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chapter 5 - Objectives Chapter 5 ACCOUNTING FOR...

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1 Chapter 5 ACCOUNTING FOR MERCHANDISING BUSINESS Professor Dominica Lee September 2005 2 Objectives: (1) compare a service business s I/S to a merchandising business s I/S. (2) Journalize the entries for merchandise transactions. (3) Prepare an I/S for a merchandising business. ACY1111 D. Lee 2005-2006 3 Merchandising Firms Merchandising firms are firms that buy and sell goods. Expenses for a merchandising company are divided into (1) the cost of goods sold and (2) operating expenses (expenses incurred in the process of earning sales revenue). Service Business Merchandising Business Fees earned Revenue (sales) -Operating exp. - Cost of goods sold = Net income = Gross Profit Operating exp. = Net Income ACY1111 D. Lee 2005-2006 4 Gross profit from sales is usu. expressed as a % of sales: gross profit % In B/S, merchandising Co. has an added asset: inventory. Inventory Systems (1) Perpetual Inventory System (2) Periodic Inventory System ACY1111 D. Lee 2005-2006 5 Perpetual Inventory System Keeps a continuous record for each inventory item. Therefore, the Merchandise Inventory A/C at all times equals the cost of merchandise on hand. Cost of Goods Sold: recorded as goods are sold. Still have to count the inventory annually. ACY1111 D. Lee 2005-2006 6 Periodic Inventory System Does not keep a continuous record of inventory. Have to count inventories at least once a year. Cost of Goods Sold: recorded at year end, based on physical inventory count. Disadvantage: because goods not on hand are assumed to be sold, therefore, cannot determine amount of inventory losses. ACY1111 D. Lee 2005-2006
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