Lesson: 43

Topic: Merchandising transactions within the Periodic Inventory System.

Objectives:

The primary focus of this lesson are the contra accounts which affect sales revenue and cost of goods sold (pages 431 - 458). Specific accounts examined will include:

• Sales (a revenue account used specifically in a merchandising firm);

• Sales Returns and Allowances (a contra “Sales” account);

• Sales Discounts (another contra “Sales” account);

• Purchases (an expense account used under the periodic inventory method);

• Transportation-in (an expense account used to record the cost of shipping associated with the purchase of inventory);

• Purchases Returns and Allowances (a contra “Purchases” account); and

• Purchases Discounts (another contra “Purchases” account)  

Method of Instruction and Evaluation Exercise:

During a Socratic presentation, the class will examine the various accounts outlined above. Their respective uses will be discussed and demonstrated.

Using Excel, students will then create a merchandising Income Statement for ACME Merchandising by:

i) placing the following account titles and balances within the proper format; and

ii) calculating and recording any missing values for the titles indicated below.

Revenue From Sales:

Sales: 30,000.00
Sales Returns & Allowances: 150.00
Sales Discounts: 50.00

Cost of Goods Sold:

Inventory, January 1: $4,500.00
Purchases: 6,000.00
Transportation-in: 700.00
Purchases Returns and Allowances: 300.00
Purchases Discounts: 100.00
Inventory, December 31: 3,800.00

Operating Expenses:

Rent Expense: $2,400.00
Hydro Expense: 900.00
Phone Expense: 550.00

Headings and figures to be calculated:

i) Net Sales
ii) Cost of Delivered Goods
iii) Cost of Goods Available for Sale
iv) Net Purchases
v) Cost of Goods Sold
vi) Gross Profit
vii) Total Expenses
viii) Net Income

(Save this spreadsheet as "yourname, Merchandising Income Statement", print it, and submit it for marking.)

Expectations Addressed:

The "Advanced Accounting Practices" strand of the BAF3M Ministry of Education Curriculum Guidelines outlines all of the following specific expectations. The expectations addressed by this lesson have been highlighted below.

• The Accounting Cycle for a Merchandising Business:
  • describe the principal accounting elements particular to a merchandising business (e.g., new accounts, cost of goods sold section, returns, discounts);
  • identify and describe the periodic and perpetual inventory systems and journalize transactions using both systems;
  • assess the effects that transactions have on the accounts and financial statements of a merchandising business;
  • record transactions in the journals and ledgers of a merchandising business;
  • prepare a trial balance and the financial statements, including a detailed cost of goods sold section, for a merchandising business;
  • record the adjusting and closing entries for a merchandising business (e.g., accruals, inventory adjustment);
  • describe the impact of year-end procedures, including adjusting and closing entries, on the financial statements of a merchandising business;
  • describe alternative accounting practices (e.g., special journals and ledgers).
• Accounting for Sales Tax:
  • describe the accounting practices particular to sales tax (e.g., accounts required, financial statement presentation);
  • record transactions related to provincial sales tax (e.g., collections, remittance);
  • record transactions related to federal sales tax (e.g., collections, remittance).
• Computer Applications in Accounting:
  • use accounting or application software to record transactions for a service business;
  • use accounting or application software to record transactions for a merchandising business;
  • use accounting or application software to prepare financial statements.

References:

• Text: chapter #11, pages 431 - 458.
• Excel Presentation