Chapter 5

Retailing operations

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 Learning objectives
• Describe retailing operations, perpetual and periodic inventory
systems and understand how to account for GST
• Account for the purchase of inventory using a perpetual
system
• Account for the sale of inventory using a perpetual system
• Adjust and close the accounts of a retailing business
• Prepare a retailer’s financial statements
• Use gross profit percentage, inventory turnover “vòng
quay HTK” and days in inventory to evaluate a business

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 5.1. What are retailing operations?
• Retailing consists of buying and selling goods rather than services
• Retailers have some new balance sheet and income statement
items, for example Inventory, Sales revenue, and Cost of
sales
• The operating cycle of a retailing business begins when the business
purchases inventory from a vendor. It then sells the inventory to a
customer. Finally, the business collects cash from customers

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 5.1. What are retailing operations?

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 5.1. What are retailing operations?

Goods and services tax (GST)

• GST is a tax levied on the supply of goods and services
• The tax is a flat percentage charge
• Each firm registered for GST collects tax on the goods and services
it supplies and pays tax on the goods and services it buys
• The firm then deducts the tax it pays on purchases from the tax it
charges on sales and pays the balance to the Australian Taxation
Office

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 5.1. What are retailing operations?
Inventory systems: Perpetual and Periodic
• The periodic inventory system is normally used for relatively
inexpensive goods
• Goods are counted periodically to determine quantity
• The perpetual inventory system keeps a running computerised
record of inventory
• The number of inventory units and the dollar amounts are
perpetually (constantly) updated
• It records units purchased and cost amount, units sold and sales
and cost amounts, and the quantity of inventory on hand and its cost

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 5.2. Accounting for inventory in the
perpetual system

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 5.2. Accounting for inventory in the
perpetual system
Purchase of Inventory
• The inventory account is increased with each purchase
• The vendor submits an invoice for payment
• The inventory account is used for goods purchased
• The method of payment is credited
Date Account title Dr Cr
Jul 3 Inventory (770/1.1) (A+) 700
GST clearing (770/11) (A+) 70
Accounts payable (L+) 770
Purchased inventory on credit
(mua hang chưa trả).
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 5.2. Accounting for inventory in the
perpetual system
• Many businesses offer customers a settlement discount for early
payment
• RCA’s credit terms of ‘3/15, Net 30 days’ mean that Smart Touch
can deduct 3% from the total bill (excluding freight charges, if any) if
the business pays within 15 days of the invoice date

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 5.2. Accounting for inventory in the
perpetual system
Date Account title Dr Cr
Jul Accounts payable (L–) 770

15
Cash ($770 × 0.97) (A–) 746.90
Inventory 21.00
($770×0.03×10/11) (A–)
GST clearing 2.10
($770×0.03×1/11) (A–/L+)
Paid within discount period.

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 5.2. Accounting for inventory in the
perpetual system
• Businesses allow customers to return goods that are
defective, damaged or otherwise unsuitable – purchase
returns
• The seller may also deduct an allowance from the amount
the buyer owes – purchase allowances
Date Account title Dr Cr
Jul 4 Accounts payable (L–) 110
Inventory (110/1.1) (A+) 100
GST clearing (110/11) (A–/L+) 10
Returned inventory to seller.

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 5.2. Accounting for inventory in the
perpetual system
• The purchase agreement specifies FOB (free on board) terms to
determine when title to the good transfers to the purchaser and who
pays the freight
• FOB delivery point means the buyer takes ownership (title) to the
goods at the delivery point
• FOB destination means the buyer takes ownership (title) to the
goods at the delivery destination point
• Freight in is the transportation cost to ship goods into the
purchaser’s warehouse (part of the cost of inventory)
• Freight out is the transportation cost to ship goods out of the
warehouse and to the customer (selling expense)

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 5.3. Sale of inventory
• After a business buys inventory, the next step is to sell the goods
• The amount a business earns from selling inventory is called Sales
revenue (Sales)
• At the time of the sale, two entries must be recorded in the perpetual
system: one entry records the sale and the cash (or receivable) at
the time of the sale; the second entry records Cost of sales (debit
the expense) and reduces the Inventory (credit the asset)
• Cost of sales (COS) is the cost of inventory that has been sold to
customers

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 5.3. Sale of inventory

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 5.3. Sale of inventory: Cash sale
Date Account title Dr Cr
Jul 9 Cash (A+) 3 300
Sales revenue (3 300/1.1) (R+) 3 000
GST clearing (3 300/11) (A–/L+) 300
Cash sale.

Date Account title Dr Cr

Jul 9 Cost of sales (E+) 1 900
Inventory (A–) 1 900
Recorded the cost of goods sold.

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 5.3. Sale of inventory: Credit sale
Date Account title Dr Cr
Jul 11 Accounts receivable (A+) 5 500
Sales revenue (5 500/1.1) (R+) 5 000
GST clearing (5 500/11) (A–/L+) 500
Sale on credit.
Jul 11 Cost of sales (E+) 2 900
Inventory (A–) 2 900 2 900
Recorded the cost of sales.
Date Account title Dr Cr
Jul 19 Cash (A+) 5 500
Accounts receivable (A–) 5 500
Collection on account.
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 5.3. Sale of inventory
• Sales returns and allowances and sales settlement discounts
decrease the net amount of revenue earned on sales
• Sales returns and allowances and Sales discounts are contra
accounts to Sales revenue

Net Sales
Sales Sales
sales returns and
revenue discounts
revenue
allowances

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 5.3. Sale of inventory: Sales returns
Date Account title Dr Cr
Jul 12 Sales returns and allowances 600
(660/1.1) (CR+)
GST clearing (660/11) (A+/L–) 60
Accounts receivable (A–) 660
Received returned goods.

Date Account title Dr Cr

Jul 12 Inventory (A+) 400
Cost of sales (E–) 400
Placed goods back in inventory.

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 5.3. Sale of inventory:
Sales allowances
Date Account title Dr Cr
Jul 15 Sales returns and allowances 100
(110/1.1) (CR+)
GST clearing (110/11) (A+/L–) 10
Accounts receivable (A–) 110
Granted a sales allowance for
damaged goods.

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 5.3. Sale of inventory: Sales discounts
Date Account title Dr Cr
Jul 17 Cash ($4 400 × 0.98) (A+) 4 312
Sales discounts ($4 400 × 0.02 × 10/11) 80
(CR+)
GST clearing ($4 400 × 0.02 × 1/11) 8
(A+/L–)
Accounts receivable (A–) 4 400 4 400
Cash collection within the discount period.
Date Account title Dr Cr
Jul 28 Cash ($7 150 – $4 400) (A+) 2 750
Accounts receivable (A–) 2 750
Cash collection after the discount period.

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 5.3. Sale of inventory: Sales revenue,
cost of sales and gross profit

Gross
Net sales
profit
revenue Cost of
sales (same as
(abbreviated
Gross
as Sales)
margin)

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 5.4. Adjusting and closing the
accounts of a retail
Adjusting inventory based on a physical count
• The Inventory account should stay current at all times in a perpetual
inventory system
• The actual amount of inventory on hand may differ from what the
books show
• For this reason, businesses take a physical count of inventory at
least once a year
• The business then adjusts the Inventory account based on the
physical count:
Adjusting entry: Dr Cost of sales
Cr Inventory
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 5.4. Adjusting and closing the
accounts of a retail
Closing the accounts of a retailer
• Step 1: Make the revenue and contra revenue accounts equal
zero via the Income summary
• Step 2: Make expense accounts equal zero via the Income
summary account
• Step 3: Make the Income summary account equal zero via the
Capital account
• Step 4: Make the Drawings account equal zero via the Capital
account

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 5.5. Preparing a retailer’s
financial statements
• AASB 101, Presentation of Financial Statements, refers to two
different income statement formats based upon the method used for
analysing expenses
• The ‘by nature of expenses method’ begins by showing sales and
other revenues and then deducts expenses analysed into
categories (descriptive format income statement – service entities)
For example: employee benefits (wages, health insurance),
the cost of depreciation and advertising

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 5.5. Preparing a retailer’s
financial statements
GREG’S TUNES
Income Statement
For the year ended 31 December 201N

Revenue
Net sales (net of sales discounts…and returns and allowances..) $xxx
Expenses
Cost of sales xxx
Wage expense xxx
Rent expense xxx
Finance expense xxx
Insurance expense xxx
Depreciation expense xxx
Supplies expense xxx
Total expense xxx
Profit $xxx

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 5.5. Preparing a retailer’s
financial statements
• The alternative ‘function of expenses method’ begins with sales but
then deducts cost of sales to show the gross profit, adds other
revenues and classifies the remaining operating expenses into
categories (functional format income statement- retailer entities)
For example: distribution, administration, marketing and finance
• Under both alternatives, revenues and finance costs must be shown
separately on the face of the income statement

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 5.5. Preparing a retailer’s
financial statements
GREG’S TUNES
Income Statement
For the year ended 31 December 201N
Sales Revenue $ xxxx
Less: sales discounts $ xxx
sales return and allowances xxx (xxx)
Net sales revenue $xxx
Cost of sales xxx
Gross profit Xxx
Operating expenses
Wage expense Xxx
Rent expense
Insurance expense Xxx
Depreciation
expense Supplies Xxx (Xxx)
expense
Xxx (Xxx)
Finance expenses
xxx
Net Profit
xxx
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$ xxx
 5.6. Three ratios for decision making
• The gross profit percentage is one of the most carefully watched
measures of profitability.
• Gross profit percentage = Gross profit / Net sales revenue
• Inventory turnover measures how rapidly inventory is sold
• Inventory turnover = Cost of sales / Average inventory
• Days in inventory ratio measures the average number of days
inventory is held by the business
• Days in inventory = 365 days / Inventory turnover ratio

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 Summary: Chapter 5
• Retailers have some new balance sheet and income statement
items, for example Inventory, Sales revenue, and Cost of
sales
• GST is a tax levied on the supply of goods and services
• The perpetual inventory system keeps a running computerised
record of inventory
• It records units purchased and cost amount, units sold and sales
and cost amounts, and the quantity of inventory on hand and its
cost
• The actual amount of inventory on hand may differ from what the
books show. For this reason, businesses take a physical count of
inventory at least once a year

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 Tasks in class
Textbook: Chapter 5
• Quick Check
• Starters
• Exercises

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 Tasks at home
Homework:
Textbook: Chapter 5
• Problems
• Apply

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The end of Chapter 5
Retailing operations

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