Week 3 financial accounting - Inventory & GST PDF

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Summary

 Identify difference between services business and merchandising business.
 Explain the recording of purchases under a perpetual inventory system.
 Explain recording of sales revenues under a perpetual inventory system.
 Prepare fully classified statement of profit or loss.

Description

FINANCIAL ACCOUNTING APPLICATIONS WEEK 3 – INVENTORIES & GST CH 4       

Identify difference between services business and merchandising business. Explain the recording of purchases under a perpetual inventory system. Explain recording of sales revenues under a perpetual inventory system. Prepare fully classified statement of profit or loss. Use ratios to analyse profitability Understand basic process and main features of GST Complete journal entries to record GST.

MERCHANDISING OPERATIONS

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Main source of revenue for business is sale of inventory (sales revenue aka sales). Expenses from merchandising businesses have two categories: o Cost of sales – total cost of inventory sold during period ( Sales – COGS = (Gross profit) – Operating expenses = Profit)

OPERATIN G CYCLES   

Is longer than that of a service business. Purchasing inventory lengthens the cycle. Added asset account for merchandising business is Inventory.

INVEN TORY SYSTEMS Perpetual system –  

Detailed records of the cost of each inventory purchase and sale are maintained Accounting records continuously and shows the qty and cost of inventory at any time.

Periodic system –   

Inventory records aren’t kept through the period. Cost of sales is determined at the end of accounting period (periodically) To determine cost of sales: 1. Determine cost of goods on hand at beginning of the accounting period. 2. Add to it cost of goods purchased 3. Subtract the cost of goods on hand at the end.

Computerised inventory systems – 

Integrated inventory system is linked with accounts payable, purchases, accounts receivable and sales o To record number of units puirchased, units sold and qty of goods on hand.

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Barcode systems at supermarkets record inventory records and updates instantly.

Additional considerations – 

Perpetual inventory system provides better control over inventories then periodic. o Inventory records show quantities that should be on hand. o o

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The goods can be counted at any time to see whether the amount of goods on hand agrees with records. Shortages can be investigated immediately.

Perpetual system requires more work and money, a computerised system minimises the cost. A computerised system may be too costly for small businesses, and supermarkets can control their inventory records by just looking at shelves.

RECORDING PURCHASES OF INVENTORIES    

1. 2. 3. 4. 5. 6. 7. 8.

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Merchandising business purchase inventories for resale. (E.g. JBHiFi purchases stock from apple, Samsung to sell to customers such as mobile phones or TV’s or laptops). Payments made at time of delivery are cash purchases in contrast to purchasing inventories for credit (on account). Common credit terms are 30 days or a week. Purchases are recorded when the goods are received from seller (Supported with source documents – written evidence) o Each cash purchase should be supported by cheque payment, cash receipt, or suppliers invoice. o Cash purchases increase inventory and decrease cash. Seller (Supplier is PW Audio supply Ltd) Purchaser is Sauk Stereo Invoice date, determines if there is a discount for prompt payment (Number 5) Salesperson is P. Lee and important to calculate commission Credit terms are 2/7, n/30; If paying within 7 days receive 2% discount. Otherwise full amount due in 30 days. Freight terms specified that Sauk Stereo is responsible for. Details of goods sold are 1x Speaker and 5x Woofer. Total of invoice amount. Inventory $3800 debit Accounts payable $3800 credit Under perpetual system, purchase of goods for resale are recorded in the inventory account. (E.g. JBHiFi would increase inventory for TV, computers for resale) Not all purchases are debited to inventory because assets purchased for use like equipment or stationary increase the specific asset account and not only inventory.

PURCHASE RETURN S AND AL LOWANCES   

If goods are damaged or unsatisfactory, the purchaser may return to seller for a cash refund or credit. This is known as a purchase return Alternatively, the purchaser may keep inventory and receive a purchase allowance (deduction) from price. Because Sauk increased inventory when goods are received, inventory is decreased when they are returned Accounts payable $300 Inventory $300

FRE IGHT COSTS   

The invoice states whether the buyer pays for transportation or the seller. When buyer pays for freight, the costs are considered part of the cost of purchasing inventory (freight-in). Usually the cost of inventory includes freight charges, however when lots of items are bought it is difficult to allocate freight costs to individual items.

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Freight-in costs are not debited to inventory, they are included in the cost. If Sauk stereo pays for freight charges it records it as Decreasing assets and decreasing equity Freight in $150 Cash $150 If freight costs are paid by seller, this is called freight-out and is an operating expense. Freight out $150 Cash $150 Some sellers charge a higher invoice to cover cost of delivery expense.

PURCHASE DISCOUNTS Settlement discounts –     

The discount is called discount received. Prompt payment has several advantages such as the buyer saves money and the seller can shorten the operating cycle by converting accounts receivable to cash earlier. The seller can specify credit terms such as 2/7, n/30 (Pay within 7 days for 2% discount or full amount in 30 days). When an invoice is paid within the discount period, the amount of the discount is credited to discount received. Discounts are recorded by the buyer as revenue, a reduction in liabilities and increase in equity. Accounts Payable $3500 Cash $3430 Discount received $70

TRAD E DISCOUN TS 

Trade discounts are disclosed on sales invoice as a % reduction in the list price of the inventory sold (E.g. List price of $500 per item and trade discount of 10% for bulk purchases). o 10% of 5000 is 500 = Purchase would cost $4500 Inventory $4500 Accounts payable $4500

RECORDING SALES OF INVENTORIES   

Sales revenue are recorded when inflow of economic benefits is probable and measured reliably. Sales can be cash or on credit, supported by source document and sales invoice. Under perpetual system, two entries are made for each sale. o First entry records sale (Cash is increased by debit, Sales increased by credit. o Second entry records cost of inventory sold (Cost of sales increased by debit, Inventory decreased by credit) Cash $2200 Sales $2200 2. Cost of sales $1400 Inventory $1400 For credit sales 1. Accounts receivable is increased and sales increased 2. Cost of sales is increased and inventory is decreased PW sold $3800 and the goods cost $2400 1. Accounts receivable $3800 Sales $3800 2. Cost of sales $2400 Inventory $2400 1.

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SALES RETURNS AND ALLOWANCES    

When customer returns goods, the seller can give a cash refund or credit note. Credit note reduces amount owed by the customer. Cash refunds and credit notes are recorded as sales returns and allowances Returned goods involve:

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1. Increase in sales returns and allowances, Decrease in accounts receivable at selling price. 2. Increase in inventory (140 cost) and decrease in cost of sales. 1. Sales return and allowances $300 Accounts receivable $300 2. Inventory $140 Cost of sales $140 If PW gave Stereo a cash refund, Cash would increase by $300 instead of A/C receivable. If goods are faulty or damaged, they can’t be returned for resale. Therefore the entry would involve: 1. Increase in sales returns and allowances, decrease in accounts receivable (or cash) 2. Increase in expense account called inventory write-down and decrease in cost of sales ($140 cost) 1. Sales returns and allowances $300 Accounts receivable $300 2. Inventory write-down $140 Cost of sales $140

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Inventory write down can also be used to record inventory shrinkage (E.g. evaporation of inventories). Sales returns and allowances is a contra revenue account to sales.

SALES DISCOUNTS Seller may offer discount for prompt payment, a discount is based on the invoice price – returns and allowances. The discount allowed account is increased (debited) for discounts that are taken by customers. The entry by PW audio supply ltd to record cash receipt is: Cash $3430 Discount allowed $70 Account receivable $3500 If Sauk pays the amount owing outside the discount, PW audio increases cash $3500 and decrease accounts receivable for same amount Discount allowed is reported as an expense in the statement of profit and loss.

STATEMENT OF PROFIT OR LOSS PRESENTATION

OVERVIEW OF THE GST PROCESS 

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GST is a value added tax which means it is levied on the value added by a business at each stage in production and distribution chain. (E.g. price paid by furniture manufacturer for timber purchase includes GST and price paid by consumer for goods purchased from retailer includes GST). Goods that attract GST are taxable supplies Two exceptions where consumer does not pay gst – GST-free supplies and input taxed supplies. Difference between the two is the supplier can obtain input tax credit from taxation authority for GST free supplies but not input taxed supplies. Seller usually acts as the collector of GST for taxation authority as the final selling price including GST is imposed on the buyer. Registered suppliers receive a credit (input tax credit) for all GST paid on goods or services purchased in the commercial chain. o At intervals (monthly, quarterly or yearly) businesses must report the amount of GST paid and collected during a period and discharge any GST liability owing to taxation authority. This is provided in a business activity statement

ACCOUNTING FOR GST

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To record GST two separate accounts will be used, one for GST collected and one for GST paid. Debits to the GST clearing account represents GST paid Credits to the GST clearing account represents GST collected.

PURCHASING INVENTORY 

Roger purchases 10 tables on credit from manufacturer for $440 each ($40 GST per item)

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$400 debit represents an asset, Full amount is payable to manufacturer including GST as they are collecting agent for tax authority.

PURCHASES RETURNS 

Retailer returned 3 tables to the manufacturer and received a credit note. (Tables cost $440 each - $40 GST per item).

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Effect of purchase return is reverse of purchase. o Inventory and GST accounts are reduced and amount owing to the supplier is now only $3080(4400-1320)

SELLIN G INVEN TORY 

Retailer sells 5 tables on credits to customer, for $550 including $50 GST on terms 2/10, n/30.

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$250 GST collected represents amount owing to taxation authority. Sales is only credited for $2500 not including GST as they collect on behalf. When goods are sold an entry is made to record cost of sales.

SALES RETURNS AND ALLOWANCES 

Customer returned one table as they only needed 4, Retailer issues adjustment note and credits account.

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$50 GST collected represents amount which is no longer owed to ATO. Sales is debited only for $500 as original transaction excluded GST. Credit of $550 is made to accounts receivable to recognise amount no longer due from customer. As goods are returned into inventory, it is increased and cost of sales decreased, excluding GST.

SETTLEMENT D ISCOUNT    

Customer wants to settle their account, amount owing from original sale of 5 tables less 1 is $2200. Terms were 2% discount if paid within 10 days, so the amount the customer will pay is $2156. Original supply due of $2200 includes 200 for GST. Therefore discount given of $$4 is split $4 against GST collected account ($200 x 2%) and $40 is the discount allowed expense....