RECORDING PURCHASES AND SALES
1. Apply the revenue recognition principle (MASTER)
2. Apply the matching principle to recognize expenses (MASTER)
3. Describe the basic format and the content of the income statement.
4. Identify the differences between service and merchandising companies. (SCAN)
5. Prepare entries for purchases under a perpetual inventory system. (MASTER)
6. Prepare entries for sales under a perpetual inventory system. (MASTER) CHAPTER OUTLINE
Learning Objective 1: Apply the revenue recognition
Learning Objective 2: Apply the matching principle to
recognize expenses. (MASTER)
Learning Objective 3: Describe the basic format and
the content of the income statement. (UNDERSTAND)
Read pages 204 - 210 (BEFORE NET SALES on page
210) in the textbook: Financial Accounting, The Impact on
Decision Makers, Second Canadian Edition, by Porter,
Norton, Chesley & Song-Bauld. Learning Objective 4 - Identify the Differences
Between Service and Merchandising Companies
In a merchandising company, the primary source of revenues is the sale of
merchandise, referred to as sales revenue or sales.
Unlike expenses for a service company, expenses for a merchandising company are
divided into two categories:
Cost of goods sold - the total cost of merchandise sold during the period.
Sales revenue less cost of goods sold is called gross profit.
Operating expenses - expenses that are incurred in the process of earning
Gross profit less operating expenses is net earnings (or net loss).
Think of examples of service companies and merchandising companies in the local
area. Consider other examples than those used in the textbook! Consider hair salons,
banks, service stations, funeral homes, etc. as service companies. Consider
department stores, grocery stores, bookstores, etc. as merchandising companies.
The yellow pages of the phone book can be a good resource. Two systems to account for inventory
Detailed records of the cost of each inventory
purchase and sale are maintained.
Cost of goods sold is determined each time a sale
Provides better control over inventory.
Detailed records are not kept throughout the period.
Cost of goods sold determined only at the end of the
accounting period, when a physical inventory count is
Think about different types of businesses that would use perpetual and periodic
inventory systems. Automobile dealers and jewellers use a particular type of
perpetual inventory system where they track specific items of inventory. Large
retailers (grocery stores and department stores) scan merchandise when it is sold,
and can easily keep track of the numbers of inventory items. The small corner store
may not have the same ability, and may use a periodic inventory system.
In this course you will learn only the perpetual method
of recording purchases and sales. However, the
difference between the two methods, as well as the
benefits and drawbacks, are at the SCAN level of