• No results found

Transportation Costs for Merchandising Transactions

In document Principles of Financial Accounting (Page 103-111)

Merchandise often must be delivered from the seller to the buyer. It is important to know which company - either the seller or the purchaser - owns the merchandise while it is in transit and in the hands of a third-party transportation company, such as UPS. The company that owns the merchandise must absorb the transportation cost as a business expense.

The shipping terms specify which company owns the merchandise while in transit. Terms may be FOB destination or FOB shipping. The acronym FOB stands for “Free On Board” and is a shipping term used in retail to indicate who is responsible for paying transportation charges. It is also the location where ownership of the merchandise transfers from seller to buyer.

If the shipping terms are FOB destination, ownership transfers at the destination, so the seller owns the merchandise all the while it in transit. Therefore, the seller absorbs the transportation cost and debits Delivery Expense. The

Inventory; the transportation charges just become part of the purchase price of

the inventory. In the case of FOB shipping, the buyer may contract directly with the transportation company (and the seller records nothing) OR the seller may pre-pay the shipping costs and pass them along in the invoice to the buyer.

There are three possible scenarios regarding transportation, as follows:

1. Terms are FOB destination The seller calls UPS to pick up the shipment from his loading dock. The seller is billed by UPS and ultimately pays the bill and absorbs the expense.

BUYER SELLER

11. Purchase 50 items on account for $10 each, terms FOB destination. Transportation charges are $20 on account.

12. Sell 50 items on account for $10 each, terms FOB destination. Each item cost $4. Transportation charges are $20 on account.

Date Account Debit Credit Date Account Debit Credit

11 Merchandise Inventory 500 12 Accounts Receivable 500

Accounts Payable 500 Sales 500

The purchaser does not record transportation

charges at all since terms are FOB destination. 12Date AccountCost of Merchandise Sold Debit200 Credit

Merchandise Inventory 200

Date Account Debit Credit

12 Delivery Expense 20

Accounts Payable 20

The seller uses Delivery Expense to record transpor- tation charges only when terms are FOB destination. NOTE: If the information about the transportation says the seller is billed or invoiced by UPS, credit Accounts Payable (as shown above.) If the informa- tion says the buyer paid UPS, credit Cash instead. 11. You pay the amount invoiced at the time of

the purchase.

11. Your customer pays you the amount invoiced for the sale.

Account Debit Credit Account Debit Credit

Accounts Payable 500Cash 500

2. Terms are FOB shipping The purchaser calls UPS to pick up the shipment from the seller’s loading dock. The purchaser is billed by UPS. Since the buyer is dealing with two different parties – the seller and the transportation company, the buyer records two journal entries.

BUYER SELLER

13. Purchase 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account.

14. Sell 50 items on account for $10 each, terms FOB shipping. Each item cost $4. Transportation charges are $20 on account.

Date Account Debit Credit Date Account Debit Credit

13 Merchandise Inventory 500 14 Accounts Receivable 500

Accounts Payable 500 Sales 500

Receive an invoice from UPS for the shipping.

Date Account Debit Credit Date Account Debit Credit

13 Merchandise Inventory 20 14 Cost of Merchandise Sold 200

Accounts Payable 20 Merchandise Inventory 200

The purchaser uses Merchandise Inventory to record transportation charges when terms are FOB shipping. Shipping becomes part of the cost of the merchandise. The first Accounts Payable is to the seller; the second one is to the shipping company. NOTE: If the information about the transportation says the buyer is billed or invoiced by UPS, credit Accounts Payable (as shown above.) If the informa- tion says the buyer paid UPS, credit Cash instead.

The seller does not record transportation charges at all since terms are FOB shipping.

11. You pay the amount invoiced to the vendor. (You do not pay the UPS invoice yet.)

11. Your customer pays you the amount invoiced for the sale. Assume payment terms are 2/10, net 30 under the gross method.

Account Debit Credit Account Debit Credit

Accounts Payable 500Cash 500

Cash 490Sales Discounts 10

Merchandise Inventory 10Accounts Receivable 500

BUYER SELLER

15. Purchase 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account.

16. Sell 50 items on account for $10 each, terms FOB shipping. Each item cost $4. Transportation charges are $20 on account.

Date Account Debit Credit Date Account Debit Credit

15 Merchandise Inventory 520 16 Accounts Receivable 520

Accounts Payable 520 Sales 500

Accounts Payable 20

The purchaser includes the shipping cost as part of the inventory cost and pays the seller not only the cost of the merchandise, but also reimbursement for the transportation charges.

Date Account Debit Credit

16 Cost of Merchandise Sold 200

Merchandise Inventory 200

The seller is owed the cost of the merchandise and the cost of the transportation. However, the seller owes those transportation charges of $20 to the shipping company.

Notice above that the buyer can combine the merchandise and transportation costs into one journal entry because the buyer is getting one invoice for both from the seller. Also notice that the seller can combine both the sale and the transportation added into one journal entry and send one invoice. Also notice that the transportation cost pre-paid by the seller does not become part of the

Sales account.

The following transactions are ALTERNATIVE ways of presenting those above, splitting both the buyer’s and the seller’s transaction into two journal entries.

BUYER SELLER

15. Purchase 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account.

16. Sell 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account.

Date Account Debit Credit Date Account Debit Credit

15 Merchandise Inventory 500 16 Accounts Receivable 500

Accounts Payable 500 Sales 500

Date Account Debit Credit Date Account Debit Credit

15 Merchandise Inventory 20 16 Accounts Receivable 20

The purchaser includes the shipping cost as part of the inventory cost and pays the seller not only the cost of the merchandise, but also reimbursement for the transportation charges.

Date Account Debit Credit

16 Cost of Merchandise Sold 200

Merchandise Inventory 200

The seller is owed the cost of the merchandise and the cost of the transportation. However, the seller owes those transportation charges of $20 to the shipping company.

Regardless of which alternative was used to record the purchase and to record the sale, the following transactions record payment to the vendor when purchasing and payment by the customer when selling.

11. You pay the amount invoiced to the vendor. 11. Your customer pays you the amount invoiced for the sale. Assume payment terms are 2/10, net 30 under the gross method.

Account Debit Credit Account Debit Credit

Accounts Payable 520Cash 510

Cash 510Sales Discounts 10

Merchandise Inventory 10Accounts Receivable 510

(500 – (500 x .02)) + 20 = 510 (500 – (500 x .02)) + 20 = 510

Important: When a purchases or sales discount is involved, be sure to only take the discount on the merchandise cost or sales price, respectively, and not on the transportation cost.

Accounts Summary Table - The following table defines and summarizes the new accounts for a merchandising business.

ACCOUNTS SUMMARY TABLE

ACCOUNT

TYPE ACCOUNTS INCREASETO DECREASETO BALANCENORMAL STATEMENTFINANCIAL CLOSE OUT?

Asset (*temporary)

Merchandise Inventory

Account that keeps track of Items in stock for resale to customers. Used only in closing en- tries under the periodic system.

Purchases *

Account that keeps track of the dollar amount of purchases of merchan- dise for sale made by a company

Freight-in *

Account that keeps track of the transportation charges that a buyer has incurred for the purchase of inventory

debit credit debit Balance Sheet NO

Contra Asset (*temporary)

Purchases Returns *

Account that keeps track of the dollar amount of returns of merchandise previously purchased by a company

Purchases Discounts *

Account that keeps track of the dollar amount of discounts that the pur- chaser has claimed

credit debit credit Balance Sheet NO

3.5 BASIC MERCHANDISING TRANSACTIONS

(PERIODIC INVENTORY SYSTEM)

A merchandising business buys product from vendors, marks it up, and sells it to customers.

Some companies do not keep an ongoing running inventory balance as was shown under the perpetual inventory system. Instead, these companies use the

periodic inventory system and choose to wait until the end of the accounting

period, just before financial statements are prepared, to conduct a physical inventory count to determine (1) how much ending inventory they still have in stock (counted) and (2) how much inventory they have sold during the period, which is their cost of merchandise sold (calculated).

Transactions 1 through 4 are for purchases under the periodic inventory system. Rather than using the Merchandise Inventory account to record purchases, returns, discounts, and transportation costs, four temporary accounts are used instead under the periodic system: Purchases, Purchases Returns, Purchases Discounts, and Freight-in. These accounts substitute for the Merchandise Inventory accounts during the accounting period and are closed into the Merchandise Inventory account at the end of the period.

1. You purchase 50 items on account for $10 each, terms 2/10, n/30.

Date Account Debit Credit ▲ Purchases is a temporary account (for an asset)

that is increasing.

1 Purchases 500

Accounts Payable 500 ▲ Accounts Payable is a liability account that is increasing.

2. You pay transportation costs to UPS for merchandise purchases.

Date Account Debit Credit ▲ Freight-in is a temporary account (for an asset)

that is increasing.

2 Purchases 500

Accounts Payable 500 ▲ Accounts Payable is a liability account that is increasing.

“Flip” over the previous purchase transaction to undo it. Add the word “Returns” to the account name.

3. Return 10 of the items to the vendor.

Date Account Debit Credit ▼ Accounts Payable is a liability account that is decreasing

3 Accounts Payable 100

Purchases Returns 100 ▼ Purchases Returns is a temporary account (for an asset) that is decreasing.

4. Pay for the purchase (minus return/with the discount).

Date Account Debit Credit ▼ Accounts Payable is a liability account that is decreasing.

4 Accounts Payable 400

Cash 392 ▼ Cash is an asset account that is decreasing.

Purchases Discounts 8 ▲ Purchases Discounts is a temporary account (for

an asset) that is decreasing.

Similar to the perpetual system, at the beginning of the accounting period (such as a year), a merchandising company under the periodic system estimates how much of its sales will be returned during the year. Assume that transaction has been recorded.

The following three transactions are used for sales, actual returns, and receipt of payments from customers under the periodic inventory system.

5a. Sell 50 items on account for $15 each, n/30.

Date Account Debit Credit ▲ Accounts Receivable is an asset account that is increasing.

5a Accounts Receivable 750

Sales 750 ▲ Sales is a revenue account that is increasing. The estimate account is reduced since some of the returns actually occurred, so less is estimated to occur in the future.

6a. Customer returns 10 items.

Date Account Debit Credit ▼ Allowance for Sales Returns is a contra account

that is decreasing.

6a Allowance for Sales Returns 150

Accounts Receivable 150 ▼ Accounts Receivable is an asset account that is decreasing.

7. Receive payment for the sale (minus the return).

Date Account Debit Credit

7 Cash 600 ▲ Cash is an asset account that is increasing.

Accounts Receivable 600 ▼ Accounts Receivable is an asset account that is decreasing.

Notice that under the periodic system there is no corresponding adjustment for the amount of inventory at the time of a sale or a return. That is what makes this system different from the perpetual system. Running balances for the Cost of Merchandise Sold and Merchandising Inventory accounts are not maintained on an ongoing basis during the accounting period.

Therefore, at the end of the year, an entry must be made to record the total amount of cost of merchandise sold for the year and to adjust the Merchandising Inventory account to its current ending balance. This is done by deducting the ending inventory balance, which includes items that were not yet sold, from the total cost of goods available for sale during the year.

As an example, assume the following about a company’s inventory for the year.

Beginning inventory on January 1 $ 10,000

Purchases 30,000

Freight-in 5,000

Purchases Discounts (1,000)

Purchases Returns (2,000)

Ending inventory balance on December 31 8,000

Total cost of goods available for sale during the year is $42,000, determined by adding the first five amounts above. Of that $42,000 available for sale, only $8,000 remains in inventory at the end of the year based on a physical inventory count. That means that $34,000 of what was available must have been sold.

The $34,000 is the cost of goods sold amount for the year, and that amount must be journalized so that it ultimately appears on the company’s end-of-year

income statement. In the same journal entry, the four temporary accounts used in the periodic inventory system – Purchases, Freight-in, Purchases Discounts, and Purchases Returns – are closed to their related permanent account, Merchandise Inventory. Using the previous data, the journal entry would be as follows:

Account Debit Credit

Cost of Merchandise Sold 34,000 ▲ Cost of Merchandise Sold is an expense account increasing.Merchandise Inventory 8,000 ▼ Merchandise Inventory is an asset account that is decreasing.Purchases Discounts 1,000 ▼ Purchases Discounts is a temporary account decreasing.Purchases Returns 2,000 ▼ Purchases Returns is a temporary account that is decreasing.Purchases 30,000 ▼ Purchases is a temporary account that is decreasing.Freight-in 5,000 ▼ Freight-in is a temporary account that is decreasing.Merchandise Inventory 10,000 ▲ Merchandise Inventory is an asset account that is increasing.

3.5.1 Inventory Shrinkage

Under the perpetual inventory system, a business keeps a running total of its inventory balance at all times by debiting (adding to) Merchandise Inventory when items are purchased and crediting (subtracting from) Merchandise

Inventory when items are sold. With each transaction, the debit balance is updated.

Occasionally businesses will take a physical inventory count to determine if it actually has all items it thinks it has per its accounting records. Inventory

shrinkage is the difference that results when the amount of actual inventory

physically counted is less than the amount of inventory listed in the accounting records. Any shrinkage amount may be due to previous miscounts, loss, or theft.

When a shortage is discovered as a result of a physical inventory count, the following entry would be made to adjust the accounting records:

17. Discover an inventory shortage of $300.

Date Account Debit Credit ▲ Cost of Merchandise Sold is an expense account that is increasing. 17 Cost of Merchandise Sold 300

Merchandise Inventory 300 ▼ Merchandise Inventory is an asset

account that is decreasing. This is the same as the entry made when there is a sale; however, this transaction does not “match up” with any particular sale. Further investigation would take place if the amount of the shortage was significant.

In document Principles of Financial Accounting (Page 103-111)