ACC 2301 Chapter Notes - Chapter 6: Gross Profit
Document Summary
To record, we debit inventory, and if purchase is paid in cash, we would credit cash. If company made purchase on account, we would credit accounts payable increasing liabilities. First entry- record increase to asset account and increase in sales revenue. Second entry- record increase cost of units sold. Purchase returns means a reduction in both inventory and accounts payable. Freight charges- significant cost associated with inventory for most merchandising companies including freight. Freight in- cost to transport inventory to company which is included as part of inventory and is added to balance of inventory. Purchase discounts- allows buyer to trim a portion of cost of purchases in exchange for payment within certain period. To account for the purchase discounts, we subtract discount from balance in inventory account. Inventory turnover ratio= cost of goods sold/ average inventory. Gross profit ratio= gross profit/ net sales (the higher the gpr, the higher is the markup a company can achieve on its inventories.
