Professional Documents
Culture Documents
OPERATIONS
Introduction
Service company perform service for a fee. Profit is
measured as the difference between revenue from
services and expenses.
Merchandising companies earn profit by buying
and selling goods
Components of Income statement for
Service and Merchandising Entities
Service Company Merchandising Company
Income Statement Income Statement
Revenue from Services Net sales
Minus
Minus Cost of sales
Equals
Expenses Gross Profit
Add or minus
Equals Income or expenses
Equals
Profit Profit
In a merchandising business, net sales from the sale of goods
while cost of sales or cost of goods sold represents the cost
of inventory the entity has sold to customer.
The difference between net sales and cost of sales is called
Gross Profit, then the operating income is added and
operating expenses are deducted from gross profit to arrive
at Operating Profit. Investment revenue, other gains and
losses and finance cost are considered to arrive at profit
before tax then income tax expenses is deducted to have
profit from continuing operations
Example
Wilhelmina Neis Traders
Income Statement
For the Year ended Dec 31, 2009
Sales on Account
Cash Purchases- Inventory- Sales on
Account- Account receivables- collection
Source of Documents
Sales invoice prepared by the seller of goods and sent to the buyer. This
document contains the name and address of the buyer.
Bill of lading document issued by the carrier a trucking, shipping or
airline- that specifies contractual conditions and terms of delivery such as
freight terms, time, place and the person named to received the goods.
Statement of account formal notice to the debtor detailing the account
already due
Official receipt - evidences the receipt of cash by the seller or the
authorizes representatives.
Deposit slip printed forms with depositors name account number and
space for details of the deposit.
Check - written order to a bank by a depositor to pay the amount
specified in check from his checking account to the person named in the
check.
Purchase requisition written request to the purchaser of an entity from
an employee or user department of the same entity that goods be
purchase.
Purchase order an authorization made by the buyer to the seller to
deliver the merchandise as detailed in the form.
Receiving report is a document containing information about goods
received from a vendor
Credit memorandum form used by the seller to notify the buyer that his
account is being decreased due to errors or other factors requiring
adjustment.
Steps in Purchase Requisition
When certain items are needed, the user department fills in a purchase
requisition form and sends it to the purchasing department.
The purchasing department then prepares a Purchase order after checking
with the price list, quotations or catalogs of approved vendors.
After receiving the purchase order, the seller forwards an invoice to the
purchaser upon shipment of the merchandise.
Upon receiving the shipment of merchandise, the purchaser receiving
department sees to it that the terms in the purchase order are complied
with and prepares receiving report.
Before approving the invoice for payment the account payable department
compares copies of PR, PO and receiving report and invoice to ensure that
quantities, description and price agree.
Terms of Transaction
Merchandise may be purchased and sold either on credit
terms or for cash on delivery.
When goods are sold on account, a period of time called
credit period is allowed for payment.
If the credit period is 30 days then payment is expected
within 30 days from the invoice date. The credit period is
usually describe as the net credit period or net terms
The credit period of 30 days is noted as n/30
If the invoice is due ten days after the end of the month, it
may be marked n/30 eom
Cash Discount
Some businesses give discount for prompt payment called
cash discount.
If trade discount is also offered. Cash discount is
computed on the net amount after the trade discount
Cash discount is designated by such notation as 2/10
which means the buyer may avail of a two percent discount
if the invoice is paid within ten days from the invoice date.
The period covered by the discount, in this case- ten days is
called the discount period.
Cash discount are called Purchase discount from the
buyers view point. And sales discount from the sellers point
of view.
Example
Assume that an invoice for P150,000 with terms
2/10, n/30 is to be paid within the discount period
with money borrowed for the remaining 20 days of
the credit period. If an annual interest rate of 18%
is assumed
Trade Discount
Trade discount encourage the buyers to purchase
products because of markdowns from the list price.
This type of discount enables the supplier to vary
prices periodically without the inconvenience of
revising price list and catalogs.
There is no trade discount account and there is no
special accounting entry for this discount. Instead all
accounting entries are based on the invoice price.
Which is obtained by subtracting the trade discount
from the list price.
Example
Pinnacle technologies quotes a list price of P2,500
for each 5 gigabyte flash drive, less trade discount
of 20% if Video fantastic company ordered seven
units, the invoice price would be.
Transportation Cost
When merchandising is shipped by a common carrier- a trucking
company or an airline the carrier prepares a freight bill in
accordance with the instruction of the party making the shipping
arrangement.
Freight prepaid or freight collect the freight bill designates which
party shoulders the cost.
FOB abbreviation for free on board
When the freight terms are FOB shipping point, the buyer shoulders
the shipping cost
FOB destination, the seller bears the shipping cost.
Freight prepaid the seller pays the transportation cost before
shipping the goods.
Freight collect freight company collects from the buyer.
Freight terms Who shoulder the Who pays the
transportation cost shipper
FOB destination, Seller Seller
Freight prepaid
FOB shipping point, Buyer Buyer
Freight collect
FOB destination, Seller Buyer
freight collect
FOB shipping point, Buyer seller
freight prepaid
Inventory Systems
Perpetual inventory system is an alternative to the periodic
inventory system. The inventory account is continuously updated.
When the company uses the perpetual inventory system, the ending
inventory should reconcile with the actual physical count at the end
of the period assuming that no theft, spoilage or error has occurred.
Periodic Inventory System primarily used by business that sell
relatively inexpensive goods and that are not yet using
computerized scanning system to analyze goods sold. When goods
are purchased, a separate set of accounts purchases, purchases
discounts, purchase return and allowances and transportation in is
used to accumulate information on net cost of the purchase.
Net sales
Merchadising Journal Entry
Sale of merchandise for cash, 25,000
Sept 16 Cash 25,000
Sale 25,000
The customers may take advantage of the sales discount any time on
or before September 30 which is 10days after the date of the
invoice. If the client paid on Sept. 30, the entry us
Sept 30 Cash 2940
Sales discount 60
Account receivable 3000
Sales Return and Allowances
Buyers may be dissatisfied with the merchandise received
either because the goods are damaged or defective of
inferior quality or not in accordance with their specification.
Each return or allowance is recorded as a debit to an
account called sales returns and allowances.
Sept 17 Sales Return and 760
allowances
Account receivables 760
If the this invoice is collected on Dec 5 the sales discount will be P340
(P17,000 x 2%). There is no debit to transportation out account since the
shipping terms provided that the buyer should shoulder the
transportation costs
Dec 5 Cash 16660
Sales Discount 340
Acct Receivable 17000
Case No. 3
Now, assume that W.Neis Traders sold merchandise totaling P17,000 FOB
destination, freight collect terms 2/10, n/30. the transportation costs
amounted to P1900
Nov 25 Account Rec. 15100
Transportation Out 1900
Sales 17000
Account receivable is decreased by the transportation charges paid by the
buyer for the benefit of the seller. If this invoice is collected on Dec 5 the
sales discount will be P340 (P17,000 x2%)
Dec5 Cash 14760
Sales Discount 340
Acct. Receivable 15100
Case No. 4
Assume further that W.Neis Traders sold merchandise totaling P17,000
FOB shipping point, freight prepaid; terms 2/10, n/30. the
transportation cost amounted to P1900
Nov 25 Account Rec. 18900
Sales 17000
CAsh 1900
if the invoice paid on Dec 5. the purchase discount will be P340 (P17000
x2%) bec. Discount applies to total purchases.