Accounting Fundamentals In Society ACCY111

Lecture 9
Dr Sanja Pupovac
 ACCOUNTING FOR RETAILING -
CHAPTER 6

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REVISION AND THIS WEEK……
REVISION:
• Closing entries
• Final step in the accounting cycle

• Let’s Kahoot
• Got to https://kahoot.it

THIS WEEK:
• Inventory
• ‘Service’ businesses to retail sector –consideration given to buying
and selling inventory.

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INVENTORY

• AASB 102/IAS2 – Inventories

• Inventory means goods or property purchased and held for sale in

the operating cycle of a business

• Also know as stock or stock in trade

• Other assets may be sold from time to time but do not constitute
inventory

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 RETAIL BUSINESS OPERATIONS

Acquire Sell Collect

Inventory Inventory Cash

• Determination of profit is a major objective

• Calculation of cost of sales is key
• This is often a retailers largest expense
• Inventory is one of the most active assets in a retail business.
• The control and safeguarding of inventory is essential for efficient and
profitable operations.
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 INCOME STATEMENT FOR A RETAILER
• Some differences to non-retail

• Sales (a revenue) is of primary importance

• Cost of Sales represents inventory sold during the period

• Sales less Cost of Sales equals Gross Profit

• Sales activities and other operating activities separated to highlight gross vs. net profit

• Expenses are grouped by function

1. Selling and Distribution Expenses
2. Administrative Expenses
6 3. Finance Expenses
CONDENSED INCOME STATEMENT FOR A
RETAILER

• Simplified income statement for a retail business:

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INCOME STATEMENT FOR A RETAILER
• Structured to present a picture of the main items of income and
expense.
• This structure enables management to assess the:
– profitability of operations
– by monitoring over time the relationships that exist among sales
– cost of sales
– gross profit
– expenses and profit.

Week 12 ratios on profitability and inventory

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RETAILING AND THE GST
• Retail business have to register for an Australian Business
Number (ABN) if their sales of goods exceed $75 000

• They must also register for GST

• They must issue tax invoices and collect GST

• They can claim input credits (GST outlays)

• As a result, record keeping is very important

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TAX INVOICES
• Required for all sales in excess of $75
• All tax invoices must have
– ‘Tax invoice’ displayed prominently
– ABN of issuing entity
– Date of issue
– Name of suppliers
– Description of items being supplied
• Invoices over $1,000 have additional requirements

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EXAMPLES OF TAX INVOICES

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ADJUSTMENT NOTES
• Adjustments notes used when
– All or part of goods sold are returned
– An allowance (discount) is given
– The price of supply is changed
– Part or full amount of debt is written off
• Essentially a ‘negative invoice’
• Will affect GST amounts
• HOWEVER – for the following examples GST will be ignored to
illustrate the fundamental principles of accounting.

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ACCOUNTING FOR SALES
TRANSACTIONS
• Recorded when inventory transferred to customer
• The entry to record a sale

General Journal
Aug 5 Accounts Receivable/Cash 1 980

Sales 1 980

(Sold merchandise on credit and for cash)

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SALES RETURNS AND ALLOWANCES
(hàng mua trả lại và giảm giá hàng mua)
– To provide information on the volume of returns and
allowances, a contra sales account called Sales Returns and
Allowances is debited for an amount excluding GST.

– Sales returns and allowances are subtracted from sales in the

income statement in order to show net sales.

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SALES RETURNS AND ALLOWANCES

• The entry to record a sales return

General Journal
Aug 8 Sales Returns and Allowances 330
Accounts Receivable 330
(Customer returned merchandise for
credit)

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CASH SETTLEMENT DISCOUNTS
(chiết khấu thanh toán)
– The inventory is sold on credit, the terms of payment, called the
credit terms — e.g. ‘n/30’.

– Provide an incentive for the buyer to make payment before the

end of the credit period.

– The seller may grant a cash discount called

– ‘discount allowed by the seller’ and ‘discount received by the
buyer’.

– Cash discounts are also known as settlement discounts.

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CASH SETTLEMENT DISCOUNTS
• Let’s assume Accounts Receivable of $1100.

• Credit terms – e.g. 2/10, n/30 (2% discount if paid within 10

days, otherwise due in 30 days)

General Journal
Aug 10 Cash at Bank 1 078

Discount Allowed ($1 100 x 2%) 22

Accounts Receivable 1 100
(Receipt of payment within discount
period)

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TRADE DISCOUNTS
• A percentage reduction granted from the normal list price
• Trade discounts are used to determine actual sale price, and therefore are
not recorded separately in the accounts
• Let’s assume 10units of inventory@$200 each and trade discount of 30%.

General Journal
Aug 15 Accounts Receivable 1 400

Sales ($200 x 10 units x 70%) 1400

(Sold inventory on credit with a 30% trade

discount)

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FREIGHT OUTWARDS
• There are a variety of costs related to moving goods from buyer to
seller
• Obligations in regards to these costs will vary and are shown on
invoice
• Standardised trade terms used:

1. EXW: Ex works – buyer pays shipping

2. DDP: Delivered duty paid – seller pays shipping
• DDP treated as selling and distribution cost

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 ACCOUNTING FOR PURCHASES AND
COST OF SALES
• Accounting for inventory involves
– Recording cost of purchased inventories
– Determining which part of inventory can be allocated to:

1. Cost of sales
2. Ending inventory

• Two distinctly different inventory systems!

1. Perpetual inventory system
2. Periodic inventory system
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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

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INVENTORY RECORD CARD

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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

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CONTRASTING THE TWO METHODS
• Note that the Cost of Sales account balance is already recorded under the
Perpetual system

• Under the Periodic system, Cost of Sales needs to be calculated.

• Perpetual = more work and more detail/control

• Periodic = less work, less detail/control

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 SUMMARY - PERPETUAL
• Involves keeping a running record of each purchase and sale
• The inventory account and Cost of Sales account is updated after
every purchase or sale
• As a result, the balance in the inventory account is the ENDING
inventory amount.
• A stocktake is only performed to verify the accuracy of this
recorded ending inventory
• If the recorded inventory and the stocktake differ, then an entry to
record the correct amount needs to be processed

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 SUMMARY - PERIODIC
• No running record of each purchase and sale
• Additional inventory purchased is recorded in the “Purchases” account,
instead of the Inventory account
• The balance in the inventory account therefore does not change until the end
of the accounting period
• A stocktake is performed to determine the closing inventory balance
• This closing balance is then used to determine the Cost of Sales

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Next Week…..

CHAPTER 7
Accounting Systems

“Real integrity is doing the right thing, knowing

that nobody’s going to know whether you did it or
not.”― Oprah Winfrey

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