May have materials inventories.
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Types of Companies/Inventories (Cont.)

Professional service firms (accounting firms, legal firms)
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
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21
Recording Purchases at Gross Invoice Price
On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes.


Service company

Provides intangible services.
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Types of Companies/Inventories

Merchandising


Sells goods in same form in which they are acquired. Inventory costs (and costs of goods sold) = acquisition costs.
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Merchandise Inventory

Inventories accounted for at cost.

Cost includes cost of
Acquiring merchandise (invoice cost of goods, freight-in) Making goods ready for sale. ( unpacking and marking)

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Methods of Accounting for Purchase (or cash) Discounts

Record at invoice price( in china)

Record discount when taken. Charge discounts not taken when paid.

Detailed record is useful. Built in check. Identifies shrinkage by item. Income statement can be prepared without taking a physical inventory.
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Types of Companies

Merchandising company

Sells goods in same form as acquired. Converts raw material into finished goods.

Manufacturing company

Beginning inventory of current period = ending inventory of preceding period.

COGS = COGA - End. Inventory
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Perpetual Inventory Method
20
Recording Purchases at Gross Invoice Price
On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes.


Count inventory (i.e., a physical inventory is taken) at the end of the period. Multiply count times cost for each item to determine total amount of inventory.

Tangible items that will be consumed in the course of normal operations.

e.g., office supplies, lubricants, repair parts.

Not sold and not accounted for as part of cost of goods sold.

Periodic inventory method. Perpetual inventory method.
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Periodic Inventory Method

Determine amount of ending inventory and deduce costs of goods sold.
Lesson 5
Inventory and Cost of Goods Sales
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Inventory Issues

What is inventory? What costs are included in inventory? How do we separate COGS from End. Inv?

Measure amount actually delivered to customers; deduce ending inventory. Perpetual inventory record is kept for each item in the inventory.

Advantages of perpetual inventory method:

Intangible inventory costs are costs incurred for client but not yet billed called jobs-in-progress or unbilled costs.
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Supplies
19 YE SUN AccountingEnglish
Recording Purchases at Gross Invoice Price
Purchases are recorded at their gross amounts.
Gross Method
Purchase discounts taken are recorded when payment is made inside the discount period. YE SUN AccountingEnglish
பைடு நூலகம்

Net of discount

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Terminology

Purchase = receipt of merchandise not to placing of a purchase order.

Usually title transfers when goods are shipped (FOB shipping point).
GENERAL JOURNAL
Date Account Titles and Explanation Accounts Payable (Kid's Clothes)
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Debit 4,000
Credit 4,000
22
July 6 Inventory
Recording Purchases at Gross Invoice Price
16
Account for the purchase
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Credit Terms and Cash Discounts
When manufacturers and wholesalers sell their products on account, the credit terms are stated in the invoice.

Net purchases = gross purchases -purchase returns and allowances + freight-in
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Measurement Issue


Dividing goods available for sale between COGS and End. Inventory. 2 approaches:
2/10, n/30
Read as: “Two ten, net thirty”