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Unit 4

English for Accounting

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56 views3 pages

Unit 4

English for Accounting

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Anonymous Fn7Ko5riKT
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© © All Rights Reserved
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Unit 4:

MERCHANDISING ENTREPRISE ACCOUNTING

ENTRIES FOR PURCHASES TRANSACTIONS ACCOUNTING ENTRIES USED TO


RECORD THE PURCHASE AND PAYMENT OF GOODS
1) When goods are purchased with cash, the following entry is necessary:
debit Purchases, credit Cash
2) When goods are purchased on credit, the following entry is necessary:
debit Purchases, credit Accounts Payable
3) When goods are purchased on credit, but are paid back early due to a cash discount
incentive, the following entry is necessary:
debit Accounts Payable, credit Cash, and credit Purchases Discount.

PURCHASES DISCOUNTS

A seller will often offer a cash discount to the buyer for an early payment. Credit terms are
the conditions for the payment agreed upon by the buyer and the seller. Cash discounts are
stated in a fractional form with the percentage of discount in the numerator and the number of
days in the denominator. The credit period, or number of days a buyer can pay without
incurring a finance charge, is stated in NET days or n/days. Example: terms 3/15, n/60 means
a buyer will receive a 3% cash discount if paid within 15 days of the invoice date, and the
buyer has a maximum of 60 days to pay the entire debt amount.

PURCHASES RETURNS AND ALLOWANCES RULES


FOR RECORDING RETURNS AND ALLOWANCES FOR GOODS PURCHASED ON
CREDIT
1) If merchandise is returned or a price adjustment is necessary, the buyer should debit
Accounts Payable and credit the Purchases Returns and Allowances account.
2) When the returned goods were purchased on credit, and a cash discount for early payment
is available, the discount only applies to the price of the goods that are kept, (in addition,
discounts are not taken on freight costs).

SALES ACCOUNTING
When goods are sold for cash or on credit, the Sales account should be credited. To
encourage early payment of goods purchased on credit, the seller will often offer a cash
discount. These discounts are recorded in the Sales Discounts account. When goods are
returned or an allowance is requested, the adjustment is made to the Sales Returns and
Allowances account. All sales discounts, returns, and allowances reduce sales revenues.

SALES ACCOUNTING - RULES FOR RECORDING SALES TRANSACTIONS


1- When goods are sold and payment is made in cash, debit Cash and credit Sales.
2- When goods are sold on credit, debit Accounts Receivable and credit Sales.
3- When goods are sold through the use of a credit card, there often will be a service fee. In
such circumstances, debit Cash and Credit Card Collection Expense (for the fee) and credit
Accounts Receivable.

SALES ACCOUNTING - RECORDING SALES DISCOUNTS


When a buyer takes advantage of a cash discount, Cash and Sales Discount should be
debited, and Accounts Receivable should be credited.
Example: Invoice for $950 with terms 3/15, n/30 is paid early by the buyer.
Debit Cash $921.50
Debit Sales Discounts $28.50
Credit Accounts Receivable $950

SALES ACCOUNTING - RECORDING SALES RETURNS AND ALLOWANCES


When a seller grants a return or an allowance, Sales Returns and Allowances is debited, and
Accounts Receivable is credited. A buyer of goods can only take a cash discount on the
goods that are actually kept (cash discounts do not apply to freight either). Example: A seller
receives a debit memorandum for $70 of goods that were not ordered by ABC company. If
the return is granted, the following entry is necessary.
Debit Sales Returns & Allowances $70
Credit Accounts Receivable ABC company $70

SALES ACCOUNTING
Manufacturers and wholesalers often reduce catalog list prices by allowing trade (or quantity)
discounts. The discounts vary depending on customer and order size. Trade discounts permit
flexible prices without having to print new catalogs. Trade discounts are not reflected in
accounting records, only the agreed upon price between a buyer and seller is recorded.

TRANSPORTATION COSTS
Whenever goods are sold, the buyer and the seller must agree upon who pays shipping costs.
When goods are shipped FOB shipping point, the buyer agrees to pay for shipping costs and
ownership passes to the buyer when the merchandise is delivered to the shipper. When goods
are shipped FOB destination, the seller agrees to pay for transportation costs and ownership
of goods passes to the buyer when the goods are delivered.

SALES TAXES
The majority of states in the United States levy a tax on the sale of merchandise. At the
moment the sale is competed (whether payment is received or not) the amount of the sales tax
is credited to the Sales Tax Payable in the books of the seller. Periodically the Sales Tax
Payable account will be debited when the tax is remitted to the state tax authority. The buyer
of goods does not record a sales tax expense separately in his/her accounts, it is merely added
to the cost of the goods, and the entire amount is debited to Purchases.

INTERIM REPORTING FOR MERCHANDISING ENTERPRISES


Merchandising enterprises often prepare quarterly or monthly financial reports, called interim
financial statements, which are useful to management. This requires the preparation of a trial
balance, and an analysis of accounts to determine what adjustments are necessary. Once
adjusting entries are entered on the work sheet, the adjusted trial balance is prepared. Interim
financial statements are then prepared based upon the information that is provided by the
work sheet.
ACCOUNTING FOR MERCHANDISE INVENTORY
There are two systems commonly used to keep track of inventory: periodic inventory and
perpetual inventory systems. In the periodic inventory system, revenue is recorded each time
a sale is made. However, but the cost of goods sold is not determined until a physical
inventory is taken. In the perpetual system, both sales amount and the cost of goods sold are
recorded each time an item is sold. This makes it possible to know quantity and the value of
inventory at all times.

DETERMINING THE COST OF GOODS SOLD


The cost of goods sold is usually reported in a separate section of the income statement. In
the periodic inventory system, determining the cost of goods sold requires the following
steps:
1)- All purchases must be totaled.
2)- Purchases returns & allowances and purchases discounts are deducted from purchases to
determine the net purchase balance.
3)- Net purchases plus transportation costs equals cost of goods purchased.
4)- Beginning inventory plus cost of goods purchased equals goods available for sale.
5)- Goods available for sale minus ending inventory equals cost of goods sold.

ADJUSTMENTS FOR MERCHANDISE INVENTORY


The merchandise inventory account only shows the beginning balance of inventory, not any
purchases made during the period. It is therefore necessary to remove the beginning inventory
balance and replace it with the ending inventory balance. This is performed by the following
two adjusting entries:
1- Debit the beginning inventory balance to Income Summary, and credit the Merchandise
Inventory account.
2- Debit the ending inventory balance to Merchandise Inventory, and credit the Income
Summary account.

ADJUSTMENTS ON THE WORK SHEET


The first step in preparing a work sheet requires a trial balance to be taken. Next, data should
be gathered to perform adjusting entries. Accounts that typically require adjustments are
Merchandise Inventory, prepaid expenses, supplies, assets that have to be depreciated, and
outstanding liabilities. All these adjustments are posted to the adjustments column of the
work sheet, and the debit and credit columns must prove. After the adjusting entries have
been entered, the adjusted trial balance is prepared. Balances in this column reflect the correct
ending balances of the accounts at the end of the fiscal period.

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