ACC 2301 Chapter Notes - Chapter 6: Gross Profit

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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.

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