Learning Objectives

Notes

2.1 To review and identify the types of local business enterprises: service, manufacturing, and merchandising. (COM)

In Module 1, students developed the concepts of each type of business. This is particularly relevant in Module 2, as they will be working through the accounting cycle for a merchandising firm as opposed to the accounting cycle for a service business discussed in Module 1.

2.2 To identify examples and examine the nature of merchandising businesses.

Students could brainstorm a list of businesses and then identify those that are merchandizing ones. Debates which arise when classifying can be a good learning experience.

2.3 To recognize that the merchandising portion of a business may be the primary source of revenue or the secondary source of revenue.

What is primary revenue? What is secondary revenue? Revenue sources of the businesses identified in Learning Objective 2.2 could be discussed to determine their primary and secondary revenue.

2.4 To discuss the role of merchandising (buying and selling) between producer, manufacturer, wholesaler, retailer, and consumer.

Discuss various examples of each business in the community. Remember businesses such as a dairy that buys milk from the producer, becomes the manufacturer of certain products, acts as a wholesaler, and may act as a retailer in door-to-door sales.

2.5 To interview an owner of a merchandising business in the community to discover how the business is handled. (IL)

Students may interview a business owner in the community. The types of businesses could vary so the class gets a good distribution of results. The questions may be sent to the business prior to the scheduled interview time for consideration. Possible questions are: How do you buy goods for resale? How many suppliers do you use?

Where do the goods come from or originate? How is the merchandise delivered to your place of business? How do you count inventory? How do you record the cost of inventory? What is the range of markup used for goods?

2.6 To realize that the difference between the acquisition price and the selling price must cover certain costs.

Although the purpose here is not a preliminary discussion to cost accounting, the idea that the difference between cost price and selling price may include: profit, overhead, storage, advertising, selling, delivering, salaries, etc. should be discussed. Some examples of desired profit may be given or the students may work through a simple percentage breakdown.

2.7 To explain the meaning of markup, margin, and markdown and perform some basic calculations. (NUM)

When retailers buy goods from wholesalers or manufacturers, the amount added to the cost price is called markup. This is a percentage of cost price. When the amount added to the cost price is expressed as a percent of retail, it is called margin.

Students may discuss why items may be marked down; for example, overstocked, out of season, due date, etc. Markdown is based on retail price. Give examples.

On the calculator, perform some basic calculations using markup (based on cost), margin (based on retail), and markdown (based on retail). Introduce special function keys where applicable. If spreadsheet software is available, students should use it.

Retail outlets often code merchandise to assist in markdown procedures. Students may find concrete examples of various merchandising schemes used in their community. These sources of information may be shared in the classroom. Students may share samples of tags, invoices, etc. which may contain the merchandise codes needed in markdown procedures.

Learning Objectives

Notes

2.8 To examine and use new accounts in the chart of accounts for a merchandising firm.

This should be used as a reference when introducing sales, purchases, merchandise inventory, etc. Sales and related accounts have account numbers beginning with 4, purchases and

related accounts have numbers beginning with 5, and expenses and related accounts have numbers beginning with 6.

2.9 To define and compute the balance of merchandise inventory in a merchandising firm. (NUM)

Introduce merchandise inventory as a current asset, defined as goods available for resale within an accounting period.

The relationship that the ending inventory (items not sold) of one period becomes the beginning inventory of the next period is important to reinforce. Examples of inventory in different businesses would be helpful.

Even if inventory is controlled by a bar code/optical character reader, physical inventory must still be taken at the end of the period to identify theft, spoilage, losses, etc.

Perpetual inventory should also be introduced and explained at this time. The types of inventory held in perpetual inventory would be large-ticket items such as TVs, cars, wheat, oil, and others. Students may give examples.

Students may compare and contrast periodic versus physical inventory.

Although the term subsidiary ledger may not be introduced until later in this module, the introduction of a card or computer record per inventory item may be useful. A mathematical exercise on the inventory card may be completed using the calculator.

Discuss the advantages of periodic and perpetual inventory regarding cost, ease of handling, computerization, and labour hours involved. Results should determine that perpetual is much more expensive and still requires a physical inventory at the end of the period. Refer to the note in the previous section regarding optical scanners.

Begin by explaining the only difference between the Income Statement for a service firm and that of a merchandising firm is the Cost of Goods Sold section. Analyze this section on an Income Statement and discuss.

At this point in time, students may compute Cost of Goods Sold in mathematical exercises. Students should be made aware that theft or loss of inventory is automatically calculated in Cost of Goods Sold.

At the beginning of a new period there is inventory on hand. Merchandise is sold throughout the period and is replaced with the purchase of new stock. The inventory at the end of the period is the amount unsold.

After viewing several Income Statements, students should realize that the term Gross Profit or Gross Margin is the difference between Revenue and Cost of Goods Sold.

Learning Objectives

Notes

A cash discount is a reduction of a bill to encourage the customer to pay promptly. Students should realize that there can be sales discounts and purchase discounts depending on whether the goods are being bought or sold.

Students should know the meaning of C.O.D. (Cash on Delivery), On Account or Charge, Net 30 days, Net 60 days, 2/10, n/30, 1/10, 2/30, n/60, etc.

Students may work through some examples of purchase invoices using purchases/purchase discounts/accounts payable accounts and through examples using sales/sales discounts/accounts receivable accounts.

A trade discount is a reduction from the list price or catalogue price. Why are trade discounts offered? Different prices are offered to different customers, for example, educational institutions. Students should realize that a trade discount is taken off a list price to attain the actual sale or purchase price of the merchandise. The actual price would be the amount recorded in the sales or purchases journal. Some calculations may be completed with trade discounts.

A catalogue may be used as an example of trade discounts. Students may use actual items and prices from the catalogue in their calculations.

When merchandise is sold, the revenue account for a merchandising business is called sales. Students should be shown the general journal entries for cash sales, credit or on account sales, and for credit card sales.

Sales Returns and Allowances is a contra Sales account. What does "contra" mean? Students could give reasons as to why goods would be returned to the seller or why the customer may be given an allowance on goods purchased. The concept of net sales may be introduced to students to see the relationship between sales and sales discounts and returns and allowances.

If a large balance is in this account, notice should be taken by management. What could be some solutions? Students may discuss in groups.

Source document: credit memorandum.

What is a credit memorandum? A credit memo is issued by the seller to credit or reduce the balance of the accounts receivable account.

Sales Discounts is another contra Sales account. It was discussed earlier in the module as being a cash discount used as an incentive for prompt payment.

Source document: credit memorandum which credits the seller's accounts receivable.

Review the concept of purchases. When goods are purchased for resale, the cost account recording the transaction is called Purchases; source document: purchase invoice.

Purchases may be on account or for cash. There is often a problem of students confusing purchases for expenses or assets for purchases of inventory. Students should be shown the general journal entry for a cash purchase and a purchase on account.

When goods are ordered, instructions should be clear as to how the goods are to be delivered. Because Transportation-In or Freight-In is closely related to the cost of Purchases, it is added to Purchases on the Income Statement. Discuss the terms FOB Destination (Free on Board Destination) and FOB Shipping Point (Free on Board

Shipping Point). Give examples and calculations for the total cost of an invoice with transportation added.

Purchase Returns and Allowances is a contra Purchases account. Again, students could give reasons why purchases may be returned or why an allowance for purchases may be given. The concept of net purchases may be introduced to the students. Source document: debit memo issued by the seller which debits (decreases) accounts payable.

Purchase Discounts is another contra Purchases account. It is a cash discount that should be received by the account payable by the last day of the discount period. Interestingly, the selling company regards this as a sales discount while the purchasing company regards this as a purchase discount.

What GAAPs relate to the area of Sales and Purchases? The Cost Principle suggests that the cash or market value of the goods is the amount recorded. Realization of Revenue Principle suggests that revenue should be recognized at the time it is earned and adjustments made for all discounts. The Matching Principle matches appropriate costs against revenue for a specific period of time. The Objectivity Principle holds that all transactions must be supported by objective evidence (source documents).

Learning Objectives

Notes

In diagram form, review the steps of the accounting cycle but explain the differences of a merchandising firm.

Steps:

1. Originating data; for example, sales and purchase related invoices, credit and debit memos, etc.

2. Journalize: cash receipts, cash payments, sales, purchases, general, or combination journal.

3. Post to Ledger: general and subsidiary.

4. Trial Balance and Worksheet.

5. Financial Statements: Classified Balance Sheet and Income Statement with Cost of Goods Sold.

6. Adjusting and Closing Entries.

7. Post-Closing Trial Balance.

2.17 Step 1: Originating Data: To understand that no entry should be made unless it has a supporting document.

Referring to the GAAP of Objectivity, students should realize that source documents in a merchandising firm include sales invoices, purchase invoices, credit and debit memos, bills, freight bills, cash receipts, cheque stubs, and many more. These should be briefly discussed as being relevant to a merchandising business.

A review of the general journal and the combination journal may be made here. However, students should be aware that if the business organization is large enough to use special journals, the general journal may only be used for opening, adjusting, closing entries, entries for Sales and Purchases Returns and Allowances, and other miscellaneous items. The synoptic/combination journal may or may not be used. Also, when using computerized accounting, there may be no special journals as such but that there may be one or two generic screens that will handle all transactions.

Sales Journal: contains all transactions involving sales of merchandise on account. The source documents used for this journal may be sales invoices, credit invoices, and charge sales slips depending on whether the journal used is a one-column journal or a columnar sales journal.

The credit terms and/or invoice number may be recorded as well as the amount.

Separate columns for GST and PST must be established in a Sales Journal as liability accounts.

Purchases Journal: contains all transactions involving purchases of merchandise on account.

The source documents used for the Purchases Journal are purchase invoices if using a one-column journal; however, many businesses keep a multi-column journal to record all acquisitions on account. The asset accounts would have special columns. The purchase invoice number may be written into the journal.

On a computerized system the purchases journal may be called the invoice register.

Cash Receipts Journal: All money received into the business must be carefully controlled and deposited promptly. All money is recorded into a cash receipts journal which usually has many columns suited to the firm's needs. (Cash control is dealt with in Module 4: Banking and Cash Control.) Source Documents: mail receipts, over-the-counter sales, cash register receipts, and others. The most common transactions are cash sales and cash received on account.

Cash Payments Journal: All money paid from the bank accounts must be carefully controlled and recorded in the cash payments journal. It is sometimes called the cash disbursements journal. The journal is usually a columnar journal suited to the needs of the firm. Source Document: the cheque stub. Examples may be given showing special columns i.e. money paid for purchases, account payable expenditures, etc.

In a larger company, the five-journal system may be used. However, a small business may only use one multi-column combination or synoptic journal to accommodate the specialized columns. An example may be useful, particularly if it comes from a local business or from a school club or activity.

Review the posting procedure with students. Total and prove journals at the end of a page or at the end of the accounting period. At the end of a page, students should be shown how to foot and cross-foot totals as well as how to carry totals forward to the next page. Total all columns and prove equality (debits = credits) using a calculator with a tape.

The concept of general and subsidiary ledgers may be introduced by indicating that the size of the business determines the number of ledgers used. If the business has a small number of accounts receivable and accounts payable, usually only a general ledger would be used.

Students should be aware that the general ledger is the book of final entry, used to prepare financial statements, used to sort transactions into appropriate accounts, etc.

Subsidiary ledgers are secondary ledgers/records containing specialized accounts. For example, accounts receivable (customers), accounts payable (vendors), inventory, payroll, and others may be in subsidiary ledgers. Students may think of other examples.

Students should be aware that in a manual system, records may be arranged alphabetically; however, in a computerized system, the program usually numbers customers and vendors as they are entered but it is able to sort accounts in numerous ways. For example, by name, location, by invoice due date, etc.

The process of posting to both the subsidiary and general ledger is of great importance. Many errors arising on the Trial Balance are the result of poor posting technique.

After posting at the end of an accounting period, students should prove the accuracy of posting by:

• working through problems to see that the total of all customers' accounts in the Accounts Receivable Ledger equals the total in the control Accounts Receivable account in the General Ledger. The same process must occur for the Accounts Payable subsidiary ledger
• preparing a Schedule of Accounts Receivable and a Schedule of Accounts Payable to prove equality using the proper format suggested in a recommended textbook
• preparing a Zero Proof or Quick Trial Balance of the General Ledger on a calculator tape in preparation for the next step in the accounting cycle. If the proof is unsuccessful, the same steps may be followed as described in Step 3 of the Accounting Cycle in Module 1.

If students are completing optional Module 12 (computerized accounting, merchandising firm) along with Module 2 they should perform the posting function manually several times to understand the process. Posting by computer is completed quickly and efficiently without any knowledge by the user of what process is taking place. Although the routine posting of journal entries to ledger accounts is one of the main advantages of accounting software, students must be aware of what process has taken place.

Learning Objectives

Notes

2.20 Step 4: Trial Balance/Worksheet: To prove the accuracy of the General Ledger by preparing a Trial Balance and to use the Worksheet to organize and plan information for the financial statements. (TL)

This process is a problem-solving technique essential to all bookkeeping functions.

The purpose of the Worksheet may be reviewed from Step 4 of the Accounting Cycle in Module 1. The heading must be in proper form and the Trial Balance should balance before completing the Worksheet.

The adjustments learned in Module 1 should be reviewed; namely, supplies used, insurance expired and others the teacher may have introduced. Remember, adjustments are an estimate of the expiration of the cost of assets and thus net income or loss becomes an estimate as well. The purposes of adjustments are to bring all accounts up to date and to emphasize compliance with GAAPs. The method used must suit the business concerned as adequately as possible.

The adjustments which students should be able to do include supplies, insurance and inventory. Merchandise Inventory is usually handled as an adjustment in the adjustment columns.

Teachers may wish to introduce, at a very basic level, the following additional adjustments for the Worksheet. More indepth coverage of these adjustments is contained in optional Module 9: Asset Analysis, which may complement the discussion here.

• Prepaid expenses: For example, adjustments, rent or advertising.
• Bad Debts or Doubtful Accounts: What is a bad debt? Why do we have bad debts? How can we avoid them? Should we aim for no bad debts at all? What does Canada Customs and Revenue Agency say about the amount of bad debt a company can claim? Briefly introduce the expense account and the allowance account (a contra account to Accounts Receivable).
• Depreciation: What is depreciation? What accounts are affected by depreciation? Briefly introduce the expense account and the Accumulated Depreciation account (a contra account to each fixed asset). Only the straight line method for calculating depreciation should be discussed here. Students should be aware that there are other methods for calculating depreciation.
• Interest Expense on loans outstanding.
• An adjustment for salaries owing but not paid at the end of the accounting period.
• An adjustment for unearned revenue such as interest on a bank account or term deposit.
• Others may include an adjustment for a late invoice.

Students could interview business people in the community to find their policies on depreciation, credit extension, and others, and then report back to the entire class.

Reversing entries may not be necessary at this level (just accumulate payables such as wages into a liability account and accumulate receivables such as interest into an asset account).

The concepts of real accounts, whose balances are carried into the next accounting period, and of nominal accounts, whose balances will be closed at the end of the accounting period, may be reviewed here in light of the new accounts in a merchandising firm. Real accounts including new contra accounts (Allowance and Accumulated) will be carried to the Balance Sheet columns of the Worksheet. Nominal accounts which include all sales and purchases accounts are carried to the Income Statement columns and the result (net income/loss) will be included in the Owners' Equity account.

2.21 Step 5: Prepare Financial Statements: To prepare a Balance Sheet, Income Statement and Statement of Owners' Equity for a merchandising firm. (IL)

Review Step 5 in Module 1 when preparing financial statements. The heading on the Income Statement indicates profit for an accounting period and the Balance Sheet shows balances on one specific date.

Prepare an Income Statement from the Worksheet of a merchandising firm. The revenue section has expanded to find Net Sales, Cost of Goods Sold section, and Gross Profit/Margin. Students should realize that Cost of Goods Sold is an expense to the business. The Expenses section may be classified into selling and administrative expenses and an Income from Operations line may be calculated before the overall Net Income/Loss of the firm. An example of a condensed income statement may be introduced but students should know that a Cost of Goods Sold Statement must accompany this format.

The Balance Sheet should be classified as it was in Module 1. New contra accounts will follow related assets.

A Statement of Owners' Equity or Capital Statement may be prepared showing additional investments, amount of withdrawals, and the increase/decrease to the worth of the owner.

Students may discuss why a Statement of Owner's Equity is necessary. What does it add to the information available to financial statements readers? What readers would be interested in this statement?

What do the financial statements say? Which statement shows financial worth? Which statement determines the reasons for net income/loss. Review the Cost of Goods Sold section with the class. What three factors cause a change in Owners' Equity (net income, withdrawals, additional investment)?

Students may discuss the use of financial statements by insiders, outsiders (including banks and creditors), government agencies, owners, employees, investors, and others. In an aboriginal context, issues such as the Band being the owner and the information requirements of Band members and various funding agencies, may be discussed.

Students could relate financial statements of the individual businesses. Students may research information for local and provincial organizations such as the Chamber of Commerce Awards, Saskatchewan Labour Force Development Board Training for Excellence Awards etc. to learn more about award-winning businesses.

Closing entries will enter net income/loss into the owners' equity account. The only new entry for a merchandising business is to eliminate the beginning merchandise inventory balance and record the ending merchandise inventory balance into the current asset account.

The purpose of adjusting entries should be reviewed from Step 6 in Module 1. These entries must be posted before general ledger nominal accounts will have a balance to be closed. The closing entry for merchandise inventory may be an adjusting entry as well.

Review the purpose of a Post-Closing Trial Balance. Follow the procedures described in Step 7 of Module 1 (Objective 1.34).

Students may work in groups to summarize and review the accounting cycle of a service firm and that of a merchandising firm. Relate to questions of cost in terms of bookkeeping time (invoicing, journalizing, preparation of statements, reporting net income/loss, and others).

Use a simulation to review the entire accounting cycle. If students have simulated their own merchandising firms as they progressed through the accounting cycle, they may be shared and tried. These simulations should be assessed by the teacher for content prior to the sharing.

Learning Objectives

Notes

The practice set may be 10 to15 hours in length and should use simulated source documents. The type of journals used would be pertinent to the type of business. Students should work independently. Frequent checks of students' work should be done to assure accuracy of data. An audit test may be administered at the end of the simulation.

A good understanding of the accounting cycle is very important prerequisite knowledge to automated accounting. Students should feel comfortable completing a manual practice set before attempting any computerized accounting procedures.

The practice set or major project should be adapted to the environment and the capabilities of the students. For example, if Module 2 is being taught in a First Nations school the source documents, journals, ledgers, etc. should be relevant to that community. A teacher may have students accumulate source documents and within several years, have a practice set suitable for the school community.