Friday, December 31, 2021
Wednesday, December 29, 2021
Tuesday, December 28, 2021
Accounting: The Language of Business (Part 30)
Accounting for Merchandising Businesses
(Part D)
by
Charles Lamson
 |
Sales Transactions
In the next several posts, we illustrate transactions that affect the financial statements of a merchandising business. These transactions affect the reporting of net sales, cost of merchandise sold, gross profits, and merchandise inventory. Merchandising transactions are recorded in the accounts, using the rules of debit and credit that we described and illustrated in earlier posts. Special journals may be used, or transactions may be entered, recorded, and posted to the accounts electronically. Although journal entries may not be manually prepared, we will use a two-column general journal format in the next several posts in order to simplify the discussion. Cash Sales A business may sell merchandise for cash. Cash sales are normally rung up (entered) on a cash register and recorded in the accounts. To illustrate, assume that on January 3, NetSolutions sells merchandise for $1,800. These cash sales can be recorded as follows:  Under the perpetual inventory system (a program that continuously estimates your inventory based on your electronic records), the cost of merchandise sold and the reduction in merchandise inventory should also be recorded. In this way, the merchandise inventory account will indicate the amount of merchandise on hand (not sold). To illustrate, assume that the cost of merchandise sold on January 3 was $1,200. The entry to record the cost of merchandise sold and the reduction in the merchandise inventory is as follows:   How do retailers record sales made with the use of credit cards? Sales made to customers using credit cards issued by banks, such as MasterCard or VISA, are recorded as cash sales. The seller deposits the credit card receipts for these sales directly into its bank account. Normally, banks charge service fees for handling credit card sales. The seller debits the service fees to an expense account. An entry at the end of a month to record the payment of service charges on bank credit card sales is shown below.  Sales on Account A business may sell merchandise on account. The seller records such sales as a debit to accounts receivable and a credit to sales. An example of an entry for a NetSolutions' sale on account of $510 follows. The cost of merchandise sold was $280.  Sales may also be made to customers using nonbank credit cards. An example of a nonbank credit card is the American Express card. Nonbank credit card sales may first be reported to the card company before cash is received. Therefore, such sales create a receivable with the card company. Before the card company pays cash, it normally deducts a service fee. For example, assume that American Express card sales of $1,000 are made by NetSolutions and reported to the card company on January 20. The cost of the merchandise sold was $550. On January 27, the card company deducts a service fee of $50 and sends $950 to NetSolutions. These transactions are recorded by NetSolutions as follows:   *WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 238-239* end |
Sunday, December 26, 2021
Saturday, December 25, 2021
Accounting: The Language of Business (Part 29)
Accounting for Merchandising Businesses
(Part C)
by
Charles Lamson
 |
Single-Step Income Statement
An alternative form of income statement is the single step income statement. As shown in Exhibit 3, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues.  The single-step form emphasizes total revenues and total expenses as the factors that determine net income. A criticism of the single step form is that such amounts as gross profit and income from operations are not readily available for analysis.  Statement of Owner's Equity The statement of owner's equity for NetSolutions is shown in Exhibit 4. This statement is prepared in the same manner that we described previously for a service business in part 8.  Balance Sheet As we discussed and Illustrated in previous posts, the balance sheet may be presented with assets on the left hand side and the liabilities and owner's equity on the right hand side. This form of the balance sheet is called the account form. The balance sheet may also be presented in a downward sequence in three sections. This form of balance sheet is called the report form. The report form of balance sheet for NetSolutions is shown in Exhibit 5. In this balance sheet, note that merchandise inventory at the end of the period is reported as a current asset and that the current portion of the note payable is $5,000. EXHIBIT 5 Report Form of Balance Sheet   *WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 236-237* end |
Friday, December 24, 2021
Thursday, December 23, 2021
Accounting: The Language of Business (Part 28)
With greater extensibility and programmability, bitcoin can evolve to enable transformations in how all forms of property are secured and exchanged, how voting and governance function, including spilling into the automation of commercial law, audit, and accounting.
Accounting for a Merchandising Businesses
(Part B)
by
Charles Lamson
 |
Financial Statements for a Merchandising Business
In the next couple posts, we illustrate the financial statements for NetSolutions after it becomes a retailer of computer hardware and software. During 2023, we assume that Chris Clark implemented a second phase of NetSolutions business plan. Accordingly, Chris notified clients that beginning July 1, 2024, NetSolutions would be terminating its consulting services. Instead, it would become a personalized retailer. Netsolutions' business strategy is to focus on offering personalized service to individuals and small businesses who are upgrading or purchasing new computer systems. Netsolutions' personal service before the sale will include no-obligation, on-site assessment of the customer's computer needs. By providing tailor-made solutions, personalized service, and follow-up, Chris feels that NetSolutions can compete effectively against larger retailers, such as Best Buy or Office Depot. Multiple-Step Income Statement The 2025 income statement for NetSolutions is shown in Exhibit 1. This form of income statement, called a multiple-step income statement, contains several sections, subsections, and subtotals. EXHIBIT 1 Multi-Step Income Statement  Sales is the total amount charged customers for merchandise sold, including cash sales and sales on account. Both sales returns and allowances and sales discounts are subtracted in arriving at net sales.  Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. For example, rather than have a buyer return merchandise, a seller may offer a $500 allowance to the customer as compensation for damaged merchandise. Sales returns and allowances are recorded when the merchandise is returned or when the allowance is granted by the seller. Sales discounts are granted by the seller to customers for early payment of amounts owed. For example, a seller may offer a customer a 2% discount on a sale of $10,000 if the customer pays within 10 days. If the customer pays within the 10-day period, the seller receives cash of $9,800 and the buyer receives a discount of $200 ($10,000 x 2%). Sales discounts are recorded when the customer pays the bill. Net sales is determined by subtracting sales returns and allowances and sales discounts from sales. Rather than reporting the sales, sales returns and allowances, and sales discounts as shown in Exhibit 1, many companies report only net sales. Cost of merchandise sold is the cost of the merchandise sold to customers. To illustrate the determination of the cost of merchandise sold, assume that NetSolutions purchased $340,000 of merchandise during the last half of 2024. If the inventory at December 31, 2024, the end of the year, is $59,700, the cost of the merchandise during 2024 is $280,300, as shown below.  As we discussed in the preceding paragraphs, sellers may offer customers sales discounts for early payment of their bills. Such discounts are referred to as purchases discounts by the buyer. Purchase discounts reduce the cost of merchandise. A buyer may return merchandise to the seller (a purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (a purchase allowance). Like purchase discounts, purchases returns and allowances reduce the cost of merchandise purchased during a period. In addition, transportation costs paid by the buyer for merchandise also increase the cost of merchandise purchased.  To continue the illustration, assume that during 2025 NetSolutions purchased additional merchandise of $521,980. It received credit for purchases returns and allowances of $9,100, took purchases discounts of $2,525, and paid transportation costs of $17,400. The purchases returns and allowances and the purchases discounts are deducted from the total purchases to yield the net purchases. The transportation costs, termed transportation in, are added to the net purchases to yield the cost of merchandise purchased of $527,755, as shown below.  The ending inventory of NetSolutions on December 31, 2024, $59,700, becomes the beginning inventory for 2025. The beginning inventory is added to the cost of merchandise purchased to yield merchandise available for sale. The ending inventory, which is assumed to be $62,150 , is then subtracted from the merchandise available for sale to yield the cost of merchandise sold of $525,305, as shown in Exhibit 2. EXHIBIT 2 Cost of Merchandise Sold  The cost of merchandise sold was determined by deducting the merchandise on hand at the end of the period from the merchandise available for sale during the period. The merchandise on hand at the end of the period is determined by taking a physical count of inventory on hand. This method of determining the cost of merchandise sold and the amount of merchandise on hand is called the periodic method of accounting for merchandise inventory. Under the periodic method, the inventory records do not show the amount available for sale or the amount sold during the period. In contrast, under the perpetual method of accounting for merchandise inventory, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. As a result, the amount of merchandise available for sale and the amount sold are continuously (perpetually) disclosed in the inventory records. Most large retailers and many small merchandising businesses use computerized perpetual inventory systems. Such systems normally use bar codes. An optical scanner reads the bar code to record merchandise purchased and sold. Merchandise businesses using a perpetual inventory system report the cost of merchandise sold as a single line on the income statement, as shown in Exhibit 1 for NetSolutions. Merchandise businesses using the periodic inventory method report the cost of merchandise sold by using the format shown in Exhibit 2. Because of its wide use, we will use the perpetual inventory method throughout the next several posts.  Gross profit is determined by subtracting the cost of merchandise sold from net sales. Exhibit 1 shows that NetSolutions reported gross profit of $182,950 in 2025. Operating income, sometimes called income from operations, is determined by subtracting operating expenses from gross profit. Most merchandising businesses classify operating expenses as either selling expenses or administrative expenses. Expenses that are incurred directly in the selling of merchandise are selling expenses. They include such expenses as salesperson salaries, store supplies used, depreciation of store equipment, and advertising. Expenses incurred in the administration or general operations of the business are administrative expenses or general expenses. Examples of these expenses are office salaries, depreciation of office equipment, and office supplies used. Credit card expertise is also normally classified as an administrative expense. Although selling and administrative expenses may be reported separately, many companies report operating expenses as a single item. Other income and expense is reported on NetSolutions' income statement in Exhibit 1. Revenue from sources other than the primary operating activity of a business is classified as other income. In a merchandising business, these items include income from interest, rent, and gains resulting from the sale of fixed assets. Expenses that cannot be traced directly to operations are identified as other expense. Interest expense that results from financing activities and losses incurred in the disposal of fixed assets are examples of these items. Other income and other expense are offset against each other on the income statement, as shown in Exhibit 1. If the total of other income exceeds the total of other expense, the difference is added to income from operations to determine net income. If the reverse is true, the difference is subtracted from income from operations. *WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 232-236* end |
Tuesday, December 21, 2021
Monday, December 20, 2021
Sunday, December 19, 2021
Accounting: The Language of Business (Part 27)
Accounting rules give financial institutions flexibility about when they choose to recognize venture capital profits.
Accounting for Merchandising Businesses
(Part A)
by
Charles Lamson
Assume that you bought groceries at a store and received the receipt shown below. This receipt indicates that you purchased 3 items totaling $5.28, the sales tax was $0.32 (6%), the total due was $5.60, you gave the clerk $10, and you receive change of $4.40. The receipt also indicates that the sale was made by store number 426 of the Ingles chain, located in Athens, Georgia. The date and time of the sale and other data used internally by the store are also indicated.
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Saturday, December 18, 2021
Friday, December 17, 2021
Accounting: The Language of Business (Part 26)
Accounting Systems and Internal Controls
(Part G)
by
Charles Lamson
 |
Adapting Manual Accounting Systems
The preceding posts illustrate subsidiary ledgers and special journals that are common for a medium-sized business. Many businesses use subsidiary ledgers for other accounts, in addition to Accounts Receivable and Accounts Payable. Also, special journals are often adapted or modified in practice to meet the specific needs of a business. In the following paragraphs, other subsidiary ledgers and modified special journals are described. Additional Subsidiary Ledgers In general, subsidiary ledgers are used for accounts that consist of a larger number of individual items, each of which has unique characteristics. For example, businesses may use a subsidiary equipment ledger to keep track of each item of equipment purchased, it's cost, location, and other data. Such ledgers are similar to the accounts receivable and accounts payable subsidiary ledgers that were illustrated in the preceding posts. Modified Special Journals A business may modify its special journals by adding one or more columns for recording transactions that occur frequently. For example, a business may collect sales taxes that must be remitted periodically to the taxing authorities. Thus, the business may add a special column for sales taxes payable in its revenue journal, as shown below.   Some other examples of how special journals may be modified for a variety of different types of businesses are:
 Regardless of how a special journal is modified, the basic principles and procedures discussed in the preceding posts apply. For example, the columns in special journals are normally totaled at periodic intervals. The totals of the debit and credit columns are then compared to verify their equality before the totals are posted to the general ledger accounts. *WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 200-201* end |
Thursday, December 16, 2021
Accounting: The Language of Business (Part 25)
Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings.
Accounting Systems and Internal Controls
(Part F)
by
Charles Lamson
 |
Manual Accounting System: The Purchase and Payment Cycle
The purchase and payment cycle for NetSolutions consists of purchases on account and payments of cash to suppliers. To make purchases of supplies and other items on account requires establishing a supplier account payable. These transactions will be recorded in a purchases journal. The payments of suppliers accounts payable will be recorded in the cash payments journal. Internal control is enhanced by separating the function of recording purchases in the purchases journal from recording cash payments in the cash payments journal. Separating duties in this way prevents an individual from establishing a fictitious supplier and then collecting payments for fictitious purchases from this supplier. Purchases Journal The purchases journal is designed for recording all purchases on account. Cash purchases would be recorded in the cash payments journal. The purchases journal has a column entitled Accounts Payable Cr. The purchases journal also has special columns for recording debits to the accounts most often affected. Since NetSolutions makes frequent debits to its supplies account, a Supplies Dr. column is included for these transactions. For example, as shown in Exhibit 8, NetSolutions recorded the purchase of supplies on March 3 by entering 600 in the Supplies Dr. column, 600 in the Accounts Payable Cr. column, and Howard Supplies in the Account Credited column. EXHIBIT 8 Purchases Journal and Postings  The Other Accounts Dr. column in Exhibit 8 is used to record purchases, on account, of any item for which there is no special debit column. The title of the account to be debited is entered in the Other Accounts column and the amount is entered in the Amount column. For example, NetSolutions recorded the purchase of office equipment on account on March 12 by entering Office Equipment in the Other Accounts Dr. column, 2,800 in the amount column, 2,800 in the Accounts Payable Cr. column, and Jewett Business Systems in the Account Credited Column.  Postings from the purchases journal to the ledgers of NetSolutions are also shown in Exhibit 8. The principles used in posting the purchases journal are similar to those used in posting the revenue and cash receipts journals. The source of the entries posted to the subsidiary and general ledgers is indicated in the Posting Reference column of each account by inserting the letter P (for purchases journal) and the page number of the purchases journal. A check mark (✓) is inserted in the Posting Reference column of the purchases journal after each credit is posted to a creditor's account in the accounts payable subsidiary ledger. At regular intervals the amounts in the Other Accounts Dr. column are posted to the accounts in the general ledger. As each amount is posted, the related general ledger account number is inserted in the Posting Reference column of the other account section. At the end of each month, the Amount columns in the purchases journal are totaled. The sum of the two debit column totals should equal the sum of the credit column. The totals of the Accounts Payable Cr. and Supplies Dr. columns are posted to the appropriate general ledger accounts in the usual manner, with the related account numbers inserted below the column totals. Because each amount in the Other Accounts Dr. column was posted individually, a check mark is placed below the $2,800 total to show that no further action is needed.  Cash Payments Journal The special columns for the cash payments journal are determined in the same manner as for the revenue, cash receipts, and purchases journals. The determining factors are the kinds of transactions to be recorded and how often they occur. The cash payments journal has a Cash Cr. column, as shown in Exhibit 9. All transactions recorded in the cash payments journal will involve an entry in this column. Payments to creditors on account happen often enough to require an Accounts Payable Dr. column. Debits to creditor accounts for invoices paid are recorded in the Accounts Payable Dr. column. For example, on March 15 NetSolutions paid $1,250 on its account with Grayco Supplies. NetSolutions recorded this transaction by entering 1,230 in the Accounts Payable Dr. column, 1,230 in the Cash Cr. column, and Grayco Supplies in the Account Debited column. EXHIBIT 9 Cash Payments Journal and Postings  NetSolutions makes all payments by check. As each transaction is recorded in the cash payments journal, the related check number is entered in the column at the right of the Date column. The check numbers are helpful in controlling cash payments, and they provide a useful cross reference. The Other Accounts Dr. column is used for recording debits to any account for which there is no special column. For example, NetSolutions paid $1,000 on March 2 for rent. The transaction was recorded by entering Rent Expense in the space provided and 1,600 in the Other Accounts Dr. And Cash Cr. columns.  Postings from the cash payments journal to the ledgers of NetSolutions are also shown in Exhibit 9. The amounts entered in the Accounts Payable Dr. column are posted to the individual creditor accounts in the accounts payable subsidiary ledger. These postings should be made frequently. After each posting, CP (for cash payments journal) and the page number of the journal are inserted in the posting reference column of the account. A check mark is placed in the Posting Reference column of the cash payments journal to indicate that each amount has been posted. At regular intervals, each item in the Other Accounts Dr. column is also posted individually to an account in the general ledger. The posting is indicated by writing the account number in the Posting Reference column of the cash payments journal. At the end of the month, each of the amount columns in the cash payments journal is totaled. The sum of the two debit totals is compared with the credit total to determine their equality. A check mark is placed below the total of the Other Accounts Dr. column to indicate that no further action is needed. When each of the totals of the other two columns is posted to the general ledger, an account number is inserted below each column total.
Accounts Payable Control and Subsidiary Ledger After all posting has been completed for the month, the sum of the balances in the accounts payable subsidiary ledger should be compared with the balance of the accounts payable controlling account and the general ledger. If the controlling account and the subsidiary ledger do not agree, the error or errors must be located and corrected. The balances of the individual supplier accounts may be summarized in a schedule of accounts payable. The total of NetSolutions schedule of accounts payable, $2,410, agrees with the balance of the accounts payable controlling account on March 31, 2023, as shown below.  *WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 196-200* end |
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