2. Gr 11 Accounting - Inventories - Activity 2
Summary
TLDRThe script discusses the Periodic Inventory System used by Pro Sport Clothing, comparing its advantages and disadvantages with the Perpetual Inventory System. It covers the accounting equation's effects, ledger accounts completion, cost of sales calculation, markup percentage achievement, and stock turnover rate. The focus is on understanding inventory management and its impact on financial reporting.
Takeaways
- 📚 The focus of Activity 2 is on the Periodic Inventory System used by Pro Sport clothing, contrasting with the Perpetual Inventory System discussed in Activity 1.
- 🔍 Advantages of the Periodic Inventory System include being less time-consuming, potentially cheaper to administer, and suitable for businesses where individual item costs are hard to determine.
- ⚠️ Disadvantages include less control over stock, difficulty in determining available trading stock without a physical count, and challenges in detecting stock discrepancies.
- 💼 The accounting equation is affected by transactions, with increases shown as positive (+), decreases as negative (-), and no effect as zero (0).
- 🏦 A favorable bank balance is crucial in accounting, as it determines how payments and receipts are recorded in the equation.
- 📈 The general ledger accounts for trading stock, purchases, and carriage on purchases are essential in tracking financial activities.
- 📅 The cost of sales on September 30, 2022, is calculated by considering opening stock, purchases, carriage on purchases, and import duties, minus the closing stock.
- 📊 The markup percentage achieved is calculated by dividing gross profit by cost of sales and comparing it to the intended markup percentage of 65%.
- 💡 Possible reasons for achieving or not achieving the markup percentage include trade discounts, sales control, source document accuracy, and stock management.
- 💸 The stock turnover rate is calculated by dividing cost of sales by the average inventory (opening stock + closing stock / 2), indicating how quickly stock is converted into cash.
Q & A
What is the main focus of Activity 2 in the transcript?
-The main focus of Activity 2 is on the Periodic Inventory System used by Pro Sport clothing business, which sells sports items and uses a markup of 65% on cost.
What are the advantages of using a periodic inventory system as mentioned in the transcript?
-The advantages of using a periodic inventory system include being less time-consuming, potentially cheaper to administer, and suitable for businesses where it's difficult to determine the cost of individual items.
What are the disadvantages of a periodic inventory system according to the transcript?
-The disadvantages include less control over stock, difficulty in determining available trading stock without a physical count, and the inability to easily detect stock discrepancies because no movement of trading stock is recorded in the trading stock account.
How does a favorable bank balance affect the accounting equation in a periodic inventory system?
-A favorable bank balance means that any payments made or money received is regarded as an asset. If it were unfavorable, the bank would have been regarded as a current liability.
What is the purpose of completing the general ledger accounts for trading stock, purchases account, and the trading account in Activity 2.3?
-The purpose is to record and organize all financial transactions related to trading stock, purchases, and sales, which will help in understanding the business's financial position and performance over the period.
What is the formula to calculate the cost of sales on 30 September 2022 as per the transcript?
-The formula to calculate the cost of sales is Opening Stock + Purchases + Carriage on Purchases + Import Duties - Closing Stock.
What does calculating the markup percentage achieved tell us about the business's pricing strategy?
-Calculating the markup percentage achieved provides insight into whether the business is meeting its intended profit margins on sales and can indicate if the owner should be satisfied with the current pricing strategy.
How can the owner determine if they should be satisfied with the markup percentage achieved?
-The owner should compare the achieved markup percentage with the intended markup percentage. If the achieved percentage is higher, it indicates better than expected profit margins, and the owner should be satisfied.
What is the significance of calculating how quickly Pro Sport clothing converts stock into cash?
-Calculating the speed at which stock is converted into cash, or the stock turnover rate, is significant as it indicates the efficiency of the business in managing its inventory and generating cash flow from sales.
What is the formula to calculate the stock turnover rate as mentioned in the transcript?
-The formula to calculate the stock turnover rate is Cost of Sales divided by the Average Inventory (which is the sum of Opening Stock and Closing Stock divided by two).
What is the importance of understanding the accounting equation effects for each transaction in a periodic inventory system?
-Understanding the effects of each transaction on the accounting equation is crucial for accurate financial recording and analysis. It helps in determining the impact on assets, liabilities, equity, expenses, and revenues, ensuring the business's financial health is properly reflected.
Outlines
📚 Overview of Activity 2 and Periodic Inventory System
Activity 2 focuses on the periodic inventory system used by Pro Sport Clothing, which sells sports bibs with a 65% markup on cost. The script explains the task of listing the advantages and disadvantages of a periodic inventory system, comparing it to the perpetual inventory system discussed in Activity 1. It also outlines the need to show the effect on the accounting equation, complete ledger accounts, calculate cost of sales, markup percentage, and the speed of stock conversion to cash, along with the given opening balances and transactions for September 2022.
🔄 Advantages and Disadvantages of Periodic Inventory System
The script lists the advantages of a periodic inventory system, including being less time-consuming and potentially cheaper to administer, and suitability for businesses where individual item costs are difficult to determine. Disadvantages include less control over stock, the need for physical stock counts to determine available trading stock, difficulty in detecting theft or stock loss, and no record of stock movement in the trading stock account.
🧾 Effects on Accounting Equation for Various Transactions
The script explains how to show the effects of various transactions on the accounting equation for a business with a favorable bank balance. Detailed examples include purchasing trading stock, paying for delivery, recording cash sales with trade discounts, purchasing stock on credit, paying import duties, credit sales, stock taken for promotions, stock returns from suppliers and customers, correcting wrongly recorded purchases, and the owner returning stock taken for personal use. Each transaction's impact on assets, liabilities, and owner's equity is described.
📑 Posting Transactions to Ledger Accounts
Details on posting transactions to the ledger accounts are provided, starting with opening balances and totals for trading stock and purchases. The script explains the recording of various transactions in the purchases account and the general journal, including purchases on credit, stock taken for promotions, goods returned to suppliers, corrections of incorrect entries, and the owner's return of stock. The process of closing the purchases account and the impact on the trading account is also described.
🔍 Calculation of Cost of Sales and Markup Percentage
The script details the process of calculating the cost of sales and the markup percentage achieved. It outlines how to use the opening stock, purchases, carriage on purchases, import duties, and closing stock to calculate the cost of sales. The calculation of the markup percentage involves subtracting the cost of sales from sales to find the gross profit, then dividing by the cost of sales and multiplying by 100. The achieved markup is compared to the target, with reasons for potential deviations discussed.
⏳ Stock Turnover Rate and Conclusion
The script covers calculating the stock turnover rate by dividing the cost of sales by the average inventory (opening stock plus closing stock divided by two). The importance of understanding the periodic inventory system for grade 11 learners is emphasized. The script concludes with a motivational quote about the value of learning and a preview of the next activity.
Mindmap
Keywords
💡Periodic Inventory System
💡Markup
💡Accounting Equation
💡Trading Stock
💡Cost of Sales
💡Gross Profit
💡Carriage on Purchases
💡Import Duties
💡Stock Turnover Rate
💡General Ledger
💡Debit and Credit
Highlights
Introduction to Activity 2 focusing on the Periodic Inventory System for Pro Sport clothing.
Comparison between Periodic and Perpetual Inventory Systems, listing their advantages and disadvantages.
Less time-consuming and potentially cheaper administration of the Periodic Inventory System.
Lack of control over stock and difficulty in detecting stock discrepancies with the Periodic Inventory System.
Explanation of the accounting equation effects with increases, decreases, and no effects marked accordingly.
Importance of understanding a business's bank balance status when conducting the accounting equation.
Detailed account completion for trading stock, purchases, and trading accounts in the general ledger.
Calculation of the cost of sales on a specific date using the Periodic Inventory System.
Method to calculate the markup percentage achieved and its evaluation against the business's target markup.
Analysis of reasons for deviation in the achieved markup percentage from the target.
Calculation of how quickly Pro Sport clothing converts stock into cash, introducing the stock turnover rate.
Use of opening balances and transaction totals for September 2022 to illustrate inventory system processes.
Step-by-step walkthrough of transactions and their effects on the accounting equation.
Correction of incorrectly recorded transactions and their rectification in the general journal.
Finalization of the trading stock and purchases accounts with closing balances and their implications.
Construction of the trading account in a periodic inventory system with detailed components and calculations.
Emphasis on the importance of learning and its permanence as a personal asset.
Transcripts
we're going to look now at activity 2.
the focus will now be on the Periodic
inventory system Pro Sport clothing the
business sells Sports bips and uses a
markup of 65 on cost the business makes
use of the periodic inventory system
required list advantages and
disadvantages of a periodic inventory
system
if you remember back in Activity 1 the
focus was on a Perpetual inventory
system where you needed to list that
advantages and disadvantages using that
type of inventory system now you will
see it will be similar types of
questions but it will be based on the
Periodic inventory system
2.2 showed the effect on the accounting
equation
show an increase with a plus before the
amount a decrease with a minus before
the amount and no effect with a zero
note
do not show the net effect the business
has a favorable bank balance that is
important to understand when you're
doing the accounting equation because if
the business has a favorable bank
balance then bank if any payments is
made or any money is received it's
regarded as an asset if it said
unfavorable bank balance then it means
that bank would have been regarded as a
current liability
2.3 complete the following later
accounts in the general ledger the
trading stock the purchases account and
the trading account
2.4 calculate the cost of sales on 30
September 2022
.5 calculate the markup percentage
achieved comment on the markup
percentage achieved should the owner be
satisfied provide possible reasons for
the deviation and 2.6
calculate how quickly pro-sport clothing
convert this stock Into Cash
and then they provided you with
information with the opening balances
and totals and transactions for
September 2022
starting now with 2.1 we will need to
list the advantages and disadvantages of
a periodic inventory system if we first
look at the advantages it's less time
consuming
may be cheaper to administer
then the Perpetual inventory system
suitable for business where it's
difficult to determine the cost of an
individual item
disadvantages there's less control over
stock over our trading stock
available trading stock can only be
determined by physical stock count I've
got nothing to compare
the physical stock count with so it's
difficult to see if there is any stock
missing when we're using this type of
system that's why at this Advantage
fifth is not detected because no
movement after trading stock is recorded
in the trading stock account the value
of the physical stock take cannot be
compared to anything so this is the
downside of using a periodic inventory
system
question 2.2 so the effect on the
counting equation
so if we now look at the transactions
and remember the business as a favorable
bank balance
when we start now before we looking at
the transactions
remember date click this is a tool that
you can use if you're not a hundred
percent sure what effect will it have on
the accounting equation
the first transaction purchase trading
stock and paid 42 000 by efd now when
the payment is made it will always be
recorded in the cpj
from the cpj bank is always going to be
credited which means now in a periodic
inventory system the purchase account is
going to be debited
to show the effect on the counting
equation purchases is regarded as an
expense if my expense increase it means
it has a negative effect on the owner's
equity and payment was made so my assets
will be minus
number two
paid
3950 cash for the delivery of goods
purchase
in a periodic inventory system
if a payment is made it will still be
recorded in my cpj bank is going to be
credited but now we're going to open up
Carriage on purchases there's no
movement of trading stock recorded in
the trading stock account any additional
cost in getting that trading stock will
not be added to the trading stock
account we need to open an expense
account for that and that will be the
courage on purchases Carriage on
purchases it's regarded as an expense so
if my expense increase it will have a
negative effect the payment was made so
bank will be minus assets minus
number three
total cash sales
182
338 customers were granted 10 trade
discount on all cash purchases so it
means they pay 10 percent less than the
original selling price
now in a periodic inventory system the
cost of sales is calculated right at the
end
so it means that the only thing that
will be recorded is the selling price
this is Cash sales which means cash
receipts journal from the cash receipt
Journal bank is debited sales is
credited bank is regarded as an asset
because we have a favorable bank balance
so my asset will increase my income will
increase which means it will have a
positive effect on the owner's equity
number four
stock purchase uncreated 147 600 and
paid 28
110 for import duties
so first what is happening here when
we're buying on credit it means we owe
money to our suppliers it will be
recorded in my creditors Journal
from the creditors Journal credit is
control is always going to be credited
now account debited stock was purchased
which means we need to open up the
purchases account
purchases is regarded as an expense
which will increase
which has a negative effect on my
owner's equity and my liabilities is
going to increase
now import duties must be shown it's an
expense in a periodic inventory system
that incurred in getting that trading
stock
which means that credit is control is
credited account debited import duties
again import duties and expense if my
expense increase it has a negative
effect on the owner's equity
and my liabilities will be plus
transaction number five
credit sales to customers
274 200.
sales means we sold Goods on credit
which means it will be shown in the
debtors Journal
we
sold on credit monies owed to us and
those people those customers who owes us
money is called debtors so debtors
control will be debited
account credited sales
status control is regarded as an asset
so Plus
income will be plus which means it will
have a positive effect on the owner's
equity there's no cost of sales in a
periodic inventory system it will only
be calculated later on
number six
the owner took stock for promotions the
cost was 23
780. so we took stock from the business
but it's not for personal use it was for
promotions which means that we need to
open up advertisement and the purchase
account this will be recorded in the
general journal
advertising will be debited and my
purchase account will be credited
now advertising and the purchases
account is regarded as an expense so if
my expense increase it will have a
negative effect on the onus Equity if my
expense decrease it will have a positive
effect nothing with your assets nothing
with liabilities
number seven
stock return to the suppliers so it
means that we've decided we want to
return stock which we purchase on credit
to our suppliers this will be recorded
in the creditors allowance journal and
from the creditors allowance Journal
creditors control will always be debited
account created now is the purchases
account
Predators controls regarded as a
liability
purchased as an expense which means it
will be plus
27
812 because my expense decrease it will
have a positive effect and liabilities
miners
number eight
stock returned by customers fourteen
thousand one hundred so if customers
returned Goods to us it means that they
owe us less money
this means it will be shown in the
debtors allowance Journal account
debited data's allowances account
credited status control
my assets
is going to be minus because they're
always less money my expense status
allowances is regarded as an expense if
it increases it will have a negative
effect on the owner's equity
there's no cost of sales entry cost of
sales is only calculated at the end
number nine Goods purchased for
5670 was incorrectly recorded under
sundry expenses so we need to make a
correction
all Corrections is done in the general
journal so what is happening here goods
were purchase and was incorrectly shown
as sundry expense which means sundry
expense will need to be credited so that
the purchase account can be debited
account credited sundry expenses both is
classified as an expense which means if
my expense increase it will have a
negative effect on the owner's equity if
the expense decrease it does have a
positive effect on the owner's equity
nothing with your liabilities
number 10 the owner returned stock taken
for personal use with a cost of 850 so
the owner took from the business but now
decided that he's going to return that
which means that in my general journal
the purchases will now be debited
because the owner returned for goods
drawings is credited
drawings is regarded as an owner's
equity it will have a negative effect
sorry the drawings
is minus but because it's minus it will
have a positive effect on the owner's
equity the purchase account is an
expense which will be debited if my
expense is debited increases it has a
negative effect on the owner's equity
now we need to use all the transactions
that we've just completed in the
counting equation and we need to
complete the later accounts
so starting now with the opening
balances and totals trading stock is
regarded as an asset plus minus
purchases expense plus minus which means
that the balance brought down will
appear on the debit side for trading
stock and the total brought forward for
the purchases will be on the debit side
now the only items that's recorded in my
trading stock account is my opening
stock and my closing stock so that
balance brought down of 38
217 must be taken to the opening stock
account so trading stock is going to be
credited and opening stock would have
been debited
starting now with all the transactions
looking at the first one
cpj
with purchased trading stock from the
cpj the purchase account is going to be
debited by details is Bank 42 000.
on day four goods were purchased on
credit from the creditors Journal my
details is credited as control and the
total 146
147 600.
then transaction number six from the
general journal
trading stock was taken for promotions
for advertising which means that my
advertising account is going to be
debited account credited
purchases account with twenty three
thousand seven hundred and eighteen
on day seven
Goods will return to the supplier which
means from the creditors allowance
Journal my details is creditors control
and the amount twenty seven thousand
eight hundred and twelve
then we had transaction number nine so
we're looking for everywhere we weep
where we actually see the word purchases
day nine
sundry expenses was incorrectly debited
and we needed to correct that
by crediting the sundry expenses so that
the purchase account can be debited
an amount
5617.
and then we had the last one the owner
returned trading stock which he took for
personal use on the debit side from the
general journal 850.
once we've taken all the transactions
from the accounting equation and we've
posted it to the purchases account we
can close off the purchase account this
is an expense account which is closed
off to the trading account if you take
the credits out
the total minus everything there that
becomes your balancing figure which will
go to
the trading account
now the last transaction after
taken all of the above into account
the physical stock count on 30 September
2022 revealed stock of twenty seven
thousand eight hundred it means that
closing stock which is an expense
would have been credited and also be
regarded as an income a closing stock is
going to be credited
account debited for trading stock
account so we've got 27 800 left over
if I'm now close off the trading stock
account
we have a balance
of 27
800. the closing stock at the end of
last year or end of September will
become opening stock in October
now if you're not a hundred percent sure
please refer to the theory booklet
trading account in a periodic inventory
system this is what you need to study
you would always have on the debit side
the opening stock plus purchases plus
Carriage on purchases plus any other
additional cost like custom duties or
import duties any additional cost in
getting that trading stock will be added
on the credit side we would always have
sales and a reminder
debtors allowances must be closed off to
the sales account and then we'll have
our closing stock
make sure that you study the trading
account with a periodic inventory system
so if we start now with
finding our opening stock and now
closing stock we can get that from the
trading stock account for opening stock
was 38 270
and the closing stock was 27 800.
not looking at our sales remember status
allowances is closed off to my sales
sales consists out of cash and credit
sales so from the cash receipts Journal
our total sales
Plus from the data's Journal our total
credit sales
minus the debtors allowances
equals my total sales
our total purchases was calculated in
the purchases account remember we took
the debit side minus the credit side
this is an expense account which is
closed off to the trading account
so make sure that you use for answer
that you've calculated in here and you
transfer it correctly to the trading
account
transaction number two we have Carriage
on purchases
3950 and then if you look at look at
transaction number four import duties
was 28 110.
once we've taken all the totals to the
trading account we can now close off
this account stop by the credit side add
everything on the credit side minus
everything on the debit side that is my
gross profit which will be taken to the
profit and loss account
in question 2.4 they've asked us to
calculate the cost of sales now you've
actually got two options if they've
asked you to do the trading account from
the trading account if you take your
sales
mine is your gross profit it will equal
your cost of sales
opening stock plus purchases plus
Carriage on purchases plus import duties
minus closing stock equals your cost of
sales so now they've asked you
specifically to complete it in this
format so again to calculate your cost
of sales it's your opening stock plus
the purchases
plus Carriage on purchases
plus any other additional cost which is
now import duties
equals cost of stock available for sale
what do we need to subtract from that
our closing stock it must be shown in
Brackets that equals my cost of sales
make sure that you know this calculation
question 2.5
calculate the market percentage achieved
to calculate the markup percentage
achieved we need to take the sales Minus
cost of sales which is equal to your
gross profit divided by cost of sales
times a hundred so we've calculated in
our trading account for gross profit
which is taken to the profit and loss
account know that this represents for
gross profit divided by the cost of
sales which you've calculated times 100
equals 70 percent now right in the
beginning they said the business
has a markup percentage of 65 so comment
on the marker percentage achieved should
the owner be satisfied yes
the business did achieve the aimed
markup of 65 on cost so now possible
reasons think about reasons why we do
not achieve our end markup and if we now
did achieve our end markup and it was
even better then you just mentioned the
opposite this means less trade discount
were given to customers better
controlled sales at lower prices than
intended
less mistakes on Source documents or in
the books better control over our
trading stock
so those are all possible reasons if we
look now at 2.6 calculate how quickly
Pro Sport clothing convert the stock
into cash when you see this type of
question you should always know but this
talks about the stock turnover rate
and when we want to calculate our stock
turnover rate
we need to take our
inventory and they didn't specifically
set the closing balance or any of that
so when we're looking at that it's
always our average inventory which means
it's the beginning plus the end divided
by two
so here we've got now our opening stock
and we've got our closing stock
we also need our cost of sales
here we've calculated our cost of sales
this is why we're using this table now
for us to complete 2.6 so we start with
the cost of sales divided by your
average inventory
that equals seven comma 9 times
again make sure you go through your
theory booklet periodic inventory
systems is new to grade 11 learners
I want to leave you with this quote the
beautiful thing about learning is that
no one can take it away from you
next we're going to do activity free
have a wonderful day
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