A merchandising business relies heavily on accurate inventory and cost accounting to determine profitability. The revised cost of goods sold formula takes into account the beginning inventory, net cost of purchases, and ending inventory.
Read as “Two, ten, net thirty”
If the bill is paid within 10 days, a cash
discount of 2% will be given. Otherwise, the
full amount of the invoice is due within 30
days after the invoice date.
Terms can vary
30 Days or Net 30
Full amount of invoice is due 30 days after
the date on the invoice.
On Account
The full amount of the invoice is due when
the invoice is received (A/P or A/R).
C.O.D (Cash on Delivery)
Goods must be paid for with cash at the time
they are delivered.
Merchandise Firm
Any business that buys merchandise or goods
to resell for a profit
Merchandise Inventory
The quantity of merchandise to be resold
Cost Of Good Sold
The term ‘Cost of Goods Sold’ refers to
the amount:
Of inventory that was sold during the fiscal
period.
It is determined by taking a ‘physical
inventory.’
eg. Merchandise Purchased
$10,000
Physical Inventory
$ 2,000
Cost of Goods Sold
$ 8,000
Physical Inventory
The unsold goods are physcially counted
once a year.
Gross Profit
The term ‘Gross Profit’ refers to the
amount:
An item is sold for
minus how much it was purchased for
eg. USB Bracelet from China
$4.60
Sold for
$10.00
Gross Profit
$5.40
Inventory System
To determine the accounting for inventory two possible
methods can be used:
Periodic Inventory System
The cost of the inventory sold is determined at the end of
the fiscal period (usually once a year)
PROS: easy to manage, faster, and inexpensive
CONS: amount of inventory on hand cannot be
determined unless a physical inventory count is performed
(this means the inventory numbers are misstated
throughout the fiscal year)
Perpetual Inventory System
Inventory is updated on a continuous basis
(more details later)
Periodic Inventory System
The cost of goods that were sold is
determined ‘periodically’.. only once a
year!
It is done in the same fashion as
determining how many supplies were used
in the fiscal period.
Sales Return and Allowances
Sometimes, merchandise is returned—or a partial allowance
is given—after the sale.
Purchase Returns and Allowances
Purchase Returns and Allowances are treated in the same
manner as Sales R & A.
Cash Discounts
A reduction in the amount owed if payment is
made on or before the discount date stated on
the bill
Incentive for the customer to pay the invoice
early
A ‘good’ (anything really)
Bought for a certain price
Sold for a higher price
Goods are bought and sold for profit!
Can of coke in store: $1.00
Can of coke from factory: $0.24
‘Gross Profit’
$ 0.76
COFS(cost of good sold) formula
Cost of beginning goods + Cost of goods purchased - Cost of ending inventory = Cost of goods sold.
Cost of beginning goods + Cost of goods purchased - Cost if goods sold = Cost ending inventory.
Revised Cost of Goods Formula
Beginning Inventory + Net cost of purchases - Ending inventory = Cost of good sold
Net sales Formula
Sales revenue – Sales discounts – Sales returns and allowances.
