Business and Types ?

There are three types of Business are under

 Service Type Business

 Merchandising Companies
 Manufacturing Companies
Merchandising companies
 Merchandising companies in contrast to
service type business earn revenue by
selling goods rather than services.
 The goods that a merchandising company
sells to its customers are called inventory
or merchandise .
 Retailers and wholesalers Merchandising
companies include both.
Merchandising Activities

Merchandising Companies

Consumer
Manufacture Wholesaler Retailer
 Operating Cycle for a
Merchandiser
Begins with the purchase of merchandise and ends with
the collection of cash from the sale of merchandise.

Cash Sale Credit Sale

Cash
Purchases collection Purchases

Merchandise
Cash Account
inventory
sales receivable

Merchandise
inventory Credit sales
Inventory

Merchandise on hand that is goods

remaining unsold.
You purchase merchandise of worth $1000
at the start of the month and on the day of
preparing balance sheet the remaining
goods worth $200 so inventory is of $200
General Ledger Account
 Up to now we have been recording
transactions only in General Ledger
accounts .These Ledger accounts are used
in preparing Financial Statements and other
Accounting reports .But it not provide much
of the detailed Information needed by
managers and other company employees in
daily business operations .The detailed
information is found in Accounting records
called Subsidiary ledgers
Subsidiary Ledgers :A source of
more detail
 A subsidiary ledger shows separately the
individual items which comprise the
balance of a general ledger account .For
example an accounts receivables
subsidiary ledger contains a separate
account for each credit customer .If a
company has 500 credit customers there
will be 500 separate accounts in the
accounts receivable subsidiary ledger .
Inventory Subsidiary ledger
 Most of Merchandising companies also
maintain an inventory subsidiary ledger
with a separate accounts for each type of
merchandise that the company sells thus
the inventory ledger of a large department
store contains thousands of accounts it
provides a detailed information to
managers and employers
 A separate subsidiary account is maintained for each item
in inventory

The
TheCost
Costof
ofGoods
GoodsSold
Soldfor
forthe
theAugust
August14 14sale
saleis
is$1,970,
$1,970,leaving
leaving$530
$530and
and55
units
unitsin
ininventory.
inventory.
Two Approaches widely used in
Accounting for Merchandising
Transaction
1)Perpetual Inventory System.
In a perpetual Inventory system
merchandising transactions are recorded
as they occur .In this system provides up
to date information about the quantity
and cost of the inventory on hand and
also a about the cost of goods sold it
enables the company to prepared
monthly or quarterly Financial statements
directly from the records .
 The Flow of Inventory Costs
BALANCE SHEET

As purchase costs
Current assets:
(or manufacturing Inventory
costs) are incurred $ $

as goods are
INCOME STATEMENT sold

Revenue $
Cost of goods sold
Gross profit
Expenses
Net income
 Perpetual Inventory System
In a perpetual inventory system, inventory entries
parallel the flow of costs.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Entry on Purchase Date
Inventory $$$$
Accounts Payable $$$$

Entry on Sale Date

Cost of Goods Sold $$$$
Inventory $$$$
2) Periodic Inventory System
1) In periodic Inventory system no effort is
made either to update the inventory account
or to record the cost of goods sold as
transactions occur throughout the year
rather the accounting records are updated
usually at year end .In fact that account
records are not updated until year end
explains why this system is not satisfactory
for a business ,periodic system is easy
inexpensive to operate and may meet the
needs of very small business
Periodic Inventory Systems
In a periodic inventory system, inventory entries
are as follows.

Note
Note that
that an
an entry
entry is
is not
not
made
made toto inventory.
inventory.
Periodic Inventory Systems
In a periodic inventory system, inventory entries
are as follows.
Periodic Inventory Systems

The inventory on
hand and the
cost of goods
sold for the year
are not
determined until
year-end.
Merchandise Purchases

On May 5, Coca cola, company. purchased

$14000 of Merchandise Inventory paying cash.

Dr. Cr.
Jun. 20 Merchandise Inventory 14,000
Cash 14,000
Purchase merchandise for cash
Purchase Merchandise on credit

On
On May
May 8 8 Coca
Coca cola.
cola. purchased
purchased $27,000
$27,000 ofof
merchandise
merchandise inventory
inventory on
on account,
account, credit
credit
terms
terms ifif we
we paid
paid 2/10,
2/10, n/30.
n/30.

Dr. Cr.
Merchandise Inventory 27,000
Accounts Payable 27,000
Purchase merchandise on account
Discounts

Incentive offers on purchases / sales

Trade Discount Cash Discount

Purchase Discount Sales Discount

19
Cash Discount

Credit Term:
Cash incentive offered
for a prompt 5/10, n/30
payment made
within the discount n/30
period. It is stated
in credit terms.

The amount is recorded in related accounts

20
Purchase Discounts
On
On May
May 15,
15, Coca
Coca Cola.
Cola. paid
paid the
the amount
amount due
due
on
on the
the purchase
purchase ofof before
before the
the maturity
maturity of
of
date
date entry
entry will
will be
be passed
passed like
like this
this in
in Journal.
Journal.

*$27,000 × 2% = $540 discount

Purchase Returns & Allowances

Cash Purchase: Dr. Cash

Cr. Inventory

Credit Purchase: Dr. Account Payable

Cr. Inventory
For purchases returns and allowances,
Accounts Payable is debited and
Merchandise Inventory is credited.

22
Purchase Returns and Allowances
On
On May
May 9
9 Coca
Coca cola.
cola. purchased
purchased $20,000
$20,000
of
of merchandise
merchandise inventory
inventory on
on account,
account,
credit
credit terms
terms are
are 2/10,
2/10, n/30.
n/30.

May 9 Merchandise Inventory 20,000

Accounts Payable 20,000
Purchased merchandise on account
 Purchase Returns and Allowances
On
On May
May 10,
10, Coca
Coca cola.
cola. returned
returned $500
$500 of
of defective
defective
merchandise
merchandise to
to the
the supplier.
supplier.

Dr. Cr.
May 10 Accounts Payable 500
Merchandise Inventory 500
Returned defective merchandise
Purchase Returns and Allowances
On
On May
May 18,
18, Coca
Coca cola.
cola. paid
paid the
the amount
amount owed
owed for
for the
the
purchase
purchase of
of May
May 9.
9.

Dr. Cr.
May 18 Accounts Payable 19,500
Cash 19,110
Merchandise Inventory 390
Pa i d a ccount i n ful l
Transportation Costs

On May 12, Coca cola Inc. purchased

$8,000 of merchandise inventory for cash
and also paid $100 transportation costs.

Dr. Cr.
May 12 Merchandise Inventory 8,100
Cash 8,100
Paid for merchandise and transportation
Cost of Merchandise Purchased

Coca
Coca cola
cola
Total
Total Cost
Cost of
of Merchandise
Merchandise Purchases
Purchases
For
For Year
Year Ended
Ended May
May 31,
31, 2008
2008
Invoice
Invoice cost
cost of
of merchandise
merchandise purchases
purchases $$ 692,500
692,500
Less:
Less:
Purchase
Purchase discounts
discounts (10,388)
(10,388)
Purchase
Purchase returns
returns and
and allowances
allowances (4,275)
(4,275)
Add:
Add:
Cost
Cost of
of transportation-in
transportation-in 4,895
4,895
Total
Total cost
cost of
of merchandise
merchandise purchases
purchases $$ 682,732
682,732
Accounting for Merchandise Sales

Sales
Sales discounts
discounts and
and returns
returns and
and allowances
allowances are
are Contra
Contra Revenue
Revenue accounts.
accounts.
Sales

Cash Sale: Dr. Cash

Cr. Sales
( to record sales at selling price )
Dr. Cost of Goods Sold
Cr. Inventory
( to record cost of goods sold )

 For cash sales, Cash is debited and Sales is credited.

 For the cost of goods sold for cash, Cost of Goods
Sold is debited and Merchandise Inventory is
credited. 29
 Sales

Credit Sale: Dr. Account Receivable

Cr. Sales
( to record sales at selling price )
Dr. Cost of Goods Sold
Cr. Inventory
( to record cost of goods sold )

 For credit sales, Accounts Receivable is debited and Sales is

credited.
 For the cost of goods sold on account, Cost of Goods Sold is
debited and Merchandise Inventory is credited.
30
Sales Returns & Allowances
Credit Sale: Dr. Sales Returns & Allowances
Cr. Account Receivable

Dr. Inventory
Cr. Cost of Goods Sold

 The seller’s entry to record a credit memorandum

involves a debit to the Sales Returns and Allowances
account and a credit to Accounts Receivable. The entry
to record the cost of the returned goods involves a debit
to Merchandise Inventory and a credit to Cost Goods
Sold.

31
Sales of Merchandise

On
On March
March 18,
18, Diamond
Diamond Store sold $25,000
$25,000 of
of
merchandise
merchandise on account. TheThe merchandise was
was carried
carried in
in
inventory
inventory at
at aa cost
cost of
of $18,000.
$18,000.
Sales Discounts
On
On June
June 8,
8, Barton
Barton Co.
Co. sold
sold merchandise
merchandise costing $3,500
for $6,000 on account. Credit terms were 2/10,
2/10, n/30.
n/30.
Let’s
Let’s prepare
prepare the
the journal entries.
entries.

Dr. Cr.
Jun. 8 Accounts Receivable 6,000
Sales 6,000
Sales of merchandise on credit

Cost of Goods Sold 3,500

Merchandise Inventory 3,500
To record cost of sales
Sales Discounts
On
On June
June 17, Barton
Barton Co. received aa check for $5,880 in full
payment
payment of
of the
the June
June 8 sale.
sale.

Cash 5,880
Sales Discount 120
Accounts Receivable 6,000
Received payment less discount
Sales Returns and Allowances
On
On June
June 12,
12, Barton
Barton Co.
Co. sold
sold merchandise
merchandise
costing
costing $4,000
$4,000 for $7,500
$7,500 on
on account.
account. The
The
credit
credit terms
terms were
were 2/10, n/30.
n/30.

Dr. Cr.
Jun. 12 Accounts Receivable 7,500
Sales 7,500
Sales of merchandise on credit

Cost of Goods Sold 4,000

Merchandise Inventory 4,000
To record cost of sales
Sales Returns and Allowances
On
On June
June 14,
14, merchandise
merchandise with
with aa sales
sales price
price of
of $800
$800 and
and aa
cost of $470 was returned
returned to Barton.
Barton. The
The return
return is related to
to
the June
June 12
12 sale.
sale.

Dr. Cr.
Jun. 14 Sales Returns and Allowances 800
Accounts Receivable 800
Customer returned merchandise

Merchandise Inventory 470

Cost of Goods Sold 470
Returned goods placed i n inventory
 Sales Returns and Allowances
On
On June
June 20, Barton
Barton received
received the
the amount
amount owed
owed to it
it from
from
the
the sale
sale of
of June
June 12.

Dr. Cr.
Jun. 20 Cash 6,566
Sales Discount 134
Accounts Receivable 6,700
Recei ved pa yment l ess di scount
 1. The Income Statement
 2. The Balance Sheet
Income Statement Formats

 Multiple-Step

 Single-Step
Multiple-Step Income Statement

Involves 2 steps in determining net income / loss.

Net Sales xxxxx

Step 1: Less : Cost of Goods Sold (xxx)
Gross Profit xxxx

Less: Operating Expenses

Selling Expenses
Step 2: Administrative Expenses xxxx
Net Income / Loss xxx
42
Multiple-Step Income Statement

It also distinguishes between operating and non-operating

activities.

Operating Revenues and expenses from

activities normal operations (merchandising)

1. Revenues and expenses from

Non-operating auxiliary operations.
activities 2. Gains and losses that are
unrelated to the company’s
operations.
43
Multiple-Step Income Statement

Sales Revenue xxxx

Less: Cost of Goods Sold (xxx)
Gross Profit xxxx
Less: Operating Expenses
Selling Expenses
Administrative Expenses xxxx
Income From Operations xxxx
Other Revenues and gains xxx
Less: Other Expenses and losses (xx)
xxx
Net Income xxx
44
Single-Step Income Statement

Involves only one step in determining net income / loss.

Total Revenues (operating & non-operating) xxxx

Less: Total Expenses
(Operating & non-operating) xxxx

Net Income xxxx

45
Single-Step Income Statement
Multiple-Step Income Statement
 The statement which shows that what
business has and what it has to pay at a
particular time is called balance sheet.
 The statement which list the assets
liabilities and owner equity of a business is
called Balance sheet.
1= Current Assets.
The assets utilized or that gives benefits
within one accounting period.
Examples
Cash , accounts receivable ,Notes receivable
, inventory ,supplies etc.
Account receivable (A/R):
The amounts due from customer.
Example. You have sold 10 marker @ 5 per
maker and you haven't received the
amount. so 50 is your account receivable
Notes receivable:
A note or bill receivable from some one.
Example. You have given $ 500 to some one
and has taken written promise from him
that he will pay the amount after 90 days.
Inventory:
Merchandise on hand that is goods
remaining unsold.
You purchase merchandise of worth $1000
at the start of the month and on the day of
preparing balance sheet the remaining
goods worth $200 so inventory is of $200.
Supplies:
The small materials used in the business
operation.
Like markers , papers etc in kardan
university
 2=Fixed Assets or Long Term asset:
 Those assets which we utilize in more than
one accounting period .
 Land ,building, furniture, machinery ,car
etc
 3=Tangible Assets:
 Those assets which we can touch.
 Or
 Those assets which have a physical
existence are called tangible assets.
 Examples
 Inventory ,land, car etc
 TYPES OF TANGIBLE ASSETS.
 1.Depreciable assets.
 Those assets which have a limited useful
life.
 Examples
 Building ,car ,furniture ,machinery etc
 2.Non depreciable assets.
 Those assets which have an unlimited
useful life.
 Example LAND
 1.Current Liability:
 The obligation payable with in one
accounting period.
 Examples
 Accounts payable , notes payable ,salaries

payable ,interest payable, utility bills

payable , accrued expenses etc
Accrued expenses:
The expenses incurred but not yet paid.
Salaries payable, rent payable ,interest
payable etc
Accounts payable:
The amounts payable to supplier.
You have purchased goods of worth $400 and
you haven’t pay for it so 400 is your accounts
payable.
Notes payable:
A written promise to repay the amount to some
one by a particular date.
Like if you have received $800 from some one
and you have made a written promise that I
will pay the amount after 60 days .so $800 is
your Notes payable
 2.Long term liability:
 The obligations payable in more than one
accounting period.
 Example
 Long term loan payable
OWNER’S EQUITY
The residual claim of the owner on the
assets of the business.
Owner equity increases from
1.Investment of cash or other assets by the
owner
2.Earnings from profitable operation of the
Owner Equity.
business.
Owner equity decreases from
1.Withdrawl of cash or other assets by the
owner
2.Losses from unprofitable operation of the
business.
 The heading of balance sheet communicate
three things
 1.The name of the business
 2.The name of the financial statement
 3.Date
 OVERNIGHT AUTO SERVICE
Balance Sheet
December 31 ,2006
Assets Liabilities & Owner ‘s equity
Cash…………… $ 14,220 Liabilities;
Account receivable 6,600 Notes payable ……. $ 30,000

Supplies 1,000 Accounts payable 8,870

Land …………... 52,000 Total liabilities $ 38,870
Building ………. 36,000 Owner ‘s equity;
Less: Accumulated Dep … 150 35,850
Tools & Equipment 12,000
Less: Accumulated Dep 200 11,800 Asad Capital 82,600
Total Assets ………….. $121,470 Total liabilities & O.Eq $121,470