Chapter 1 Merchandising Operation PDF

1 Chapter 1 Merchandising Operation Introduction to Accounting Cycle for Merchandising Sole Proprietorship Operation Notre Dame of Marbel University Accountancy Department  2 Accounting Cycle The accounting cycle is the proces...

1 Chapter 1 Merchandising Operation Introduction to Accounting Cycle for Merchandising Sole Proprietorship Operation Notre Dame of Marbel University Accountancy Department  2 Accounting Cycle The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time. Service Operation – is the selling of people’s expertise and time to the consumers. Merchandising Operation – is the promotion of goods and/or services that are available for retail sale. Notre Dame of Marbel University Accountancy Department  3 Merchandising Operation Merchandising Operation – is the promotion of goods and/or services that are available for retail sale. Notre Dame of Marbel University Accountancy Department  4 Merchandising Operation Differentiate the operating cycle between service operation to merchandising operation? Notre Dame of Marbel University Accountancy Department  5 Merchandising Operation Differentiate the components of income statement between service operation to merchandising operation? Notre Dame of Marbel University Accountancy Department  6 Source Document Purchase Requisition A written request to the purchaser of the entity that goods be purchased from the suppliers. Notre Dame of Marbel University Accountancy Department  7 Source Document Purchase Order An authorization made by the buyer to the seller to deliver the merchandise as detailed in the form. Notre Dame of Marbel University Accountancy Department  8 Source Document Sales Invoice Contains the name of the buyer, sales information, quantity, description, and price of the inventory; amount of sales and the payment terms. Notre Dame of Marbel University Accountancy Department  9 Source Document Bill of Lading A document issue by the carrier that specifies the contractual conditions and term of delivery. Notre Dame of Marbel University Accountancy Department  10 Source Document Receiving Report A document containing information about goods from a vendor. It formally records quantities and description of the goods delivered. Notre Dame of Marbel University Accountancy Department  11 Source Document Statement of Account A formal notice to the debtor detailing the account due. Notre Dame of Marbel University Accountancy Department  12 Source Document Deposit Slip Form that signifies a cash were deposited to the holder of the account. Notre Dame of Marbel University Accountancy Department  13 Source Document Check A written order to the bank to pay the amount specified therein to the person named in the check. Notre Dame of Marbel University Accountancy Department  14 Source Document Official Receipt Evidence of cash has been received by the seller. Notre Dame of Marbel University Accountancy Department  15 Source Document Credit Memorandum Form used by the seller to notify the buyer that his account is being decrease. Debit Memorandum Form used by the buyer to notify the seller that his account is being decrease. Notre Dame of Marbel University Accountancy Department  16 Source Document Discuss again and explain the different source documents in merchandising operation. Why is it necessary to be familiarized with those source document? What values and attitude are we developing in this topic discussion? Notre Dame of Marbel University Accountancy Department  17 Terms of Transactions The arrangement or agreement made by the buyer and seller in a certain transactions. Credit Terms – arrangement that indicate when payment is due for sales that are made on credit, possible discounts, and any applicable interest or late payment fees shall be imposed. Transportation Terms – arrangement how will the inventory be transported and who will shoulder the cost and inventory while in transit. Notre Dame of Marbel University Accountancy Department  18 Terms of Transactions Credit Terms Trade Discount Given to encourage buyers to purchase products because of the markdowns from the list price. No trade discount account and no special accounting entry for this Entries are based on the INVOICE PRICE INVOIVE PRICE = List Price net of Trading Discount Example: Pinnacle Technologies quoted a list price of P2,500 for each 64 gigabyte flash drive, less a trade discount of 20%. If Video Fantastic ordered 7units, how much would be the invoice price? What will be your entry? Notre Dame of Marbel University Accountancy Department  19 Terms of Transactions Credit Terms Trade Discount If it is a trade discount, no necessary entry for the discount is required. Only to record the invoice price when the purchased was made. Sales Volume Discount Series Discount Notre Dame of Marbel University Accountancy Department  20 Terms of Transactions Credit Terms Trade Discount Exercises: Compute the Invoice Price ABC purchased an inventory costing P10,000 with market discount of 5%. ABC purchase 5 units of inventory for 1,000 each. If purchase 10 units AABC will received 15% discount. Pinnacle Technologies quoted a list price of P2,500 for each 64 gigabyte flash drive, less a trade discount of 20%, 10%. Video Fantastic purchased eight units. ABC purchased ten inventory with a list price of P2,000 for a specific product. A 30%, 20%, 10% trade discount is given. Notre Dame of Marbel University Accountancy Department  21 Terms of Transactions Credit Terms Cash Discount Given to encourage prompt payment from customers. This discount require journalizing entry aside from recording the purchase/sale transaction. “2/10, n/30” 2 is the discount rate 10 is the discount period 30 is the credit term 2% of discount is given if the obligation is paid within 10 days for a liability outstanding for 30days. Notre Dame of Marbel University Accountancy Department  22 Terms of Transactions Credit Terms Cash Discount Example: Assume that an invoice for P150,000 with terms 2/10, n/30, was paid within the discount period how much cash should the buyer need to pay? What will be your entry? Assume that an invoice for P150,000 with terms 2/10, n/30, discount period was not taken advantage how much cash should the buyer need to pay to settle the transaction? What will be your entry? Notre Dame of Marbel University Accountancy Department  23 Terms of Transactions Credit Terms Cash Discount Exercises: Compute the Cash Discount On January 1, a company received an invoice stating a P100,000 amount with terms 3/15, n/30. The company paid the said invoice on January 15. On January 1, a company received an invoice stating a P200,000 amount with terms 2/10, n/30. The company paid the said invoice on January 30. On January 1, a company received an invoice stating a P150,000 amount with terms 1/20, n/30. The company paid the said invoice on January 15. Notre Dame of Marbel University Accountancy Department  24 Journal Entries SELLER’S VIEWPOINT BUYER’S VIEWPOINT Notre Dame of Marbel University Accountancy Department  25 Journal Entries SELLER’S VIEWPOINT BUYER’S VIEWPOINT Notre Dame of Marbel University Accountancy Department  26 Example: June 1: Purchase 10 inventory 2/10, n/eom with list price of P10,000 each. The seller offered 10% trade discount. June 5: Returned 3 damage inventory. June 11: Paid the entire obligation of this inventory transaction. Notre Dame of Marbel University Accountancy Department  27 Example: June 1: Sold 10 inventory 2/10, n/eom with list price of P10,000 each. The seller offered 10% trade discount. June 5: Received the 3 damage returned inventory. June 11: Received the entire payment of this inventory transaction. Notre Dame of Marbel University Accountancy Department  28 Terms of Transactions The arrangement or agreement made by the buyer and seller in a certain transactions. Credit Terms – arrangement that indicate when payment is due for sales that are made on credit, possible discounts, and any applicable interest or late payment fees shall be imposed. Transportation Terms – arrangement how will the inventory be transported and who will shoulder the cost and inventory while in transit. Notre Dame of Marbel University Accountancy Department  29 Terms of Transactions Transportation Terms FOB Shipping Point The buyer owns the merchandise while in transit The buyer shoulders the shipping costs Ownership passes at the point of shipment FOB Destination The seller owns the goods while in transit The seller shoulders the shipping costs Ownership passes at the point of destination  30 Terms of Transactions Transportation Cost Shipment of merchandise done by a common carrier “freight bill” designates which party shoulders the costs and whether the shipment is freight prepaid – the seller pays the transportation cost before shipping the goods sold. freight collect – the buyer pays the transportation cost upon collecting the shipped goods sold. Notre Dame of Marbel University Accountancy Department  31 Terms of Transactions Transportation Term Who Shoulders the Who pays the Freight Terms transportation costs? Shipper? FOB Destination, Freight Prepaid Seller Seller FOB Shipping Point, Freight Collect Buyer Buyer FOB Destination, Freight Collect Seller Buyer FOB Shipping Point, Freight Prepaid Buyer Seller Notre Dame of Marbel University Accountancy Department  32 Journal Entries SELLER’S VIEWPOINT BUYER’S VIEWPOINT Notre Dame of Marbel University Accountancy Department  33 Journal Entries SELLER’S VIEWPOINT BUYER’S VIEWPOINT Notre Dame of Marbel University Accountancy Department  34 Journal Entries SELLER’S VIEWPOINT BUYER’S VIEWPOINT Notre Dame of Marbel University Accountancy Department  35 Journal Entries SELLER’S VIEWPOINT BUYER’S VIEWPOINT Notre Dame of Marbel University Accountancy Department  36 Merchandising Operation Exercises: Journalize the ff. transactions Oct 1 Purchased merchandise from ABC $15,500, terms FOB Shipping Point, 2/10, n/eom. Prepaid freight of $400. Oct 5 Purchased merchandise from DEF, $14,150, terms FOB destination, n/30. Transportation Cost $300 Oct 10 Paid ABC for invoice due from October 1. Oct 13 Sold merchandise from GHI, $8,000, terms FOB Destination, 1/10, n/30. Freight Collect, $500. Oct 14 Issued credit memo to GHI for $1,500 of merchandise returned from sale on October 13. Oct 18 Purchased merchandise from JKL Company, $12,250, terms FOB Shipping Point, n/eom. Freight Collect $250 Oct 19 Purchased merchandise from MNO $11,150, terms FOB Destination, 2/10, n/30. Freight Collect $300 Oct 23 Received payment from GHI for invoice of Oct. 13. Oct 29 Paid MNO for invoice of Oct.19. Oct 31 Paid JKL Company for invoice of October 18. Oct 31 Paid DEF for invoice of October 5. Notre Dame of Marbel University Accountancy Department  37 Inventory Accounting Systems Inventory Accounting System is a method of recording the inventories in merchandising operation to tract the inventory. - Inventory count is - No entries are made to continuously updated the inventory account as - Usually used by the merchandise is merchandising entities bought and sold. - Advisable for low-volume, - Advisable for large- high-priced goods volume, low-priced goods - Need for physical count - Use of “purchases” account Notre Dame of Marbel University Accountancy Department Journal Entries 38 PERPETUAL SYSTEM PERIODIC SYSTEM  39 Inventory Accounting Systems COST OF GOODS SOLD This refer to the carrying value of goods sold during a particular period Perpetual Method We need to maintain this account during our accounting cycle. Periodic Method This is computed at the end of accounting period after conducting the physical count. Notre Dame of Marbel University Accountancy Department