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Unformatted text preview: Chapter 5 - Retailing operations CHAPTER OVERVIEW Throughout the previous four chapters you learned about the accounting cycle as it applies to a service business. In Chapter 5, the emphasis changes from a service business to a retail business - one that earns its revenue by selling products (inventory, goods, merchandise or stock). The revenue we call ‘Sales’ and the associated cost to the retailer of the goods sold ‘Cost of Goods Sold’ (COGS or COS). Understanding this chapter will make subsequent chapters, particularly Chapters 6 and 8, easier to comprehend. The learning objectives for this chapter are to: 1. Account for the purchase of inventory and GST. 2. Account for sale of inventory and GST. 3. Use sales and gross profit to evaluate a business. 4. Adjust and close the accounts of a retailing business. 5. Prepare a retailer’s financial statements. 6. Use the gross profit percentage and the inventory turnover to evaluate a business. Appendix to Chapter 5 Accounting for inventory in a periodic inventory system: A1. Account for the purchase and sale of inventory. A2. Calculate the cost of goods sold. A3. Adjust and close the accounts of a retailing business. A4. Prepare a retailer’s financial statements. CHAPTER REVIEW Australia like many countries has a goods and services tax ( GST ). A retailer pays GST on goods and services they buy (that are subject to the GST) and collects GST on many of the goods (inventory) they sell. The retailer claims back the GST they have paid and passes on the GST they have collected. Logistically a retailer will usually pass on the net of the two. Usually the retailer will show the revenues and expenses net of GST and a current liability ‘GST Clearing’. Businesses not registered for the GST include the GST they pay simply as part of their business expenses and do not charge GST on the goods they sell. The two main accounting systems used for inventory are the periodic system and the perpetual system . The major difference between the two is the availability, within the accounting records, of an up-to-date (and therefore reasonably accurate) value for inventory on hand. When a perpetual system is used, this value is available, whereas the periodic system can determine a value only by an actual physical count (which is time consuming and expensive). With the increasing use of computers and barcode scanning, most businesses have changed their systems from periodic to perpetual. For this reason, we use the perpetual system in our discussion of retail businesses (the periodic system is covered in the chapter appendix). Objective 1 - Account for the purchase of inventory and GST. Typically, the process of purchasing inventory and selling it to customers is a continuous process. A large business may have many different products it sells to customers, and may deal with many different suppliers....
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- Accounting, Generally Accepted Accounting Principles, Net Sales