10/13/2020

Objectives
 Distinguish the activities of a service business from those of a
trading business
Chapter 5
 Journalise the entries for trading transactions

Accounting for  Prepare a profit and loss statement for a trading business

Trading Business

Contents Nature of Trading Businesses

1. Nature of Trading Businesses  Would you please tell me three most common
2. Accounting for Purchases type of businesses?
3. Accounting for Sales
4. Trade Discounts
Manufacturing Trading Services
5. Transportation Costs
6. Profit and loss statement for a trading
business

Nature of Trading Businesses Nature of Trading Businesses

 Which type of business has the most complex  Why?
accounting system?
Service Business Trading Business
Fees X Sales X

Expenses (X) COGS (X)

Manufacturing Net Profit X Gross Profit X

Operate Expenses (X)

Net Profit X

COGS in a manufacturing business: Material, Labour and

Overhead

1
 10/13/2020

Accounting for Purchases Accounting for Purchases

1. Perpetual Inventory System 1. Perpetual Inventory System
2. Periodic Inventory System Each purchase and sale of goods is recorded in an
3. Purchase Inventory Account. The amount of goods available for
sale and the amount sold are continuously (perpetually)
4. Purchases discounts
shown in the inventory records.
5. Purchases Returns and Allowances
Closing Balance = Opening Balance + Purchase - Sale

Accounting for Purchases Accounting for Purchases

2. Periodic Inventory System 3. Purchase

Inventory is accounted for at the end of the period  Could be made:

- By Cash
COGS = Opening Balance + Purchase – Closing Balance
- On Credit
- By Mixture (Cash + Credit)

Stocktaking

Accounting for Purchases Accounting for Purchases

 Purchase by Cash  Purchase discounts: reduced amount when making early
 Debit Inventory payment
 Credit Cash
 Credit terms: Terms for when payments for goods are to be
 Purchase on Credit made
 Not allowed an amount of time to pay: Cash or Net Cash
 Debit Inventory
 Allowed an amount of time to pay: Credit
 Credit Trade Payable

 Credit period: Amount of time allowed before a payment is

 Purchase on Mixture
required (begin with the date of the sale as shown on the
 Debit Inventory invoice) (30 days, 45 days, 90 days, etc)
 Credit Cash
 Credit Trade Payable

2
 10/13/2020

Accounting for Purchases Accounting for Purchases

Credit terms: Cash or Credit 4. Purchases discounts
Purchase good (assume on credit)
Could be express: Debit Purchase
n/30 Credit Trade Payable
n/eom When making early payment (enjoy purchases discounts)
2/10 Debit Trade Payable
Credit Cash/Bank Account
Purchases Discounts
Could use more than 1 term together
2/10, n/30 Note: These discounts reduce the cost of the goods purchased

Accounting for Purchases Accounting for Sales

5. Purchases Returns and Allowances 1. Sales
Debit Trade Payable 2. Sales Discounts
Credit Purchases Returns and Allowances 3. Sales Returns and Allowances
4. Goods and Services Tax
 When goods are returned or price is adjusted, 5. Trade Discounts
buyer usually sends the seller a letter – called
debit note or debit memorandum

Accounting for Sales Accounting for Sales

 Sales by Cash
1. Sales:
 Debit Cash
 Credit Sales/Sales Revenue
 Could be made:
- By Cash  Sales on Account
 Debit Trade Receivable
- On Account
 Credit Sales/Sales Revenue
- By Mixture (Cash + Credit)
 Sales on Mixture
 Debit Trade Receivable
 Debit Cash
 Credit Sales/Sales Revenue

3
 10/13/2020

Accounting for Sales Accounting for Sales

 Sales made with the use of credit cards? (Master cards, VISA,
etc)
 Will create a receivable with the card companies. These
companies will charge a service fee.
Sales on credit cards:
Debit Account Receivable (Card Company)
Credit Sales
Receive money from card company:
Debit Cash
Debit Credit Card Expenses
Credit Account Receivable (Card Company)
2. Sales Discounts
Seller may offer the buyer credit terms that include
a discount for early payment.
In theory, discount for early payment will reduce
Sales/Sales Revenues (Debit it!!!). However,
managers may want to know the amount of sales
discount for the period  Open Sales Discounts
Account (Contra Sales Account)

Accounting for Sales Accounting for Sales

2. Sales Discount 3. Sales Returns and Allowances

Goods sold be returned to seller (sales return)

Debit Cash The seller may reduce the initial price because of defects
(sales allowance)
Debit Sales Discounts
Credit Account Receivable The seller usually issues the buyer a credit note or credit
memorandum

This will reduce sales. However, manager may want to know

the amount of returns and allowances for a month or a year
 open contra sales accounts

Accounting for Sales Accounting for Sales

4. Goods and Services Tax (GST) 4. Goods and Services Tax (GST)

In some countries, this type of tax could be also known

In some countries, this type of tax could be also
known under the name Value Added Tax (VAT)
Businesses are authorised to charge and collect GST
(or VAT) on behalf of the Controller of GST (Tax
Authority)
under the name Value Added Tax (VAT)
GST Payable (When sale is made)
GST Receivable (When purchase is made)
At the end of each quarter, business pays the net amount of
tax (ie GST Payable – GST Receivable)

4
 10/13/2020

Trade Discounts Trade Discounts

 Businesses may offer special discounts for large quantities  Sellers and buyers do not normally record the list
prices of goods and the related trade discounts in
their accounts.

 In order words, the recorded amount is already

reflected the trade discount.

Transportation Costs Transportation Costs

 Sale is determined when ownership (title) of the
good passes to the buyer. Buyer Pays Shipping
Point
FOB (Free On Board)

Destination
Seller Pays
 This point determines which party (buyer or
seller) must pay the transportation costs.

Profit and loss statement for a trading

Transportation Costs business
 FOB Shiping point Revenue from Sales X
 Debit Transportation In
Buyer
 Credit Cash/Bank/Payable Cost of Goods Sold (X)
Gross Profit X
 FOB Destination
 Debit Transportation Out
Other Revenue X
Seller
 Credit Cash/Bank/Payable
Operating Expenses (X)

Net Profit X