Merchandising Accounting (follow my slide share LinkedIn account for more presentation)

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Contents

Merchandising Activities:• Operating Cycle of Merchandising Companies• Income statement of Merchandising Companies• Perpetual and Periodic Inventory Systems

Inventories And The Cost Of Goods Sold:• Specific Identification• Average Cost Method• FIFO• LIFO

MERCHANDISING ACTIVITIES What is Inventory?

“Goods that are purchased for the purpose to resale

to customers ” Operating cycle of a Merchandising Company: “The series of transactions through which a

business generate its revenue and its

cash receipts from consumer.” What is Cost of Goods Sold?

“It is the cost which a company pays for making

a product or for inventory purchased” What is Goods Available for sale?

“ It is the total goods which you could have

sold in your interim period

of company”

THE OPERATING CYCLE OF MERCHANDISING COMPANY

Cash

InventoryAccount

Receivables

Purchase of

Merchandise

Sale of Merchandise on Account

Colle

ction

s of

Rece

ivabl

es

TYPES OF MERCHANDISE COMPANY

Whole Seller & Retailer:

Wholesaler buy large quantity of merchandise from several different manufactures and then resell this merchandise to many different retailers.

A retailer is a business that sells merchandise directly to the public.

INCOME STATEMENT OF MERCHANDISING COMPANY

Other Company Merchandising Company

Revenue

Expenses

Net Income

minus

equals

Sales

Cost of goods sold

Gross Profit

Other Expenses

Net Income

equals

minus

equals

minus

INCOME STATEMENT CONTD..Sales - Cost of goods sold = Gross profit

Gross Profit - Other Expenses = Net Income

Example

Sales $15,000

Less : Cost of goods sold (3500)

Gross profit $11,500

Operating Expenses:

Wages Exp 620

Adv Exp 150

Depreciation Exp 430 (1200)

Net Income $10,300

APPROACHES USED IN ACCOUNTING FOR MERCHANDISING INVENTORIES Perpetual System:

All Transaction including Costs of merchandise are

recorded immediately as they occur. Record is up-to-

date all the time. Periodic System:

No effort is made to keep records up-to-date neither

inventory nor Cost of goods sold and are only updated

at the end of interim period.

PERPETUAL INVENTORY SYSTEMThe following example contains several journal entries used to

account for transactions in a perpetual inventory system:

Purchase of Merchandise:

Purchase of inventory is recorded at cost.

To record a purchase of $5,000 of 5 items that are stored in inventory each item has cost $1,000.

 

 

Account Title Debit CreditInventory $5000 Cash $5000

PERPETUAL INVENTORY SYSTEM

Sales of Merchandise:

Sold 3 items $1200 each, for $3,600. for which the cost is 3,000.

Debit CreditCash $3600

Revenue

$3600

Cost of Goods Sold

$3000

Inventory

$3000

Gross Profit: 3600 – 3000 = $600Let Expenses are $200. Then,Net Income = 600 – 200 = $400

If inventory is purchased and sold on account, Then entries will be:

Purchase of Inventory: (On Account)

Inventory Record:

Debit CreditA/C Receivables $3600

Revenue

$3600

Account Title Debit CreditInventory $5000 A/C Payable $5000

Selling of Inventory: (On Account)

Debit Credit

Cost of Goods Sold $3000

Inventory

$3000

Payment of A/C Payables to Suppliers:

Collection of Accounts Receivable from Customers:

Debit CreditCash $3600 A/C Receivable $3600

Debit CreditA/C Payables $5000 Cash

$5000

PERIODIC INVENTORY SYSTEM:

Its an alternative to a perpetual inventory system

When merchandise is purchased, its cost is debited to an account entitled Purchases.

EXAMPLE

The inventory on hand at the end of 2011 cost $20000.

During 2012, purchases of merchandise for resale of customers totaled $100000

Inventory on hand at the end of 2012 cost $15000.

CONT…

Recording Purchases of Merchandises:Suppose from total purchases of $100,000 the first

purchase was of $10,000 so purchase entry will be:

Debit Credit

Purchases 10000

Cash 10000

CONT…

Computing the cost of goods sold:

Inventory(beginning of the year 2012)………… $20000

Add : Purchases……………………....................100000

Cost of goods available for sale………………..$120000

Less : Inventory (end of the year 2012)………….15000

Cost of goods sold…………………………….$105000

INVENTORIES & COST OF GOODS SOLDThe Cost of Goods Sold is determined using 4 methods

1. Specific Identification

2. Average Cost

3. FIFO (First-in-First-out)

4. LIFO (Last-in-First-out)

Specific Identification Method:

This method can only be used if the actual costs of individual units of inventory are known.

In Perpetual System the cost of goods sold is determined by calculating the cost of each merchandise from invoices

While in Periodic System we calculate the cost of each merchandise which we have on hand and deduct it from Cost of goods available for sale in that time period

EXAMPLE

A company bought 5 units of goods in which 2 @ $500 and 3@ $600. And sold 2 units which costed us 1@ $500 and 1@ $600.

IF Beginning Inventory is zero. Then,

B.I= 0, Goods Available for Sale = $1000 + $1800

= $2800

Goods on Hand = $500 + $ 1200 = $1700

In Perpetual System:

Cost of Goods Sold = 500 + 600

= $1100

In Periodic System:

Cost of Goods Sold = 2800 – 1700

= $1100

AVERAGE COST METHOD

“The average cost of all units is taken”

Example:

A Company bought 5 identical generators at two different rates

2 @ $1000 per unit (10th March, 2010)

3 @ $1200 per unit (9th May, 2010)

Therefore, the generators in inventory, acquired at a total cost of (2000 + 3600)=$5600.

Thus the average cost of each generator is 5600/5 = $1120

The company sold a generator at $1800 on June 1

Let the Beginning entry level of Inventory is zero and

interim period of comp. is semi-annually starting from Jan.

Debit CreditCash 1800 Revenue/Sale 1800Cost of Goods Sold 1120 Inventory 1120

In Perpetual Inventory System:Entries will be of:Purchase:There will be two entriesDate A/C Title Debit Credit10th Mar2010

Inventory $2000 Cash $2000

9th May2010

Inventory $3600 Cash $3600

Sale:

Purchase Sold Balance

Date Units UnitCost

Total Units UnitCost

Total Units UnitCost

Total

10th

Mar2 $100

0$2000

2 $1000

$2000

9th May

3 $1200

$3600

5 $1120

$5600

1st

June1 $112

0$1120

4 $1120

$4480

In Periodic System:

Cost of Goods Sold= Goods Available for sale – Cost of goods on hand

Cost of Goods on hand = Average cost x Remaining units goods = 1120 x 4 = $4480COGS = $5600 - $4480 = $1120

First-In, First-Out Method (FIFO): First merchandise purchased is the first merchandise sold..

Last-In, First-Out Method (LIFO)

Most recently purchased merchandise (the last in) is assumed to be sold first.

In Perpetual System:

Example:

A Company bought 5 identical generators at two different rates

2 @ $1000 per unit (10th March, 2010)

3 @ $1200 per unit (9th May, 2010)

Therefore, the generators in inventory, acquired at a total cost of (2000 + 3600)=$5600.

The company sold a generator at $1800 on June 1

Let the Beginning entry level of Inventory is zero and

interim period of comp. is semi-annually starting from Jan.

In FIFO: We will assume generator which was sold was from purchase of 10th March.And Entry of COGS will be:

Date A/C Title Debit Credit10th

MarCOGS $1000 Inventory

$1000

Date Purchase Sold Total Units Units

CostTotal Unit

sUnit Cost

Total Units

Unit Cost

Total

10th Mar 2 $1000

$2000

2 $1000 $2000

9th May 3 $1200

$3600

2+3 (5)

2 x $10003 x $1200

$5600

1st Jun 1 $1000

$1000

1+3 (4)

1 x $10003 x $1200

$4600

In LIFO: We will assume generator which was sold was from purchase of 9th May.And Entry of COGS will be:

Date A/C Title Debit Credit10th

MarCOGS $1200 Inventory

$1200

Date Purchase Sold Total Units

Units Cost

Total Units Unit Cost

Total Units

Unit Cost

Total

10th Mar 2 $1000 $2000

2 $1000 $2000

9th May 3 $1200 $3600

2+3 (5)

2 x $10003 x $1200

$5600

1st Jun 1 $1200 $1200 2+2 (4)

2 x $10002 x $1200

$4400