📅 Tuesday, May 14th, 2024
Get busy living or get busy dying.
— Stephen King
MGT011A Lecture: inventory and merchandise sales
- manufacturer (material to product ) → wholesalers (buy in large quantities and sell in small quantities) → retails (buy from wholesalers then sell to individual customers)
- recall that operating cycle is the period of time in which a company buys some raw materials, produce product, sell to customer, and receive cash
- inventory systems: perpetual inventory system (accrural basis of accounting) vs periodic inventory system
- They differ in when the cost of merchandise inventory sold is calculated.
- perpetual inventory system
- cost of goods sold is calculated after every sale
- inventory balance is constantly kept up to date
- gives greater control over inventory
- periodic inventory system
- COGS (cost of inventory sold) is only updated periodically via a physical count of inventory
- can’t know actual up-to-date time until the inventory count is done
- any costs related to acquiring the inventory must be accounted for in inventory, e.g, shipping cost needs to be a part of the inventory (debit) account
- transportation cost
- FOB (free on board) shipping point: sale is finalized when the goods leave the seller, so buyer is responsible for shipping cost
- FOB destination: sale is finalized when the goods arrive at the buyer, so seller is responsible for shipping cost
- payment terms: specifies if early payment results in discount
- credit memo: document issued by the seller to that can reduce the client’s balance (alternative to a refund), so the client can use it on next purchase (?)
- credit period / net credit period: maximum time given to pay for goods; a 30-day term is notated as “n/30”.
- purchase discounts: seller may give customers incentives to boost sale
- For example, a 30-day net credit period with a 10-day early payment discount of 2% is notated as “2/10, n/30”. If the company pays the 98% within the discount period in cash, the transaction is journalized as: debit account payable (-L), credit inventory by 2% of original cost (-A; because actual cost of inventory decreased), cash (-A).
- Under a perpetual inventory system, once the merchandise sale entry is journalized (debit accounts receivable/cash, credit sales revenue), you must also journalize another entry to record the cost of goods sold (debit cost of goods sold, credit inventory).
- Sales returns also require 2 journal entries
- To journalize the decrease to revenue, we must use a contra-account called “Sales returns and allowances” that has a debit normal balance, as opposed to debiting revenue directly. This allows the company to review whether the return policy is too loose/strict, etc. Example: a return could result in debit Sales returns and allowances and credit accounts receivable (or cash)
- Returns when a discount was used
- debit cash (+A), debit sales discount (+Contra-Rev -SE), credit accounts receivable (-A)
- net sales = gross sales revenue - sales returns and allowances - sales discounts