ACCOUNTING FOR RETAILING (Ch6)
Inventory.
• Inventory is goods or property purchased and held for sale in the operating cycle of a business.
• Other assets may be sold from time to time but do not constitute inventory (e.g. the sale of a
company car).
• Also known as ‘stock’ or ‘stock in trade’.
• The operating cycle is the average length of time it takes for the business to acquire inventory,
sell that inventory to its customers and collect cash from those customers.
Acquire Inventory
Collect Cash
Sell Inventory
• Determination of profit is a major objective of accounting for inventory. It involves determining the
amount of the total inventory cost to be deducted from sales in the current period and the amount
to be carried forward as an asset to be expensed in some future period.
• Cost of sales (what the inventory cost to the producer) is often a retailers largest expense.
• The inventory asset is often a significant part of total assets and is likely to be very active
(continuously being acquired, sold and replaced).
Condensed Income Statement for A Retailer.
THE FASHION SHOP
Income Statement
For the year ended 30 June 2016
INCOME
Net sales revenue
692, 890
Less: Cost of sales
470, 490
222, 400
GROSS PROFIT
Other income
5, 260
227, 660
EXPENSES
Selling and distribution
Administrative
Finance and other
PROFIT (before income tax)
100, 270
78, 850
4, 260
183380
44, 280
• The differences between the previous income statement and an income statement that includes
inventory:
- “Net sales revenue” is the amount of sales minus the amount of sales returned.
- For a retail business, the most important item of income (revenue) is sales (net sales
revenue)
- The inclusion of ‘cost of sales’, which shows the total cost of the inventory that was sold
during the period.
- Sales less cost of sales = Gross profit.
- Expenses are now grouped by function:
- Selling and Distribution Expenses (e.g. storage costs, advertising, salaries etc)
- Administrative Expenses (e.g. insurance)
- Finance and Other Expenses (e.g. bank fees, interest and anything that can’t be
grouped under the other headings)
Accounting for Sales Transactions, Including GST.
• Retail business must register for an Australian Business Number (ABN), and hence GST, if their
gross taxable supplies (sales of goods) exceed $75, 000 per year.
• A business who is registered for GST must issue tax invoices and collect GST on behalf of their
customers (GST Payable). They can also claim input credits (GST Receivable).
• Tax invoices:
- Required for all sales in excess of $75.
- All tax invoices must have:
- ‘Tax Invoice’ displayed prominently.
- ABN of issuing entity.
- Date of issue.
- Name of suppliers.
- Description of items being supplied.
- Invoices over $1, 000 have additional requirements (e.g. have the name of the recipient
on the invoice, the quantity of goods supplied as well as the ABN/address of the
recipient).
- Example:
• Adjustment notes:
- Adjustment notes are used when:
- All or part of goods sold are returned.
- An allowance (discount) is given.
- The price of supply is changed.
- Part of or the full amount of debt is written off.
- Adjustment notes are essentially a ‘negative invoice’ in which they undo the original
transaction.
- Adjustment notes affect the GST amount incurred.
• Accounting for sales transactions:
- A sales transaction is generally recorded by the retailer when inventory is transferred from
the business to the customer.
- Example:
General Journal
Aug 5 Accounts Receivable/Cash
1 980
Sales
1 800
GST Payable
180
(Sold merchandise on credit (for cash))
- GST is calculated by dividing the good by 11 (e.g. 1980/11 = 180)
• Sales returns and allowances:
- The return of goods or an adjustment of the sales price (allowance) is a reduction in the
amount of recorded sales, and either a cash refund is made to the customer, or the
customer’s accounting receivable is credited.
- Example:
General Journal
Aug 8 Sales Returns and Allowances
300
GST Payable
30
330
Accounts Receivable
(Customer returned merchandise for credit)
- Note that ‘Sales Returns and Allowances’ is a contra-revenue (increases through debits,
not credits).
Cash
settlement
discounts:
•
- When inventory is sold on credit, the terms of payment, called the credit terms, agreed to
by the buyer and seller should be clear about the amount due and the credit period.
- Example: 2/10, n/30 means that a discount of 2% is given if paid within 10days, otherwise
the total amount (without discount) is due within 30 days.
- This creates inventive to pay early, with earlier payments generally reducing losses from
uncollectible account receivable.
- Example:
General Journal
Aug 10 Cash at Bank
Discount Allowed
GST Payable
Accounts Receivable
(Receipt of payment within discount period)
- Steps:
1078
20
2
1100
1. 1100 x 0.2 = $22
2. $22 / 11 = $2 GST
3. Therefore, a 2% discount is $20.
• Trade discounts:
- A trade discounts is a percentage reduction granted to a customer from the normal list
price.
- In contrast to a cash discount, a trade discount is not related to early payment but it used
in determining the actual invoice price to the customer.
- Trade discounts are used to determine actual sale price, and therefore are not recorded
separately in the accounts.
- Example:
General Journal
July 10 Accounts Receivable
Sales ($200 x 10 units x 70%)
GST Payable
(Sold inventory on credit with a 30% trade discount)
• Freight-outwards:
- There are a variety of costs related to moving goods from buyer to seller.
- Obligations in regards to these costs will vary and are shown on invoice.
- The standardised trade terms used include:
- EXW: Ex works - buyer pays the shipping.
- DDP: Delivered duty paid - seller pays the shipping.
- DDP is treated as selling and distribution costs.
- Freight inwards: Part of cost of sales.
- Freight outwards: Selling expense.
1540
1400
140