Week 3- ACCT1101

• Inventory

  Goods held by a company for sale in the ordinary course of business. For retailers, inventory typically includes finished goods purchased for resale.
• Retail operations

  Buying and selling of goods directly to consumers. Retailers purchase inventory from suppliers or manufacturers and sell them to customers at a markup.
• Income Statement for Retail Businesses

  • Revenue: Sales revenue from goods sold to customers
  • Cost of Goods Sold (COGS): Cost of inventory sold during the period
  • Gross Profit: Revenue minus COGS
  • Operating Expenses: Expenses related to running the retail business, such as rent, utilities, wages, and advertising
  • Net Income (or Loss): Gross profit minus operating expenses
• Accounting for Sales Transactions of Retail Businesses

  1. Sales Revenue: Recorded at the selling price of goods sold to customers, including GST (if applicable)

  2. Sales Returns: Recorded as a reduction of sales revenue and inventory when customers return goods

  3. Cash Discounts: Discounts offered to customers for early payment are recorded as a reduction of sales revenue

  4. Trade Discounts: Reductions in the selling price offered to customers based on negotiated terms are not recorded in the accounting records

  5. Freight Costs: Freight costs incurred to deliver goods to customers are included in the cost of inventory (COGS)
• Perpetual Inventory System


  Inventory and cost of goods sold are continuously updated as purchases and sales occur
• Periodic Inventory System


  Inventory purchases are recorded when made, and cost of goods sold is calculated at the end of the accounting period based on physical inventory counts
• Preparing Worksheets and Closing Accounts for Retail Businesses

  1. Worksheets summarize the transactions and adjustments made during the accounting period to prepare financial statements

  2. Closing entries transfer revenue and expense account balances to the income summary account and then to the retained earnings (or equity) account
• Detailed Income Statement for a Retail Business

  • Includes detailed breakdowns of sales revenue, cost of goods sold, gross profit, operating expenses, and net income
• Net Method of Recording Purchases and Sales with Settlement Discounts

  Purchases and sales are initially recorded at the gross amount, and any settlement discounts taken or granted are recorded as separate line items
• Profitability Analysis in Retail Businesses

  • Involves assessing the financial performance of a retail business by analyzing key metrics such as gross profit margin, operating profit margin, and net profit margin
  • Helps in decision-making by identifying areas of strength and weakness in the business operations and guiding strategic planning for improvement