Financial Accounting - Chapter 5_ Accounting for merchandising operations.txt

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Unformatted text preview: Financial Accounting - Chapter 5: Accounting for merchandising operations 00:00:00 [MUSIC] 00:00:01 Welcome to the video summary series for Perdisco's Financial Accounting text book. 00:00:07 In addition to chapter summary videos such as this one. 00:00:10 Financial accounting also offers podcasts, virtualtutor e-learning, home work activities with anticheat and autograde functionality. 00:00:21 And detailed instructor resources, find out more at perdisco.com/finacc, for now, over to the author. 00:00:32 Hi again, I'm Rachel Wyatt, and welcome to the next summary in the Perdisco accounting series. 00:00:37 In this one, we're going to look at accounting for merchandising operations, starting with merchandising operations, recording purchases of merchandise. 00:00:47 Recording sales of merchandise and completing the accounting cycle of the merchandiser. 00:00:52 So, let's start by finding out what exactly are merchandising operations. 00:00:57 Merchandising operations are those activities involved in purchasing items from a supplier, and then selling those items to a customer. 00:01:05 These items purchased for resale are called merchandise inventory, or just merchandise or just inventory. 00:01:12 Basically what happens in a merchandising business, is that the business uses its cash to purchase the goods, which form part of the inventory of the business. 00:01:21 When the inventory is sold to a customer, its cost is reported as the cost of goods sold. 00:01:27 The business then collects the cash and the customer and the cycle starts all over again. 00:01:32 Now there are two ways we can record the purchase and sale of merchandise, under the perpetual inventory system the accounting records are continuously updated to reflect the value of the inventory available for sale and cost of goods sold as each transaction occurs. 00:01:49 The alternative is to use the periodic inventory system where the value of inventory available for sale and cost of goods sold is updated only at the end of the accounting period. 00:02:00 We're going to focus on how to record transactions under the perpetual inventory system. 00:02:06 This brings us to our next topic recording purchases of merchandise using the perpetual inventory system. 00:02:13 The journal entry to record the purchase of merchandise is pretty simple, we just did with the merchandise inventory account because it is an asset account, and asset accounts are increased by debits. 00:02:24 Within credit cash or accounts payable, depending on whether it was a cash or credit purchase. 00:02:31 Now, we might have managed to negotiate a trade discount with the supplier, which is where we paid a lower price than was advertised. 00:02:38 If so, the value recorded in the accounts is the actual price we purchase the goods for not the higher advertised price. 00:02:47 Sometimes when we purchase items we may need to return them to the supplier. 00:02:51 This may be because we received the wrong color or the goods arrived damaged. 00:02:56 The way we record this in the accounts is simply to flip the general entry for the purchase around, and debit either cash or accounts payable and credit merchandise inventory. 00:03:07 For credit purchases of merchandise, sometimes suppliers offer purchase discounts to encourage early payment of the invoice. 00:03:15 So how do we record the journal entry if we are eligible to receive the discount? 00:03:20 First, we debit accounts payable for the full value of the invoice to recognize that we no longer owe this amount to the supplier. 00:03:28 The value of the discount is credited to the merchandise inventory account. 00:03:32 This is because by taking the discount, we didn't actually end up paying as much for the merchandise as was originally recorded in that account. 00:03:41 So crediting merchandise inventory reduces the value of inventory to the amount we actually paid. 00:03:47 The final part of the journal entry credits cash for the value of the invoice minus the discount amount. 00:03:54 Now that we know how to record purchases of merchandise, the next step is to record the styles of merchandise to customers. 00:04:01 Under the perpetual inventory system, there are actually two journal entries to be recorded every time a sale is made. 00:04:08 The first journal entry records the revenues earned by debiting cash, or accounts receivable and crediting sales revenues. 00:04:16 Similar to the purchase transaction, if we offered a trade discount to our customers, the value of this entry would be what we actually charge the customer for the sale, not the normal advertised price of the goods. 00:04:29 The second entry is particular to the perpetual inventory system in the at the time the transaction occurred. 00:04:34 An entry is made to transfer the cost of the merchandise sold to an expense account, and record the reduction of the value of the inventory held by the business. 00:04:43 This is done by debiting cost of goods sold and crediting merchandise inventory for the value of the inventory sold. 00:04:50 Now when we sell merchandise, there are times that we refund the customers in money. 00:04:54 Perhaps because the merchandise was damaged or faulty in some way, to help manage the business we want to separately keep track of these refunds. 00:05:02 So, instead of just reversing the original sounds entry, we record the refund by debiting the sales returns and allowances account. 00:05:09 And crediting cash or accounts receivable for the value of the allowance. 00:05:14 The difference between a sales return and allowance is that in an allowance, we just refund the customer's sum, or all of the purchase price. 00:05:21 But in a sales return, the customer also returns the inventory for us to resell. 00:05:27 Under the perpetual inventory system for a sales return, we also have to update the merchandise inventory account. 00:05:33 To reflect the that we have received the inventory back from the customer. 00:05:37 This is done by debiting the merchandise inventory account and crediting cost of goods sold, for the value of the inventory returned. 00:05:45 The final thoughts transaction we cover today is when we offer customers a sales discount for early payment of the invoice. 00:05:52 This sales discount is considered a reduction in the revenues of the business, so as recorded as a debit to the contra revenue account sales discount. 00:06:01 The cash account is also debited to record the cash received from the customer. 00:06:05 And the corresponding credit is recorded in the accounts receivable account, for the combined value of both the cash receipt plus the sales discount given to the customer. 00:06:13 To record that the customer no longer owes us, the full amount of the invoice. 00:06:18 This summary only covers some of the basic transactions in recording the purchase and sale of inventory, under the perpetual inventory system. 00:06:26 The best way to learn these, and the rest of the transactions covered in the chapter, is to practice doing them, which is where your Perdisco virtual tutor questions can help. 00:06:36 You'll find many questions for you to practice, such as this one where a trade discount is received for the purchase of inventory. 00:06:44 We can select the correct number of debits and credits required for the transaction to review where we record the general entry. 00:06:52 Then, we select the accounts to be debited and credited, and typing the value of the general entry. 00:06:59 Once we submit that, we now get personalized feedback for our answers, and an explanation for the question. 00:07:08 Now that we know how to record sales transactions, we can move on to completing the accounting cycle of a merchandiser. 00:07:15 The adjusting entries of a merchandiser may include the same entries as recorded by a service business with the addition of one more journal entry. 00:07:23 At the end of the accounting period, a physical inventory account is taken and used to calculate the dollar value of the inventory on hand. 00:07:31 This is compared with the value recorded in the merchandise inventory account. 00:07:36 What may happen is that the actual amount of inventory on hand is less than the amount recorded in the accounts. 00:07:42 Now there may be several reasons to explain this loss of merchandise, including employee theft, shop lifting, or just deterioration of the goods. 00:07:52 The adjusting entry to record this inventory shrinkage under the perpetual inventory system, is to debit the cost of goods sold account and credit the merchandise inventory account. 00:08:02 After this adjusting entries recorded, the ending balance of the merchandise inventory account has been updated to reflect the actual value of inventory on hand, ready to be reported in the financial statements. 00:08:15 At the end of the accounting period, merchandise businesses also need to record closing entries. 00:08:20 This is similar to those of a service business, except that the merchandiser has some new accounts that need to be closed. 00:08:27 In the first closing entry that closes or temporary accounts with a credit balance to the income summary account. 00:08:33 The only difference is that the merchandiser uses the sales revenues account rather than the revenues account use by service business. 00:08:41 In a second closing entry, all temporary accounts with a debit balance are closed to the income summary account. 00:08:47 The new accounts closed here include sales returns and allowances, sales discounts, cost of goods sold, and delivery expense. 00:08:56 The final two closing entries to close the income summary account to equity, and in close to withdrawals account equity remain the same for both service businesses and merchandisers. 00:09:07 Now this summer has focused on a selection of the basic transactions of a merchandiser. 00:09:12 If you haven't done so already, you should carefully study the chapter in your prediscore textbook. 00:09:18 There you'll find a few more variations on the transactions presented in this summary. 00:09:22 Which you should study until you're able to confidently record all the journal entries presented in the chapter. 00:09:29 So that's Chapter 5, accounting for merchandising operations. 00:09:33 The key topics were merchandising operations, recording purchases of merchandise, recording sales of merchandise and completing the accounting cycle of a merchandiser. cielo24 | what’s in your video? | cielo24.com...
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