Accounting for a retail industry business

Accounting for a retail industry business

Contents

Introduction 3

The perpetual inventory system 3

General journal entries relevant to the perpetual inventory system 4

Format of the income statement for a retail business 5

Sales returns and purchases returns 7

Alternative treatment 7

Discounts allowed 8

Discounts received 9

This learning guide is based on the following resource: Textbook Duncan A (2006) Introductory Accounting, National Core Accounting Publications, Bondi

Key to resources

Resource	Textbook
1	Chapter 7 ‘Accounting for merchandising operations’
2	Chapter 7: ·  self-testing exercises 1, 3, 4 and 5 ·  end of chapter exercises, questions 2, 4, 5 and 8 (a), (b – General Ledger only), and (c).

Introduction

You will have studied general journal entries and ledger postings processed in respect of a service industry business where the source of income would be from fees received for services provided, eg legal, tradesman, etc.

We will now cover the processing of transactions dealing with a retail industry business where income is generated from the sale of merchandise, being goods purchased for resale in the ordinary course of business.

Goods purchased for resale and which are unsold are referred to collectively as inventory or trading stock.

Transactions will continue to be accounted for through the general journal. Later you will be introduced to the transaction-specific journals for credit sales (sales journal) and credit purchases (purchases journal) and for cash receipts (journal) and cash payments (journal).

The perpetual inventory system

The transactions for a retail business will be accounted for based on the use of the perpetual inventory system.

Now go to Resource 1 Take note of the contrasting explanation of the alternative ‘periodic inventory system’. (Note: The Key to resources is located at the beginning of this document.)

The extensive use of computerised inventory system programs has seen the perpetual inventory system become much more widely used with its decided advantages, especially in its identification of theft and other shortages, errors and so on.

We will also introduce the occurrence of credit transactions, ie transactions where the sale or purchase price is settled in the future, usually within the terms of credit allowed by the seller (eg 14 days, 30 days).

Perpetual inventory systems operate by recognising retail transactions as adjusting the balance of the inventory account—an asset (account). Purchases of merchandise for resale are recognised as increasing the balance of the inventory account as a debit entry.

Sales of merchandise will therefore be recognised as reducing the balance of the inventory account as a credit entry. This reduction for sales is made at the cost (purchase) price of the goods sold. Sophisticated computer inventory programs will do this costing automatically.

The perpetual inventory system in operation is summarily as follows:

	Inventory	120
01/07/0x	Balance b/f	xxx	30/06/0x	Balance c/f	xxxx
30/06/0x	Acc payable – purchases	xxxx		Cost of goods sold	xxxx
		xxxx			xxxx

Note:

1 01/07/0x Balance b/f is the inventory value brought forward from last year.

2 30/06/0x Accounts Payable—Purchases is the accumulated total value of goods purchased for resale during the year, not including GST.

3 30/06/0x Balance c/f is the value of unsold goods as determined by a physical stocktake at cost price, not including GST.

4 Cost of goods sold is the cost price, not including GST, of goods sold during the year. Unless computer generated, this figure will be the balancing difference of the account.

General journal entries relevant to the perpetual inventory system

Debit	Inventory	xxxx
Debit	GST clearing (paid)	xxxx
Credit	Accounts payable		xxxx
	Purchases of goods for resale

Debit	Cost of goods sold	xxxx
Credit	Inventory		xxxx
	Cost of goods sold transfer

Debit	Accounts receivable	xxxx
Credit	GST clearing (collected)		xxxx
Credit	Sales		xxxx
	Sale of goods

Format of the income statement for a retail business

Income statement for the year ended 30 June 200x
Sales	xxxx
Less: Cost of goods sold	xxxx
Gross profit	xxxx
Less: Operating expenses (detailed)	xxxx
Net profit (to Capital)	xxxx

Discount allowed and discount received

Discount is described as the sum allowed (off the amount owing) to the payer of an account for prompt or early payment (of the amount owing).

Discount allowed is the allowance to an account receivable for prompt or early payment (to the business).

General journal entry for cash receipt with discount allowed

Debit	Bank	xxx
Debit	Discount allowed (Expense)	x
Credit	Account receivable		xxx
	Receipt from Account receivable

Discount received is the allowance from an account payable for prompt or early payment (by the business).

General journal entry for cash payment with discount received

Debit	Account payable	xxxx
Credit	Bank		xxxx
Credit	Discount received (income)		x
	Payment to Account payable

Effect of GST on discount allowed and discount received transactions

The consequence of GST on these transactions is that an adjustment of the GST collected (on sales) and the GST paid (on purchases) is required.

General journal entry for receipt from account receivable ($550 incl GST) less cash discount @ 2%

Debit	Bank ($550 – $11)	539
Debit	Discount allowed (2% × $500)	10
Debit	GST clearing (collected) (10% × $10)	1
Credit	Account receivable		550
	Receipt from account receivable

General journal entry for payment to account payable ($440 incl GST) less cash discount @ 5%

Debit	Account payable	440
Credit	Bank ($440 – $22)		418
Credit	Discount received (5% × $400)		20
Credit	GST clearing (paid) (10% × $20)		2
	Payment to account payable

Now go to Resource 2

Sales returns and purchases returns

Some businesses will use separate general ledger accounts to record when a business either receives goods back from a customer (sales returns) or returns goods to a supplier (purchase returns). If they do use separate general ledger accounts, these accounts will need to be offset against the original sales general ledger account or purchases general ledger account at the end of the reporting period for the business (usually each year).

The journal entry to offset the balance of the sales returns account to the sales account would be:

Debit Sales
Credit	Sales returns

Alternative treatment

You do not need to use separate general ledger accounts for returns. You can simply record them directly in the same general ledger accounts used when goods were sold or purchased (as a reduction to the account). So sales returns can be recorded in the sales account. For purchase returns, it will depend on what inventory method is being used (ie, the perpetual or the periodic method). If you are using the periodic method, the original purchase would have been recorded as a debit entry in the purchases account. So the purchase return will be recorded as a credit entry in the purchases account.

However, if you are using the perpetual method, the original purchase would have been recorded as a debit entry in the inventory account. Therefore the return would be recorded as a credit entry in the inventory account.

To record these returns in the journals, they should be shown as a negative entry under the sales column in the sales journal or the inventory column in the purchases journal.

Example

								SDJ
Date	Invoice no	Particulars	Fol	Accounts receivable	Sales	GST clearing		General
20xx				$	$	$		$
Mar 17	100024	North East Wholesalers		550.00	500.00	50.00
Mar 18	C00895	North East Wholesalers		(55.00)	(50.00)	(5.00)

Discounts allowed

When goods are sold on credit, the customer will pay their account at a later date. In some cases we may offer a discount to encourage an earlier payment. It is important to record these discounts as part of the receipt transaction. As a result you will see cash receipt transactions that also include the discount allowed. The cash receipts journal may use a separate column (and general ledger account) to record the discount allowed.

								CRJ
Date	Receipt no	Particulars	Fol	Bank	Accounts receivable	Disc allowed	GST clearing	General
20xx				$	$	$		$
Mar 17	87652	South East Retailers		495.00	550.00	(50.00)	(5.00)

However, the accounting standards require that the value of sales be recorded after offsetting any discounts allowed to customers. Therefore the discounts allowed will need to be deducted from the sales account. If the receipt transaction is recorded using a discount allowed account, this offsetting transaction will be done at a later date—usually at the end of the reporting period for the business (usually each year). This is the method used in the recommended textbook. However, as an alternative, this offsetting transaction may be done at the same time that the receipt is recorded. In this case the discount allowed would be shown in the cash receipts journal as a negative entry in the sales column.

								CRJ
Date	Receipt no	Particulars	Fol	Bank	Accounts receivable	Sales	GST clearing	General
20xx				$	$	$		$
Mar 17	87652	South East Retailers		495.00	550.00	(50.00)	(5.00)

Either method is suitable. It is important to note that at the end of the reporting period the value of the sales account to be recorded in the income statement would be the total of sales less any discounts allowed.

Discounts received

When goods are purchased on credit, the business will pay the supplier’s account at a later date. In some cases we may be offered a discount to encourage an earlier payment. It is important to record these discounts as part of the cash payment transaction. As a result, you will see cash payment transactions that also include the discount received. The cash payments journal may use a separate column (and general ledger account) to record the discount received.

								CPJ
Date	Cheque no	Particulars	Fol	Bank	Accounts payable	Discount received	GST clearing	General
20xx				$	$	$		$
Mar 17	87652	South East Retailers		495.00	550.00	(50.00)	(5.00)

However, the accounting standards require that the value of inventory (when using the perpetual inventory method) be recorded after offsetting any discounts received from suppliers. Therefore the discounts received will need to be deducted from the inventory account. If the payment transaction is recorded using a discount received account, this offsetting transaction will be done at a later date—usually at the end of the reporting period for the business (eg each year). This is the method used in the recommended textbook. However, as an alternative, this offsetting transaction may be done at the same time that the payment is recorded. In this case the discount received would be shown in the cash payments journal as a negative entry in the inventory column.

								CPJ
Date	Cheque no	Particulars	Fol	Bank	Accounts payable	Inventory	GST clearing	General
20xx				$	$	$		$
Mar 17	87652	South East Retailers		495.00	550.00	(50.00)	(5.00)

Either method is suitable. It is important to note that at the end of the reporting period the value of the inventory account to be recorded in the balance sheet would be reduced by the effect of any discounts received.