BSB110 Lecture Notes - Lecture 6: Perpetual Inventory, Current Asset, Stockout
Week 6 Accounting Lecture Notes
Inventories
Operating Cycles
• The operating cycle of a retailer is usually longer than that of a service business
because the retailer must purchase and sell inventory.
• A retail business has a current asset account called Inventory or Stock.
• Retailer’s ietory is goods oed ad i a for ready for sale i the ordiary
course of business.
• Frequently inventory is the most significant current asset on the balance sheet of
retailers.
o David Jones Ltd = 88%
Retail Businesses
• Business activity is based on goods rather than services
• Main revenue item is Sales of goods
o = the number of items sold x selling price
▪ (e.g. 3,000 items x $30 per item)
o Net sales = Sales - Sales Returns
• Main expenditure item is Cost of Sales (COS)
o = the cost price of the goods which have been sold
▪ (e.g. 3,000 x $20 per item)
▪ Only Seller generally knows the cost price, not buyer
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Retail Inventory
• INVENTORY = goods held for resale in the normal course of business
o e.g. clothes, food, petrol, electrical goods— must be held for resale in the
normal course of business not used in the business
• Current asset in the Balance Sheet
Merchandising operations
Management of Inventory
• Efficient handling of inventory
o Stock-out vs excessive stock
• Safeguarding stock
o Self-checkout
o Stocktake
• Fire-sale of inventory
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Inventory Systems
• Periodic system:
o Inventory system in which detailed records are not maintained.
o Cost of sales is determined only at end of accounting period by a physical
inventory account.
o Used widely by small businesses:
▪ e.g. convenience stores, cafes.
• Perpetual System:
o Detailed inventory system in which the cost of inventory is maintained.
o Records continuously show the inventory that should be on hand:
▪ e.g. car dealerships, furniture stores.
o Use of bar codes and optical scanners has led to wide use:
▪ e.g. supermarkets, department stores.
Recording Purchases of inventories in a periodic inventory system
• Purchases account used to record cost of all inventory purchased
o Example:
▪ Sauk Stereo purchase of inventory on credit from PW Audio Supply
Ltd.
• May 5 Purchases 3 800
• Accounts Payable 3 800
• (To record goods purchased on account, terms 2/7, n/30)
Purchases returns and allowances in a periodic inventory system
• Example: Sauk Stereo returns goods costing $300 to PW Audio Supply Ltd.
o May 8 Accounts Payable 300
o Purchase Returns and Allowances 300
o (To record return of incorrect goods purchased from PW Audio Supply)
Recording sales of inventory in a periodic system
• Sale of inventory:
o Example:
▪ Sale of inventory on credit to Sauk Stereo by
PW Audio Supply Ltd.
▪ Record sale only, no record of inventory movement or cost of sale as
this is done at the end of period
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Management of inventory: efficient handling of inventory, stock-out vs excessive stock, safeguarding stock, self-checkout, stocktake, fire-sale of inventory. Recording purchases of inventories in a periodic inventory system: purchases account used to record cost of all inventory purchased, example, sauk stereo purchase of inventory on credit from pw audio supply. 3 800 (to record goods purchased on account, terms 2/7, n/30) Recording sales of inventory in a periodic system: sale of inventory, example, sale of inventory on credit to sauk stereo by. Pw audio supply ltd: record sale only, no record of inventory movement or cost of sale as this is done at the end of period, may 5 accounts receivable 3 800, sales. 3 800 (to record credit sales per invoice no. Inventory on hand must be determined by a physical inventory count: determining ownership of goods, who owns goods in transit that are not included in the physical, calculating cost of sales: count, example: pw audio supply ltd.
