Unit 4Chapter 10: Accounting for Merchandising Operations

Thursday : Summative reviewFriday : Summative reviewMonday : Summative Let’s vote about summative date.

Remember the HW rule: 1.1% bonus mark2.Formula Sheet

Cash Refunds• There is one term that I did not mention from yesterday’slesson.

Cash Refunds• Sometimes cash sale is as common as credit sale. • A customer who paid cash at the purchase date, might

want to return the goods and get cash refund. • In principle, accounting for refunds is similar to that for

credit invoices. • However when a refund is given instead of issuing credit

invoice, we will now issue check or give cash back to the customer.

Revised Cost of Goods sold• Remember from previous lesson that COGS• COGS =BI + Purchase – EI• COGS = BI + Net Purchase – EI• BI = Beginning Inventory• EI = Ending Inventory• COGS = Cost of Goods sold• Net Purchase = Purchase account – Purchase

Returns and allowance account

Sales Discounts1.Cash discounts is a reduction of the amount of an

invoice if payment is made on or before the discount date, (which is stated on the invoice.)

Terms of Sale• Talk about a meeting Samsung and Bestbuy• Every businesses arranges with their customers as to

• when the goods of service are to be paid for • Whether a cash discount is offered. • This arrangement is called “Terms of Sale”.

Terms of Sale• Common Examples of Terms of Sale in

business are: 1. COD = Cash on Delivery2. Net 303. Net 604. 2/10, n/305. 1/15, n/30

Terms of Sale• Common Examples of Terms of Sale in business are:

1. COD = Cash on Delivery : The goods must be paid for at the time they are delivered. This is the most common example of Terms of Sale. COD is common in retail business such as Tim Horton, Dollarama and Wal-mart.

2. Net 30 : The full amount of the invoice is due 30 days after the date of the invoice.

3. Net 60 : The full amount of the invoice is due 60 days after the date of the invoice. Sixty day terms are becoming less common.

Terms of Sale• Common Examples of Terms of Sale in business are:

1. 2/10, n/30 = Two ten net thirty = If the bill is paid within 10 days of the invoice date, a cash discount of 2% is taken. Otherwise, the full amount of the invoice is due 30 days after the invoice date. (most common practice in business)

2. 1/15, n/30 = One fifteen net thirty = If the bill is paid within 15 days of the invoice date, a cash discount of 1% is taken. Otherwise, the full amount of the invoice is due 30 days after the invoice date.

Sales Discounts• Which one of the 5 terms of sale is the most favorable for

the seller? (=vendor)• COD• Which one of the 5 terms of sale is the most favorable for

the purchaser? (or buyer) • Net 60 and 2/10, n/30• The terms of sale depend on the customer’s reputation

for reliability in paying. • A reliable customer of long standing will probably be

granted very favorable terms.

• When the seller makes sales invoice, they always remind the buyer about the terms in its sales invoice. Page 428 shows an example.

Accounting for Cash Discounts• Accounting for cash discounts begins when the

credit sale is made. • In the books of the buyer• On Feb 1, Bestbuy (retail store) bought USBs worth

$411.90 + HST = $465.45 with “2/10, n/30” term:Dr. Cr.

Purchases $411.90HST Recoverable $53.55

Accounts Payable 465.45

Accounting for Cash Discounts• 2% = 0.02 * 411.90 = 8.24• If the buyer pays in 10 days, (on Feb 8) then the

accounting entry would be: Feb 8 Dr. Cr.Accounts Payable 465.45

Purchase Discounts 8.24Bank 457.21

Paid Invoice #1235 with 2% discount

***Purchase Discounts = Discounts earned

Accounting for Cash DiscountsIn the books of the seller (Kingston, manufacturer)When they sold the USBs on Feb 1:

Dr. Cr.Accounts Receivable 465.45

Sales 411.90HST Payable 53.55

As the accounting clerk receives the check, they make sure that the payment has been received within 10 days.

Accounting for Cash DiscountsIn the books of the seller (Kingston, manufacturer)On Feb 8, when they received the check with discount

amount: Dr. Cr.

Bank 457.21Sales discounts 8.24

Accounts Receivable 465.45

*** Sales Discounts = “Discounts allowed” account

Revenue (P431)Sales 403955Less: Return and Allowances 21151

Sales Discounts (5296) 26447Net Sales 377508

Cost of Goods soldInventory Jan 1 72074Purchases 233567Less: Returns and allowance (18356)Purchase Discounts (4358)Net Purchases 210853Freight In 5731Cost of goods available for sale 288658Less Inventory,December 31 83562COGS 205096

Classwork / Homework for Monday class

P432 Ex 1, 2, 3 and 4