2. Gr 11 Accounting - Inventories - Activity 2

Summary

The 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

00:00

📚 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.

05:01

🔄 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.

10:02

🧾 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.

15:04

📑 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.

20:04

🔍 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.

25:04

⏳ 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.

Keywords

💡Periodic Inventory System

The Periodic Inventory System is a method of accounting for inventory where the business only records the cost of goods sold at the end of an accounting period. This system is less time-consuming and may be cheaper to administer compared to the Perpetual Inventory System. In the video, it is contrasted with the Perpetual Inventory System, highlighting its advantages such as reduced administrative effort and suitability for businesses where tracking individual items is challenging.

💡Markup

Markup refers to the difference between the cost of an item and its selling price. In the context of the video, Pro Sport Clothing uses a markup of 65% on cost, which means they sell their sports items at 65% more than what they cost. The video discusses calculating the markup percentage achieved and whether the business is satisfied with it, relating to the company's profitability and pricing strategy.

💡Accounting Equation

The Accounting Equation is a fundamental concept in accounting that states Assets = Liabilities + Owner's Equity. It is used to analyze the impact of business transactions on a company's financial position. In the video, the equation is used to demonstrate how transactions affect the balance of assets, liabilities, and owner's equity, particularly in relation to the Periodic Inventory System.

💡Trading Stock

Trading Stock, also known as inventory, represents the goods a business has on hand for sale. In the video, the script discusses how trading stock is recorded in the accounting system, particularly in the context of the Periodic Inventory System, and how it affects the calculation of cost of sales and gross profit.

💡Cost of Sales

Cost of Sales is the total expense incurred in producing or purchasing goods that were sold during an accounting period. The video script explains how to calculate the cost of sales by adding the opening stock, purchases, carriage on purchases, and import duties, then subtracting the closing stock, which is crucial for determining the gross profit.

💡Gross Profit

Gross Profit is the difference between sales revenue and the cost of goods sold. It is an indicator of a company's profitability. In the video, the calculation of gross profit is discussed in relation to the markup percentage and the cost of sales, showing how it can be used to evaluate the business's financial performance.

💡Carriage on Purchases

Carriage on Purchases refers to the transportation costs associated with acquiring inventory. In the video, it is mentioned as an additional cost that is included in the calculation of the cost of sales, affecting the overall profitability of Pro Sport Clothing.

💡Import Duties

Import Duties are taxes levied on imported goods. In the context of the video, import duties are considered an expense that must be accounted for in the cost of sales, impacting the profitability of the business when calculating the gross profit.

💡Stock Turnover Rate

Stock Turnover Rate measures how quickly a company's inventory is sold and replaced over a period. It is calculated by dividing the cost of sales by the average inventory. The video script discusses this rate as an indicator of how efficiently Pro Sport Clothing manages its inventory, converting stock into cash.

💡General Ledger

The General Ledger is the central repository of accounting records for a business. It contains all financial transactions and balances of accounts. In the video, the general ledger is used to record and summarize transactions related to trading stock, purchases, and other accounts, providing a comprehensive view of the company's financial activities.

💡Debit and Credit

Debit and Credit are terms used in double-entry bookkeeping to record financial transactions. Debits increase assets and expenses, while credits increase liabilities and decrease assets and expenses. The video script uses these terms to explain how transactions are recorded in the accounting system, particularly in relation to the Periodic Inventory System.

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