Week 3: Accounting for Retailing Flashcards
inventory
goods or property purchased and held for sale
also means other assets held for future sale but not normally sold as part of regular business activities.
stock and stock in trade are commonly used terms for inventory
used to generate profit by making a mark-up on inventory items purchased from a supplier
buying stock for business is crucial = best price at best quality, regular suppliers
treated as an asset
they are essentially items sitting on the shelf, and therefore you want it in and out (sold) as fast as possible
retail business operations
- determination of profit is a major objective of accounting for inventory
- cost of sales for a given period is often the business’s largest expense
- inventory is one of the most active assets in a retail business
- the control and safeguarding of inventory is essential for efficient and profitable operations
income statement for retailers (format)
sales is of primary importance = revenue
cost of sales represents inventory sold during the period = how much you PAID for inventory sold
sales returned = negative income = debit balance
the cost of sales is subtracted from net sales revenue to arrive at an intermediate amount called gross profit on sales
income statement = “from the year ended ___”
balance sheet = as at ___”
expenses are grouped by function
- selling and distribution expenses
- administrative expenses
- finance expense
GST
GST must be paid for all inventory
complete BAS to get GST back
retail business have to register for an australian business number if their sales of goods exceed $75 000 per year
- they must also register for GST
- they must issue tax invoices
- they can claim input credits
tax invoices
required for all sales in excess of $75
all tax invoices must have:
- ‘tax invoice’ stated prominently
- ABN of entity issuing
- date of issue
- name of suppliers
- description of items being supplied
tax invoice, less than $1000 = cash sale
invoices over $1,000 have additional requirements = credit sale
adjustment notes
adjustment notes are used when
- all or part of goods sold are returned
- an allowance (discount) is given
- the price of supply is changed
- part or full amount owing has to be written off
they are essentially a ‘negative invoice’ as they are inventory returned back to supplier
reduces purchases amount
a valid tax invoice can serve both as a tax invoice and as an adjustment note
- the statement can replace adjustment notes for returns, refunds, allowances and discounts provided certain requirements are met
sales transactions (format)
recorded when inventory is transferred from the business to the customer
to record a sale an asset account is debited and the sales account is credited
significant difference between cash collections from sales and the balance accumulated in the sales account
accounts receivable balance includes GST
- GST is 10%
- GST payable is a liability
sales returns and allowances (format)
sales returns and allowances account is debited for an amount excluding GST
subtracted from sales in the income statement in order to show net sale
trade discounts (format)
a percentage reduction granted from the normal list price
trade discounts are not recorded in the accounts by either the buyer or the seller
cash discounts (format)
the inventory is sold on credit, the terms of payment, called the credit terms
provide an incentive for the buyer to make payment before the end of the credit period
the seller may grant a cash discount called ‘discount allowed by the seller’ and ‘discount received by the buyer’
cash discounts are also known as settlement discounts
done to improve cash flow of business
discount received is classified as revenue (income)
freight outwards
there are a variety of costs incurred in moving goods from seller to buyer
obligations of the seller and/or buyer in relation to these costs are stated on the invoice issued by the seller
freight inwards is the cost of getting goods from supplier to seller
freight outwards is the cost of getting goods from seller to buyer = treated as a selling and distribution expense
standardised trade terms used
- EXW: ex works
- DDP: delivered duty paid
perpetual inventory system (format)
involves keeping current and continuous records of all inventory transactions
separate computer record or inventory card for each type of inventory item held
- quantity, unit cost and total cost for each purchase and each sale.
running inventory balance
every time there is a transaction the system updates
- inventory in = +1
- inventory sold = -1
periodic inventory system
not continuous
inventory at start of period minus inventory at end of period = amount sold
profitability analysis
the income statement is structured to present a picture of the main items of income and expense
this structure enables management to assess the
- profitability of operations
- by monitoring over time the relationships that exist among sales
- cost of sales
- gross profit
- expenses and profit
gross profit ratio (equation)
the gross profit ratio expresses gross profit as a percentage of net sales
represents the portion of the sales dollar that is reflected in gross profit
this ratio also indirectly reflects the relationship of cost of sales to sales
should be as high as possible
profit margin (equation)
reflects the portion of each sales dollar that ends up as final profit
ratio is considered more informative than simply stating profit in absolute terms
should be as high as possible
