Chapter 5 - Understanding Retail Business Accounting Principles

Operating Cycle

Process of cash flow in businesses.

Service Business

Provides services, not merchandise, to customers.

Retail Business

Buys and sells merchandise to customers.

Revenue Activities

Income generation through service or sales.

Cost of Goods Sold

Expense for merchandise sold to customers.

Gross Profit

Sales minus cost of goods sold.

Operating Income

Gross profit minus operating expenses.

Inventory

Merchandise not sold at period end.

Current Asset

Assets expected to be converted to cash within a year.

Merchandise Inventory

Goods available for sale at period end.

Operating Expenses

Costs incurred in running a business.

Sales

Revenue from selling merchandise.

Fees Earned

Revenue from services provided by a service business.

Merchandise Transactions

Buying and selling activities in retail accounting.

Assets

Resources owned by a business.

Liabilities

Obligations or debts owed by a business.

Stockholders' Equity

Owner's interest in the business.

Revenues

Income generated from normal business operations.

Expenses

Costs incurred in the process of earning revenue.

Cash

Liquid currency available for transactions.

Accounts Receivable

Money owed by customers for goods/services.

Office Supplies

Consumable items used in office operations.

Prepaid Insurance

Insurance paid in advance for future coverage.

Land

Real estate owned by the business.

Store Equipment

Physical assets used in retail operations.

Accumulated Depreciation

Total depreciation expense recognized over time.

Accounts Payable

Money owed to suppliers for purchases.

Salaries Payable

Wages owed to employees at period end.

Unearned Rent

Rent received before services are provided.

Common Stock

Equity shares issued to investors.

Retained Earnings

Cumulative profits retained in the business.

Cost of Goods Sold

Direct costs attributable to sold products.

Physical Inventory

Actual count of inventory at period end.

Perpetual Inventory System

Continuous tracking of inventory transactions.

Periodic Inventory System

Inventory counted at specific intervals.

Credit Terms

Conditions for payment timing and discounts on purchases.

Invoice

Document detailing the sale terms from seller to buyer.

Credit Period

Time allowed for payment after sale date.

Purchases Discounts

Reductions in price for early payment of invoices.

Discount Terms Example

2/10, n/30 means 2% discount if paid in 10 days.

Debit Memo

Notification of return or price allowance sent to seller. Buyer will debit accounts payable

Purchases Returns

Merchandise returned to seller for a refund.

Purchases Allowance

Price reduction granted for damaged or defective goods.

Accounts Payable

Liability account for amounts owed to suppliers.

Discount Period

Time frame to qualify for payment discount.

Net Purchase Price

Total invoice amount after applying any discounts.

Cash Sales

Sales transactions settled immediately in cash.

Credit Card Sales

Sales processed via credit card transactions.

Processing Fees

Charges for handling credit card transactions.

Sales Discount

Discount for early payment of invoices.

Net Method

Recording sales at expected cash received after discounts.

Revenue from Sales

Income generated from selling goods or services.

Sales of Merchandise

Revenue specifically from selling physical goods.

Inventory Purchase

Acquisition of goods for resale.

Credit Memorandum

Document indicating account credit to customer. Seller credits accounts receivable.

Customer Refunds Payable

Liability for estimated future customer refunds.

Sales Transaction Terms

Conditions like 2/10, n/30 for payment.

Merchandise Cost

Original cost of sold goods to seller.

Credit Memo Purpose

Indicates intent to reduce customer's balance.

FOB shipping point

Ownership transfers when merchandise is delivered to carrier.

Freight costs

Expenses added to inventory cost by buyer.

FOB destination

Ownership transfers when merchandise is received by buyer.

Delivery Expense

Seller's cost for shipping, reported as selling expense.

Sales Tax

Tax liability incurred at the time of sale. Seller collects tax on behalf of consumer. Seller remits the tax to the government.

Sales Tax Payable

Liability for sales tax collected from customers.

Trade Discounts

Discounts offered to businesses for bulk purchases.

B2B transactions

Sales between businesses, not to the public.

Sales Catalogs

Publications listing products and prices from wholesalers.

Multiple-Step Income Statement

Income statement with detailed revenue and expense sections, including cost of goods sold and gross profit.

Single-Step Income Statement

Income statement with total revenues minus total expenses.

Physical Inventory

Actual count of inventory on hand.

Depreciation

Allocation of asset cost over its useful life.

Store Supplies

Materials used in the operation of a store.