Accounting For Retailing Accounting For Retailing

Chapter Chapter 66

Accounting Accounting for for retailing retailing

Learning Objectives 1. Understand the nature of inventory and retailing operations 2. Describe the basic format of an income statement for retail businesses 3. Understand the impact of GST legislation on retail businesses

Learning Objectives (cont’d) 4. Account for sales transactions of retail businesses registered for the GST, including the treatment of sales returns, cash discounts, trade discounts and freight costs 5. Account for purchases of inventory and cost of goods sold under both the perpetual and periodic inventory systems by retail businesses registered for the GST

Learning Objectives (cont’d) 6. Prepare worksheets and close the accounts for retail businesses for both the perpetual and periodic inventory systems 7. Prepare a detailed income statement for a retail business 8. Perform a brief analysis of profitability in a retail business for decision-making purposes

Lecture References • Hoggett, Edwards & Medlin, 6th edition, Chapter 6 • IAS 2/AASB 102 – Inventories

Inventory • Goods or property held for sale in the ordinary course of business • Does not include assets acquired to operate the business (e.g. plant and equipment) • Also referred to as ‘stock’ or ‘stock in trade’

Retail Business Operations (cont’d) • Condensed Income Statement – Income referred to as ‘sales’ – ‘Cost of sales’ (COS) used to show total cost of inventory sold during the period – Sales — COS (Gross Profit) determined to show profit from buying and on-selling inventory – Expenses classified by type

Retail Business Operations (cont’d) SUNRISE CD SALES LTD Income Statement for the year ended 31 December 2006

INCOME INCOME Net Net sales sales revenue revenue Less: Less: Cost Cost of of sales sales GROSS GROSS PROFIT PROFIT Other Other income income

$692 $692 890 890 470 470 490 490 222 222 400 400 55 260 260 227 227 660 660

EXPENSES EXPENSES Selling $100 Selling expenses expenses $100 270 270 Administrative Administrative expenses78 expenses78 850 850 Financial 44 260 Financial expenses expenses 260 183 183 380 380 PROFIT $$ 44 PROFIT (before (before tax) tax) 44 280 280

Retailing and the Goods and Services Tax • Registration for an Australian Business Number (ABN) • Registration for GST • Input credits • GST collections • GST outlays • Need adequate records!

Retailing and the GST (cont’d) • Tax invoices – Required for all sales over $50 – Common requirements • • • • •

‘tax invoice’ ABN of issuing entity date of issue supplier name brief description of the items supplied

Retailing and the GST (cont’d) • Adjustment notes – – – –

All or part of the goods are returned An allowance (e.g. discount) is made The price of a supply is changed All or part of the amount owing has to be written off – The retailer cannot pay the debt

Accounting for Sales Transactions Date Date Accounts Accounts receivable receivable Sales Sales 1800 1800 GST GST Collections Collections

1980 1980 180 180

Sold Soldmerchandise merchandiseto toRay Ray Stevens Stevens on oncredit credit

Date Date Cash Cash Sales Sales GST GST Collections Collections

Sold Sold merchandise merchandise for for cash cash

1980 1980 1800 1800 180 180

Accounting for Sales Transactions (cont’d) • Sales returns and allowances – Goods sold for $300 plus GST of $30 returned as unsuitable

Date Date Sales Sales Returns Returns & & Allowances300 Allowances300 GST 30 GST Collections Collections 30 Accounts 330 Accounts Receivable Receivable 330 return return of of unsatisfactory unsatisfactory merchandise merchandise sold sold on on credit credit

Accounting for Sales Transactions (cont’d) • Cash (settlement) discounts – Goods sold for $1000 plus GST of $100

Date 1078 Date Cash Cash at at Bank Bank 1078 Discount 20 Discount Allowed Allowed 20 GST 22 GST Collections Collections Accounts Accounts Receivable Receivable –– AA Jones Jones 1100 1100 payment payment of of account account within within the the discount discount period period

Accounting for Sales Transactions (cont’d) • Sales return and settlement discount – Credit terms 2/10, n/30 – Return of $330 Date Date

Cash 1078 Cash at at Bank Bank 1078 Discount Discount Allowed Allowed ($1500 ($1500 xx 2%) 2%)30 30 GST 33 GST Collections Collections ($150 ($150 xx 2%) 2%) Accounts Accounts Receivable Receivable ($1980 ($1980 –– $330) $330) 1650 1650 payment payment of of a/c a/c Ray Ray Stevens Stevens within within the the discount discount period period

Accounting for Sales Transactions (cont’d) • Trade discounts – Percentage reduction on list price – 10 units of $200, 30% trade discount

Date 1540 Date Accounts Accounts Receivable Receivable 1540 Sales Sales ($200 ($200 xx 10 10 xx 70%) 70%) 1400 1400 GST 140 GST Collections Collections 140 Sale Sale of of inventory inventory on on credit, credit, subject subject to to 30% discount 30% trade trade discount

Retail Transactions • Freight outwards – Who is responsible for freight costs? – FOB shipping point/FOB destination – Recorded as a selling cost if seller responsible

Accounting for Purchases and Cost of Goods Sold • Perpetual inventory system • Periodic inventory system

Perpetual Inventory System • Involves keeping current and continuous records of all inventory transactions • Separate card or computer file kept for each inventory item – Quantity and unit cost for each sale/purchase – Running inventory balance

Perpetual System — Stock Card

Location Item Refrigerator 1 unit showroom Minimum Stock Code C350 Maximum Stock 1 Remainder - Warehouse Purchases

Sales

Balance Unit Total Unit Total Date Explanation cost Units cost 1/1 Beginning bal 650 2600 15/1 Purchases 14 650 9100 21/1 Sales 11 650 7150

Units cost

cost

Unit cost

Units

Total cost 4

10

650

6500 3

650

1950

Perpetual Inventory System (cont’d)

• Single general ledger account for all inventory transactions • Details maintained on inventory cards Inventory Increases (debits) Decreases (credits) Sales Purchases Sales Returns

Purchase returns

Perpetual System — Transactions Purchases on credit Jan Jan 15 15 Inventory Inventory GST GST Outlays Outlays Accounts Accounts Payable Payable

66 500 500 650 650 7150 7150

purchased purchased 10 10 refrigerators refrigerators from from …. ….

Freight inwards (FOB shipping point) Jan 420 Jan 17 17 Freight Freight Inwards Inwards 420 GST 42 GST Outlays Outlays 42 Cash 462 Cash at at Bank Bank 462 paid paid freight freight on on merchandise merchandise

Perpetual System — Transactions (cont’d) Sales on credit Jan Jan 21 21 Accounts Accounts Receivable Receivable 33 465 465 Sales 33 Sales 150 150 GST 315 GST Collections Collections 315 sold sold 33 fridges fridges on on credit credit ([$1050 ([$1050 + + $105 $105 ]] xx 33 units units = = $3 $3 456) 456)

Jan Jan 21 21 Cost Cost of of Goods Goods Sold Sold Inventory Inventory

1950 1950 1950 1950

to to remove remove the the cost cost of of inventory inventory sold sold ($650 ($650 xx 33 units) units) from from the the inventory inventory account account

Perpetual System — Transactions (cont’d) Purchase returns Jan Jan 24 24 Accounts Accounts payable payable Inventory Inventory GST GST Outlays Outlays

715 715

650 650 65 65

Defective Defective unit unit returned returned to to Fridge Fridge King King Ltd on Ltd for for credit credit on account account

Perpetual System — Transactions (cont’d) Payment of creditor within discount period Jan Accounts Jan 24 24 Accounts Payable Payable ($7150 ($7150 –– $715) $715) 6435 6435 Cash 6306 Cash at at bank bank 6306 Discount Discount Rec’d Rec’d (5850 (5850 xx 2%) 2%) 117 117 GST GST Outlays Outlays ($6435 ($6435 xx 2% 2% xx 1/11) 1/11) 12 12 Income Income payment for inventory purchases payment for inventory Saving in outflow! Saving in outflow! purchases

Perpetual System — Transactions (cont’d) Sales returns and allowances Jan Jan 24 24 Sales Sales returns returns & & allowances1 allowances1 050 050 GST 105 GST Collections Collections 105 Accounts 11 Accounts Receivable Receivable 155 155 ffridge ridge sold sold on on 21 21 Jan. Jan. returned returned Jan 650 Jan 24 24 Inventory Inventory 650 Cost 650 Cost of of Goods Goods Sold Sold 650 returned returned fridge fridge placed placed back back into into inventory inventory

Periodic Inventory System • Beginning balance of inventory not changed until the end of the period • Purchases recorded in a ‘purchases’ account • Only one entry is made for sales to record the selling price of the goods sold • Ending balance determined by stock count

Periodic System — Transactions Purchases on credit Jan Jan 15 15 Purchases Purchases GST GST Outlays Outlays Accounts Accounts Payable Payable

66 500 500 650 650 7150 7150

purchase purchase of of fridges fridges on on credit credit from... from...

Freight inwards (FOB shipping point) Jan 420 Jan 17 17 Freight Freight Inwards Inwards 420 GST 42 GST Outlays Outlays 42 Cash 462 Cash at at Bank Bank 462 paid paid freight freight cost cost on on merchandise merchandise

Periodic System — Transactions (cont’d)

Sales on credit Jan Jan 21 21 Accounts Accounts Receivable Receivable 33 465 465 Sales 33 Sales 150 150 GST 315 GST Collections Collections 315 sold sold inventory inventory on on credit credit

Purchase returns Jan 715 Jan 24 24 Accounts Accounts Payable Payable 715 Purchase Purchase Returns Returns & & Allowances 650 Allowances 650 GST 65 GST Outlays Outlays 65 defective defective unit unit returned returned for for credit credit

Periodic System — Transactions (cont’d)

Payment of creditor within discount period Jan Jan 24 24 Accounts Accounts Payable Payable ($7150 ($7150 –– $715) $715) 6435 6435 Cash 6306 Cash at at Bank Bank 6306 Discount Discount Rec’d Rec’d (5850 (5850 xx 2%) 2%) 117 117 GST GST Outlays Outlays ($6435 ($6435 xx 2% 2% x1/11) x1/11) 12 12 Income Income payment for inventory purchases payment for inventory purchases Saving in outflow! Saving in outflow!

Periodic System — Transactions (cont’d)

Sales returns and allowances Jan Jan 24 24 Sales Sales Returns Returns & & Allowances1 Allowances1 050 050 GST 105 GST Collections Collections 105 Accounts 11 Accounts Receivable Receivable 155 155 fridge fridge sold sold on on 21 21 January January returned returned

FRIDGE TOWN Income Statement for the period ended 31 January

Perpetual PerpetualInventory InventorySystem System Sales $3150 Sales revenue revenue $3150 Less: Less: Sales Sales returns returns & & allowances allowances 1050 1050 Net 2100 Net sales sales revenue revenue 2100 Cost 1720 Cost of of sales* sales* 1720 GROSS $380 GROSS PROFIT PROFIT $380 ** $1720 $1720 = = $1950 $1950 –– $650 $650 + + $420 $420

FRIDGE TOWN Income Statement for the period ended 31 January

Periodic PeriodicInventory InventorySystem System Sales Salesrevenue revenue Less: Less:Sales Salesreturns returns&&allowances allowances Net Netsales salesrevenue revenue Cost Costofofsales sales Cost Costofofbeginning beginninginventory inventory Add: $6500 Add: Cost Costofofpurchases purchases $6500 Freight 420 Freightinwards inwards 420 6920 6920 Less: 650 Less: Purchase Purchasereturns returns 650 Net Netcost costofofpurchases purchases Cost Costofofgoods goodsavailable availablefor forsale sale Less: Less: Cost Costofofending endinginventory inventory Cost Costofofsales sales GROSS GROSSPROFIT PROFIT

$3150 $3150 1050 1050 2100 2100 $2600 $2600

6270 6270 8870 8870 7150 7150

1720 1720 $$380 380

Perpetual System — Transactions Updating of Inventory account at the end of the accounting period June June 30 30 Inventory Inventory (ending (endingbalance) balance)10 10 000 000 PP & 10 & LL Summary Summary 10 000 000

inventory inventory balance balance as as per per stock stock count count June 12 June 30 30 PP & & LL Summary Summary 12 000 000 Inventory Inventory (beginning (beginningbalance) balance)12 12 000 000 inventory inventory balance balance as as per per stock stock count count

Periodic Inventory System Inventory Beginning balance 12 000

P & L summary12 000

Ending balance 10 000

balance c/d 10 000 22 000

22 000 balance b/d10 Ending inventory from the previous 000period becomes the beginning inventory for the next period

Detailed Income Statement • Expenses classified as – Selling expenses – Administrative expenses – Financial expenses

• Sales activities and other operating activities separated to highlight gross vs. net profit

SUNRISE CD SALES LTD Income Statement for the period ended 31 December 2006 INCOME Revenue: Sales revenue Less: Sales returns & allowances Net sales revenue Cost of sales Inventory 1/1/06 Add: Purchases Freight inwards Less: Purchase returns & allowances Net cost of purchases Cost of goods available for sale Less: Inventory 31/12/06 Cost of sales GROSS PROFIT (continued next page)

$714 280 21 390 692 890 $ 58 400 $472 620 6 210 478 830 13 480 465 350 523 750 53 260 470 490 $222 400

SUNRISE CD SALES LTD Income Statement for the period ended 31 December 2006 GROSS PROFIT

222 400

(from previous page)

Other income Rent revenue Discount received

2 400 2860 227 660

EXPENSES Selling & distribution expenses: Sales salaries & commission Freight outwards Advertising expense Rent expense - store space Depn. expense - store equip.

61 040 6 210 8 420 17 000 7 600 100 270

SUNRISE CD SALES LTD Income Statement for the period ended 31 December 2007 EXPENSES cont’d…. Administrative expenses: Office salaries expense Rent expense - office space Depn. expense - office equip. Insurance expense Finance & other expenses: Interest expense Discount allowed NET PROFIT BEFORE INCOME TAX Less: Income tax expense NET PROFIT

63 040 12 000 3 200 610

1 000 3 260

78 850

4 260 183 380 44 280 10 470 $ 33 810

Profitability Analysis for Decision Making Gross profit ratio Profit margin Expenses to sales ratio

Inventory turnover

Gross Gross Profit Profit Net xx Net Sales Sales 100% 100% Operating Operating Profit Profit Net xx Net Sales Sales 100% 100% Operating Operating Expenses Expenses Net xx Net Sales Sales 100% 100% Cost Cost of of Sales Sales Average Average Turnover Turnover

Where to get more information • Insert details of additional resources here