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6. Accounting for Merchandising Businesses. Distinguish between the activities and financial statements of service and merchandising businesses. 1. Describe and illustrate the financial statements of a merchandising business. 2.

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Accounting for merchandising businesses

6

Accounting for Merchandising Businesses


Click to edit master title style

Distinguish between the activities and financial statements of service and merchandising businesses.

1

Describe and illustrate the financial statements of a merchandising business.

2

Describe and illustrate the accounting for merchandising transactions including: sale of merchandise; purchase of merchandise; freight, sales taxes, and trade discounts; dual nature of merchandising transactions.

3

Click to edit Master title style

Accounting for Merchandising Businesses

After studying this chapter, you should be able to:

  • Click to edit Master text styles

    • Second level

      • Third level

        • Fourth level

          • Fifth level

6-2


Accounting for merchandising businesses

4

Describe the adjusting and closing process for a merchandising business.

Accounting for Merchandising Businesses (continued)

After studying this chapter, you should be able to:

6-3


Accounting for merchandising businesses

1

Distinguish between the activities and financial statements of service and merchandising businesses.

6-4


Accounting for merchandising businesses

1

Nature of Merchandising Businesses

Service Business

Fees earned$XXX

Operating expenses–XXX

Net income$XXX


Accounting for merchandising businesses

1

Nature of Merchandising Businesses

Merchandising Business

Sales$XXX

Cost of Merchandise Sold–XXX

Gross Profit$XXX

Operating Expenses–XXX

Net Income$XXX


Accounting for merchandising businesses

1

When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold.


Accounting for merchandising businesses

1

Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.


Accounting for merchandising businesses

Follow My Example 6-1

The gross profit is $490,000 ($250,000 + $975,000 –$735,000).

Follow My Example 6-1

For Practice: PE 6-1A, PE 6-1B

1

Example Exercise 6-1

Gross Profit

During the current year, merchandise is sold for $250,000 cash and for $975,000 on account. The cost of the merchandise sold is $735,000. What is the amount of the gross profit?

6-9


Accounting for merchandising businesses

1


Accounting for merchandising businesses

2

Describe and illustrate the financial statements of a merchandising business.

6-11


Accounting for merchandising businesses

2

Multiple-Step Income Statement

The multiple-step income statement contains several sections, subsections, and subtotals.


Accounting for merchandising businesses

Exhibit 1

2

Multiple-Step Income Statement

(continued on Slide 19)


Accounting for merchandising businesses

2

The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.


Accounting for merchandising businesses

2

Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.


Accounting for merchandising businesses

2

Sales discountsare granted by the seller to customers for early payment of amounts owed.


Accounting for merchandising businesses

2

Net salesis determined by subtracting sales returns and allowances and sales discounts from sales.


Accounting for merchandising businesses

2

The cost of merchandise sold is the cost of the merchandise sold to customers.


Accounting for merchandising businesses

Exhibit 1

2

Multiple-Step Income Statement (continued)

(continued on Slide 28)


Accounting for merchandising businesses

2

The buyer may return merchandise to the seller (apurchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (apurchase allowance).


Accounting for merchandising businesses

2

You have seen how sellers may offer customers sales discounts for early payment of their bills. From the buyer’s perspective, such discounts are referred to as purchase discounts.


Accounting for merchandising businesses

2

If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand, a periodic inventory system is being used.


Accounting for merchandising businesses

2

Under the perpetual inventory system of accounting, the amounts of inventory available for sale and sold are continuously (perpetually) updated in the inventory records.


Accounting for merchandising businesses

Exhibit 2

2

Cost of Merchandise Sold


Accounting for merchandising businesses

2

Selling expenses are incurred directly in the selling of merchandise.

  • Sales salaries

  • Store supplies used

  • Depreciation of store equipment

  • Delivery expense

  • Advertising


Accounting for merchandising businesses

2

Administrative expenses sometimes called general expenses, are incurred in the administration or general operation of the business.

  • Office salaries

  • Depreciation of office equipment

  • Office supplies used


Accounting for merchandising businesses

2

  • Other income is revenue from sources other than the primary operating activity of a business.

  • Other expenseis an expense that cannot be traced directly to the normal operations of the business.


Accounting for merchandising businesses

Exhibit 1

2

Multiple-Step Income Statement (concluded)


Accounting for merchandising businesses

2

Example Exercise 6-2

Cost of Merchandise Sold

Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2.

Merchandise Inventory, May 1$121,200

Merchandise Inventory, May 31142,000

Purchases985,000

Purchases Returns and Allowances23,500

Purchases Discounts21,000

Transportation In11,300

6-29


Accounting for merchandising businesses

Follow My Example 6-2

For Practice: PE 6-2A, PE 6-2B

2

Example Exercise 6-2 (continued)

Merchandise Inventory, May 1$ 121,200

Purchases$985,000

Less: Purchases ret. and allow.$23,500

Purchases discounts 21,000 44,500

Net purchases$940,500

Add transportation in 11,300

Cost of merchandise purchased 951,800

Merchandise available for sale$1,073,000

Less merchandise inventory, May 31 142,000

Cost of merchandise sold$ 931,000

6-30


Accounting for merchandising businesses

2

An alternative form of income statement is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues.


Accounting for merchandising businesses

Exhibit 3

2

Single-Step Income Statement


Accounting for merchandising businesses

Exhibit 4

2

Statement of Owner’s Equity for Merchandising Business


Accounting for merchandising businesses

Exhibit 5

2

Report Form of Balance Sheet

(Continued)


Accounting for merchandising businesses

Exhibit 5

2

Report Form of Balance Sheet (continued)


Accounting for merchandising businesses

3

Describe and illustrate the accounting for merchandise transactions including:

6-36


Accounting for merchandising businesses

3

  • Sale of merchandise

  • Purchase of merchandise

  • Freight, sales taxes, and trade discounts

  • Dual nature of merchandise transactions

6-37


Accounting for merchandising businesses

Exhibit 6

3

Chart of Accounts for NetSolutions Merchandising Business


Accounting for merchandising businesses

3

Cash Sales

On January 3, NetSolutions sold $1,800 of merchandise for cash.


Accounting for merchandising businesses

3

Cash Sales

Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are recorded. The cost of merchandise sold on January 3 is $1,200.


Accounting for merchandising businesses

3

Credit Card Sales

Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 1.


Accounting for merchandising businesses

3

Sales on Account

On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.


Accounting for merchandising businesses

3

Sales Discounts

The terms for when payments for merchandise are to be made, are called credit terms. If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay.


Accounting for merchandising businesses

Exhibit 7

3

Invoice

Wireless

PC Card


Accounting for merchandising businesses

Exhibit 8

3

Credit Terms


Accounting for merchandising businesses

3

Receipts on Account

On January 22, NetSolutions receives the amount due, less the 2 percent discount.

$1,500 x .02


Accounting for merchandising businesses

3

Credit Memorandum

A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable.


Accounting for merchandising businesses

Exhibit 9

3

Credit Memo


Accounting for merchandising businesses

3

On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.


Accounting for merchandising businesses

3

Example Exercise 6-3

Sales Transactions

Journalize the following merchandise transactions:

  • Sold merchandise on account, $7,500 with terms of 2/10, n/30. The cost of the merchandise sold was $5,625.

  • Received payment less the discount.

6-50


Accounting for merchandising businesses

Follow My Example 6-3

For Practice: PE 6-3A, PE 6-3B

3

Example Exercise 6-3 (continued)

Accounts Receivable…………….7,500

Sales……………………………..7,500

Cost of Merchandise Sold……….5,625

Merchandise Inventory……….5,625

Cash………………………………….7,350

Sales Discounts……………………150

Accounts Receivable………….7,500

6-51


Accounting for merchandising businesses

3

Purchase Merchandise for Cash

*

*Assumes a perpetual inventory system is used.


Accounting for merchandising businesses

3

Purchase Merchandise on Account

*

*Assumes a perpetual inventory system is used.

We will assume a perpetual inventory system is used throughout the chapter. The periodic inventory system is discussed in Appendix 2.


Accounting for merchandising businesses

3

Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions pays the amount due, less the discount, on March 22.


Accounting for merchandising businesses

Discount of 2% on $3,000$60.00

Interest for 20 days at the rate

of 6% on $2,940– 9.80

Savings from borrowing$50.20

3

NetSolutions borrows cash at an annual interest rate of 6%. Should the firm borrow cash to pay the invoice within the discount period?

YES


Accounting for merchandising businesses

3

3

Discount Taken


Accounting for merchandising businesses

3

Discount Not Taken

Assume that NetSolutions pays the invoice on April 11.


Accounting for merchandising businesses

3

A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.


Accounting for merchandising businesses

3

When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, that is a purchases allowance.


Accounting for merchandising businesses

Exhibit 10

3

Debit Memo


Accounting for merchandising businesses

3

NetSolutions receives the delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debitmemorandum #18 (also called a debit memo) is issued to Maxim Systems.


Accounting for merchandising businesses

3

NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 10 as follows:


Accounting for merchandising businesses

3

Price Allowance

On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.


Accounting for merchandising businesses

3

NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link on May 4.


Accounting for merchandising businesses

3

On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.


Accounting for merchandising businesses

3

Example Exercise 6-4

Purchase Transactions

Rofles Company purchased merchandise on account from a supplier for $11,500, terms 2/10, n/30. Rofles Company returned $3,000 of the merchandise and received full credit.

If Rofles Company pays the invoice within the discount period, what is the amount of cash required for the payment?

Under a perpetual inventory system, what account is credited by Rofles Company to record the return?

6-66


Accounting for merchandising businesses

For Practice: PE 6-4A, PE 6-4B

Follow My Example 6-4

3

Example Exercise 6-4 (continued)

$8,330. Purchase of $11,500 less the return of $3,000 less the discount of $170 [($11,500 – $3,000) × 2%].

Merchandise inventory

6-67


Accounting for merchandising businesses

3

Freight

If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, it is said to be FOB (free on board) shipping point.


Accounting for merchandising businesses

3

On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50.


Accounting for merchandising businesses

3

If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB (free on board) destination.


Accounting for merchandising businesses

3

On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. NetSolutions pays freight of $40.


Accounting for merchandising businesses

3


Accounting for merchandising businesses

3

On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost of the merchandise sold is $360.


Accounting for merchandising businesses

3


Accounting for merchandising businesses

Exhibit 11

3

Freight Terms


Accounting for merchandising businesses

3

Example Exercise 6-5

Freight Terms

Determine the amount to be paid in full settlement of each of invoices (a) and (b), assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period.

Returns and Allowances

Freight Paid by Seller

Merchandise

Freight Terms

a. $4,500$200FOB shipping point, $ 800 1/10, n/30

$5,00060FOB destination, 2,500 2/10, n/30

6-76


Accounting for merchandising businesses

For Practice: PE 6-5A, PE 6-5B

Follow My Example 6-5

3

Example Exercise 6-5 (continued)

$3,863. Purchase of $4,500 less return of $800 less the discount of $37 [($4,500 – $800) × 1%] plus $200 of shipping.

$2,450. Purchase of $5,000 less return of $2,500 less the discount of $50 [($5,000 – $2,500) × 2%].

6-77


Accounting for merchandising businesses

3

Sales Taxes

On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.


Accounting for merchandising businesses

3

Sales Taxes

On a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected.


Accounting for merchandising businesses

3

Trade Discounts

When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts.


Accounting for merchandising businesses

3

Dual Nature of Merchandise Transactions

Each merchandising transaction affects a buyer and a seller. In the following illustrations, we show how the same transactions would be recorded by both the seller and the buyer.

July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,500.


Accounting for merchandising businesses

3

Scully Company (Seller)

Accounts Receivable—Burton Co.7,500

Sales7,500

Cost of Merchandise Sold4,500

Merchandise Inventory4,500

Burton Company (Buyer)

Merchandise Inventory.7,500

Accounts Payable—Scully Co.7,500


Accounting for merchandising businesses

3

July 2. Burton Company paid transportation charges of $150 on the July 1 purchase from Scully Company.


Accounting for merchandising businesses

3

Scully Company (Seller)

No entry.

Burton Company (Buyer)

Merchandise Inventory150

Cash150


Accounting for merchandising businesses

3

July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.


Accounting for merchandising businesses

3

Scully Company (Seller)

Accounts Receivable—Burton Co.5,000

Sales5,000

Cost of Merchandise Sold3,500

Merchandise Inventory3,500

Burton Company (Buyer)

Merchandise Inventory.5,000

Accounts Payable—Scully Co.5,000


Accounting for merchandising businesses

3

July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.


Accounting for merchandising businesses

3

Scully Company (Seller)

Delivery Expense250

Cash250

Burton Company (Buyer)

No entry.


Accounting for merchandising businesses

3

July 13. Scully Company issued Burton Company a credit memorandum for merchandise returned, $1,000. The cost of the merchandise returned was $700.


Accounting for merchandising businesses

3

Scully Company (Seller)

Sales Returns and Allowances1,000

Accounts Receivable—Burton Co.1,000

Merchandise Inventory700

Cost of Merchandise Sold700

Burton Company (Buyer)

Accounts Payable—Scully Co.1,000

Merchandise Inventory1,000


Accounting for merchandising businesses

3

July 15. Scully Company received payment from Burton Company for purchase of July 5.


Accounting for merchandising businesses

3

Scully Company (Seller)

Cash4,000

Accounts Receivable—Burton Co.4,000

Burton Company (Buyer)

Accounts Payable—Scully Co.4,000

Cash4,000


Accounting for merchandising businesses

3

July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.


Accounting for merchandising businesses

3

Scully Company (Seller)

Accounts Receivable—Burton Co.12,000

Sales12,000

Accounts Receivable—Burton Co.500

Cash500

Cost of Merchandise Sold7,200

Merchandise Inventory7,200

Burton Company (Buyer)

Merchandise Inventory12,500

Accounts Payable—Scully Co.12,500


Accounting for merchandising businesses

3

July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% × $12,000).


Accounting for merchandising businesses

3

Scully Company (Seller)

Cash12,260

Sales Discounts240

Accounts Receivable—Burton Co.12,500

Burton Company (Buyer)

Accounts Payable—Scully Co.12,500

Merchandise Inventory240

Cash12,260


Accounting for merchandising businesses

3

Example Exercise 6-6

Transactions for Buyer and Seller

Sievert Co. sold merchandise to Bray Co. on account, $11,500, terms 2/15, n/30. The cost of the merchandise sold is $6,900. Sievert Co. issued a credit memorandum for $900 for merchandise returned and later received the amount due within the discount period. The cost of the merchandise returned was $540. Journalize Sievert Co.’s and Bray Co.’s entries for the payment of the amount due.

6-97


Accounting for merchandising businesses

Bray Company Journal Entries:

Accounts Payable—Sievert Co. ($11,500 – $900)……...10,600

Merchandise Inventory [($11,500 – $900) × 2%]……212

Cash ($11,500 – $900 – $212)……………....................10,388

For Practice: PE 6-6A, PE 6-6B

Follow My Example 6-6

3

Example Exercise 6-6 (continued)

Cash ($11,500 – $900 – $212)……………………………..10,388

Sales Discounts [($11,500 – $900) × 2%]….....................212

Accounts Receivable—Bray Co ($11,500 – $900)…10,600

6-98


Accounting for merchandising businesses

4

Describe the adjusting and closing process for a merchandising business.

6-99


Accounting for merchandising businesses

4

Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory. If the balance of the Merchandise Inventory account is larger than the total amount of the merchandise count, the difference is often called inventory shrinkage or inventory shortage.


Accounting for merchandising businesses

4

NetSolutions’ inventory records indicate the following on December 31, 2011:

Dec. 31, 2011

Account balance of Merchandise Inventory$63,950

Physical merchandise inventory on hand 62,150

Inventory shrinkage$ 1,800


Accounting for merchandising businesses

4

At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry:


Accounting for merchandising businesses

4

Step 1: Closing Entries

Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary.


Accounting for merchandising businesses

4

Step 2: Closing Entries

Credit each temporary account with a debit balance, such as an expense, for the balance and credit Income Summary.


Accounting for merchandising businesses

4

Step 3: Closing Entries

Debit Income Summary for the amount of its balance (net income) and credit the owner’s equity account.


Accounting for merchandising businesses

4

Step 4: Closing Entries

Debit the owner’s capital account for the balance of the drawing account and credit the drawing account.


Accounting for merchandising businesses

4

NetSolutions’ Income Summary account after the closing entries have been posted is as follows:


Accounting for merchandising businesses

4

Example Exercise 6-7

Inventory Shrinkage

Pulmonary Company’s perpetual inventory records indicate that $382,800 of merchandise should be on hand on March 31, 2010. The physical inventory indicates that $371,250 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Pulmonary Company for the year ended March 31, 2010.

6-108


Accounting for merchandising businesses

For Practice: PE 6-7A, PE 6-7B

Follow My Example 6-7

4

Example Exercise 6-7 (continued)

Mar. 31 Cost of Merchandise Sold………. 11,550

Merchandise Inventory……….11,550

Inventory shrinkage ($382,800 – $371,250).

6-109


Accounting for merchandising businesses

Appendix 1:

Accounting Systems for Merchandisers

6-110


Accounting for merchandising businesses

Manual Accounting Systems

Special JournalType of Transaction

Sales journalSales on account

Purchases journalPurchases on account

Cash receipts journalCash receipts

Cash payments journalCash payments


Accounting for merchandising businesses

Exhibit 12

Sales Journal for a Merchandising Business


Accounting for merchandising businesses

Exhibit 13

Purchases Journal for a Merchandising Business


Accounting for merchandising businesses

Exhibit 14

Cash Receipts Journal for a Merchandising Business


Accounting for merchandising businesses

Exhibit 15

Cash Payments Journal for a Merchandising Business


Accounting for merchandising businesses

Exhibit 16

Enter Bills Form


Accounting for merchandising businesses

Exhibit 17

Create Invoice Form


Accounting for merchandising businesses

Appendix 2:

The Periodic Inventory System

6-118


Accounting for merchandising businesses

Exhibit 18

Determining Cost of Merchandise Sold Using the Periodic System


Accounting for merchandising businesses

Exhibit 19

Chart of Accounts Under the Periodic Inventory System


Accounting for merchandising businesses

Exhibit 20

Transactions Using the Periodic and Perpetual Inventory Systems


Accounting for merchandising businesses

Exhibit 20

Transactions Using the Periodic and Perpetual Inventory Systems (continued)


Accounting for merchandising businesses

Closing Entries for NetSolutions


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