Chapter

Chapter 66
Accounting
Accounting for
for retailing
retailing
 Learning Objectives

1. Understand the nature of inventory and

retailing operations
2. Describe the basic format of an income
statement for retail businesses
3. Understand the impact of GST legislation
on retail businesses
 Learning Objectives (cont’d)

4. Account for sales transactions of retail

businesses registered for the GST,
including the treatment of sales returns,
cash discounts, trade discounts and freight
costs
5. Account for purchases of inventory and
cost of goods sold under both the perpetual
and periodic inventory systems by retail
businesses registered for the GST
 Learning Objectives (cont’d)

6. Prepare worksheets and close the

accounts for retail businesses for both the
perpetual and periodic inventory systems
7. Prepare a detailed income statement for a
retail business
8. Perform a brief analysis of profitability in a
retail business for decision-making
purposes
 Lecture References

• Hoggett, Edwards & Medlin, 6th edition,

Chapter 6
• IAS 2/AASB 102 – Inventories
 Inventory

• Goods or property held for sale in the

ordinary course of business
• Does not include assets acquired to operate
the business (e.g. plant and equipment)
• Also referred to as ‘stock’ or ‘stock in trade’
 Retail Business Operations (cont’d)

• Condensed Income Statement

– Income referred to as ‘sales’
– ‘Cost of sales’ (COS) used to show total cost of
inventory sold during the period
– Sales — COS (Gross Profit) determined to show
profit from buying and on-selling inventory
– Expenses classified by type
Retail Business Operations (cont’d)
SUNRISE CD SALES LTD
Income Statement
for the year ended 31 December 2006
INCOME
INCOME
Net
Net sales
sales revenue
revenue $692
$692 890
890
Less:
Less: Cost
Cost of
of sales
sales 470
470 490
490
GROSS
GROSS PROFIT
PROFIT 222
222 400
400
Other
Other income
income 55 260
260
227
227 660
660
EXPENSES
EXPENSES
Selling
Selling expenses
expenses $100
$100 270
270
Administrative
Administrative expenses78
expenses78 850
850
Financial
Financial expenses
expenses 44 260
260 183
183 380
380
PROFIT
PROFIT (before
(before tax)
tax) $$ 44
44 280
280
 Retailing and the Goods and
Services Tax

• Registration for an Australian Business

Number (ABN)
• Registration for GST
• Input credits
• GST collections
• GST outlays
• Need adequate records!
 Retailing and the GST (cont’d)

• Tax invoices
– Required for all sales over $50
– Common requirements
• ‘tax invoice’
• ABN of issuing entity
• date of issue
• supplier name
• brief description of the items supplied
 Retailing and the GST (cont’d)

• Adjustment notes
– All or part of the goods are returned
– An allowance (e.g. discount) is made
– The price of a supply is changed
– All or part of the amount owing has to be
written off
– The retailer cannot pay the debt
 Accounting for Sales
Transactions

Date
Date Accounts
Accounts receivable
receivable 1980
1980
Sales
Sales 1800
1800
GST
GST Collections
Collections 180
180
Sold
Soldmerchandise
merchandiseto
toRay
Ray Stevens
Stevens on
oncredit
credit

Date
Date Cash
Cash 1980
1980
Sales
Sales 1800
1800
GST
GST Collections
Collections 180
180
Sold
Sold merchandise
merchandise for
for cash
cash
 Accounting for Sales
Transactions (cont’d)

• Sales returns and allowances

– Goods sold for $300 plus GST of $30 returned as
unsuitable

Date
Date Sales
Sales Returns
Returns && Allowances300
Allowances300
GST
GST Collections
Collections 30
30
Accounts
Accounts Receivable
Receivable 330
330
return
return of
of unsatisfactory
unsatisfactory merchandise
merchandise
sold
sold on
on credit
credit
 Accounting for Sales
Transactions (cont’d)

• Cash (settlement) discounts

– Goods sold for $1000 plus GST of $100

Date
Date Cash
Cash at
at Bank
Bank 1078
1078
Discount
Discount Allowed
Allowed 20
20
GST
GST Collections
Collections 22
Accounts
Accounts Receivable
Receivable –– AA Jones
Jones
1100
1100
payment
payment of
of account
account within
within the
the discount
discount
period
period
 Accounting for Sales
Transactions (cont’d)

• Sales return and settlement discount

– Credit terms 2/10, n/30
– Return of $330

Date
Date Cash
Cash at
at Bank
Bank 1078
1078
Discount
Discount Allowed
Allowed ($1500
($1500 xx 2%)
2%)30
30
GST
GST Collections
Collections ($150
($150 xx 2%)
2%) 33
Accounts
Accounts Receivable
Receivable ($1980
($1980 –– $330)
$330)
1650
1650
payment
payment ofof a/c
a/c Ray
Ray Stevens
Stevens within
within the
the
discount
discount period
period
 Accounting for Sales
Transactions (cont’d)

• Trade discounts
– Percentage reduction on list price
– 10 units of $200, 30% trade discount

Date
Date Accounts
Accounts Receivable
Receivable 1540
1540
Sales
Sales ($200
($200 xx 10
10 xx 70%)
70%)
1400
1400
GST
GST Collections
Collections 140
140
Sale
Sale of
of inventory
inventory on
on credit,
credit, subject
subject to
to
30%
30% trade
trade discount
discount
 Retail Transactions

• Freight outwards
– Who is responsible for freight costs?
– FOB shipping point/FOB destination
– Recorded as a selling cost if seller responsible
 Accounting for Purchases and
Cost of Goods Sold

• Perpetual inventory system

• Periodic inventory system
 Perpetual Inventory System

• Involves keeping current and continuous

records of all inventory transactions
• Separate card or computer file kept for each
inventory item
– Quantity and unit cost for each sale/purchase
– Running inventory balance
 Perpetual System — Stock Card

Location
Item Refrigerator 1 unit showroom Minimum Stock
Code C350 Remainder - WarehouseMaximum Stock 1
Purchases Sales
Balance
Unit Total Unit Total
Unit Total
Date Explanation Units cost cost Units cost
cost Units cost cost
1/1 Beginning bal 4
650 2600
15/1 Purchases 10 650 6500
14 650 9100
21/1 Sales 3 650 1950
11 650 7150
 Perpetual Inventory System
(cont’d)

• Single general ledger account for all

inventory transactions
• Details maintained on inventory cards

Inventory

Increases (debits) Decreases (credits)

Purchases Sales
Sales Returns Purchase returns
 Perpetual System —
Transactions
Purchases on credit
Jan
Jan 15
15 Inventory
Inventory 66 500
500
GST
GST Outlays
Outlays 650
650
Accounts
Accounts Payable
Payable 7150
7150
purchased
purchased 10
10 refrigerators
refrigerators from
from ….
….

Freight inwards (FOB shipping point)

Jan
Jan 17
17 Freight
Freight Inwards
Inwards 420
420
GST
GST Outlays
Outlays 42
42
Cash
Cash at
at Bank
Bank 462
462
paid
paid freight
freight on
on merchandise
merchandise
 Perpetual System —
Transactions (cont’d)
Sales on credit
Jan
Jan 21
21 Accounts
Accounts Receivable
Receivable 33 465
465
Sales
Sales 33
150
150
GST
GST Collections
Collections 315
315
sold
sold 33 fridges
fridges on
on credit
credit
([$1050
([$1050 + + $105
$105 ]] xx 33 units
units =
= $3
$3 456)
456)
Jan
Jan 21
21 Cost
Cost of
of Goods
Goods Sold
Sold 1950
1950
Inventory
Inventory 1950
1950
to
to remove
remove the
the cost
cost of
of inventory
inventory sold
sold
($650
($650 xx 33 units)
units) from
from the
the inventory
inventory account
account
 Perpetual System —
Transactions (cont’d)

Purchase returns

Jan
Jan 24
24 Accounts
Accounts payable
payable 715
715
Inventory
Inventory 650
650
GST
GST Outlays
Outlays 65
65
Defective
Defective unit
unit returned
returned to
to Fridge
Fridge King
King
Ltd
Ltd for
for credit
credit on
on account
account
 Perpetual System —
Transactions (cont’d)

Payment of creditor within discount period

Jan
Jan 24
24 Accounts
Accounts Payable
Payable ($7150
($7150 ––
$715) 6435
$715) 6435
Cash
Cash atat bank
bank 6306
6306
Discount
Discount Rec’d
Rec’d (5850
(5850 xx 2%)
2%)
117
117
GST
GST Outlays
Outlays ($6435
($6435 xx 2%
2% xx 1/11)
1/11)
12
12
Income
Income
payment
payment for inventory purchases
Saving in outflow! purchases
Saving for
in inventory
outflow!
 Perpetual System —
Transactions (cont’d)

Sales returns and

allowances
Jan
Jan 24
24 Sales
Sales returns
returns && allowances1
allowances1 050 050
GST
GST Collections
Collections 105
105
Accounts
Accounts Receivable
Receivable 11
155
155
ffridge
ridge sold
sold on
on 21
21 Jan.
Jan. returned
returned
Jan
Jan 24
24 Inventory
Inventory 650
650
Cost
Cost of
of Goods
Goods Sold
Sold 650
650
returned
returned fridge
fridge placed
placed back
back into
into
inventory
inventory
 Periodic Inventory System

• Beginning balance of inventory not changed

until the end of the period
• Purchases recorded in a ‘purchases’
account
• Only one entry is made for sales to record
the selling price of the goods sold
• Ending balance determined by stock count
 Periodic System — Transactions

Purchases on credit
Jan
Jan 15
15 Purchases
Purchases 66 500
500
GST
GST Outlays
Outlays 650
650
Accounts
Accounts Payable
Payable 7150
7150
purchase
purchase of
of fridges
fridges on
on credit
credit from...
from...
Freight inwards (FOB shipping point)
Jan
Jan 17
17 Freight
Freight Inwards
Inwards 420
420
GST
GST Outlays
Outlays 42
42
Cash
Cash at
at Bank
Bank 462
462
paid
paid freight
freight cost
cost on
on merchandise
merchandise
 Periodic System — Transactions
(cont’d)

Sales on credit
Jan
Jan 21
21 Accounts
Accounts Receivable
Receivable 33 465
465
Sales
Sales 33
150
150
GST
GST Collections
Collections 315
315
sold
sold inventory
inventory on
on credit
credit
Purchase returns
Jan
Jan 24
24 Accounts
Accounts Payable
Payable 715
715
Purchase
Purchase Returns
Returns &
&
Allowances
Allowances 650
650
GST
GST Outlays
Outlays 65
65
defective
defective unit
unit returned
returned for
for credit
credit
 Periodic System — Transactions
(cont’d)

Payment of creditor within discount period

Jan
Jan 24
24 Accounts
Accounts Payable
Payable ($7150
($7150 –– $715)
$715)
6435
6435
Cash
Cash at
at Bank
Bank 6306
6306
Discount
Discount Rec’d
Rec’d (5850
(5850 xx 2%)
2%)
117
117
GST
GST Outlays
Outlays ($6435
($6435 xx 2%
2% x1/11)
x1/11)
12
12
Income
Income
payment
payment
Saving in for
for inventory
inventory
outflow! purchases
purchases
Saving in outflow!
 Periodic System — Transactions
(cont’d)

Sales returns and allowances

Jan
Jan 24
24 Sales
Sales Returns
Returns && Allowances1
Allowances1
050
050
GST
GST Collections
Collections 105
105
Accounts
Accounts Receivable
Receivable 11
155
155
fridge
fridge sold
sold on
on 21
21 January
January returned
returned
 FRIDGE TOWN
Income Statement
for the period ended 31 January

Perpetual
PerpetualInventory
InventorySystem
System

Sales
Sales revenue
revenue $3150
$3150
Less:
Less: Sales
Sales returns
returns &
& allowances
allowances
1050
1050
Net
Net sales
sales revenue
revenue 2100
2100
Cost
Cost ofof sales*
sales* 1720
1720
GROSS
GROSS PROFIT
PROFIT $380
$380
** $1720
$1720 = = $1950
$1950 –– $650
$650 + + $420
$420
 FRIDGE TOWN
Income Statement
for the period ended 31 January
Periodic
PeriodicInventory
InventorySystem
System
Sales
Salesrevenue
revenue $3150
$3150
Less:
Less:Sales
Salesreturns
returns&&allowances
allowances 1050
1050
Net
Netsales
salesrevenue
revenue 2100
2100
Cost
Costofofsales
sales
Cost
Costofofbeginning
beginninginventory
inventory $2600
$2600
Add:
Add: Cost
Costofofpurchases
purchases $6500
$6500
Freight
Freightinwards
inwards 420
420
6920
6920
Less:
Less: Purchase
Purchasereturns
returns 650
650
Net
Netcost
costofofpurchases
purchases 6270
6270
Cost
Costofofgoods
goodsavailable
availablefor
forsale
sale 8870
8870
Less:
Less: Cost
Costofofending
endinginventory
inventory 7150
7150
Cost
Costofofsales
sales 1720
1720
GROSS
GROSSPROFIT
PROFIT $$380
380
 Perpetual System —
Transactions
Updating of Inventory account at the end of
the accounting period

June
June 30
30 Inventory
Inventory (ending balance)10
(endingbalance) 10 000
000
PP &
& LL Summary
Summary 10
10
000
000
inventory
inventory balance
balance as
as per
per stock
stock count
count
June
June 30
30 PP &
& LL Summary
Summary 12
12 000
000
Inventory
Inventory (beginning balance)12
(beginningbalance) 12
000
000
inventory
inventory balance
balance as
as per
per stock
stock count
count
 Periodic Inventory System

Inventory
Beginning balance P & L summary12
12 000 000
Ending balance balance c/d 10 000
10 000 22 000
22 000
balance b/d10
Ending inventory from the previous
000period becomes the beginning
inventory for the next period
 Detailed Income Statement

• Expenses classified as
– Selling expenses
– Administrative expenses
– Financial expenses
• Sales activities and other operating activities
separated to highlight gross vs. net profit
 SUNRISE CD SALES LTD
Income Statement
for the period ended 31 December 2006
INCOME
Revenue:
Sales revenue $714 280
Less: Sales returns & allowances 21 390
Net sales revenue 692 890
Cost of sales
Inventory 1/1/06 $ 58 400
Add: Purchases $472 620
Freight inwards 6 210
478 830
Less: Purchase returns & allowances 13 480
Net cost of purchases 465 350
Cost of goods available for sale 523 750
Less: Inventory 31/12/06 53 260
Cost of sales 470 490
GROSS PROFIT (continued next page) $222 400
 SUNRISE CD SALES LTD
Income Statement
for the period ended 31 December 2006

GROSS PROFIT (from previous page) 222 400

Other income
Rent revenue 2 400
Discount received 2860

227 660
EXPENSES
Selling & distribution expenses:
Sales salaries & commission 61 040
Freight outwards 6 210
Advertising expense 8 420
Rent expense - store space 17 000
Depn. expense - store equip. 7 600 100 270
 SUNRISE CD SALES LTD
Income Statement
for the period ended 31 December 2007

EXPENSES cont’d….
Administrative expenses:
Office salaries expense 63 040
Rent expense - office space 12 000
Depn. expense - office equip. 3 200
Insurance expense 610 78 850

Finance & other expenses:

Interest expense 1 000
Discount allowed 3 260 4 260
183 380
NET PROFIT BEFORE INCOME TAX 44 280
Less: Income tax expense 10 470
NET PROFIT $ 33 810
 Profitability Analysis for
Decision Making

Gross profit ratio Gross

Gross Profit
Profit
Net
Net Sales
Sales xx
100%
100%
Profit margin Operating
Operating Profit
Profit
Net
Net Sales
Sales xx
100%
100%
Expenses to sales Operating
Operating Expenses
Expenses
ratio Net
Net Sales
Sales xx
100%
100%
Inventory turnover Cost
Cost of
of Sales
Sales
Average
Average
Turnover
Turnover
 Where to get more information

• Insert details of additional resources here