Accounting Principles 1: Accounting For Merchandising Operations Inventories

ACCOUNTING
PRINCIPLES 1
FOURTH MEETING
Lecture 5:
Accounting for Merchandising
Operations
Lecture 6:
Inventories
Lecture 5: Accounting for Merchandising Operations
Retailers
Merchandising
Companies
Wholesalers
Source of Revenue?
Type of Expenses?
1. Perpetual system ~ continuous
Keep detailed record of the cost of each inventory
How to record purchase and sale
Inventory? 2. Periodic system ~ at the end of accounting

period (physical count)
Do not keep detailed inventory records.
Record purchases under a perpetual inventory system
Purchases using cash Purchases using credit
Dr. Inventory Dr. Inventory

Cr. Cash Cr. Account Payable
Freight Cost (Delivery Expense) 1. Incurred by the buyer
Dr. Inventory/ Freight-In 150

Cr. Cash 150
When the buyer incurs the transportation costs,

these costs are considered part of the cost of
purchasing inventory. Companies recognize these
costs as cost of goods sold when inventory is sold.
Freight Cost (Delivery Expense) 2. Incurred by the seller
Dr. Freight-Out 150

Cr. Cash 150
Freight costs incurred by the seller on outgoing

merchandise are an operating expense to the
seller. These costs increase an expense account
titled Freight-Out (sometimes called Delivery
Expense)
Purchase Return The purchaser may return the goods to the

When seller for credit if the sale was made on credit,
purchaser is or for a cash refund if the purchase was for
cash.
dissatisfied
Purchase Allowances The purchaser may choose to keep the
merchandise if the seller is willing to grant an
allowance (deduction) from the purchase
price.
Purchase Discounts The credit terms of a purchase on account may permit

the buyer to claim a cash discount for prompt payment.
Credit Terms:
If payment is made within 10 days of the invoice date
(the discount period).
The buyer may take a 2% cash discount on the invoice
price, less (“net of”) any returns or allowances.
Otherwise, the invoice price, less any returns or
allowances, is due 30 days from the invoice date.
1% discount is available if the invoice is paid within the

first 10 days of the next month.
Example (2/10, n/30):
Buyer pays the balance due of $3,500 (gross If the buyer failed to take the discount, the
invoice price of $3,800 less purchase returns and buyer will have to make a full payment ($3500)
allowances of $300) during the discount period.
The cash discount is $70 ($3,500 x 2%), and

buyer only need to pay $3,430 ($3,500 - $70).
Summary of Purchasing Transaction Entries

Purchase Return
Dr. Account Payable 300
Cr. Inventory 300
Purchase from Merchandisers Purchase discount/ cash discount

Dr. Inventory 3800 Dr. Account Payable 70
Cr. Account Receivable 3800 Cr. Inventory 70
Freight Costs incurred by the buyer

Dr. Inventory/ Freight-In 3800
Cr. Account Receivable 3800
Record sales under a perpetual inventory system
Revenue Recognition Principle

“Revenue can be recognized when the goods are transferred from
the seller.”
Two entries should be made by the seller for each sale.

Sales Return The seller accepts goods back from

the buyer (a return)
When seller
records
Sales Allowances The seller grants a reduction in the
purchase price (an allowance) so
the buyer will keep the goods.
Contra revenue account

to Sales Revenue
Sales Discounts The seller may offer the customer a cash discount for
the prompt payment of the balance due.
A sales discount is based on the invoice price less
returns and allowances, if any.
Contra revenue account

to Sales Revenue.
Adjusting Entries in Perpetual System
Involves adjusting Inventory and Cost of Goods Sold
Closing Entries in Perpetual System
Closes to Income Summary all accounts that affect net income.
TEMPORARY PERMANENT
These accounts are closed These accounts are not closed

Summary for Merchandising Entries
Summary for Merchandising Entries
Multiple-step
Income Statement
*Separates Revenues and Expenses into Operating
and Non-Operating
Single-step
Income Statement
*Single-Step Income Statement:
Total revenue – Total expenses = Net Income
Classified
Balance Sheet
*list current asset items in the order of their closeness to cash (liquidity)
End of lesson 5: Accounting for Merchandising Operations

Lesson 6: Inventories
Classifying Inventory
Lecture 6: Inventories
Determining 1. Taking physical inventory
Inventory ~ Counting physical inventory on
Quantity
hand at the end of accounting period.
2. Determining ownership of goods
Determining
• Goods in Transit
Inventory
Quantity
• Consigned Goods
1. Specific Identification
If a company can positively identify which units it
Inventory sold, and which are still in ending inventory.
Costing
Method
Inventory
Historically, specific identification was possible
only when a company sold a limited variety of
high-unit-cost items that could be identified
Costing clearly from the time of purchase through the
time of sale.
Method Examples of such products are cars, pianos, or

expensive antiques.
The reality is, however, that this practice is still

relatively rare.
2. Cost Flow Assumptions
Inventory Company make assumptions (periodically) about which

Costing units were sold because specific identification is often
impractical.
Method Cost flow methods:

The costs of the oldest units are recognized first.
1. First-in, first -out (FIFO) → oldest purchases sell first

The costs of the latest goods purchased are recognized first.
2. Last- in, first- out (LIFO) → new est purchases sell first
3. Average-cost →
Pelanggan memesan 550 units product.
First-in, first-out (FIFO) Last-in, first-out (LIFO)

Pelanggan memesan 550 units product.
Average-cost Method
Sangat mudah :D
$12* 550 = $6600 (COGS)

Income
Statement
Effects
Income
Statement
Effects
A major advantage of the FIFO method is that in a period of

inflation, the costs allocated to ending inventory will
Balance approximate their current cost.
Sheet
For example, 400 of the 450 units in the ending inventory
are costed under FIFO at the higher November 27 unit cost
of $13.
Effects A major shortcoming of the LIFO method is that in a period

of inflation, the costs allocated to ending inventory may be
significantly understated in terms of current cost.
Balance
Sheet
Effects
During inflation...
We have seen that both inventory on the balance sheet

and net income on the income statement are higher when
Tax companies use FIFO in a period of inflation.
Yet, many companies have selected LIFO. Why?

Effects The reason is that LIFO result in the lowest income taxes
(because of lower net income) during times of rising
Prices (inflation).
Balance Sheet - Inventory classified as current asset.

Income Statement - Cost of goods sold subtracted from
net sales.
Statement
Basis of accounting (Cost or LCM/ Net Realizable Value)
Presentation
Cost method (FIFO, LIFO, or average cost)

To measure the liquidity of the inventory.
Inventory
Analysis To measure the average number of days the inventory is held.
1. Gross Profit Method
Methods of
Estimating
Inventories
End of lesson 6: Inventories
When company has thousands of different
types of merchandise at low unit costs.
2. Retail Inventory Method
Methods of
Estimating
Inventories

Accounting Principles 1: Accounting For Merchandising Operations Inventories

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ACCOUNTING

1. Perpetual system ~ continuous

Keep detailed record of the cost of each inventory

How to record purchase and sale

Inventory? 2. Periodic system ~ at the end of accounting

Purchases using cash Purchases using credit

Dr. Inventory Dr. Inventory

Freight Cost (Delivery Expense) 1. Incurred by the buyer

Dr. Inventory/ Freight-In 150

When the buyer incurs the transportation costs,

Freight Cost (Delivery Expense) 2. Incurred by the seller

Dr. Freight-Out 150

Freight costs incurred by the seller on outgoing

Purchase Return The purchaser may return the goods to the

Purchase Discounts The credit terms of a purchase on account may permit

1% discount is available if the invoice is paid within the

Example (2/10, n/30):

The cash discount is $70 ($3,500 x 2%), and

Summary of Purchasing Transaction Entries

Purchase from Merchandisers Purchase discount/ cash discount

Freight Costs incurred by the buyer

Revenue Recognition Principle

Two entries should be made by the seller for each sale.

Sales Return The seller accepts goods back from

Contra revenue account

Contra revenue account

These accounts are closed These accounts are not closed

End of lesson 5: Accounting for Merchandising Operations

Determining 1. Taking physical inventory

Inventory ~ Counting physical inventory on

2. Determining ownership of goods

Inventory sold, and which are still in ending inventory.

Method Examples of such products are cars, pianos, or

The reality is, however, that this practice is still

2. Cost Flow Assumptions

Inventory Company make assumptions (periodically) about which

Method Cost flow methods:

1. First-in, first -out (FIFO) → oldest purchases sell first

First-in, first-out (FIFO) Last-in, first-out (LIFO)

$12* 550 = $6600 (COGS)

A major advantage of the FIFO method is that in a period of

Balance approximate their current cost.

Effects A major shortcoming of the LIFO method is that in a period

We have seen that both inventory on the balance sheet

Tax companies use FIFO in a period of inflation.

Yet, many companies have selected LIFO. Why?

Balance Sheet - Inventory classified as current asset.

Cost method (FIFO, LIFO, or average cost)

To measure the liquidity of the inventory.

1. Gross Profit Method

2. Retail Inventory Method

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