Recording-2025-02-13T20_03_44.138Z

Understanding Allowances in Accounts Receivable

• Allowance for Damage: In the case discussed, Pendleton Dentistry received a $100 allowance due to product damage.

  • Initial amount owed: $2,500

  • New amount after allowance: $2,400 (decrement of $100)

  • Customer retains the product, which keeps the customer satisfied.

• Recording Cash Receipt: When Pendleton pays the owed amount on June:

  • Debit Cash: $2,400

  • Credit Accounts Receivable: $2,400

• Impact on Inventory: No change in merchandise inventory occurs during this process.

Handling Transportation Costs

• Freight Charges: SmartTouch incurs shipping costs and pays $30 for shipping goods to a customer.

  • Entry shown as:

    • Debit Delivery Expense: $30

    • Credit Cash: $30

• Shipping Considerations:

  • Freight companies typically require fast payment.

  • Understanding the cost of shipping is crucial for businesses, especially those offering "free shipping" to customers.

Adjusting and Closing Accounts for Merchandising Business

• Worksheet Process: Merchandisers adjust and close accounts similarly to service businesses.

  1. Unadjusted Trial Balance: Enter into a worksheet.

  2. Adjust Accounts: Make necessary adjustments including any allowances and inventory shrinkage considerations.

• Inventory Shrinkage: Unique to merchandising entities, affecting adjustments made.

  • Potential causes: theft, damage, or accounting errors.

  • Example of errors: Mislabeling inventory items, leading to discrepancies during physical counts.

Physical Inventory Procedures

• Annual Inventory Requirement: Businesses conduct a physical inventory count at least once a year, with potential options for more frequent counts.

• Methods to Maintain Accuracy:

  • Periodic counts throughout the year to assess inventory levels.

  • Rotating basis counts at specific areas or full counts annually.

• Adjustment Entries: If inventory discrepancies occur, companies record an additional cost of goods sold to reflect missing or damaged inventory.

Adjusting Entries for Inventory Discrepancy Example

• Hypothetical Scenario: SmartTouch inventory shows an unadjusted balance of $31,530 but physical count reveals only $30,000.

  • Adjustment Required:

    • Debit Cost of Goods Sold: $1,530

    • Credit Merchandise Inventory: $1,530

• Temporary Accounts Closure: After adjustments, closing entries are needed for revenue and expense accounts.

  • Revenue Closing: Debit revenue accounts, credit Income Summary.

  • Expense Closing: Credit expense accounts, debit Income Summary.

  • Net Income Close to Capital Account: Transfer net income or loss to owner’s capital account.

Financial Statement Preparation for Merchandisers

• Income Statement Variants:

  • Single Step vs. Multi Step Income Statement:

    • Single Step: Groups revenues and expenses to determine net income simply.

    • Multi Step: Provides subtotals (gross profit and operating income) that illustrate operational efficiency.

• Subtotals Importance: Gross profit measures profits from sales before considering operating expenses.

  • Calculate gross profit:

    • Gross Profit = Net Sales - Cost of Goods Sold.

• Operating Income: Income after deducting total operating expenses, providing insight into operational performance.

Importance of Financial Ratios: Gross Profit Percentage

• Definition: Measures profitability relative to sales.

  • Formula: Gross Profit Percentage = (Gross Profit / Net Sales) x 100.

• Yearly Comparison: A declining gross profit percentage could indicate problems with pricing or cost control.

• Example Analysis: For PepsiCo:

  • 2020 Gross Profit Percentage: 54.8%

  • 2021 Gross Profit Percentage: 53.3%

  • Implication of decline suggests potential issues needing investigation.

Accounting Principles Related to Inventory

• Key Principles:

  1. Consistency: Use of the same accounting methods over time.

  2. Disclosure: Reporting accurate information for informed decision-making.

  3. Materiality: Significant items must be properly accounted, depending on company context.

  4. Conservatism: Report the least favorable figures when in doubt between options to prevent misleading valuations.

Inventory Controls and Best Practices

• Importance of Controls: Necessary to protect against erroneous purchases, improper inventory tallies, and loss.

• Control Measures:

  1. Authorized Purchases: Ensure only qualified individuals make purchases and use vetted suppliers.

  2. Inventory Receipt Tracking: Document all incoming inventories and inspect for discrepancies to avoid theft or substitution issues.

  3. Damaged Goods Reporting: Establish a protocol for dealing with damaged items immediately upon receipt.

  4. Physical Inventory Counts: Perform counts regularly to ensure records match physical inventory.

Usage of Data Analytics in Inventory Management

• Evolving Technologies: Companies like Airbnb utilize data analytics to understand customer preferences and optimize listings.

• Example from Dickies Barbecue: Regularly assessing inventory every twenty minutes to avoid excess preparation leads to reduced waste.