Riassunto Accounting

BUYER View of- He returns an item he purchased on account for 300€

His journal entry:

• Accounts payable decreases debit
• Inventory decreases credit

If Buyer decides to keep the good for an allowance of 50€

His journal entry:

• Accounts payable decreases 50€
• Inventory decreases 50€
• Purchase Discounts - perpetual

Credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment - a purchase discount

Advantage for both parties:

• Purchaser saves money
• Seller shortens operating cycle and can more quickly convert the accounts receivable into cash

Credit terms:

• Specify amount of cash discount and time period in which it's offered
• Also indicates time period in which the purchaser has to pay the full amount
• Examples: 2/10, n/30 "two-ten, net thirty"
• If buyer pays within first 10 days he gets a discount of 2% on the invoice price

less any• àreturns or allowances

Otherwise the invoice price, less returns or allowances, is due 30 days from the invoice data•1/10 EOM (end of month)§ 1% discount available if invoice is paid within first 10 days of the next month

If seller decides not to offer cash discounts for prompt payment, there will only be the maximum time period foro when the balance is due to pay

Examples:o n/30, n/60 or n/10 EOM§ buyer must pay net amount within 30 days, 60 days, within 10 days of next month

buyerwhen pays invoice within discount period amount of discount increases inventory- àwhy?

Because companies record inventory at cost and, by paying the discount period, the merchandiser§ has reduced that cost.

Example:§ Buyer pays balance due of 3,500€ ( gross invoice price was 3,800 less purchase returns and• allowances of 300 (previous example!)) on May 14, the last day of discount period

There is a cash discount of 2% = 3,500*2% =

70€ à So the buyer pays 3,430€ (3,500 – 70)
Buyers entry:
- Accounts payable decrease 3500à
- Cash 3,430à
- Inventory (discount) 70à
If Buyer paid after the discount period: (he passes up (verzichten) the discount)
- Accounts payable decrease 3500à
- Cash decrease 3500à
BUYER records discount in INVENTORY
Summary of Purchasing Transactions
Can be summarized in a T-account
- - 32 -
Recording Sales of Merchandise - perpetual
Companies record sales revenue when performance obligation is satisfied
- = when goods transfer from seller to buyer
o sales transaction is complete, sales prices areàestablished
Sales can be made
- For cash
- On credit (=on account)
Business document to provide written evidence of the sale
- àCash register tapes provide evidence of cash sales
- àSales invoice (Verkausrechnung) provides support for a credit sale
- àOriginal copy goes to customer
- Seller keeps a copy

to record the sale

It shows date, customer name, total sales price, other info

Sale of merchandise - perpetual

Seller makes 2 entries for each sale-

First entry records the sale (selling price)

Cash/Accounts receivable increases debit àSales revenue increases credit

Second entry records the cost of merchandise sold (cost)

COGS increases debit àInventory decreases credit

Inventory account: shows at all times the amount of inventory on handà

Merchandise companies may use more than 1 sales account it’s for internal decision-making purposes- àEasier to monitor sale trends and respond to changes in sales patterns

Sales Returns and Allowances - perpetual

SELLER records return and allowances under sales returns and allowances-

= transactions where seller either

Accepts goods back from buyer (return)§ Or grants a reduction in purchase price (allowance) and buyer keeps goods§

Example:- Buyer returns an

item he purchased on account for 300€; and it has now cost of 140€

Assume that goods were not defective:

Journal entry for seller:

(1) Increase in Sales Returns and Allowances 300
Decrease in Accounts receivable 300

(2) Increase in Inventory 140
Decrease in COGS 140

If goods are damaged or defective and had scrap value (Schrottpreis) of 50€

Journal entry for seller would be:

(1) Sales Returns and Allowances 300
Accounts receivable 300

(2) Inventory 50
COGS 50

If seller grants allowance by reducing purchase price

Journal entry for seller:

Sales Returns and Allowances debit
Accounts receivable decrease credit
Sales Returns and Allowances- Contra revenue account to Sales Revenue

Normal balance: debit

It’s to not directly debit Sales revenue!

Because:

Would obscure importance of sales returns and allowances as a percentage of sales
Could distort comparisons
Sales Discounts - perpetual= when seller

offers the customer a cash discount for prompt payment- Like purchase discount, it is based on the invoice price less returns and allowances- Seller increases Sales Discount account for discounts that are taken- Example:- Buyer pays balance due of 3,500€ ( gross invoice price was 3,800 less purchase returns and allowances of 300)o on May 14, the last day of discount periodThere is a cash discount of 2% = 3,500*2% = 70€ào Seller gets payment of 3,430 (3,500-70)o Sellers entry for payment within discount periodo Cash 3430Sales discount 70@Accounts receivable 3500Sellers entry if payment after discount periodo Cash 3500@Accounts receivable 3500 - 33 -Sales discount- Contra revenue account against sales revenueo Normal balance = debito It’s to know for the seller the amount of cash discounts taken by customersoThere are 3 sales-related transactions that have an effect on net sales-Summary of Merchandising Entries – using perpetual inventory system - 34

• Periodic Inventory System

Key difference to perpetual system:

• Point at which the company computes cost of goods sold

Perpetual system:

• Computes cost of goods sold at each time a sale is made
• Directly adjusts Inventory account for transactions that affect Inventory (like freight costs, returns, discounts)

Determining Cost of Goods sold under Periodic System:

• No running account of changes in inventory
• Company performs count to determine the ending balance in inventory
• Calculates cost of goods sold by subtracting ending inventory from goods available for sale
• Goods available for sale = Beginning Inventory + Purchases
• Uses different accounts for purchase, freight cost, returns and discounts
• There are contra purchase accounts:
• Purchase returns and allowances
• Purchase discounts

Statement under financial position under both system reports inventory under current asset section

Recording Merchandise Transactions - periodic system

Companies record revenues

1. from sale of merchandise when sales are made (=like in perpetual system)- However, the companies do not compute the COGS on the date of sale- Instead, company makes physical inventory count at end of the period to determine- The cost of merchandise on hand
2. Cost of goods sold during the period
3. Companies record purchases of merchandise in Purchase account (not Inventory account)
4. Purchase returns and allowances, purchase discounts, freight costs on purchase recorded in separate accounts
5. Recording Purchases of Merchandise - periodic system BUYER
6. Hint: When buy equipment and supplies debit it to their accounts and not to Purchases account!
7. Purchase of merchandise
8. Company purchased merchandise for 3,800 on account (because sale invoice =Rechnung) from supplier
9. Purchases 3,800@Accounts payable 3800
10. Freight costs
11. When purchaser incurs freight costs pays 150€ to freight company
12. Freight-In 150@Cash 150
13. Freight-in is part of the cost of goods

purchased- Because cost of goods purchased should include any freight charges necessary to bring the goods to the purchaser- Freight costs are not subject to a purchase discount purchase discounts apply only to invoice cost of the merchandise- à - 35 -Purchase Returns and allowancesNormal balance = creditoCompany returns goods of 300€ to the supplier- Accounts payable 300@Purchase Returns and Allowances 300Purchase discounts Normal balance = creditoThe company pays the balance due to the supplier, taking 2% cash discount because of credit terms on sales invoice- (2/10)Company pays with discount- Accounts payable (3,000-300) 3500@Purchase discount (3,500*0.2) 70@Cash 3,430Recording Sales of Merchandise – Periodic system – SELLERSale of merchandiseSupplier records sale of 3,800 merchandise by company on account (sale invoice) (doesn’t compute COGS yet)- Accounts receivable 3,800@Sales Revenue 3,800Sales Returns and allowancesSupplier gets goods of 300€