Accounting Chapter 5 terms

Administrative Expenses

Overhead costs related to the general management of a business, such as office salaries, rent, and utilities. Not directly tied to selling products.

Cost of Goods Sold (COGS)

The direct cost of the merchandise that was sold during the period. Calculated as: Beginning Inventory + Purchases − Ending Inventory.

Credit Terms

The payment conditions a seller sets for a buyer, such as when payment is due and whether a discount is offered for early payment (e.g., 2/10, n/30).

FOB Destination

The seller pays freight costs and owns the goods until they reach the buyer’s location. Title transfers upon delivery.

FOB Shipping Point

The buyer pays freight costs and takes ownership of the goods as soon as they leave the seller’s location. Title transfers when shipped.

Freight In

The shipping cost paid to get purchased merchandise to the buyer’s location. It is added to the cost of inventory (a purchase cost).

Freight Out

The shipping cost paid to deliver sold goods to customers. It is a selling expense, not an inventory cost.

Gross Profit

The profit remaining after subtracting COGS from Net Sales Revenue. Formula: Net Sales Revenue − COGS.

Gross Profit Percentage

Measures how much of each sales dollar is kept as gross profit. Formula: Gross Profit ÷ Net Sales Revenue × 100.

Inventory Shrinkage

The loss of inventory due to theft, damage, spoilage, or errors. Discovered when the physical count is less than the recorded balance.

Invoice

A document issued by the seller to the buyer listing the items sold, quantities, prices, and payment terms.

Merchandise Inventory

The goods a business holds for the purpose of selling to customers. Reported as a current asset on the balance sheet.

Merchandiser

A business that earns revenue by buying and selling physical goods, rather than providing services.

Multi-Step Income Statement

An income statement that separates operating and non-operating activities into multiple sections, showing Gross Profit and Operating Income as distinct subtotals.

Net Sales Revenue

Gross sales after deducting sales returns, allowances, and discounts. Formula: Sales Revenue − Sales Returns & Allowances − Sales Discounts.

Operating Expenses

The costs of running the business beyond COGS, including both selling expenses and administrative expenses.

Operating Income

Profit earned from core business operations. Formula: Gross Profit − Operating Expenses.

Other Income and Expenses

Non-operating items that fall outside the main business activity, such as interest income, interest expense, or gains/losses on asset sales.

Periodic Inventory System

Inventory records are only updated at the end of the period through a physical count. COGS is calculated at that time, not continuously.

Perpetual Inventory System

Inventory and COGS are updated continuously after every purchase and sale, giving real-time inventory balances.

Purchase Allowance

A price reduction granted by the seller to the buyer who keeps defective or damaged goods rather than returning them.

Purchase Discount

A reduction in the amount owed by the buyer for paying an invoice early, based on the seller’s credit terms (e.g., 2/10, n/30).

Purchase Return

When a buyer sends merchandise back to the seller due to defects, wrong items, or other issues, reducing the cost of inventory.

Retailer

A business that buys goods from wholesalers or manufacturers and sells them directly to end consumers.

Sales Discount

A reduction in the amount collected from a customer who pays their invoice early, based on the offered credit terms.

Sales Allowance

A price reduction given to a customer who keeps defective or unsatisfactory merchandise instead of returning it.

Sales Return

When a customer returns previously purchased merchandise to the seller for a refund or credit.

Sales Returns and Allowances

A contra-revenue account that combines both sales returns and sales allowances, used to reduce gross sales revenue.

Sales Revenue

The total amount earned from selling merchandise before any deductions. Also called Gross Sales.

Selling Expenses

Costs directly related to selling and marketing products, such as advertising, sales commissions, and freight out.

Single-Step Income Statement

A simplified income statement that groups all revenues together and all expenses together, calculating net income in one step without showing Gross Profit or Operating Income.

Vendor

The supplier or company that sells goods or services to a business.

Wholesaler

A business that buys large quantities of goods from manufacturers and resells them in smaller quantities to retailers, rather than directly to consumers.