Accounting in Merchandising Companies
5.5.4 Analysis of the inventory sale transaction
Event No. 4.This event is composed of two parts. The first one (4a in the table below) is recognition of sales revenue. Cash and Retained Earnings increase by $5,500. Transaction 4a is an asset source transaction. The second part (4b) is designed to record the cost of goods sold. Remember that goods are expensed only at the point of sale (under perpetual system). Accordingly, $2,000 should be removed from the Merchandise Inventory account and placed to the expense account called Cost of Goods Sold. Transaction 4b is an asset use transaction.
Illustration 5-4: Effects of inventory sale
Event No. |
Balance Sheet |
Income Statement |
Cash Flows |
|||||||||||
Cash |
+ |
Inv. |
= |
Cont. Cap. |
+ |
Ret. Earn. |
Rev. |
- |
Exp. |
= |
Net Inc. |
|||
| Beg. |
4,800 |
+ |
7,200 |
= |
12,000 |
+ |
0 |
0 |
- |
0 |
= |
0 |
|
|
| 4a |
5,500 |
+ |
n/a |
= |
n/a |
+ |
5,500 |
5,500 |
- |
n/a |
= |
5,500 |
5,500 |
OA |
| 4b |
n/a |
+ |
(2,000) |
= |
n/a |
+ |
(2,000) |
n/a |
- |
(2,000) |
= |
(2,000) |
(2,000) |
OA |
| End. |
10,300 |
+ |
5,200 |
= |
12,000 |
+ |
3,500 |
5,500 |
- |
(2,000) |
= |
3,500 |
|
|
5.5.5 Analysis of transportation-out expenses
Event No. 5. The cash payment made by the bookstore to deliver goods to the customer is called transportation-out:
Transportation-out expenditures are expenses incurred to deliver products from the company to the customer. Transportation-out expenditures are treated as period costs and expensed in the period of incurrence.
The company records transportation-out expenditures as an operating expense. This is an asset use transaction:
Illustration 5-5: Effect of transportation-out expenses
Event No. |
Balance Sheet |
Income Statement |
Cash Flows |
|||||||||||
Cash |
+ |
Inv. |
= |
Cont. Cap. |
+ |
Ret. Earn. |
Rev. |
- |
Exp. |
= |
Net Inc. |
|||
| Beg. |
10,300 |
+ |
5,200 |
= |
12,000 |
+ |
3,500 |
5,500 |
- |
(2,000) |
= |
3,500 |
|
|
| 5 |
(300) |
+ |
n/a |
= |
n/a |
+ |
(300) |
n/a |
- |
(300) |
= |
(300) |
(300) |
OA |
| End. |
10,000 |
+ |
5,200 |
= |
12,000 |
+ |
3,200 |
5,500 |
- |
(2,300) |
= |
3,200 |
||
5.5.6 Analysis of selling expenses transaction
Event No. 6. The $400 cash payment for selling expense has the same effect as operating expenses do. Cash and Retained Earnings decrease. This is an asset use transaction:
Illustration 5-6: Effect of selling expenses
Event No. |
Balance Sheet |
Income Statement |
Cash Flows |
|||||||||||
Cash |
+ |
Inv. |
= |
Cont. Cap. |
+ |
Ret. Earn. |
Rev. |
- |
Exp. |
= |
Net Inc. |
|||
| Beg. |
10,000 |
+ |
5,200 |
= |
12,000 |
+ |
3,200 |
5,500 |
- |
(2,300) |
= |
3,200 |
|
|
| 6 |
(400) |
+ |
n/a |
= |
n/a |
+ |
(400) |
n/a |
- |
(400) |
= |
(400) |
(400) |
OA |
| End. |
9,600 |
+ |
5,200 |
= |
12,000 |
+ |
2,800 |
5,500 |
- |
(2,700) |
= |
2,800 |
|
|
5.5.7 Journal entries and T-accounts for illustration #1 of accounting for inventory
Let us prepare the general journal and post all transactions to T-accounts.
Illustration 5-7: General journal for illustration #1
| Event No |
Account titles |
Debit |
Credit |
1 |
Cash |
9,000 |
|
|
Merchandise Inventory |
3,000 |
|
|
Contributed Capital |
|
12,000 |
| 2 |
Merchandise Inventory |
4,000 |
|
|
Cash |
|
4,000 |
3 |
Merchandise Inventory (Transportation-in) |
200 |
|
|
Cash |
|
200 |
4a |
Cash |
5,500 |
|
|
Sales Revenue |
|
5,500 |
4b |
Cost of Goods Sold |
2,000 |
|
|
Merchandise Inventory |
|
2,000 |
5 |
Transportation-out |
300 |
|
|
Cash |
|
300 |
6 |
Selling Expense |
400 |
|
|
Cash |
|
400 |
Closing |
Sales Revenue |
5,500 |
|
entry |
Cost of Goods Sold |
|
2,000 |
|
Transportation-out |
|
300 |
|
Selling Expense |
|
400 |
|
Retained Earnings |
|
2,800 |
Note the last entry that is called a closing journal entry. We zeroed the nominal accounts (revenue and expense accounts) for use in the next accounting period. The closing entry is combined because we include both revenue and expense accounts into it.
Page 3 of 8
Location