Trial Balance Columns

Data for the trial balance are obtained from the ledger balances of Highpoint Electronic at December 31. The amount shown for Merchandise Inventory, $36,000, is the beginning inventory.
Adjustments Columns
A merchandising company generally have the same types of adjustments as a service company. As you see in the work sheet, adjustments (a), (b), and (c) are for insurance, depreciation, and salaries. These adjustments were also required for Pioneer Advertising Agency, as illustrated in Chapters 3 and 4.
After all adjustment data are entered on the work sheet, the equality of the adjustment column totals is established. The balances in all accounts are then extended to the adjusted trial balance columns.2 Read the rest of this entry »

Cost of Goods Sold

As you learned earlier in this chapter, the second factor in measuring net income SUBJECTIVITY in a merchandising company is the cost of goods sold. The cost of goods sold may be determined each time a sale occurs or at the end of an accounting period. State the steps in to make the determination when the sale occurs, a company uses a perpetual determining cost of inventory system. Under this system, detailed records of the cost of each inventor sold. Tory item are maintained and continuously show the inventory that should be on hand. For example, a Ford dealership will have separate inventory records for each Escort, Tempo, Taurus, and Thunderbird. When a car is sold, its cost is obtained from the inventory records. Perpetual inventory systems have traditionally been used by companies that sell high unit-value items such as automobiles, furniture, television sets, and large home appliances.
When cost of goods sold is determined only at the end of an accounting period, a company is said to be using a periodic inventory system. This system is widely used by companies that sell thousands of low unit-value items, such as Walt-Mart, True Value Read the rest of this entry »

Purchase Returns and Allowances

A sales return and allowance on the seller’s books is recorded as a purchase return and allowance on the books of the purchaser. The purchaser initiates the request for a reduction of the balance due through the issuance of a debit memorandum. A debit memorandum is a document issued by a buyer to inform a seller that a debit has been made to the seller’s account. The original copy of the memorandum is sent to the seller and one copy is retained by the purchaser. The information contained in a debit memorandum is similar to the information found in the credit memorandum in Illustration 5-4 (p. 184). The entry by Chelsea Video for the merchandise returned on May 8 is:

Purchase Returns and Allowances represent a reduction in the cost of goods purchased for resale. It is a contra account to Purchases and its normal balance is a credit. The contra account is used instead of crediting Purchases in order to disclose both the dollar Read the rest of this entry »

Gross Profit

Sales revenue used for this computation is net sales (which takes into account sales returns and allowances and sales discounts). On the basis of the sales data presented in Illustration 5-5 and the cost of goods sold data in Illustration 5-10, the gross profit for Highpoint Electronic is $144,000, computed as follows:

A company’s gross profit may also be expressed as a percentage by dividing the amount of gross profit by net sales. For Highpoint Electronic the gross profit rate is 31.3% ($144,000 — $460,000). The gross profit rate is generally considered to be more useful than the gross profit amount because it expresses a more meaningful (qualitative) relationship between net sales and gross profit. For example, a gross profit of $1,000,000 may be impressive. But, if it is the result of a gross profit rate of only 7%, it is not so impressive. Read the rest of this entry »