Merchandising Operations and the Accounting Cycle - Pearson

KEY POINT
The recording of cost of goods sold
along with sales revenue is an
example of the matching principle
(Chapter 3, page 111)—matching
expense against revenue to
measure net income.
232 Part One The Basic Structure of Accounting
•Asales discount: If the customer pays within the discount period—under
terms such as 2/10 n/30—Austin Sound collects the discounted amount.
•Freight out: Austin Sound may have to pay Delivery Expense to transport the
goods to the buyer’s location.
The sale of inventory may be for cash or on account, as Exhibit 5-2 shows.
Cash Sale Sales of retailers, such as grocery stores and restaurants, are often for
cash. Cash sales of $3,000 would be recorded by debiting Cash and crediting Sales
Revenue as follows:
Jan. 9 Cash.............................................................................. 3,000
Sales Revenue........................................................ 3,000
Cash sale.
To update the inventory records, the business also must decrease the Inventory
balance. Suppose these goods cost the seller $1,900. An accompanying entry is
needed to transfer the $1,900 cost of the goods—not their selling price of $3,000—
from the Inventory account to the Cost of Goods Sold account as follows:
Jan . 9 Cost of Goods Sold..................................................... 1,900
Inventory................................................................ 1,900
Recorded the cost of goods sold.
Cost of goods sold (also called cost of sales) is the largest single expense of most businesses
that sell merchandise, such as Bombardier, JVC, and Austin Sound. It is the
cost of the inventory that the business has sold to customers. The Cost of Goods
Sold account keeps a current balance as transactions are journalized and posted.
After posting, the Cost of Goods Sold account holds the cost of the merchandise
sold ($1,900 in this case):
Inventory Cost of Goods Sold
Purchases 50,000 Jan. 9 1,900 Jan. 9 1,900
(amount
assumed)
The computer automatically records this entry when the cashier keys in the code
number of the inventory that is sold. Optical scanners at cash registers perform this
task in most stores.
Sale on Account Most sales in Canada are made on account (on credit) using either
the seller’s credit facility or a credit card such as Visa or MasterCard. To simplify
the discussion, we will assume the seller records the receivable as a regular
account receivable rather than a special receivable from the credit card company. A
$5,000 sale on account is recorded by a debit to Accounts Receivable and a credit to
Sales Revenue, as follows:
Jan. 11 Accounts Receivable .................................................. 5,000
Sales Revenue........................................................ 5,000
Sale on account.
If we assume that these goods cost the seller $2,900, the accompanying cost of goods
sold and inventory entry is
Jan . 11 Cost of Goods Sold..................................................... 2,900
Inventory................................................................ 2,900
Recorded the cost of goods sold.
After recording the January 9 and 11 transactions, sales revenue is $8,000 ($3,000
+ $5,000). Cost of goods sold totals $4,800 ($1,900 + $2,900).
The seller records the related cash receipt on account as follows:
Jan . 19 Cash.............................................................................. 5,000
Accounts Receivable............................................. 5,000
Collection on account.