Chapter 6
Accounting for retailing
PowerPoint presentation by Anne Abraham
University of Wollongong
©2009 John Wiley & Sons Australia, Ltd
INVENTORY
• Goods or property held for sale in the
ordinary course of business
• Does not include assets acquired to operate
the business (e.g. plant and equipment)
• Also referred to as ‘stock’ or ‘stock in trade’
• Determination of profit is a major objective
of accounting for inventory
2
Retail business operations
• Operating cycle is average length of time
taken to
– Acquire inventory
– Sell inventory
– Collect cash from customers
• In a retail business, inventory
– Is one of the most active assets
– Can make up a significant part of total assets
3
1
CONDENSED INCOME STATEMENT
FOR A RETAILER
• Income referred to as ‘sales’
• ‘Cost of sales’ (COS) used to show total
cost of inventory sold during the period
• Sales — COS (Gross Profit) determined to
show profit from buying and on-selling
inventory
• Expenses classified by type
4
CONDENSED INCOME STATEMENT
FOR A RETAILER continued
SUNRISE CD SALES LTD
Income Statement
for the year ended 31 December 2010
INCOME
Revenue
Net sales revenue
Less: Cost of sales
GROSS PROFIT
Other income
EXPENSES
Selling and distribution
Administrative
Finance and other
PROFIT (before income tax)
$692 890
470 490
222 400
5 260
227 660
$100 270
78 850
4 260
183 380
$ 44 280
5
RETAILING AND THE GST
• Registration for an Australian Business
Number (ABN)
• Registration for GST
• Input credits
• GST collections
• GST outlays
• Need adequate records!
6
2
RETAILING AND THE GST continued
• Tax invoices
– Required for all sales over $50
– Common requirements
• ‘tax invoice’
• ABN of issuing entity
• date of issue
• supplier name
• brief description of the items supplied
7
Tax invoice – less than $1000 cash sale
8
Tax invoice – more than $1000 credit
sale
9
3
RETAILING AND THE GST continued
• Adjustment notes
– All or part of the goods are returned
– An allowance (e.g. discount) is made
– The price of a supply is changed
– All or part of the amount owing has to be
written off
– The retailer cannot pay the debt
10
Retailing and the GST
11
ACCOUNTING FOR SALES
TRANSACTIONS
• Entry for credit sales:
Aug 5 Accounts Receivable
1 980
Sales
GST Collections
(Sold merchandise on credit to R Stevens)
1 880
180
• Entry for cash sales
Aug 5 Cash
Sales
GST Collections
(Sold merchandise for cash)
1 980
1 880
180
12
4
Sales returns and allowances
• Example
– Goods sold on account for $300 plus GST of
$30 returned as unsuitable
Aug 8 Sales Returns and Allowances
GST Collections
Accounts Receivable
(Return of unsatisfactory merchandise
sold on credit by R Stevens)
300
30
330
13
Cash (settlement) discounts
• Discount given if buyer pays within the
settlement period
e.g. 2/10 n/30
• Example
– Goods sold for $1000 plus GST of $100
Aug 10 Cash at Bank
1 078
Discount Allowed
20
GST Collections
3
Accounts Receivable – A Jones
(Payment of account within the discount
period)
1 100
14
Cash (settlement) discounts continued
• Example
– Sales return and settlement discount
• Credit terms 2/10, n/30
• Return of $330
Aug 15 Cash at Bank
1 617
Discount Allowed ($1500 x 2%)
30
GST Collections ($150 x 2%)
3
Accounts Receivable – R Stevens
($1980 – $330)
(Received payment from R Stevens within
the discount period)
1 650
15
5
Trade discounts
• Percentage reduction on list price
• Example
– 10 units of $200, 30% trade discount
Jul 10 Accounts Receivable
Sales ($200 x 10 units x 70%)
GST Collections
(Sale of inventory on credit, subject
to a 30% trade discount)
1 540
1 400
140
16
Freight outwards
• Who is responsible for freight costs?
• FOB shipping point/FOB destination
• Recorded as a selling cost if seller
responsible
17
ACCOUNTING FOR PURCHASES AND
COST OF SALES
• Accounting for inventory involves
– Recording cost of purchased inventories
– Determining which part of inventory can be
allocated to
• Cost of sales
• Ending inventory
• 2 distinctly different inventory systems
– Perpetual inventory system
– Periodic inventory system
18
6
Perpetual inventory system
• Involves keeping current and continuous
records of all inventory transactions
• Separate card or computer file kept for
each inventory item
– Quantity and unit cost for each
sale/purchase
– Running inventory balance
19
Perpetual inventory system continued
• Inventory record card
Location
1 unit showroom
Remainder - Warehouse
Minimum Stock 4
Maximum Stock 17
Purchases
Sales
Unit Total
Unit Total
Units cost cost Units cost cost
Balance
Unit Total
Units cost cost
Item Refrigerator
Code C350
Date Explanation
1/1
15/1
21/1
23/1
24/1
Beginning bal
Purchases
Sales
Purch. Return
Sales Return
10
650
6500
(1) 650
(650)
3
650
(1)
650
1950
(650)
4
14
11
10
11
650
650
650
650
650
2600
9100
7150
6500
7150
20
Perpetual inventory system continued
• Single general ledger account for all
inventory transactions – Inventory
Inventory
Increases (debits)
Decreases (credits)
Purchases
Sales
Sales returns
Purchases returns
21
7
Perpetual inventory system continued
Illustration of transactions
1. Recording purchases on credit
Jan 15 Inventory
GST Outlays
Accounts Payable
(Purchased 10 refrigerators from …)
6 500
650
7 150
2. Recording freight costs
Jan 17 Freight Inwards
GST Outlays
Cash at Bank
(Paid freight on merchandise)
420
42
462
22
Perpetual inventory system continued
3. Recording sales on credit
Jan 21 Accounts Receivable
Sales
GST Collections
(Sold 3 refrigerators on credit)
3 465
Jan 21 Cost of Sales
1 950
Inventory
(Removing cost of 3 refrigerators sold
from inventory)
3 150
315
1 950
23
Perpetual inventory system continued
4. Recording purchases returns
Jan 23 Accounts Payable
Inventory
GST Outlays
(Defective unit returned for credit)
715
650
65
5. Recording payment of creditors within
discount period
Jan 24 Accounts Payable (7150 - 715)
6 435
Cash at Bank
Discount Received (6435 x 2% x 10/11)
GST Outlays (6435 x 2% x 1/10)
(Paid for inventory purchased on 15 Jan)
6 306
117
12
24
8
Perpetual inventory system continued
6. Recording sales returns and allowances
Jan 24 Sales Returns and Allowances
GST Collections
Accounts Receivable
(Refrigerator sold on 21 Jan returned
by customer)
Jan 24 Inventory
Cost of Sales
(Returned refrigerator was placed back
in inventory)
1 050
105
650
1 155
650
25
Periodic inventory system
• Beginning balance of inventory not changed
until the end of the period
• Purchases recorded in a ‘purchases’
account
• Only one entry is made for sales to record
the selling price of the goods sold
• Ending balance determined by stock count
26
Periodic inventory system continued
Illustration of transactions
1. Recording purchases on credit
Jan 15 Purchases
GST Outlays
Accounts Payable
(Purchased 10 refrigerators from …)
6 500
650
7 150
2. Recording freight costs
Jan 17 Freight Inwards
GST Outlays
Cash at Bank
(Paid freight on merchandise)
420
42
462
27
9
Periodic inventory system continued
3. Recording sales on credit
Jan 21 Accounts Receivable
Sales
GST Collections
(Sold inventory on credit)
3 465
3 150
315
4. Recording purchases returns
Jan 23 Accounts Payable
Purchases Returns and Allowances
GST Outlays
(Defective unit returned for credit)
715
650
65
28
Perpetual inventory system continued
5. Recording payment of creditors within
discount period
Jan 24 Accounts Payable (7150 - 715)
6 435
Cash at Bank
Discount Received (6435 x 2% x 10/11)
GST Outlays (6435 x 2% x 1/10)
(Paid for inventory purchased on 15 Jan)
6 306
117
12
6. Recording sales returns and allowances
Jan 24 Sales Returns and Allowances
GST Collections
Accounts Receivable
(Refrigerator sold on 21 Jan returned
by customer)
1 050
105
1 155
29
Perpetual and periodic inventory
systems contrasted
• Perpetual inventory system
FRIDGE TOWN
Income Statement
for the period ended 31 January
Sales revenue
Less: Sales returns and allowances
Net sales revenue
Cost of sales*
GROSS PROFIT
$3150
1050
2100
1720
$380
* $1720 = $1950 – $650 + $420
30
10
Perpetual and periodic inventory
systems contrasted continued
• Periodic inventory system
FRIDGE TOWN
Income Statement
for the period ended 31 January
Sales revenue
Less: Sales returns and allowances
Net sales revenue
Cost of sales
Cost of beginning inventory
Add: Cost of purchases
Freight inwards
$3 150
1 050
2 100
$6 500
420
6 920
Less: Purchase returns and allows 650
Cost of purchases
6 270
Cost of goods available for sale
Less: Cost of ending inventory
Cost of sales
GROSS PROFIT
$2 600
8 870
7 150
1 720
$ 380
31
END OF PERIOD PROCESSES
• Perpetual inventory system
– Updating inventory account at end of period
Jun 30 Inventory (ending balance)
10 000
P & L Summary
10 000
(Inventory balance as per stock count)
Jan 30 P & L Summary
12 000
Inventory (beginning balance)
12 000
(Inventory balance as per stock count)
32
END OF PERIOD PROCESSES continued
• Periodic inventory system
Inventory
Beg. balance
12 000
P & L summary
12 000
End. balance
10 000
balance c/d
10 000
22 000
balance b/d
22 000
10 000
Ending inventory from the previous period becomes
the beginning inventory for the next period
33
11
DETAILED INCOME STATEMENT
FOR A RETAILER
• Expenses classified as
– Selling expenses
– Administrative expenses
– Financial expenses
• Sales activities and other operating
activities separated to highlight gross vs.
net profit
34
SUNRISE CD SALES LTD
Income Statement
for the period ended 31 December 2010
INCOME
Revenue:
Sales revenue
Less: Sales R&A
Net sales revenue
Cost of sales
Inventory 1/1/10
Add: Purchases
Freight inwards
Less: Purchase R&A
Net cost of purchases
Cost of goods available for sale
Less: Inventory 31/12/10
Cost of sales
GROSS PROFIT
$714 280
21 390
692 890
$472 620
6 210
478 830
13 480
$ 58 400
465 350
523 750
53 260
470 490
$222 35
400
… continued next slide
SUNRISE CD SALES LTD
Income Statement
for the period ended 31 December 2010
GROSS PROFIT (from previous slide)
$222 400
Other income
Rent revenue
Discount received
EXPENSES
Selling & distribution expenses:
Sales salaries & commission
Freight outwards
Advertising expense
Rent expense - store space
Depn. expense - store equip.
2 400
2 860
227 660
61 040
6 210
8 420
17 000
7 600
100 270
36
… continued next slide
12
SUNRISE CD SALES LTD
Income Statement
for the period ended 31 December 2010
EXPENSES (continued from previous slide)
Administrative expenses:
Office salaries expense
63 040
Rent expense - office space
12 000
Depn. expense - office equip.
3 200
Insurance expense
610
Finance & other expenses:
Interest expense
Discount allowed
1 000
3 260
78 850
4 260
PROFIT BEFORE INCOME TAX
Less: Income tax expense
PROFIT
183 380
44 280
10 470
$ 33 810
37
PROFITABILITY ANALYSIS FOR
DECISION MAKING
Gross profit ratio
Gross Profit x 100%
Net Sales
Profit margin
Operating Profit x 100%
Net Sales
Expenses to sales ratio Operating Expenses x 100%
Net Sales
Inventory turnover
Cost of Sales
Average Turnover
38
39
13