determine the differences between a company enterprise and a merchandising company. Describe the recording of to buy under a perpetual inventory system. Explain the recording of sales earnings under a perpetual inventory system. Distinguish between a single-step and a multiple-step earnings statement. Recognize the expense of goods sold under a regular inventory system. Explain the determinants affecting the profitability. (Appendix) explain the recording of purchases and also sales of perform under a periodic inventory system.

Chapter outline

Study target 1 - identify the Differences between a company Enterprise and a Merchandising Company

In a merchandising company, the primary resource of revenues is the revenue of merchandise, referred to as sales revenue or sales. Unlike prices for a service company, costs for a merchandising agency are separated into two categories: price of products sold - the total cost of goods sold throughout the period. Operating expenses - selling and administrative expenses.

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

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

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

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

Service company

Merchandising agency

Perform Services

Buy perform (Cash or bsci-ch.org Payable)

Bill client (bsci-ch.org Receivable)

Sell list

Collect Cash from bsci-ch.org Receivable

Bill client (bsci-ch.org Receivable)

Collect Cash from account Receivable

Merchandising providers use one of two equipment to account because that inventory

Perpetual –

thorough records that the expense of every inventory purchase and sale room maintained and the records continuously display the perform that should be top top hand for every item. For regulate purposes, carriers take a physics inventory count to verify the accuracy the the perform records.

Periodic –

detailed records of the products on hand are not retained throughout the period. A physics inventory is taken at the finish of the accounting periods to determine expense of goods on hand as well as cost of items sold.

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

Study objective 2 -Explain the record of to buy under a Perpetual Inventory mechanism

The purchase of merchandise because that resale is typically recorded through the merchandiser when the products are received from the seller.

Every purchase need to be supported by business documents that carry out written evidence of the transaction. Every cash purchase should be sustained by a canceled examine or a cash it is registered receipt indicating the item purchased and the quantities paid. Each credit transaction purchase need to be supported by a purchase invoice, which suggests the total purchase price and other pertinent information. Cash purchase are tape-recorded by boost in merchandise Inventory and a decrease in Cash. Credit transaction purchases are tape-recorded by an increase in Merchandise list and rise in bsci-ch.org Payable. For example, the entry to document the may 4 purchase merchandise inventory by Sauk native PW Audio, 2/10, n/30 (as displayed in the text) is:

May 4 ........Merchandise Inventory.......... 3,800 .........................bsci-ch.org Payable..........................3,800


goods that are damaged, defective, or of inferior quality may be returned to the seller for credit if the sale to be made ~ above credit, or for a cash refund if the acquisition was for cash. The transaction explained is a purchase return and also is videotaped by decreasing bsci-ch.org Payable and also decreasing Merchandise Inventory. The purchaser may choose to keep the goods that room damaged, defective, or of inferior quality provided the seller will approve a discount referred to as a purchase allowance. Freight costs are the cost of transferring the products to the buyer"s location of business. If the freight expenses are to by paid by the buyer, the expenses are considered part of the cost of to buy inventory. In this instance, Merchandise Inventory is increased and also Cash is decreased. Because that example, if upon distribution of goods on may 9, Sauk stereo (the the person who lives pays Haul-It Freight firm $150 for freight charges, the entry on Sauk’s books is:

May 9 ........Merchandise list .......150 ................................ Cash ...................................150 (To record payment of freight on products purchased)

Freight costs incurred by the seller top top outgoing merchandise space an operating price to the seller and labeled freight-out. Freight-out is taped by increasing Freight-out and decreasing Cash. Because that 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 that freight on products sold)

The credit terms of a purchase on account may permit the the person who lives to claim a discount if payment is made within a specific time. A typical credit ax is 2/10, n/30 which method a 2 percent purchase discount may be bring away if the invoice is paid within 10 days of the invoice date. Network amount of the invoice is due in ~ 30 days. As soon as payment is made in ~ the discount period, the quantity of Merchandise list decreases. The entrance to record a payment would need the purchaser to decrease bsci-ch.org Payable, to decrease Cash, and decrease was Inventory. Because that example, assume Sauk stereotype pays the balance early out of $3,500 on might 14, the critical day the the discount period, and takes the $70 discount. The credit term is 2/10, n/30.

May 14 ....bsci-ch.org Payable 3,500 ...............................................Cash ...................3,430 ...............................................Merchandise Inv. .....70

If Sauk stereotype failed to take it the discount and instead made full payment of $3,500 ~ above June 3, Sauk would certainly debit bsci-ch.org Payable and also credit Cash for $3,500.

June 3 ......bsci-ch.org Payable 3,500 ................................................ Cash ................3,500

Not every purchases constitute purchase of merchandise Inventory. Rather, a purchase of a cash register to be supplied in a clothing business would no be a acquisition of merchandise for resale. However, if Dixie Cash register purchased a cash it is registered for resale the transaction would be taken into consideration a purchase of goods Inventory.

Examples of to buy on account that would certainly not be considered merchandise inventory and also the proper audit treatment for each.

Item purchased

Accounting treatment

Supplies

Record as a current asset. Do an advertisement justing entrance on the last day the the accounting duration to document supplies expense for the amount that was used during the accounting period.

Buildings, Equipment,

Furniture, Computers, Autos currently used in organization operations

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

Land

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

Assets acquired 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 goods are transferred from the seller to the buyer. This practice is in accordance with the revenue recognition principle. Sales might be make on credit or for cash. Each sales transaction should be sustained by a business document that offers written proof of the sale. Cash register tapes carry out evidence of cash sales. A sales invoice gives written evidence of a credit sale. Cash sales are recorded by increasing Cash and increasing Sales. Credit transaction sales are tape-recorded by enhancing bsci-ch.org Receivable and increasing Sales.

For example, the journal entry to document the might 4 PW Audio Supply revenue to Sauk stereo is (the merchandise expense to PW is $2,400), terms 2/10, n/30:

May 4 .......bsci-ch.org union .....3,800 .................................................Sales..........................3,800

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

Sales Returns and Allowances, a contra revenue account to Sales, might be provided to record credit for went back goods. 2 entries are required to record the credit for Sales Returns and also Allowances. The an initial entry is an increase in Sales Returns and Allowances and also a diminish in account Receivable. The second entry is boost in Merchandise inventory and a diminish in Cost of items Sold. Because that example, the entrance by PW Audio to document a return on may 8 because that which the offering price to be $300 and the merchandise cost to PW to be $140 is:

May 8 .......Sales Returns and Allowances ...........300 ................................... bsci-ch.org Receivable.....................300

...................Merchandise Inventory...................... 140 ................................... Cost of items Sold.....................140

The seller might offer the customer a sales discount for the prompt payment the the balance due. A sales discount, which is based on the invoice price less any kind of returns and allowances, is taped by enhancing cash for the amount received from the customer, decreasing bsci-ch.org Receivable because that the amount fan by the customer, and also increasing Sales Discounts through the amount of the discount. Because that example, the entrance by PW Audio it is provided to record the cash receipt on might 14 from Sauk stereotype within the discount period is:

May 14 ........Cash ......................3,430 .....................Sales Discounts ..........70 ...................................bsci-ch.org receivable .............3,500 (To record collection in ~ 2/10,n/30 discount period from Sauk Stereo)

Sales Discounts is a contra revenue account to sales.

It is important to have the network sales figure and also the quantities in the contra heritage bsci-ch.org--sales returns and allowances and sales discounts.

A Sales Returns and Allowances account is supplied rather than decreasing sales directly since the company will want to know around the lot of merchandise gift returned. Likewise, a Sales Discounts account is used in stimulate disclose the amount of cash discounts taken by customers. Also, the is good to reinforce the id that both the Sales Returns and also Allowances account and the Sales Discounts bsci-ch.org space contra revenue account to the Sales account. Because they space contra revenue bsci-ch.org, lock will have normal debit balances.

Study objective 4 - Distinguish in between a Single-Step and also a Multiple-Step revenue Statement

There are two forms of earnings statements provided by companies:

Single-step income statement - one action is required in determining net income--subtract full expenses from full revenues. Revenues--includes both operation revenues and also other revenues and gains. Expenses--includes cost of products sold, operation expenses, and also other expenses and losses. Multiple-step revenue statement Highlights the contents of net income. Distinguishes in between operating and non-operating activities. Sales revenues--The revenue statement because that a merchandising concern commonly presents gun sales revenues because that the duration and deducts the contra revenue bsci-ch.org(sales returns and also allowances and sales discounts) to come at network sales. Cost of products sold is the cost of the was 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 goods sold is an expense and, traditionally, the largest expense item the company will have.

The gun margin is the lot a merchandising agency has left after it pays because that the merchandise it sold.

Operating expenses - are subtracted from gross benefit in order to determine income from operations Operating expenses include- Selling expenses--all of the expenses linked with marketing the merchandise from the solicitation of the sale till the product is in the hands of the buyer. Administrativeexpenses--general costs relating to basic operating activities, person resources, accounting, clerical, security, etc. Non-operating activities--unrelated to the company"s major line that operations. Other revenues and gains--Interest, dividend, rent revenue, and gain from sale of property. Other expenses and losses--Interest expense; lossc losses; ns from revenue or abandonment of property, plant, and equipment; and loss native strikes by employees and also suppliers

Study objective 5 - Determine cost of goods Sold under a periodic Inventory mechanism

To determine expense of goods sold:

Beginning inventory (amount of ending inventory because that the ahead period)

Add: cost of products Purchased purchases ... Less: purchase Returns and Allowances ... To buy Discounts Add: Freight-in

This outcomes in cost of Goods accessible for sale (total quantity that can have been sold throughout the accountancy period)

Subtract: ending inventory (determined through a physical count on the critical day that the accountancy period)

This results in cost of items Sold (subtract this quantity from net Sales to arrive a gun Profit)

Study objective 6 -Explain the factors Affecting Profitability

Gross benefit rate, calculate by splitting the lot of gross profit by network sales, is generally considered to be much more informative than the gross benefit amount since it expresses a more meaningful (qualitative) relationship in between gross profit and net sales.

Profit margin ratio, calculated by dividing net revenue by net sales, steps the percentage of each dollar the sales that results in net income.

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

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A company can enhance its profit margin proportion by either enhancing its gun profit rate and/or by controlling its operating expenses and also other costs.

Study target Appendix –Explain the recording of purchases and sales of perform under a routine inventory system.

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