Accounting in Merchandising Companies
Illustration 5-8: Summary of T-accounts for illustration #1
Assets |
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Liabilities |
+ |
Equity |
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Cash |
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Contributed Capital |
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(1) 9,000 (4a) 5,500 |
(2) 4,000 (3) 200 (5) 300 (6) 400 |
0 |
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(1) 12,000 |
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Bal. 12,000 |
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Bal. 9,600 |
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Retained Earnings |
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(cl.) 2,800 |
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Bal. 2,800 |
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Merchandise Inventory |
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(1) 3,000 (2) 4,000 (3) 200 |
(4b) 2,000 |
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Sales Revenue |
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(cl.) 5,500 |
(4a) 5,500 |
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Bal. 0 |
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Bal. 5,200 |
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Cost of Goods Sold |
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(4b) 2,000 |
(cl.) 2,000 |
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Bal. 0 |
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Transportation-out |
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(5) 300 |
(cl.) 300 |
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Bal. 0 |
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Selling Expense |
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(6) 400 |
(cl.) 400 |
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Bal. 0 |
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Totals |
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Assets 14,800 |
= |
Liabilities 0 |
+ |
Equity 14,800 |
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5.6 Illustration #2 of accounting for inventory (period 2)
Let us go on with the illustration and expand Dav's Books operations to the next (20X7) accounting period. The following transactions took place:
- On May 14, the company purchased $5,000 of goods (inventory) on account. The seller delivered the goods at their expense.
- Some goods delivered to Dav's Books were damaged; thus, Dav's Books returned $300 of them to the seller (May 16).
- On September 18, the company made cash payment on the balance of the accounts payable. In addition, the bookstore would receive a 2% cash discount from the seller if Dav's Books made the payment in two weeks. As the payment was made within two weeks, Dav's Books took advantage of the 2% discount.
- On June 12, the company sold goods costing $2,000 for $4,000 on account.
- Dav's Books incurred $400 of transportation expenses to deliver the goods to the customers. The expense was paid in cash on June 12.
- Due to an error in filling out the purchase order in Event No. 6 and respectively shipping some goods not ordered, the customers sent back and the bookstore accepted a return of $500 of goods. The cost of the goods was $250.
- On June 15, the company provided the buyer with a 2% cash discount if the buyer pays within two weeks. The buyer met the requirement (buyer paid within two weeks).
- On September 12, the company collected the balance due on accounts receivable.
5.6.1 Effects of transaction for illustration #2 of accounting for inventory
Let us look at each of the transactions, record them in the general journal, transfer the data to T-accounts, and prepare the financial statements. All effects of the transactions on the accounting equation are shown in the table below.
Illustration 5-9: Effects of 20X7 events of the accounting equation
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Assets |
= |
Liab. |
+ |
Equity |
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Cash |
+ |
Invent. |
+ |
Accts Rec. |
= |
Accts Pay. |
+ |
Contr. Cap. |
+ |
Ret. Earn. |
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| Beginning Balances |
$9,600 |
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$5,200 |
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$ 0 |
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$ 0 |
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$12,000 |
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$2,800 |
| 1) Inventory purchase |
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+ 5,000 |
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+ 5,000 |
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| 2) Goods return |
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(300) |
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(300) |
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| 3a) Cash discount on goods |
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(94) |
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(94) |
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| 3b) Cash payment |
(4,606) |
(4,606) |
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| 4a) Rev. recognition |
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+ 4,000 |
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+ 4,000 |
| 4b) COGS recognition |
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(2,000) |
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(2,000) |
| 5) Transp.-out expense |
(400) |
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(400) |
| 6a) Adjusting revenue |
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(500) |
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(500) |
| 6b) Adjusting COGS |
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+ 250 |
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+ 250 |
| 7) Providing cash discount |
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(70) |
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(70) |
| 8) Cash collection |
+ 3,430 |
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(3,430) |
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| Ending Balances |
$8,024 |
+ |
$8,056 |
+ |
$ 0 |
= |
$ 0 |
+ |
$12,000 |
+ |
$4,080 |
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