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part 2 - 1 2 Review for Exam 2 Merchandise Inventory System...

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Review for Exam 2 Merchandise Inventory System Net sales= total sales- sales discount – sales returns and allowances Net sales – COGS = Gross Profit(Gross Margin) Gross Profit- selling and administration expenses = Income before taxes Income before taxes – income taxes = net income Bad Debts expense belongs to selling and administration expenses Beginning inventory + net purchases = cost of goods available for sales Cost of goods available for sales – Cost of goods sold = ending inventory Cost of Goods Sold: it includes the direct costs attributed to the production of the goods sold by a company. Perpetual system: Periodic System: Journal entry for the purchase of inventory: Inventory XX Purchases XX Cash, A/P XX Cash, A/P XX Journal entry for the sale of inventory: Cash, A/R XX Cash, A/R XX Sales XX Sales XX Cost of goods sold XXX Inventory XXX purchase discount e purchase allowance and return S + * merchandise inventory(credit it). Sales discounts and sales returns and allowances are contra-revenue account Account Receivable, Bad Debt Expense Credit Card expense e journal entry Valuing accounts receivable: 1. Direct write-off method 2. Allowance method Example for Direct write off method On August 4, Barton determines it cannot collect $350 from Martin, Inc., a credit customer. Bad Debts Expense $350 A/R $350 On September 9, Martin pays $200 that was previously written off. A/R $200 Bad Debts Expense $200 ( ) Cash $200 A/R $200 Allowance for doubtful accounts is a contra-asset account Total Accounts Receivable(Gross Account Receivable) – Allowance For Doubtful Accounts= Net Account Receivable (Net Realizable value of account receivable) Allowance for doubtful accounts e debit balance before doing adjusting entry. Estimating bad debts expense: 1. Percent of sales method 2. Accounts receivable methods(balance sheet viewpoint) Percent of accounts receivable method Aging of accounts receivable method Bad debts expense+ bal. after write off= bal. of allowance for doubtful accounts
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Percent of sales method: first bad debt expense, then allowance for doubtful accounts Accounts receivable method: first allowance for doubtful accounts, then bad debt expense Bad debts expense belongs to selling expense Aging of accounts receivable method: e current portion Example of allowance method of AR: Bad Debts Expense XXX Allowance for Doubtful Accounts XXX Actual Write-Off: Allowance for Doubtful Accounts XX Accounts Receivable XX Note: no expense is recorded because the expense was recorded when the estimate was made and it doesn’t change the net AR either Example of “allowance method does not change AR” Friar Company uses the allowance method to account for uncollectible accounts. On January 1, the allowance for doubtful accounts had a credit
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