Week 4 - Inventories

The differences between service and retail firms

The definition of inventory (AASB 102 - Inventories para 6)

Income measure for a retailer

  1. Sales Revenue - Cost of sales = Gross Profit
  1. Gross profit - operating expenses = Profit/ Loss

Perpetual Method (record the inflows and outflows of inventories continuously) so that in the end of each period => can determine the gain/ loss of inventory. In Perpetual Method, each transaction has 2 journal entries

Periodic method (initially record inventory as an expense)

4 most important things to remember

How to determine inventory and cost of goods sold in the end of each period ?

  1. NOT touch the cost of sales until the period end
  1. Use purchase expense and purchase returns ledger
  1. NOT touch the inventory until the period end
  1. Update Inventory and Cost of Sales at the end of each period
  1. Transfer purchases to COGS by Dr COGS and Cr Purchases
  1. Transfer Purchase Returns to COGS by Dr Purchases Returns and Cr COGS
  1. Transfer beginning inventory to COGS by Dr COGS and Cr Inventory
  1. Create Inventory Assets on hand and reduce COGS by Dr Inventory (end) and Cr COGS

Settlement Discount

When we GIVE a discount

When we GET a discount

  1. Dr Account Receivable and Cr Sales Revenue
  1. Dr Cash at Bank and Dr Discount Expense and Dr Account Receivable
  1. Dr Inventory and Cr Account Payable
  1. Dr Account Payable and Cr Cash at Bank and Cr Discount Revenue

GST (always paid by final consumers)

Calculating GST

Recording GST

  1. If transaction account does not have GST included => add 10% to the total
  1. If transaction amount has already included the GST => divided by 11 to get the GST amount

Sale with GST => Cr GST Collected (liability)

Purchase with GST => Dr GST Paid (assets)

If GST Paid > GST Collected => the government needs to pay you

If GST Collected < GST Paid => you need to pay the government