University of Information Technology & Sciences

Term Paper On Merchandise Accounting

Course Name: Financial Accounting Batch : 59 Discipline: RMBA

Prepared By : Mohammad Abu Baser Student Id:11335015

Prepared for: Ms.Rumana Tasreen Khanam Lecturer School of Business UITS

Date of Submission: September 10, 2011

Accounting for Merchandising Inventory

Chapter Learning Objectives: 1. Account for inventory by the perpetual and periodic systems

2. Apply the inventory costing methods: specific unit cost, weightedaverage cost, FIFO, and LIFO 3. Identify the income effects and the tax effects of the inventory costing methods 4. Apply the lower-of-cost-or-market rule to inventory

5. Compute the effects of inventory errors on cost of goods sold and net income 6. Estimate inventory by the gross margin method

7. Use the gross margin percentage and the inventory turnover ratio to evaluate a business

Chapter Objective 1: Account for inventory by the perpetual and periodic systems The Basic Concept of Inventory Accounting Record amount and quantity of inventory on hand at end of accounting period

Record amount and quantity of inventory on hand at end of accounting period Recognize cost of sales Inventory is primary current asset for merchandising organization

Cost of goods sold (cost of sales) is organizations primar Perpetual System Advantages: Improves internal control over merchandise inventory Physical counts should agree with amounts reported in records Otherwise, adjust records for spoilage, theft, etc. Improves internal control over merchandise inventory Physical counts should agree with amounts reported in records Otherwise, adjust records for spoilage, theft, etc.

Enhances customer service Report up-to-date information to customers: quantity, expected delivery dates, etc.

Entries Under the Perpetual System:

Goods purchased debited to Inventory (or Merchandise Inventory) ledger account

Cash or A/P credited SITUATION: On November 14, Asian Art, Inc. purchases Tk43,000 of sculptures and watercolors on account for resale to customers. 11/14/xx Inventory Tk43,000 A/P Tk 43,000 To record inventory purchased on account Inventory Tk43,000 A/P Tk43,000 To record inventory purchased on account

11/14/xx

Sales to customers captured through two journal entries

(1) record sales revenue (2) reduce inventory and increase cost of goods sold

Sales to customers captured through two journal entries

(1) record sales revenue (2) reduce inventory and increase cost of goods sold

11/29/xx

A/R Sales Revenue

Tk7,000 Tk7,000
4

To record sale on account 11/29/xx A/R Tk7,000 Sales Revenue Tk7,000 To record sale on account

Accounts Receivable 11/29/xx A/R Tk7,000 Sales Revenue Tk7,000 To record sale on account Sales Revenue

Accounts Receivable

11/29 Tk7,000 Tk7,000 11/29 11/29/xx Cost of Goods Sold Tk2,900 Inventory Tk2,900 To record cost of sales 11/29/xx Cost of Goods Sold Tk2,900 Inventory Tk2,900 To record cost of sales

Cost of Goods Sold 11/29 Tk2,900 11/29/xx Cost of Goods Sold Tk2,900 Inventory Tk2,900 To record cost of sales Cost of Goods Sold 11/29 Tk2,900 Inventory Tk2,900 11/29

Inventory Accounting Periodic System Accounting records do not continuously track on-hand inventory At period end, physical count performed to determine proper ending inventory account balance Inventory and cost of goods sold account balances adjusted before preparing financials Fewer journal entries required during accounting period Easy to use for small companies with rather homogenous goods Although computerized accounting and sales systems make perpetual system just as easy to work with

Goods purchased debited to Purchases ledger account

Cash or A/P credited 2/20/xx 2/20/xx 2/20/xx Purchases Tk850 A/P Tk850 To record inventory purchased on account Purchases Tk850 A/P Tk850 To record inventory purchased on account Purchases Tk850 A/P Tk850 To record inventory purchased on account Purchases 2/20 Tk850 Accounts Payable Tk850 2/20

Gross Margin (Gross Profit)

 Difference between sales revenue and cost of sales Computing the Cost of Inventory Determining Inventory Quantities Physical count of merchandise owned taken on last day of fiscal year regardless of method Sometimes taken monthly or quarterly for interim financial reports Complicating factors Who owns merchandise in transit between vendor and company? Who owns goods on Inventory costing methods: specific unit cost, weighted-average cost, FIFO, and LIFO 1. Specific Unit Cost 2. Weighted-Average Cost 3. First-In-First-Out (FIFO) 4. Last-In-First-Out (LIFO)