7. Cheatsheet Perpetual System

Which new accounts in this chapter have normal debit balances?

- Cost of Goods Sold (expense)

- Merchandise Inventory (asset)

- Sales Discounts (contra revenue account to sales)

- Sales Returns and Allowances (contra revenue account to sales)

Which new accounts in this chapter have normal credit balances?

Sales (revenues)

What is the formula for gross profit?

Gross profit = Net sales - cost of goods sold

What is the formula for Net income?

Net income = Net sales - Cost of goods sold - Expenses

How can the formula for net income be rewritten?

net income = gross profit - expenses

What is the formula for goods available for sale?

beginning inventory + net purchases (these numbers are usually given in the problem)

What is the formula for cost of goods sold?

Cost of goods sold = beginning inventory + net purchases - ending inventory

How can the formula for cost of goods sold be rewritten?

cost of goods sold = goods available for sale - ending inventory

How do you calculate income from operations on the multi-step income statement?

Gross profit - total Operating expenses (see Multi-step Income Statement)

How do you calculate net sales on the multi-step income statement?

Net sales = Sales - sales discounts - sales returns and allowances (see Multi-step Income Statement)

How do you calculate operating expenses given net income and gross profit values?

operating expenses = gross profit - net income

What is the entry to record purchase of merchandise as a merchandiser with cash?

Debit Merchandise Inventory and credit Cash (if paid with credit, credit account payable instead of cash)

Does the entry to record the purchase of merchandise as a merchandiser change if you pay within or not within the discount period?

No it is the same, if paid within the discount period another appropriate entry is made later.

What is the entry to record paying off the purchase within the discount period?

Debit accounts payable, credit Merchandise inventory by discount amount, credit cash (by the amount owed minus the discount)

What is the entry to record paying off the purchase after the discount period?

Debit accounts payable and credit cash

What is the entry to record when the purchase is granted a price reduction because of either defective or unacceptable merchandise?

Debit accounts payable, credit merchandise inventory (if cash is refunded instead, debit cash instead of accounts payable)

What is the entry to record returning goods to seller?

Debit accounts payable or cash and credit merchandise inventory

What is the entry to record FOB shipping point as the buyer (pay freight charge for merchandise purchased)?

Debit merchandise inventory and credit cash

What is the entry for when you the seller agree to FOB destination?

debit Delivery expense and credit Cash since you are paying for the shipping

How many entries does a sale transaction have (selling of merchandise)?

two entries, one for the revenue side and one for the cost side

What is the entry to record sales of merchandise with and without cash discounts for the revenue side?

Debit accounts receivable or cash and credit sales (revenues)

Is the sales transaction entry the same for both if paid within the discount period and not?

The entry is the same since if there is a cash discount, we make another entry later.

What is the entry to record sales of merchandise with and without cash discounts for the cost side?

Debit cost of goods sold (expense) and credit merchandise inventory

What is the entry to record when the buyer pays within the discount period?

Debit cash (for original amount minus discount), debit Sales Discounts (for the discount amount), credit Accounts Receivable.

What is the entry to record when the buyer pays after the discount period?

Debit cash and credit accounts receivable

When a buyer returns goods, it impacts the seller's…

revenue and cost sides so we need an entry for the revenue side and another for the cost side.

What is the entry for when a buyer returns goods, revenue side?

Debit Sales Returns and Allowances and credit cash or accounts receivable (both amounts are for the amount the customer paid)

What is the entry for when a buyer returns goods, cost side?

debit Merchandise Inventory and credit Cost of Goods Sold (for amount you purchased the merchandise for not how much the customer paid)

What is the entry for when the buyer is granted an allowance (customer keeps goods for partial refund)?

Debit Sales Returns and Allowances (expense) and credit Accounts Receivable.

Why is there only a revenue side entry for when a buyer is granted an allowance?

Only has a revenue side entry and no cost side since the inventory is not returned.

Review

If the seller has already collected cash for the sale, the seller could give the price reduction in cash. The entry would credit Cash instead of Accounts Receivable.

What is the entry for Inventory Shrinkage?

Debit cost of goods sold and credit Merchandise Inventory for the amount lost.

What are the temporary accounts that need to be closed at the end of the accounting period for merchandisers?

1. Sales (of goods, revenues)

2. Sales Discounts (contra revenue to sales, normal debit balance)

3. Sales Returns and Allowances (contra revenue to sales)

4. Cost of Goods Sold (expense)

What is the first closing step?

Close credit accounts which in this case is Sales

How do we close the sales account?

Debit Sales and Credit Income Summary.

What is the second closing step?

Close debit accounts by crediting Sales Discounts, Sales Returns and Allowances, Cost of Goods Sold and all expense accounts and debiting Income Summary

Review

The third and fourth closing steps are the same as in chapter 4 for service companies.

3. Close Income Summary account:

- Debit Income Summary and credit Capital account.

4. Close Withdrawals account:

- Debit Capital account and credit Withdrawals