UNIT 5- ACCOUNTING FOR RETAIL COMPANIES

Question 1

Service business

Answer 1

sells knowledge

• Service companies, such a law firms, accounting firms, and advertising agencies, perform services and the compensation received is recorded in various accounts such as: income from fees, commissions income, and income from services
• These revenue totals, when compared with total expenses, determine if the serviced business has earned a profit or sustained a loss

Question 2

Trading business

Answer 2

sells a particular product or group of products

• The accounting for a trading business is primarily the same as for a service business, except that in trading business a product is being sold
• The determination of profit or loss for a trading business, involves the cost of purchasing the product being sold

Question 3

Merchandise purchased

Answer 3

(600)

• Expense account used when purchasing goods for the purpose of resale
• The goods being returned are recorded in a separate revenue account:
  PURCHASES AND SIMILAR TRANSACTIONS (608)
• If the cost of transporting the goods is responsibility of the company, it must be added at the purchase value. Same accounting treatment for any kind of purchases expenses.
• As an incentive to pay early, the company may be offered discount, by the seller: it is recorded in a ledger account called PROMPT PAYMENT DISCOUNTS ON PURCHASES (606)

Question 4

Merchandise sold

Answer 4

(700)

• Revenue account used when selling merchandises
• Every sale, whether it is made cash or on credit, will be credited to this account
• Its balance represents, at the end of the accounting period. The GROSS SALES: the total sales made by the organization
• SALES RETURNS AND SIMILAR TRANSACTIONS (708): account debited when a defective or unsatisfactory item is returned by the customer

Question 5

Value added tax

Answer 5

In Spain VAT is levied at a standard rate of 21%, and two reduced rates of 10% on food, restaurants, hotels and constructions of new houses, and 4% on basic necessities such as milk, bread, fruits, books, etc.

Question 6

INPUT VAT

Answer 6

(472)

VAT records the VAT registered or paid in advance when the company buys goods or services

Question 7

OUTPUT VAT

Answer 7

(477)

registers the VAT charge to customers when the company sells its goods or services

Question 8

VAT PAYABLE

Answer 8

(475)

amount owed to tax office by the company

Question 9

VAT RECOVERABLE (RECEIVABLE)

Answer 9

(470)

amount owed to the company by the tax office

Question 10

Purchases on account

Answer 10

(400) Merchandise bought on account
(523) Short-term fixed assets bought on account
(173) Long-term fixed assets bought on account

Question 11

Charges

Answer 11

• VAT not included

- Transport, insurance etc.

Question 12

Acquisition price

Answer 12

Purchase price
+ charges
- discounts
= acquisition price

Question 13

Discounts

Purchases

Answer 13

REVENUES

(606) - prompt payment
(609) - volume
(608) - others ++ RETURNS

Only recorded in these accounts when the discount appears later!!

Question 14

Discounts

Sales

Answer 14

EXPENSES

(706) - prompt payment
(709) - volume
(708) - other ++ when customer RETURNS

If recorded at the moment decrease the selling price, if recorded later use these accounts.

Question 15

Discounts and VAT

Answer 15

FOR ANY DISCOUNT WE NEED TO REDUCE THE VAT AS WELL!!

Question 16

Containers

Answer 16

1. Non-returnable included in charges- increase the purchase price (throw out after)
2. Returnable possibility of returning them
   - charged- when returned- money back
   - it is a right, an asset (406)

Question 17

Containers- purchases

Answer 17

• (602) when buying containers (not returning all of them)

- (406) a right until returned/bought

Question 18

Containers- sales

Answer 18

• (704) containers and packaging sold (customers decides to keep some)
• (437) an obligation until we know if the customer returns/buys