[FDNACCT] Unit 4 (Part 3): Merchandising Transactions

Periodic
Perpetual

2 Types of inventory system

Periodic inventory system

An inventory system in which merchandise inventory balance is updated when a physical inventory is taken, normally at end of the period

Periodic inventory system

Low-cost items; High volume of transactions

Perpetual inventory system

An inventory system in which merchandise inventory balance is updated perpetually

Perpetual inventory system

Expensive items; Low volume of transactions

Merchandise Inventory

Goods on hand at end of the period

Current Asset

Classification of Merchandise Inventory

Purchases

Purchase of goods for sale

Cost of Sales

Classification of Purchases

Freight In

Delivery of goods purchased assumed by the buyer

Cost of Sales

Classification of Freight In

Purchase Returns

Return of goods due to damage, low quality, or wrong specifications

Contra-Purchases

Classification of Purchase Returns

Purchase Allowances

Reduction in the original price charged by supplier due to damage, low quality, or wrong specifications

Contra-Purchases

Classification of Purchase Allowances

Purchase Discount

A cash discount offered by supplier for payment within the specified discount period

Contra-Purchases

Classification of Purchase Discount

Sales

Sale of goods

Revenue

Classification of Sales

Freight Out

Delivery of goods sold assumed by the seller

Expense

Classification of Freight Out

Sales Returns

Return of goods by customers due to damage, low quality, or wrong specifications

Contra-Sales

Classification of Sales Returns

Sales Allowances

Reduction in the original price charged to customers due to damage, low quality, or wrong specifications

Contra-Sales

Classification of Sales Allowances

Sales Discount

A cash discount offered to customers for payment within the specified discount period

Sales Discount

designed to encourage customers to pay their accounts promptly

Contra-Sales

Classification of Sales Discount

Trade discounts

Discounts for bulk purchases

Trade discounts

deducted from list price to determine invoice price

Trade discounts

not reflected in the books

Cash discounts

Discounts for early payment of account

Cash discounts

deducted from invoice price

Free on Board

determines the ownership of the goods while in transit and the party who is responsible for the freight and other expenses from the Point of Shipment to the Point of Destination

FOB Destination Point

title transferred to the buyer when the goods are delivered to the destination point

FOB Selling Point

title transferred to the buyer as soon as the goods are shipped

Freight term

determines the party who actually paid the freight and other expenses from the Point of Shipment to the Point of Destination

Freight Prepaid

Seller actually pays for the freight

Freight Collect

Buyer actually pays for the freight.

Freight In, Cash

Buyer | FOB SP Collect

Freight In, Accounts Payable

Buyer | FOB SP Prepaid

Accounts Payable, Cash

Buyer | FOB DP Collect

no entry

Buyer | FOB DP Prepaid

no entry

Seller | FOB SP Collect

Accounts Receivable, Cash

Seller | FOB SP Prepaid

Freight Out, Accounts Receivable

Seller | FOB DP Collect

Freight Out, Cash

Seller | FOB DP Prepaid

Wholesaler

a firm which typically sells goods to another firm

Retailer

sells goods to the final customer

Periodic inventory system

ending inventory is accounted for at the end of the accounting period

Perpetual inventory system

inventory is accounted for continuously during the accounting period

Free on board term

determines the ownership of the goods while in transit and the party who is responsible for the freight and other expenses from the point of shipment to the point of destination

Freight term

determines the party who actually pays the freight and other expenses from the Point of Shipment to the Point of Destination

Physical count

required for monitoring and internal control purposes regardless of the method used