| Returned Sales | |||
| 19— | 19— | ||
| June 30 (Total) | 3,924.83 | June 30 Sales (G) | 3,924.83 |
| Sales Rebates and Allowances | |||
| 19— | 19— | ||
| June 30 (Total) | 392.48 | June 30 Sales (H) | 392.48 |
| Profit and Loss | |||
| 19— | 19— | ||
| June 30 Purchases (F) | 44,922.62 | June 30 Sales (I) | 60,965.90 |
To show the total cost of goods bought during the period, the freight-in of $560.25 is transferred or closed into Purchases. To show the “gross cost of goods to be accounted for,” amounting to $58,583.34, the inventory of January 1 of $10,125.67 is transferred to the debit side of Purchases account. To show the net cost of goods to be accounted for, the returned purchases and allowances are deducted from this gross cost by being transferred to the credit side of Purchases. The balance in Purchases account at this point, viz., $58,583.34 minus $2,393.32, or $56,190.02, indicates the net cost of goods to be accounted for.
This item of $56,190.02 is not indicated in the account, however, but is given here simply to make the discussion intelligible. Part of this $56,190.02 (net cost of goods to be accounted for), amounting to $11,267.40, is the cost value of the unsold goods according to the inventory of June 30, and the balance of $44,922.62 ($56,190.02 minus $11,267.40) constitutes therefore the cost of the goods sold. This final inventory is also shown as an asset on the debit side of Merchandise Inventory in the new section of the account, i.e., the portion of the account following the initial inventory section which has now been closed and ruled off as shown on [page 118].
Put in a somewhat different form, we may say that the cost of goods sold is found by subtracting from the gross cost of goods to be accounted for, $58,583.34, first the returns and the rebates, $2,393.32, and then the amount of the closing inventory of June 30, $11,267.40. The balance left of $44,922.62 represents the cost of goods sold. This balance is now transferred to the debit of Profit and Loss account.
All the transfer entries given above have their debits and credits determined as explained in [Chapter XIV]. The student should note that the same additions and subtractions are thus brought about in the Purchases account as are made arithmetically in the section of the profit and loss statement given over to cost of goods sold.
The Sales account is debited with the balances of the Returned, Sales and Sales Rebates and Allowances, thus showing a balance of net income from sales which is transferred to the credit of Profit and Loss. The Profit and Loss account then shows net income from sales on the credit side, and cost of goods sold on the debit side. The difference between the two sides is gross profit on sales. All of the merchandise accounts, except the Inventory account, are now balanced, and should be ruled off in the manner explained in [Chapter XIV].
The second illustration covers the case where the stock-in-trade record is kept in one mixed account called Merchandise. Using the same data as in the other illustration, the account appears as follows:
| Merchandise | |||
| 19— | 19— | ||
| Jan. 1 Inventory | 10,125.67 | June 30 Sales | 65,283.21 |
| June 30 Purchases | 47,897.42 | Returned Purchases | 2,125.40 |
| Returned Sales | 3,924.83 | ||
| Sales Rebates and Allow | 392.48 | Purchases Rebates and Allow | 267.92 |
| Inward Freight and Cartage | 560.25 | Inventory, June 30 | 11,267.40 |
| Profit and Loss | 16,043.28 | ||
| 78,943.93 | 78,943.93 | ||
| June 30 Inventory | 11,267.40 | ||
When the merchandise record is kept under separate accounts the freight-in is transferred to the debit of the Purchases account; but when a single mixed account is kept with merchandise, freight-in is usually entered directly to the debit of that account. To adjust the account when kept in this manner, the new inventory is entered to the credit of Merchandise. The balance of the Merchandise account now shows the gross profit on sales, $16,043.28. This is transferred to the credit of Profit and Loss. (It will be noted that this transferred item is identical with the balance of the Profit and Loss account of the first illustration.) The Merchandise account is now totaled and ruled off. On the debit side, beneath the ruling, the new inventory is entered, being the contra to the credit entry of $11,267.40 above the ruling. The equilibrium of debits and credits is thus maintained. In this open item of $11,267.40 the account shows an asset, the goods on hand June 30.
The handling of merchandise transactions according to the second illustration is not considered good accounting but is shown because it is frequently met with in bookkeeping practice.