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Chapter 5

ACC 100 Chapter 5 Notes.docx

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ACC 100
Walter Krystia

Identify the Differences Between Service and Merchandising CompaniesIn 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 categoriesCost of goods soldthe total cost of merchandise sold during the periodSales revenue less cost of goods sold is called gross profitOperating expensesexpenses that are incurred in the process of earning sales revenuesGross profit less operating expenses is net earnings or net loss Two systems to account for inventory Perpetual Detailed records of the cost of each inventory purchase and sale are maintainedCost of goods sold is determined each time a sale occursProvides better control over inventory PeriodicDetailed 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 taken Prepare Analysis for Purchases under a Perpetual Inventory System Using the Accounting Equation WalMart is both a PURCHASER of inventory and a SELLER of inventoryThey play both rolls as all merchandisers do The purchase of merchandise for resale is normally recorded by the merchandiser when the goods are received from the seller Every purchase should be supported by business documents that provide written evidence of the transactionEvery cash purchase should be supported by a cash register receipt indicating the items purchased and the amounts paidEach credit purchase should be supported by a purchase invoice which indicates the total purchase price and other relevant information NoteSales taxes HST or GST and PST are amounts collected by most merchandising and service organizations at the time of payment They are later remitted to the government For simplicity accounting transactions are presented without the added complication of sales taxesWhen WalMart purchases inventory for CASHAssetsLiabilities Shareholders EquityCashInventoryCash purchases are recorded by an increase in Merchandise Inventory and a decrease in CashNOTEInventory is a PREPAID EXPENSEwe own it it has future economic benefit and it is a physical goodWhen WalMart purchases inventory ON ACCOUNTAssetsLiabilities Shareholders EquityInventoryAccounts PayableCredit purchases are recorded by an increase in Merchandise Inventory and an increase in Accounts PayableWhat about FREIGHT COSTS Freight costs are the cost of transporting the goods to the buyers place of business If the freight costs are to be paid by the buyer the costs are considered part of the cost of purchasing inventory In this instance Merchandise Inventory is increased and Cash is decreasedAssetsLiabilities Shareholders EquityCashInventoryWHY are freight costs add into the cost of inventoryBecause when a company pays freight the inventory is MORE EXPENSIVEBy adding the cost of freight into the cost of inventory it
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