ACG2021 Chapter 5 (Principles of Financial Accounting)

Purchase (Purchase Returns, Purchase Discounts, Purchase Allowances) DO NOT use contra (special) accounts

Sales (Sales Returns, Sales Discounts, Sales Allowances) ALWAYS use contra (special) accounts. (PS: The contra-account used is the same for both perpetual and periodic)


2) In purchase journal entires, 'Purchase Returns & Allowances' are used in th eperiodic method. Also, purchase discounts are used in the periodic method)

Freight in: The transportation cost of a good from the supplier to yhe ware hourse

Freight out: The transportation cost of a good from the warehouse to the customer

(Free on Board) Tells you

1. Who pays for shipping

2. When ownership transfers from seller to buyer

FOB Shipping Point-Buyer owns goods during shipping. The buyer pays for shipping

FOB Destination-Sellers owns good until delivered to buyer. The seller pays for shipping.

The same for service stores.


1. Close revenues


2. Close Expenses


3. Close Income Summary to Retained Earnings


4. Close Dividends

Net cost of inventory purchased = Purchase cost of inventory - Purchase returns & allowances - Purchase discounts + Freight in

Net Purchased = Purchase cost of inventory - Purchase returns & allowances - Purchase discounts

Net Sales Revenue = Sales Revenue - Sales Returns & Allowances - Sale Discounts

Gross Profit percentage = Gross Profit / Net Sales Revenue



Gross Profit = Net Sales Revenue − Cost of Goods Sold (COGS)

Net Sales Revenue = Sales Revenue − Sales Returns − Sales Allowances − Sales Discount

*Measures a business ability to earn a profit. HIgher is better

1. Net sales Revenue - COGS = Gross Profit


2. Total Operating Expenses = Total Selling Expense + Total Administrative Expense


3. Operating Income = Gross Profit - Total Operating Income


4. Income Before Income Tax expense = Operating Income +/- the other income and expense


5.Net Income = Income before Income tax expense - Income tax expense



Terms:

Selling Expenses: Operating Expenses related to marketing and selling companies products

Administrative Expenses: Expenses unrelated to marketing.



"other income and expenses": Income that falls out of the normal money making methods of the business. An example is liquidating a plant asset

Just groups together revenues and expenses and then finds Net income

The same as the Retaiend Earnings Summary for a Service Company

(also called Payment Terms)

Credit terms are the conditions a seller offers a buyer regarding when payment is due and whether any discounts are available for early payment.

ex)

2/10, Net 30

"2/10": Buyers get 2% discount if payment is made within 10 days
"Net 30": Full payment is due within 30 days

ex)2/10, n/30

"2/10": Buyers get 2% discount if payment is made within 10 days
"n/30": Full payment is due within 30 days

ex)2/10, n/EOM

"2/10": Buyers get 2% discount if payment is made within 10 days
"n/EOM": Full payment is due at the End of the month

ex)2/10, 10 EOM

"2/10": Buyers get 2% discount if payment is made within 10 days
"10 EOM": Full payment is due 10 days at the End of the month

This is because it states the name of the vendor to help keep better track on who they owe money to.

Periodic Inventory System-Count inventory physically (by hand); usually used by small local stores2. Perpetual Inventory System-Counts inventory based on bar code scanned

Usually listed below Accounts Reciveables, but above prepaid assets such as supplies, pr-paid rent, & pre-paid insurance

A business that sells merchandise, or goods, to customers.

Wholesaler: A wholesaler is a merchandiser who buys goods from a manufacturer and then sells them to retailers.

Relaitor: A retailer buys merchandise either from a manufacturer or a wholesaler and then sells those goods to consumers.

1. It begins when a company buys inventory from someone called a Vendor

2. The company sells the inventory to the customer

3.Company collects cash from customer

No! Only freight in(cost to get the inventory)

Requires inventory to be reported at the lower of its historical cost or its current market value (Replacment cost)


So, whichever is lower has to be used