Chapter 5 Accounting for retail operations

PowerPoint presentation by Dr Anne Abraham University of Western Sydney 2009 John Wiley & Sons Australia, Ltd

LO1

RETAIL OPERATIONS

Income for a retailer

The primary source of source is the sale of inventory Often known as sales revenue or sales

Expenses for a retailer

1. cost of sales (COS) = total cost of inventory sold during the period 2. Other expenses = expenses incurred in the process of earning sales revenue

Gross profit is sales revenue less COS

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney 2

RETAIL OPERATIONS continued

Revenue management process
Sales revenue Less

Cost of sales

Equals

Gross profit

Less

Operating expenses
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

Equals

Profit (loss)
3

Operating cycles
The operating cycle of a retailer is usually longer than that of a service business because they must purchase and sell inventory A retail business has a current asset account called Inventory or Stock

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

Inventory systems
1. Perpetual inventory system
Maintains detailed records of cost of each inventory purchase and sale Made easier with use of bar codes and optical scanners COS is determined at time a sale occurs

Illustrated in this chapter

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney 5

Inventory systems continued

To determine cost of sales under periodic system:
1. Determine cost of goods on hand at beginning of period 2. Add the cost of goods purchased 3. Subtract cost of goods on hand at end of period

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

Inventory systems continued

2. Periodic inventory system
Detailed inventory records of goods on hand not kept throughout the period Physical count of inventory at the end of the period to determine cost of goods on hand (inventory) COS determined only at end of accounting period

Described in Appendix
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LO2

RECORDING PURCHASES OF INVENTORY

Purchases of inventory may be made for cash or on account The purchase is normally recorded by the purchaser when the goods are received from the seller Each credit purchase should be supported by a purchase invoice

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

Purchases continued
Example
Purchase of inventory on credit from Sellers Electrics
Apr 5 Inventory 3 800 Accounts Payable (To record goods purchased on account from Sellers Electrics) 3 800

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

Purchases returns and allowances

A purchase return is the return of goods by the customer because
Goods are damaged or defective Goods are of inferior quality Goods do not meet purchaser s specifications

The customer will receive a refund in the form of either credit or cash A purchase allowance occurs where the sell keeps the goods and a reduction in price is granted
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Purchases returns and allowances

continued

Example
Goods costing $300 are returned to Sellers Electrics
Apr 8 Accounts Payable Inventory (To record return of goods received from Sellers Electrics) 300 300

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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Freight costs
Sales agreement should indicate whether the seller or the buyer is to pay freight charges FOB delivery means that goods are placed free on board the carrier by the seller and the purchaser pays the freight FOB destination means that goods are placed free on board to the buyer s place of business, and the seller pays the freight

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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Freight costs continued

Cost of freight is added to the cost of inventory where cost is charged to the buyer Cost is allocated to Freight-in account Example
Beyer Video pays Acme Freight Company $150 for freight charges
Apr 6 Freight-in Cash (To record payment of freight on goods purchased) 150 150

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

13

Freight costs continued

Freight costs incurred by the seller are an operating expense to the seller These costs are included as part of delivery or freight-out expenses Example
Sellers Electrics paid freight charges $150 for goods sold
May 4 Freight-out Cash (To record payment of freight on goods sold)
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

150 150

14

Purchase discounts
The credit terms of a purchase may allow a buyer to claim a cash discount for prompt payment of an account Example
Beyer Video settles account outstanding of $3500 and receives a 2% discount (or $70)
Apr 15 Accounts Payable Cash Discount Received (To record payment within the discount period)
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

3 500 3 430 70

15

Purchase discounts continued

Trade discounts (or quantity discounts) are a percentage reduction in the list price of inventory sold Example
List price quoted is $400 per item with a trade discount 10% if 10 or more items purchased (as in this case)
May 16 Inventory 3 600 Accounts Payable (To record purchase of inventory on account with a trade discount of $400)
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

3 600

16

RECORDING SALES OF INVENTORY

Sales revenues are recorded when earned (revenue recognition principle) Evidence of sales is provided by:
A sales invoice for a credit sale A cash register receipt for a cash sale

Two journal entries are made for each sale:

1. To record the sale of goods 2. To record the cost of sales

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

17

Sales continued
Example
Sellers Electrics sold $3800 to Beyer Video on credit. COS was $2400
1. Sale of the goods on credit for $3800
Apr 4 Accounts Receivable Sales (To record credit sale to Beyer Video per invoice #731) 3 800 3 800

2. cost of sales was $2400

Apr 4 cost of sales Inventory (To record cost of inventories sold on invoice #731 to Beyer Video)
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

2 400 2 400

18

Sales returns and allowances

When a customer returns goods, the seller may give
a cash refund, or a credit note

Two journal entries are required for each return of goods:

1. To record sales return at selling price 2. To record return to inventory at cost price

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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Sales returns and allowances continued

Example 1
Goods are returned to seller (not damaged or defective)
1. Sales return at selling price of $300
Apr 8 Sales Returns and Allowances 300 Accounts Receivable (To record credit granted to Beyer Video for returned goods) 300

2. Return (increase) to inventory at cost price of $140

Apr 8 Inventory 140 cost of sales 140 (To record cost of goods returned)
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Sales returns and allowances continued

Example 2
Faulty goods are returned to seller
1. Sales return at selling price of $300
Apr 8 Sales Returns and Allowances 300 Accounts Receivable (To record credit granted to Beyer Video for returned goods) 300

2. Increase in expense account of $140

Apr 5 Inventory Write-down Cost of sales (To record cost of faulty goods returned)
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

140 140

21

Sales discounts
A seller may offer the invoice amount less a discount for prompt payment by a customer Example
Beyer Video pays Sellers Electrics and receives a discount
Apr 14 Cash 3 430 Discount Allowed 70 Accounts Receivable (To record collection within 2/7 n/30 discount period from Beyer Video)

3 500

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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LO4

COMPLETING THE ACCOUNTING CYCLE

Adjusting entries Same as those for service firms with one additional adjustment A retailer using a perpetual inventory system will need to make sure the records agree with the stock on hand Records may be incorrect due to recording errors, theft or waste This requires determining extra stock on hand to be covered in Chapter 6
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COMPLETING THE ACCOUNTING CYCLE continued

Closing Entries All accounts affecting profit determination are closed to Profit and Loss Summary Cost of sales must be closed to Profit and Loss Summary After closing entries are posted, all temporary accounts have zero balances

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

24

Closing entries illustrated

Dec 31 Sales Profit and Loss Summary (To close income statement account with credit balances) Profit and Loss Summary Sales Returns and Allowances Sales Discounts Cost of sales Store Salaries Expense Administrative Salaries Expense Freight-out Advertising Expense Utilities Expense Depreciation Expenses Insurance Expense (To close income statement accounts with debit balances) Profit and Loss Summary RA Lewis, Capital (To close profit to capital) RA Lewis, Capital RA Lewis, Drawings PowerPoint presentation by Dr Anne Abraham, University of Western Sydney (To close drawings to capital) 480 000 480 000 450 000 12 000 8 000 316 000 45 000 19 000 7 000 16 000 17 000 8 000 2 000 30 000 30 000 15 000 15 000
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31

31 31

FORMS OF FINANCIAL STATEMENTS

LO5

IAS 1 provides information on presentation of financial statements Profit is regarded as the net change in equity after excluding transactions with the owners Total comprehensive income reflects a net-equity view of determining profit Two components
Profit or loss, and Other comprehensive income
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FORMS OF FINANCIAL STATEMENTS

continued

IAS 1 provides entities with option to present income and expenses as either a single statement or two statements
Single statement of comprehensive income
STATEMENT OF COMPREHENSIVE INCOME For the month ended 30 September 2010 Income Less Expenses Profit or Loss Other comprehensive income Total comprehensive income
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

XX XX XX XX $XX
27

FORMS OF FINANCIAL STATEMENTS

continued

Two statement approach to presenting a statement of comprehensive income

INCOME STATEMENT For the month ended 30 September 2010 Income Less Expenses Profit or Loss STATEMENT OF COMPREHENSIVE INCOME For the month ended 30 September 2010 Profit or Loss Other comprehensive income Total comprehensive income
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

XX XX $XX

XX XX $XX
28

FORMS OF FINANCIAL STATEMENTS

continued

Classified income statement presentation of sales

SELLERS ELECTRICS Income Statement (partial) Income Sales revenue Sales $480 000 Less: Sales returns and allowances $12 000 20 000 Sales discounts 8 000 Net Sales $460 000

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

29

FORMS OF FINANCIAL STATEMENTS

LO6
continued

Gross profit
Net sales Less:Ccost of sales Gross Profit $460 000 316 000 $144 000

Other revenue
Interest revenue Rent revenue $ 3 000 600

Other expenses and profit

Gross profit Other operating income Operating expenses Profit
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

$144 000 3 600 147 600 116 000 $ 31 600

30

FORMS OF FINANCIAL STATEMENTS

continued

Subgrouping of expenses
Selling or distribution expenses cost of making the sale e.g., advertising, delivery expenses Administration expenses cost of operating activities of the general, accounting and personnel offices e.g., salaries, rent Finance costs costs of financing the business e.g., interest expense, discounts allowed
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney 31

SELLERS ELECTRICS Income Statement for the year ended 31 December 2010 (partial)

Operating expenses Selling expenses Shop salaries expense Advertising expense Depreciation expense equipment Freight-out Total selling expenses Administration expenses Salaries expense Utilities expense Insurance expense Total administrative expenses Financial expenses Interest expense Total finance expenses Total expenses
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

$45 000 16 000 8 000 7 000 $76 000 19 000 17 000 2 000 38 000 2 000 2 000 $116 000
32

Simpler nature of expense income statement

SELLERS ELECTRICS Income Statement for the year ended 31 December 2010

Income Net sales Interest revenue Rent revenue Discount received Total income Expenses cost of sales Selling expenses Administrative expenses Finance expenses Total expenses profit PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

$460 000 3 000 400 200 463 600 $316 000 76 000 38 000 2 000 432 000 $ 31 600
33

Classified statement of financial position

SELLERS ELECTRICS Statement of Financial Position (Partial) as at 31 December 2010

Assets Current assets Cash Accounts Receivable Inventory Prepaid insurance Total current assets Property, plant and equipment Shop equipment $80 000 Less: Accum. depreciation shop equipment 24 000 Total assets
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

$ 9 500 16 100 40 000 1 800 67 400 56 000 $123 000

34

LO7

DETERMINING cost of sales UNDER A PERIODIC SYSTEM

SELLERS ELECTRICS Cost of sales for the year ended 31 December 2010
Cost of sales Inventory, 1 January Purchases Less: Purchases returns & allowances Discount received Net purchases Add: Freight-in Cost of goods produced Cost of goods available for sale Inventory, 31 December cost of sales $ 36 000 $325 000 $10 400 6 800 17 200 307 800 12 200 320 000 356 000 40 000 $316 000

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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LO8

APPENDIX 5A PERIODIC INVENTORY SYSTEM

Revenues from the sale of merchandise are recorded when sales are made in the same way as in a perpetual system No attempt is made on the date of sale to record the cost of merchandise sold Physical inventories are taken at end of period to determine:
The cost of merchandise on hand The cost of the goods sold during the period
PowerPoint presentation by Dr Anne Abraham, University of Western Sydney 36

Recording purchases of inventory

1. Purchase of inventory Purchases account used to record cost of all inventory purchased Example:
Beyer Video purchases inventory for $3800 from Sellers Electrics
Apr 5 Purchases Accounts Payable (To record goods purchased on account, terms 2/10, n/30) 3 800 3 800

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

37

Recording purchases of inventory continued

2. Purchase returns and allowances Example:
Beyer Video returns goods valued at $300 to Sellers Electrics as they are defective
Apr 8 Accounts Payable Purchase Returns and Allowances (To record return of defective goods purchased from Sellers Electrics) 300 300

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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Recording purchases of inventory continued

3. Freight costs Freight costs incurred by purchaser Example:
Beyer Video pays Acme Freight Company $150 for freight charges on purchases
Apr 9 Freight-in Cash (To record payment of freight, terms FOB delivery point) 150 150

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

39

Recording purchases of inventory continued

4. Purchase discounts Example:
Beyer Video pays Sellers Electrics balance outstanding and receives a 2% discount
Apr 14 Accounts Payable ($3800 - $300) Discount Received ($3500 x 0.02) Cash (To record payment to Sellers Electrics within the discount period) 3 500 70 3 430

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

40

Recording sales of inventory

1. Sale of inventory Example:
Sale of inventory to Beyer Video by Seller Electrics
Apr 4 Accounts Receivable Sales (To record credit sales per invoice no. 731 to Beyer Video) 3 800 3 800

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

41

Recording sales of inventory continued

2. Sales returns and allowances Example:
Goods returned to Sellers Electrics by Beyer Video
Apr 8 Sales Returns & Allowances Accounts Receivable (To record return of goods from Beyer Video) 300 300

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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Recording sales of inventory continued

3. Sales discounts Example:
PW Audio Supply Ltd receives cash of $3430 from Sauk Stereo after allowing 2% discount
Apr 15 Cash Sales Discounts ($3500 x 0.02) Accounts Receivable ($3800 - $300) (To record collection from Sellers Electrics within discount period) 3 430 70 3 500

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Comparison of entries: perpetual vs periodic

ENTRIES IN BEYER VIDEO S BOOKS

TRANSACTION

PERPETUAL SYSTEM
3800 300

PERIODIC SYSTEM

Apr 4 Purchase of Inventory inventory on A/C A/Cs Payable Apr 8 Purchases returns and allowances A/Cs Payable Inventory

Purchases 3800 3800 A/Cs Payable 3800 A/Cs Payable 300 Purchase Ret. & Allow. Freight-in Cash 300 300 150 150

Apr 9 Freight costs on Freight-in/Inventory 150 purchases Cash 150 Apr 14 Payment on A/Cs Payable account with a Cash discount COS 3500

A/Cs Payable 3500 3430 Cash 3430 70 Discount rec d 70

44

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

Comparison of entries: perpetual vs periodic

continued

ENTRIES IN SELLERS ELECTRICS BOOKS

TRANSACTION

PERPETUAL SYSTEM

PERIODIC SYSTEM

Apr 5 Sales of A/Cs Receivable 3800 A/Cs Receivable 3800 inventory on A/C Sales 3800 Sales 3800 COS 2400 No entry for COS Inventory 2400 Apr 8 Return of Sales Returns Sales Returns inventory sold and Allowances 300 and Allowances 300 A/Cs Receivable 300 A/Cs Receivable 300 Inventory 140 No entry for COS COS 140 Apr 15 Cash received Cash 3430 Cash 3430 on account Sales Discounts 70 Sales Discounts 70 PowerPoint presentation by Dr Anne Abraham, University of Western Sydney with a discount A/Cs Receivable 3500 A/Cs Receivable 45 3500

LO9

APPENDIX 5B WORKSHEET FOR A RETAIL BUSINESS

Trial balance columns Data from the trial balance are obtained from the ledger balances at the end of the period The amount shown for Inventory is the year-end inventory amount which results from the application of a perpetual inventory system

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

46

WORKSHEET FOR A RETAIL BUSINESS

continued

Adjustments columns A merchandising company usually has the same types of adjustments as a service company Adjusted trial balance The adjusted trial balance shows the balance of all accounts after adjustment at the end of the accounting period

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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WORKSHEET FOR A RETAIL BUSINESS

continued

Income statement columns The accounts and balances that affect the income statement are transferred from adjusted trial balance columns to income statement columns All amounts in the income statement credit column should be totalled and compared to the total of amounts in the income statement debit column

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

48

WORKSHEET FOR A RETAIL BUSINESS

continued

Statement of financial position columns The major difference between statements of financial position of a service company and a merchandising company is inventory The ending Inventory amount is shown in the statement of financial position debit column The information to prepare the owner s equity statement is also found in these columns

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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LO10

APPENDIX 5C THE GOODS AND SERVICES TAX (GST)

The GST is a value-added tax

i.e., tax is levied on the valued added by a business at each stage of production and distribution chain

Taxable supplies are goods and services subject to the GST GST rates:
Australia: 10% New Zealand: 12.5%

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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GST continued
Two exceptions:
i.e., no GST charged

(1) GST-free supplies

e.g., basic food, education, health services, exports

(2) Input taxed supplies

e.g., financial services and residential rents

Supplier can obtain an input tax credit for (1) but not for (2)

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GST continued

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GST example

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Accounting for GST

1. Purchasing inventory Example
Retailer purchases a table on credit from manufacturer for $440 (includes $40 GST)
Inventory GST Paid (an asset account) Accounts Payable (To record purchase of furniture from the manufacturer) 400 40 440

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Accounting for GST

continued

2. Selling inventory Example

Retailer sells a table for cash $550 (includes $50 GST)
Cash GST Collected (a liability account) Sales (To record sale of furniture to a customer) 550 50 500

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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Accounting for GST

continued

3. Remitting GST to the taxation authority Where GST amount collected is greater than GST paid the difference is to be remitted to ATO Journal entry:
GST Collected (a liability account) GST Paid (an asset account) Cash (To record payment of GST owing to taxation authority) 50 40 10

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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Accounting for GST

continued

Where GST collected is less than GST paid, the difference is to be remitted to ATO Journal entry:
Cash GST Collected (a liability account) GST Paid (an asset account) (To record refund of GST paid from taxation authority) 60 100 160

PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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Accounting for GST

continued

Where one account is used to account for GST collected and paid to ATO
Inventory GST Clearing (GST paid) Accounts payable (To record purchase of furniture from the manufacturer) Cash GST Clearing (GST collected) Sales (To record sale of furniture to a customer) GST Clearing Cash (To record payment of GST owing to taxation authority) PowerPoint presentation by Dr Anne Abraham, University of Western Sydney 400 40 440

550 50 500 10 10
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PowerPoint presentation by Dr Anne Abraham, University of Western Sydney

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