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Chapter 6.merchandizing Activities - KSBL

The document discusses the operating cycle and key accounting entries for a merchandising company. The operating cycle involves purchasing inventory, selling inventory for cash or on credit, and collecting accounts receivable. It also compares merchandising activities to manufacturing. Key aspects covered include calculating cost of goods sold, using perpetual and periodic inventory systems, accounting for purchases, sales returns and discounts, and using special journals to automate routine transactions.

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Sohail Ausaf
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149 views22 pages

Chapter 6.merchandizing Activities - KSBL

The document discusses the operating cycle and key accounting entries for a merchandising company. The operating cycle involves purchasing inventory, selling inventory for cash or on credit, and collecting accounts receivable. It also compares merchandising activities to manufacturing. Key aspects covered include calculating cost of goods sold, using perpetual and periodic inventory systems, accounting for purchases, sales returns and discounts, and using special journals to automate routine transactions.

Uploaded by

Sohail Ausaf
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Merchandising Activities

THE OPERATING CYCLE OF A MERCHANDISING


COMPANY
What is an Operating Cycle?
• Series of Transactions to generate Revenues &
Cash Receipts

Operating Cycle – Merchandising Company


1. Purchase of Merchandise
2. Sales of Merchandise ( Cash / on Account)
3. Collection of Accounts receivables
Excess Cash reinvested in Purchases.
Cycle Continues ……..
Comparing Merchandising Activities with Manufacturing
Activities

Merchandising Manufacturing
1. Purchase ( Finished goods) from 1. Purchase Raw materials from
Whole Sale / Manufacturers Wholesaler/Distributor
2. WholeSalers / Retailers
Income Statement Format – Merchandising/ Manufacturing Company
Cost of Goods Sold ( COGS) / Gross profit
COGS
• Its an accounting measure. It works on the “Matching Principle” where
goods sold at selling prices are matched against their carrying values as
Merchandize.
• COGS represent all the direct costs involved in bringing the goods to its
location for sale.

Gross Profit
• It’s a very important accounting measure where the Difference between the
Selling Price and the Carrying Value of Merchandize are determined. Gross
Profits or Gross Profit Margins ( Gross profit / Sales) are indicative of the
sensitivities in pricing or costs in relation to the Merchandized goods.
• GP’s are monitored over time as well as benchmarked against competitor
General & Subsidiary Ledgers – Essential for Merchandizing
Company
General Ledger
• Main Accounts in Chart of Accounts – Trial Balance
• Strict Access Controls – Postings, editing, Changing are monitored
• Link with all Subsidiary Ledgers ( Batch Postings or Real Time Posting)

Subsidiary Ledgers
• Staff Costs, Inventory, Accounts Payable, Accounts Receivables, Fixed Assets, CRM
( Loyalty Programs)
• Subsets of General Ledger. Detailed postings from Source records.
• Summary postings onto the General ledger
• Analytical use – extremely important
Perpetual Inventory – System and Accounting Entries
• Instantly Updates Inventory records on Purchases as well as Sales via
Subsidiary Ledgers.
• Inventory Subsidiary Levels are maintained for all Items by cost per
item, type, etc

Sales Transactions results in 2 Journal Transactions


1. DR – Receivables / Cash
CR - Sales

2. DR – Cost of Sales Acc


CR – Merchandize Acc
Perpetual Inventory – System and Accounting Entries

1. Purchase of Merchandise

DR – Inventory Account
CR – Accounts Payable
2. Settlement of Accounts Payable

DR – Accounts Payable
CR – Cash

3. Receivables from Customer

DR – Cash
CR – Accounts Receivables
Physical Inventory – Process & Accounting Entries
• Inventory has been continuously updated.
• Spot Count / Surprise Counts can be carried out on any line item to match
with Book Count
• Sample Count or a Complete 100% count can be carried out
• Discrepancies in count – Inventory Shrinkage (Theft, damage, etc)
• Actual Count multiplied by its respective cost determines total Inventory value

• Accounting Journal Entry


DR – Cost of Sales
CR – Inventory
Adjustment made to individual items in Subsidiary Inventory Ledger
Perpetual Inventory Closing Entries

• All Transactions had been recorded at the same time in the Ledger and
Subsidiary ledgers so closing Process is simple:

• Transfers of all Summary Balances onto the main General Ledger Accounts:
• Sales
• Purchases
• Inventory
• Payables
• Receivables
Periodic Inventory System & Accounting Entries ( 1/2)
• Inventories are not maintained / updated during the period.
• Month End / Year End Adjustments are passed
• Accounting Entries

1. Purchase of Merchandise
DR – Purchases
CR- Cash / Accounts Payable
2. Sale of Merchandise
DR – Cash / Receivables
CR - Sales
Periodic Inventory System & Accounting Entries ( 2/2)
3. Cost of Sales Adjustment
Calculate Opening and Closing Year end Inventories diff xxxxx
Add: Purchases during the Period/Year xxxxx
Cost of Goods Sold xxxxx
=====
4. Accounting entries – Cost of Goods Sold
DR – Cost of Goods Sold
CR – inventory ( Beginning Balance)
CR – Purchases
5. Accounting entries – Year End Inventory Balance
DR – Year End Inventory
CR – Cost of Goods Sold
Who Uses Perpetual vs Periodic

• Updated Information needed on Sales, Stocks, Cash


• Large manufacturers/ Retail / Wholesale Operations
• Cost of Setting up Perpetual System outweighs benefits – Small
retailers
• Sell low cost item, cannot justify maintenance of Computerized
system
Perpetual vs Periodic
Purchases – Credit terms & Cash Discount ( Net Method)
• Net Discount Method – Journal Entries
1. DR – Inventories ( Net of Discount)
CR- Payables ( Net of Discount)

Payment made within credit period : Journal Entries


2. DR – Accounts Payables ( Net)
CR - Cash

Payments made after Credit Period: Due to oversight


3. DR – Accounts payable ( Net)
DR – Purchase Discount Lost ------------------ Finance Charge
CR – Cash ( Gross – Full amount)
Purchases – Credit terms & Cash Discount ( Gross Method)
• Gross Discount Method – Journal Entries
1. DR – Inventories (Gross Amount)
CR- Payables ( Gross Amount)

Payment made within credit period : Journal Entries


2. DR – Accounts Payables ( Gross)
CR – Discount Taken ( balance) ---------- Reduction in Cost of Goods
CR – Cash ( Net)

Payments made after Credit Period:


3. DR – Accounts payable ( Gross)
CR – Cash ( Gross – Full amount)
Return of Merchandise / Transportation Costs
• Journal Entries
DR – Payables ( Returned items)
CR – Inventories

Subsidiary Ledgers adjusted

• Transportation Costs related to Inventories


Costs related to transportation in bringing the merchandise to its present
location can be added on the cost of merchandise

If Transportation costs are too small or cannot be added onto the inventories
then expenses as Cost of Sales
Transactions related to Sales – Sales Returns and Allowances /
Sales Discount (1/2)
• Net Sales
• Gross sales less sales returns and allowances less Sales discount

• Sales Returns and Allowances


• Contra Revenue Account- deducted from Sales to come to Net Sales figure
• Why Use a Separate Sales Return and Allowances Account?
• Cannot directly net off in Sales Account. Must show separately
• Accounting Entries
• 2 Entries – need to be reversed as was done with sale of Merchandise
• DR – Sales Return and Allowances ( sales Price)
CR – Receivables

DR - Inventories ( Cost of Merchandise)


CR – Cost of Sales
Transactions related to Sales – Sales Returns and Allowances /
Sales Discount ( 2/2)

• Sales Discount
• Initial sales are recorded at FULL ( Gross) Price
• DR- Receivables ( Full)
CR – Sales (Full)

• Discount taken entry ( Money received within Discount Period)


• DR – Cash ( Net)
DR - Discount Taken
CR- Accounts Receivables ( Full)
Sales Transactions – Delivery Expenses / Sales tax
• Merchandise delivered to Customers are part of operating expenses
and shown as expense. These are not part of Cost of Sales expenses.

• Shown separately and monitored by managed for better efficiencies

• Sales Tax
• DR – Cash / Accounts Receivables ( Gross)
CR – Tax payable ( Tax amount)
CR – Sales ( Balance)
Special Journals

• Special Journals
• Routine business transactions for Sales, Purchases, expenses, cash collections and payments
• Same Accounting Principles apply to Special Journals as applies to General Journal. General
Journal mostly required at closing /amendments/Write offs

• Automation and Computerization of Routine entries


• POS ( Point of Sale) machines
• Bar Code Readers / scanners ( RFID) readers
• Computerized ERP Systems

• Transactions are faster


• Accounting expertise not required
• Online Transfers

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