Ch4 Accounting for Merchandizing entities A merchandising corporation: Quybuill aS pill Is a business entity that buys (or manufactures) merchandise and offers them for sale. hoe pow Lose (lprriai I) glad! slaty ogi sill no teyjbaill aS il This feature of having the merchandise available for customers and exchanging it for cash or a promise to receive cash shapes the operating cycle and the accounting system of the enterprise. oud Glu le gf S38 Joly Jana! 5,51 0,0 pau pi yes acladl ld aloe aulasdsall opgall In a merchandising entity, The revenue is earned from buying and selling merchandise. pool acladl gay sic olslyWl gas tale lS il 9d Thus, the net income of a merchandising entity is achieved only after covering the cost of merchandise sold and all other operating expenses for the accounting period wayjlas 98b aubsi pi Vel acho! aclaJl aalSs abs se Jl sdlo Gar Why (adisricll a) bao!) aS ridThe operating cycle: aubacisll opal the activities and length of time that are needed to buy the merchandise and sell it and collect the price (revenue) in cash (pied Jaaay lpow i (09 aeladl elyid o;\UI ciglly abi no raldeatall 0,9.) « The length of time differs from one enterprise to the other S51 oll Spd yo BLAS aes! 0,9 oro depending on: VI a> ole v the nature of the merchandise, yd p> sill acladl eg) v the demand for the commodity. atoll gle ULbIl v the credit policy of the firm, (Claus gle gud!) oles VI ulin ¢ Under normal circumstances: the operating cycle is usually less than a year and it might be 50 days, three months, more or less. aie Go Jil pie Qetall o,9)l : aaubll VEU sdhei! 09! abil ulw The main activities (chains) of the typical merchandising operating cycle. Operating Cycle of a Merchandising Business 1. Acquisition of Merchandise acladll slit This activity creates several accounts: ¥ purchase account ¥ accounts payable v inventory account 2. Holding Inventory for sale au poe) aclaJl bla>Vi And finding a buyer This activity involves repackaging The merchandise, advertising, and displaying the commodity. This step creates several accounts: Y advertising expense accounts v inventory maintenance 3. Sale of Merchandise aclaJl ev This step creates several accounts: y Sales revenue account v Sales returns and discount accounts leno] pas9 leno! wler,o yv Accounts receivable 4. Collection from Receivabl sMMosll oblu> Juan This step is associated with some accounts: v bad debt expense aogizoJl Ug tll i> S900 Y collection of previously written-off accounts LaLa Y8ic pi 48 O99 Jaensclad) =» The Inventory in the merchandising firm has Two Prices : wn @ Purchanse Price (or) Cost Price ( Cost of goods sold) (C.G.S) aac) (sete Lig Ae) an i ia Mea gay eg. ALG pe (4) 62 © Selling Price (or) Martket Price ( Sales Revenue ) ont (51) eb daa MeL ey ll aes) al # Usally , the selling price is greater than the purchase price and the difference © (Multiple step income statemnt) [Gross Profit Sales XX - COGS (Xx) = Gross Profit ax <= (1) - Operating expenses Selling expenses (xx) General expenses (xx) Administrative expenses (xx) = Operating Income before tax xx <= (2) - Income Tax Expense (xx) = Net Income (Profit) XX << — (3) Gross Profit = Sales Revenue - COGSInventory Accounting Systems Inventory: ( cis 5al ) Ae bcaalt is current assets , and refers to products (goods) owned by the merchandising frim and expected to be Sold during the financial year. Gay ly WS 4S gS Gl lal A Gy Beginning cost of Inventory Purchases Inventory available for sales Ending cocs Inventory Balance sheet Income Statement Beg. Inventory + Purchases = End Inventory + COGS Beg, Inventory + Purchases - End Inventory = COGSWD NW olbs ped (ab Loy | we inventory Syphon flor sz deb Gap 32) yb Continually updates accounting Updates the accounting records records for merchandising transaction for merchandising transactions Only at the end of an accounting period Hence, the cost of goods sold is Hence, the cost of goods sold is determinedOn the date of each sale determined at the end of the period only au alec JS ae acloll aclad! aals Glas px sell ailpi a9 achall acladl aalSs Glue iy SUN eller a VP) Gls Ube obses OLE hase & {OZ ey oh ofa PPA) Sve Le x [POD ow lee ON OP we I x G22) & leas GE) bps ED) ells a Ea clhea Dlase ulssese * Us Davy a on GF ID bprs er (PO oF whe YOrs 2 (2 oF wy ja +s (PP nw Sars o GED) ce lps s GED) ilps 2Rriodie -dshbJ) s)— PRvchases xx Cosh @ Nye Xx “3%. rob ane Claris Cosh @ AlP KK Farchase Veluvn XK 3 RDG We AN A/P XX ' Cash xx Parclrase iscout ay =1 RD of sha) AIP 7 xy Cash XK (Freight-in ) -_ ee Epps —Trenspertdtion-in exPense XX Cash @ AIP XX2G Zhlbs OF Cash Ale oe Sales Revenue KX «FB ams Warp #* Sales Return SS Cash @& AIR xx REN op ws WO » Cosh a Sialed dliscount XK AIR xX iy yRa)) om 20 ors Cash Pe AIR Xx 1 OLS Cojlpe #¥ ( Freight-out ) ee TVronspottdion-out expense XX Cash @ AIP XXCask Uccoull * 2lio , wn] se =) Po 24 gRr Discount period Credit period ws) ia ee oll all bh \e ast QDs laa Trade Discount: Alas) deo yy gel P21 Tiade discomt Sy fl Gy pe gle Aaa dea Ga eg jl ill) dag yah nad Bll 8 Leal el UN (aya gb oY) ball GA Jaa Y 5 ll al) ad arcs es Sy Sl (gb OSs (MI aul G) Cue Examp! EI Nasr Company offers a 10% trade discount for order of 1000 units. each unit has a list price (cataloge price) of _L.E. 12. Required : determine the invoice price ? Solution Quantity Sold 1000 x List Price per unit x12 =Total 12,000 () 10% trade discount _ (1,200), —— (10% 12000 = Invoice price 10,800 —Foe 10 oS Shipping Point (FOBSP) PENT Jos Gasll gel Gls Freight - in x Cash (or) A/P KX Destination (FOBD) PIES Jos BAM aBloy ZB Qs (delivery exp). Freight - Out xX Cash (or) A/P XX Lah Go cnlne slau BU od 1H GA ie dls 1 BW Db by Al Rec. XK Cash xx Co) dyles 14> G78 els Lal BU we tla Less A /fayoble XK Cash XX ELAR ie (cas tw11 Purchase Return & allowance Purchase Return: jie Cilaas ya goods returned by the Buyer to the Seller because the goods contain deffects or unacceptable . IE gay Ca Ql ll Ae Leal og fall hy Lie Puchase allowance: aly fie Cie ganse a reduction in the cost of defective or unacceptable goods received by the Buyer from the Seller . (class pal Sie Jala) Ail aoa oS Gils Notes atlad (8 83 13) ee ate 3 ’ Glee Gleat yo ist Credit Memorandum ——> soles return & allwowance atfueall (6 483 131 Debit Memorandum ——> , 2" Purchase Return & allwowance12 Saal posd| Vlas Sb Purchase Cash Discount ‘Sometimes suppliers of merchandise give cash discounts as an incentive for customers to pay for purchases early. (lea) Spay goal le aad Sutra) Saas pad Usha) yi2,90ll yan) Cash discount in books can be done in two ways: pas] GlLucd yt b 1) The gross method. 2) The net method, 1) The gross method: purchases are recorded at the invoice cost. alals Upioaty Jara ob asia If the firm pays for purchases in the discount period: sil 0,28 JS dull ps Isl A Cash discount is recognized only. (necdl Jaws) puccdls sedioni OS! Ifthe firm fails to pay within the discount period: prccll 0539 dap gall pi IS) No entry is needed and the discount is lost. (ew Jari s=g/¥) owas! bad oS! 2) The net meth Purchases are recorded at the net amount of the invoice assuming that the firm will take advantage of the cash discount. pasll yo dle Jus ob icall If the firm fails to pay within the discount period: puacell 0529 ae g9.! pi IS! then the firm pays the supplier the whole value of the purchase, and the discount is recorded as a lost purchase discount. (spite pas) al ole aleais masll Uru ul13 Example: Assume that the Midnight Moon Corporation trades in furniture. On January 19, 2020, - The firm ordered 1,000 disk chairs at a cost of $ 100 per chair. - The invoice came FOBSP for a total purchase price of $ 100,000 plus $ 2000 freight-in. On February 10, 2020 - The Midnight Moon corporation Purchase of the disk chairs, 50 chairs were not matching the ordered quality, which was returned immediately to supplier - Another 20 chairs were damaged during transportation and the supplier gave Midnight Moon a discount of 50% of the cost in order to keep the chairs and sell them as defective units. Required: Record the above transactions ( using Periodic method )? Solution obyituall Jarxiual Jan.19 | Purchases (1,000 x $ 100) 100,000 Accounts Payable 100,000 Chyidiall gad ajlae Jeu) Jan.19 | Freight-in Expenses 2,000 Accounts Payable 2,000 lpndioll lexi ye Jextu Feb.10 | Accounts Payable (50 x $ 100) 5,000 Purchases Return & Allowance 5,000 Chyndiall (Slee) Ob gaue feria Feb.10 | Accounts Payable (20x $100)x 50% | 1,000 Purchases Return & Allowance 1,00014 Gross Method Example: Assume that the Midnight Moon Corporation trades in furniture. On January 19, 2020, - The firm ordered 1,000 disk chairs at a cost of $ 100 per chair (Total = $ 100,000) - Assume that the supplier stated in the invoice that terms are 2% or net within 10 days. IE On January 29, 2020, pec] 0538 JME gdall pi Isl - Moonlight corporation paid the amount of purchases to the supplier IF On Feb 5, 2020, puosel 0:8 Amy @94ll ps Isl - Moonlight corporation paid the amount of purchases to the supplier Required: Record the above transactions ( using Gross Method)? Solution Jan.19 | Purchases 100,000 Accounts Payable 100,000 peal 0538 SME adil pi SI Jan.29 | Accounts Payable 100,000 Cash (100,000 — 2,000 ) 98,000 Purchase Discount (100,000 x 2%) 2,000 puosdl 0,39 ass 29)l pi Is! Feb.5 Accounts Payable 100,000 Cash 100,00015 Net Method Example: Assume that the Midnight Moon Corporation trades in furniture. On January 19, 2020, - The firm ordered 1,000 disk chairs at a cost of $ 100 per chair (Total = $ 100,000) - Assume that the supplier stated in the invoice that terms are 2% or net within 10 days. IE On January 29, 2020, procel 058 JME g8.)l oi [51 - Moonlight corporation paid the amount of purchases to the supplier IF On Feb 5, 2020, puosel 0,23 ase gall p3 Isl - Moonlight corporation paid the amount of purchases to the supplier Required: Record the above transactions ( using Net Method )? Solution pucisll yo Udle Sb yisisall Juresuti Jan.19 | Purchases $ 100,000 — (2% x $100,000 ) 98,000 Accounts Payable 98,000 pocdl 0:8 IMS goal! pi 131 Jan.29 | Accounts Payable 98,000 Cash (100,000 - 2,000 ) 98,000 pecs] 0,38 su Ql pi ISI Feb.5 Accounts Payable 98,000 Lost Discount (Dr lpisaib o,lus) pasll Une | 2,000 Cash 100,00016 Example: On February 25, 2020: - The Midnight Moon Corporation in the sold 300 disk chairs at $ 200 per chair on credit. - Terms are FOBD. The shipment cost of this sale was $ 1500 On February 28, 2020: the customer returned 50 chairs because of unmatched quality Required: Record the above transactions (using Periodic method)? Solution colegall lac Jarauil Feb.25 | Accounts Receivable (300 x $ 200) 60,000 Sales 60,000 clenell yd ayes Jureuil Feb.25 | Freight — Out Expenses 1,500 Accounts Payable 1,500 leno! cleripo jr Feb.28 | Sales Return & Allowance (50 x $ 200 ) 10,000 Accounts Receivable 10,00017 Example: GL! Jeol! ste Joss Assume in the sales transaction of the Midnight Moon on February 25, the terms of payment call for 3% within 15 days or net within 50 days. on March 7, 2020: customer paid for the merchandise sold at Feb.25 Required: Record the above transactions (using Periodic method)? Solution Feb.28 Cash (50,000 - 1,500) 48,500 Sales discount ( 50,000 x 3%) 1,500 Accounts Receivable (60,000 - 10,000) 50,000 proce! 09 UMS Jaaritl bod lil boV