Term
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Definition
an account that is offset against a revenue account on the income statement
Sales returns and allowances
sales discounts |
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Term
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Definition
| the total cost of merchandise sold during the period |
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Term
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Definition
| freight terms indicating that the seller places the goods free on board to the buyer's place of business, and the seller pays the freight |
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Term
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Definition
| freight terms indicating that the seller places goods free on board the carrier, and the buyer pays the freight costs |
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Term
gross profit
define and give formula |
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Definition
the excess of net sales over the cost of goods sold
net sales - cost of goods sold
or
sales - discounts, returns and allowances - sales discounts - cost of goods sold = gross profit |
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Term
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Definition
| gross profit expressed as a percentage by dividing the amount of gross profit by net sales |
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Term
income from operations
define and give formula |
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Definition
income from a company's principal operating activity; determined by subtracting cost of goods sold and operating expenses from net sales
net sales - cost of good sold - operating expenses |
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Term
| multiple-step income statement |
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Definition
| an income statement that shows several steps in determining net income |
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Term
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Definition
| sales less sales returns and allowances and less sales discounts |
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Term
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Definition
| various revenues, expenses, gains, and losses that are unrelated to a company's main line of operations |
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Term
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Definition
| expenses incurred in the process of earning sales revenues |
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Term
| other expenses and losses |
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Definition
| a nonoperating-activities section of the income statement that shows expenses and losses unrelated to the company's main line of operations |
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Term
| periodic inventory system |
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Definition
Inventory adjusted at end of period - not continually
an inventory system under which the company does not keep detailed inventory records throughout the accounting period but determines the cost of goods sold only at the end of an accounting period |
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Term
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Definition
a deduction made to the selling price of merchandise, granted by the seller so that the buyer will keep the merchandise
this is an adjusting entry to buyer's account.
Recorded as reduction to Inventory and Accounts Payable. Does reduce inventory because inventory is calculated by cost...not units so do this even if you keep the merchandise!
Accounts Payable xxxx
Inventory xxxx
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Term
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Definition
a cash discount claimed by a buyer for prompt payment of a balance due
Seller will debit the sales discount account (to increase)
Buyer will credit inventory (to decrease) |
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Term
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Definition
| a document tha supports each credit purchase |
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Term
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Definition
a return of goods from the buyer to the seller for a cash or credit refund.
This is a buyer's account. Reduces inventory and amount owed to seller for original purchase.
Accounts Payable xxxx
Inventory xxxxx |
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Term
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Definition
| a reduction given by a seller for prompt payment of a credit sale |
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Term
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Definition
| a document that supports each credit sale |
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Term
| sales returns and allowances |
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Definition
Sellers account. Decreases an asset account. Is a contra account to Sales Revenue. The way a seller records either a return of merchandise (return) or an allowance offered to keep merchandise that a buyer is trying to return (allowance)
The buyer will record the same transaction as a purchase returns and allowances |
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Term
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Definition
| the primary source of revenue in a merchandising company |
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Term
| single-step income statement |
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Definition
| an income statement that shows only one step in determining net income |
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Term
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Definition
| terms to purchase goods on account with a early-pay incentive: If buyer pays in full within 10 days, seller will discount total owed by 2%, if buyers pays after 10 days the full amount originally billed is due in no later than 30 days |
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Term
| How are purchase discounts recorded? |
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Definition
If invoice is paid within terms for the discount, then example:
Accounts Payable 200
Purchase Discount 50
Cash 150
Remember to reduce the amount by any returns before calculating the purchase discount! |
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Term
| How do you record inventory loss (shrinkage) |
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Definition
Cost of Goods Sold xxxx
Inventory xxxx |
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Term
| Why are contra accounts used? |
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Definition
| to keep all discounts, allowances, returns, etc in one place for easy tracking and to keep the asset asset account simple |
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Term
| What is the normal balance of a contra account? |
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Definition
| the opposite of its corresponding asset account. |
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Term
| list some types of contra accounts |
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Definition
| discounts, returns and allowances, depreciation |
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Term
| How does the seller record their freight costs for a sale? |
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Definition
Freight Out, which is an expense account, so normal balance is a debit to increase
Freight Out xxxx
Cash xxxx
remember that this is an expense account when creating Income Statement!! |
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Term
| How does the buyer record their freight costs for a purchase? |
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Definition
| It is recorded in Inventory because it contributes to the total cost of merchandise...it becomes an expense when the inventory is sold as part cost of goods sold |
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Term
| what is the formula for gross profits |
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Definition
| net sales-cost of goods sold = gross profits |
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Term
| how do you calculate the cost of goods sold when using the period method |
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Definition
| goods available-ending inventory = cost of goods sold |
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Term
| Perpetual inventory system |
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Definition
| an inventory system under which the company keeps detailed records of the cost of each inventory purchase and sale, and the records continuously show the inventory that should be on hand. |
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Term
| Identify the differences between service and merchandising companies |
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Definition
| merchandising companies have sales revenue, cost of goods sold and gross profit because of inventory. Because of inventory a merchandising company must also choose between a perpetual and a periodic inventory system. |
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Term
| Explain the recording of purchases under a perpetual inventory system |
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Definition
| company debits the inventory account for all purchases of merchandise and freight-in, and credits it for purchase discounts and purchase returns and allowances. |
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Term
| Explain the recording of sales revenues under a perpetual inventory system |
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Definition
| when a merchandising company sells inventory, it debits accounts receievable (or cash) and credits sales revenue for the selling price of the merchandise. At the same time, it debits cost of goods sold, and credits inventory for the cost of the inventory items sold |
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Term
| Explain the steps in the account cycle for a merchandising company |
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Definition
| accounting cycle is the same as for service company, except that for the perpetual system, companies must do an additional adjusting entry after a physical inventory is taken if there is a discrepency due to shrinkage. |
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Term
| Distinguish between a multiple-step and a single-step income statement |
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Definition
| the multiple step income statement shows numerous steps in determining net income, including nonoperating activities sections. A single step income statement classifies data under two categories, revenues and expenses and determines net income in one step |
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Term
| Explain the computation and importance of gross profit |
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Definition
| Merchandising companies compute gross profit by subtracting cost of goods sold from net sales. Gross proft represents the merchandising profit of a company. |
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Term
| Describe the flow of costs for a merchandising company |
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Definition
| At the begining of a new business period, the Begining Inventory reflects the Cost of Goods Available for Sale. During the period, activity changes the Cost of Goods Available for Sale as follows: increased by Cost of Goods Purchased, decreased by Cost of Goods Sold. At the end of the inventory, Costs of Goods Available for Sales should match the Ending Inventory...if not the company has experienced shrinkage. |
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Term
| how does seller record the sale of merchandise to a customer |
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Definition
Cash or Accounts Receivable xx
Sales Revenue xx
Cost of Goods Sold xx
Inventory xx |
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Term
| How does seller record granting a return or allowance to a customer? |
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Definition
Sales Returns and Allowances xx
Cash or Accounts Reciev xx
Inventory xx
Cost of Goods Sold xx |
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Term
| How does a seller record his freight costs (FOB destination) |
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Definition
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Term
| How does the seller record the receipt of payment from a customer with a discount period (ex: 2/10) |
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Definition
Cash xx
Sales Discounts xx
Accounts Receivable xx |
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Term
| How does the buyer record his freight costs (FOB shipping point) |
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Definition
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Term
| How does the buyer record purchase returns and/or allowances? |
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Definition
Cash or Accounts Payable xx
Inventory xx |
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Term
| How does the buyer record paying suppliers within discount period? (ex 2/10) |
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Definition
Accounts Payable xx
Inventory xx
Cash xx |
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Term
| How does a merchandising company record a physical inventory showing less merchandise than Goods Available for Sale reflects? |
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Definition
Costs of Goods Sold xx
Inventory xx |
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Term
| How do companies close temporary accounts with credit balances (at the end of the period) |
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Definition
Sales Revenue xx
Income Summary xx |
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Term
| How do companies close temporary accounts with debit balances (at the end of the period) |
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Definition
Income Summary xx
Sales Returns/Allowances xx
Sales Discounts xx
Cost of Goods Sold xx
Freight-out xx
Expense xx |
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