventory
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ACCTG 1A                                                            Chapter 9 v10E




MERCHANDISE SALES ENTRIES
Accounts to track Sales:
     Sales
     Sales Returns and Allowances – CONTRA
     Sales Discount – CONTRA
     Sales Tax Payable

Cash Sale:
     Sold merchandise to cash customer for $1,000

      Cash
              Sales

Credit Sale:
      Sold merchandise to Buch Co on account using invoice #333 for $2,000.

      Accounts Receivable-Butch
           Sales

Return of Merchandise:
      Buch Co. returned $400 of the merchandise purchased and received a credit
      memo.

      Sales Returns and Allowances
            Accounts Receivable-Butch

Sale involving Sales Tax
       Sold merchandise to a retail customer for $500 plus 10% Sales tax. Paid in
       Cash.

      Cash
              Sales
              Sales Tax Payable


Show T-Acct for Sales, Sales Returns and Allowances, A/R, Cash, Sales Tax Payable

Calculate Net Sales (What you really expect to collect)

E9-1, P9-1A




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ACCTG 1A                                                                Chapter 9 v10E




MERCHANDISE PURCHASE ENTRIES - PERIODIC
Accounts to track Purchases:
Purchases
Purchase Returns and Allowances– CONTRA
Purchase Discounts– CONTRA
Freight-in


Cash Purchase:
     Purchased merchandise inventory from VENDOR for $3,000.

       Purchases
             Cash

Credit Purchase:
      Purchased merchandise inventory from VENDOR Vick Co on account using
      Purchase Order #444 for $6,000.

       Purchases
             Accounts Payable-Vick

Return of Merchandise:
      We returned $800 of the merchandise purchased and received a credit memo.

       Accounts Payable-Vick
            Purchases Returns and Allowances

FREIGHT TERMS
Shipping Cost
 FOB (free on board) terms
 FOB Shipping Point - BUYER is responsible for shipping cost
 FOB Destination - SELLER is responsible for shipping cost

If you are the BUYER purchasing inventory and you are responsible for the freight cost,
then book the cost to Merchandise Inventory.

If you are the SELLER and you are responsible for the freight cost, then book the cost
to a Selling Expense account called Transportation Out.

Frequently the freight terms are FOB Shipping Point but the Seller pays the freight
company on behalf of the Buyer and then adds the shipping charge to the invoice.
Remember that you can not take a Purchase Discount on the freight portion of the
invoice.

If the shipping company bills the freight separate you would do it as 2 entries.

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ACCTG 1A                                                               Chapter 9 v10E




Freight Charge:
      Purchased merchandise inventory from VENDOR Vick Co on account using
      Purchase Order #555 for $7,000 plus Shipping charge of $250.

       Purchases
       Freight-IN
              Accounts Payable-Vick

PURCHASE (CASH) DISCOUNTS
Incentive for customers to pay their bills early - a.k.a. “terms”

Normal terms are expressed n/30, n/60, n/eom

Two Reasons Purchase Discounts are offered:
   The longer a receivable is outstanding the less likely it is to be collected
   There is a time value to money, the quicker a business can get cash back in the
     system the quicker it can turn it into product to be sold.

Commonly when you deal with a vendor they have terms of payment. They ship you
the product and you need to pay the invoice within 30 days. The vendor may want to
encourage you to pay within 10 days offering you a 2% discount to do so.

Expressed as 2/10, n/30 = take two percent off the bill if you pay within ten days, else
the whole balance is due in 30 days.

It is almost always advantageous to take advantage of cash discounts. On a $1,000
purchase at 2/10, n/30 you take $20 off the bill as a purchase discount and only remit
$1,980.

       Compare that to leaving the cash in the bank for an extra 20 days assuming a
       bank interest rate of 5%.
       1000 x 5% = $50 x 20/365 = $2.73
OR
       Annual return 360 days/20 days = 18
       18 x 2% = 36% annual rate of return

Important:
 If offered a purchase discount, we don't record it until we actually take it.
 The discount taken is a reduction of the Merchandise Inventory cost.
 Normally you can pay a portion of the bill within the discount period and take partial
   benefit of the discount (unless otherwise stipulated).
 You have to remove freight charges and any returned merchandise before
   calculating the discount.


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ACCTG 1A                                                          Chapter 9 v10E



Purchase with terms:
Bought merchandise Inventory on account from Sid Co., terms were 2/10, n/30. Cost
was $2,000. (Note the terms but don’t consider in entry)

Purchase
      Accounts Payable-Sid

Payment when terms are involved:
Paid within the discount term (looking ahead to Chapter 10)

Accounts Payable-Sid
     Purchase Discount
     Cash

E9-6, P9-2A

Practice:
P9-3A




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