Accounting for Retailing Accounting for Retailing

Chapter 6Accounting for retailing

Chapter 6Accounting for retailing

Learning Objectives

1. Understand the nature of inventory and retailing operations

2. Describe the basic format of an income statement for retail businesses

3. Understand the impact of GST legislation on retail businesses

Learning Objectives (cont’d)

4. Account for sales transactions of retail businesses registered for the GST, including the treatment of sales returns, cash discounts, trade discounts and freight costs

5. Account for purchases of inventory and cost of goods sold under both the perpetual and periodic inventory systems by retail businesses registered for the GST

Learning Objectives (cont’d)

6. Prepare worksheets and close the accounts for retail businesses for both the perpetual and periodic inventory systems

7. Prepare a detailed income statement for a retail business

8. Perform a brief analysis of profitability in a retail business for decision-making purposes

Lecture References

• Hoggett, Edwards & Medlin, 6th edition, Chapter 6

• IAS 2/AASB 102 – Inventories

Inventory

• Goods or property held for sale in the ordinary course of business

• Does not include assets acquired to operate the business (e.g. plant and equipment)

• Also referred to as ‘stock’ or ‘stock in trade’

Retail Business Operations (cont’d)

• Condensed Income Statement– Income referred to as ‘sales’– ‘Cost of sales’ (COS) used to show total cost of

inventory sold during the period– Sales — COS (Gross Profit) determined to show

profit from buying and on-selling inventory– Expenses classified by type

Retail Business Operations (cont’d)

SUNRISE CD SALES LTDIncome Statement

for the year ended 31 December 2006

INCOME Net sales revenue $692 890 Less: Cost of sales 470 490GROSS PROFIT 222 400 Other income 5 260

227 660EXPENSES Selling expenses $100 270 Administrative expenses 78 850 Financial expenses 4 260 183 380PROFIT (before tax) $ 44 280

INCOME Net sales revenue $692 890 Less: Cost of sales 470 490GROSS PROFIT 222 400 Other income 5 260

227 660EXPENSES Selling expenses $100 270 Administrative expenses 78 850 Financial expenses 4 260 183 380PROFIT (before tax) $ 44 280

Retailing and the Goods and Services Tax

• Registration for an Australian Business Number (ABN)

• Registration for GST• Input credits• GST collections• GST outlays• Need adequate records!

Retailing and the GST (cont’d)

• Tax invoices– Required for all sales over $50– Common requirements

• ‘tax invoice’

• ABN of issuing entity

• date of issue

• supplier name

• brief description of the items supplied

Retailing and the GST (cont’d)

• Adjustment notes– All or part of the goods are returned– An allowance (e.g. discount) is made– The price of a supply is changed– All or part of the amount owing has to be

written off– The retailer cannot pay the debt

Accounting for Sales Transactions

Date Accounts receivable 1980Sales 1800GST Collections 180

Sold merchandise to Ray Stevens on credit

Date Accounts receivable 1980Sales 1800GST Collections 180

Sold merchandise to Ray Stevens on credit

Date Cash 1980Sales

1800GST Collections

180 Sold merchandise for cash

Date Cash 1980Sales

1800GST Collections

180 Sold merchandise for cash

Accounting for Sales Transactions (cont’d)

• Sales returns and allowances– Goods sold for $300 plus GST of $30 returned as

unsuitable

Date Sales Returns & Allowances 300GST Collections 30

Accounts Receivable 330return of unsatisfactory merchandise sold on credit

Date Sales Returns & Allowances 300GST Collections 30

Accounts Receivable 330return of unsatisfactory merchandise sold on credit


• Cash (settlement) discounts– Goods sold for $1000 plus GST of $100

Date Cash at Bank 1078Discount Allowed 20GST Collections 2

Accounts Receivable – A Jones1100payment of account within the discount period

Date Cash at Bank 1078Discount Allowed 20GST Collections 2

Accounts Receivable – A Jones1100payment of account within the discount period


• Sales return and settlement discount– Credit terms 2/10, n/30– Return of $330

Date Cash at Bank 1078Discount Allowed ($1500 x 2%) 30GST Collections ($150 x 2%) 3

Accounts Receivable ($1980 – $330)1650

payment of a/c Ray Stevens within the discount period

Date Cash at Bank 1078Discount Allowed ($1500 x 2%) 30GST Collections ($150 x 2%) 3

Accounts Receivable ($1980 – $330)1650

payment of a/c Ray Stevens within the discount period


• Trade discounts– Percentage reduction on list price– 10 units of $200, 30% trade discount

Date Accounts Receivable 1540Sales ($200 x 10 x 70%)

1400GST Collections

140Sale of inventory on credit, subject to 30% trade discount

Date Accounts Receivable 1540Sales ($200 x 10 x 70%)

1400GST Collections

140Sale of inventory on credit, subject to 30% trade discount

Retail Transactions

• Freight outwards– Who is responsible for freight costs?– FOB shipping point/FOB destination– Recorded as a selling cost if seller responsible

Accounting for Purchases and Cost of Goods Sold

• Perpetual inventory system• Periodic inventory system

Perpetual Inventory System

• Involves keeping current and continuous records of all inventory transactions

• Separate card or computer file kept for each inventory item– Quantity and unit cost for each sale/purchase– Running inventory balance

Perpetual System — Stock Card

Location1 unit showroom

Remainder - WarehouseMinimum Stock 4Maximum Stock 17

Item RefrigeratorCode C350

Purchases Sales Balance Unit Total Unit Total Unit Total

Date Explanation Units cost cost Units cost cost Units cost cost

1/1 Beginning bal 4 650 2600 15/1 Purchases 10 650 6500 14 650 910021/1 Sales 3 650 1950 11 650 715023/1 Purch. Return (1) 650 (650) 10 650 650024/1 Sales Return (1) 650 (650) 11 650 7150

Perpetual Inventory System (cont’d)

• Single general ledger account for all inventory transactions

• Details maintained on inventory cards

Inventory

Increases (debits)

Purchases

Sales Returns

Decreases (credits)

Sales

Purchase returns

Perpetual System — Transactions

Purchases on credit

Jan 15 Inventory 6 500GST Outlays 650

Accounts Payable 7150purchased 10 refrigerators from ….

Jan 15 Inventory 6 500GST Outlays 650

Accounts Payable 7150purchased 10 refrigerators from ….

Freight inwards (FOB shipping point)

Jan 17 Freight Inwards 420GST Outlays 42

Cash at Bank 462paid freight on merchandise


Cash at Bank 462paid freight on merchandise

Perpetual System — Transactions (cont’d)

Sales on credit

Jan 21 Accounts Receivable 3 465Sales 3 150GST Collections 315

sold 3 fridges on credit ([$1050 + $105 ] x 3 units = $3 456)


sold 3 fridges on credit ([$1050 + $105 ] x 3 units = $3 456)

Jan 21 Cost of Goods Sold 1950Inventory 1950

to remove the cost of inventory sold ($650 x 3 units) from the inventory account

Jan 21 Cost of Goods Sold 1950Inventory 1950

to remove the cost of inventory sold ($650 x 3 units) from the inventory account


Purchase returns

Jan 24 Accounts payable 715Inventory 650GST Outlays 65

Defective unit returned to Fridge King Ltd for credit on account

Jan 24 Accounts payable 715Inventory 650GST Outlays 65

Defective unit returned to Fridge King Ltd for credit on account


Payment of creditor within discount period

Jan 24 Accounts Payable ($7150 – $715) 6435Cash at bank 6306Discount Rec’d (5850 x 2%) 117GST Outlays ($6435 x 2% x 1/11) 12

payment for inventory purchases

Jan 24 Accounts Payable ($7150 – $715) 6435Cash at bank 6306Discount Rec’d (5850 x 2%) 117GST Outlays ($6435 x 2% x 1/11) 12


IncomeSaving in outflow!IncomeSaving in outflow!


Sales returns and allowances

Jan 24 Sales returns & allowances 1 050GST Collections 105

Accounts Receivable 1 155fridge sold on 21 Jan. returned

Jan 24 Sales returns & allowances 1 050GST Collections 105

Accounts Receivable 1 155fridge sold on 21 Jan. returned

Jan 24 Inventory 650Cost of Goods Sold 650

returned fridge placed back into inventory

Jan 24 Inventory 650Cost of Goods Sold 650

returned fridge placed back into inventory

Periodic Inventory System

• Beginning balance of inventory not changed until the end of the period

• Purchases recorded in a ‘purchases’ account

• Only one entry is made for sales to record the selling price of the goods sold

• Ending balance determined by stock count

Periodic System — Transactions

Purchases on credit

Jan 15 Purchases 6 500GST Outlays 650

Accounts Payable 7150purchase of fridges on credit from...

Jan 15 Purchases 6 500GST Outlays 650

Accounts Payable 7150purchase of fridges on credit from...

Freight inwards (FOB shipping point)


Cash at Bank 462paid freight cost on merchandise


Cash at Bank 462paid freight cost on merchandise

Periodic System — Transactions (cont’d)

Sales on credit


sold inventory on credit


sold inventory on credit

Purchase returns

Jan 24 Accounts Payable 715Purchase Returns & Allowances 650GST Outlays 65

defective unit returned for credit

Jan 24 Accounts Payable 715Purchase Returns & Allowances 650GST Outlays 65

defective unit returned for credit


Payment of creditor within discount period

Jan 24 Accounts Payable ($7150 – $715) 6435Cash at Bank 6306Discount Rec’d (5850 x 2%) 117GST Outlays ($6435 x 2% x1/11) 12


Jan 24 Accounts Payable ($7150 – $715) 6435Cash at Bank 6306Discount Rec’d (5850 x 2%) 117GST Outlays ($6435 x 2% x1/11) 12


IncomeSaving in outflow!IncomeSaving in outflow!


Sales returns and allowances

Jan 24 Sales Returns & Allowances 1 050GST Collections 105

Accounts Receivable 1 155fridge sold on 21 January returned

Jan 24 Sales Returns & Allowances 1 050GST Collections 105

Accounts Receivable 1 155fridge sold on 21 January returned

FRIDGE TOWNIncome Statement

for the period ended 31 January


Sales revenue $3150 Less: Sales returns & allowances 1050Net sales revenue 2100Cost of sales* 1720GROSS PROFIT $380

* $1720 = $1950 – $650 + $420


Sales revenue $3150 Less: Sales returns & allowances 1050Net sales revenue 2100Cost of sales* 1720GROSS PROFIT $380

* $1720 = $1950 – $650 + $420

FRIDGE TOWNIncome Statement

for the period ended 31 January


Sales revenue $3150 Less: Sales returns & allowances 1050Net sales revenue 2100Cost of sales Cost of beginning inventory $2600 Add: Cost of purchases $6500

Freight inwards 4206920

Less: Purchase returns 650Net cost of purchases 6270 Cost of goods available for sale 8870

Less: Cost of ending inventory 7150Cost of sales 1720GROSS PROFIT $ 380


Sales revenue $3150 Less: Sales returns & allowances 1050Net sales revenue 2100Cost of sales Cost of beginning inventory $2600 Add: Cost of purchases $6500

Freight inwards 4206920

Less: Purchase returns 650Net cost of purchases 6270 Cost of goods available for sale 8870

Less: Cost of ending inventory 7150Cost of sales 1720GROSS PROFIT $ 380

Perpetual System — Transactions

Updating of Inventory account at the end of the accounting period

June 30 Inventory (ending balance) 10 000P & L Summary 10 000inventory balance as per stock count

June 30 Inventory (ending balance) 10 000P & L Summary 10 000inventory balance as per stock count

June 30 P & L Summary 12 000Inventory (beginning balance) 12 000

inventory balance as per stock count

June 30 P & L Summary 12 000Inventory (beginning balance) 12 000

inventory balance as per stock count


Inventory

Beginning balance 12 000

Ending balance 10 000

22 000

balance b/d 10 000

P & L summary 12 000

balance c/d 10 000

22 000

Ending inventory from the previous period becomes the beginning inventory for the next period

Detailed Income Statement

• Expenses classified as– Selling expenses– Administrative expenses– Financial expenses

• Sales activities and other operating activities separated to highlight gross vs. net profit

SUNRISE CD SALES LTD Income Statement

for the period ended 31 December 2006

INCOMERevenue:Sales revenue $714 280 Less: Sales returns & allowances 21 390Net sales revenue 692 890Cost of sales Inventory 1/1/06 $ 58 400 Add: Purchases $472 620

Freight inwards 6 210 478 830

Less: Purchase returns & allowances 13 480Net cost of purchases 465 350 Cost of goods available for sale 523 750

Less: Inventory 31/12/06 53 260 Cost of sales 470 490GROSS PROFIT (continued next page) $222 400

INCOMERevenue:Sales revenue $714 280 Less: Sales returns & allowances 21 390Net sales revenue 692 890Cost of sales Inventory 1/1/06 $ 58 400 Add: Purchases $472 620

Freight inwards 6 210 478 830

Less: Purchase returns & allowances 13 480Net cost of purchases 465 350 Cost of goods available for sale 523 750

Less: Inventory 31/12/06 53 260 Cost of sales 470 490GROSS PROFIT (continued next page) $222 400



GROSS PROFIT (from previous page) 222 400

Other incomeRent revenue 2 400Discount received 2860

227 660EXPENSESSelling & distribution expenses:

Sales salaries & commission 61 040Freight outwards 6 210Advertising expense 8 420Rent expense - store space 17 000Depn. expense - store equip. 7 600 100 270



EXPENSES cont’d….Administrative expenses:

Office salaries expense 63 040Rent expense - office space 12 000Depn. expense - office equip. 3 200Insurance expense 610 78 850

Finance & other expenses:Interest expense 1 000Discount allowed 3 260 4 260

183 380NET PROFIT BEFORE INCOME TAX 44 280

Less: Income tax expense 10 470NET PROFIT $ 33 810

Profitability Analysis for Decision Making

Gross profit ratio Gross Profit Net Sales x 100%Gross Profit Net Sales x 100%

Profit margin Operating Profit Net Sales x 100%Operating Profit Net Sales x 100%

Expenses to sales ratio

Operating Expenses Net Sales x 100%Operating Expenses Net Sales x 100%

Inventory turnover Cost of Sales Average Turnover

Cost of Sales Average Turnover

Where to get more information

• Insert details of additional resources here

Accounting for Retailing Accounting for Retailing

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