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6
Accounting for
Merchandising Businesses
Accounting for Merchandising Businesses
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After studying this chapter, you should be able to:
• Click to edit Master text styles
Distinguish between the activities and
1
– Second
level
financial
statements of service and
merchandising
businesses.
• Third
level
2
3
6-2
– Fourth level
Describe
and illustrate the financial
» Fifth level
statements
of a merchandising business.
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.
Accounting for Merchandising Businesses (continued)
the adjusting
and
closing
After
studying this
chapter, you
should
be able to:
4 Describe
process for a merchandising business.
6-3
1
Distinguish between the
activities and financial
statements of service and
merchandising businesses.
6-4
1
Nature of Merchandising
Businesses
Service Business
Fees earned
Operating expenses
Net income
6-5
$XXX
–XXX
$XXX
1
Nature of Merchandising
Businesses
Merchandising Business
Sales
Cost of Merchandise Sold
Gross Profit
Operating Expenses
Net Income
6-6
$XXX
–XXX
$XXX
–XXX
$XXX
1
When merchandise is sold, the revenue
is reported as sales, and its cost is
recognized as an expense called cost
of merchandise sold.
6-7
1
Merchandise on hand (not
sold) at the end of an
accounting period is called
merchandise inventory.
6-8
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?
Follow My Example 6-1
The gross profit is $490,000 ($250,000 + $975,000 –
Follow
My Example 6-1
$735,000).
For Practice: PE 6-1A, PE 6-1B
6-9
6-9
1
6-10
2
Describe and illustrate
the financial statements
of a merchandising
business.
6-11
2
Multiple-Step Income Statement
The multiple-step income
statement contains several
sections, subsections, and
subtotals.
6-12
2
Exhibit 1
Multiple-Step Income Statement
(continued on Slide 19)
6-13
2
The Sales account provides
the total amount charged to
customers for merchandise
sold, including cash sales
and sales on account.
6-14
2
Sales returns and allowances
are granted by the seller to
customers for damaged or
defective merchandise.
6-15
2
Sales discounts are granted
by the seller to customers for
early payment of amounts
owed.
6-16
2
Net sales is determined by
subtracting sales returns
and allowances and sales
discounts from sales.
6-17
2
The cost of merchandise sold
is the cost of the merchandise
sold to customers.
6-18
2
Exhibit 1
Multiple-Step Income Statement (continued)
(continued on Slide 28)
6-19
2
The buyer may return merchandise
to the seller (a purchase return),
or the buyer may receive a
reduction in the initial price at
which the merchandise was
purchased (a purchase allowance).
6-20
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.
6-21
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.
6-22
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.
6-23
2
Exhibit 2
6-24
Cost of Merchandise Sold
2
Selling expenses are incurred directly
in the selling of merchandise.
• Sales salaries
• Store supplies used
• Depreciation of store
equipment
• Delivery expense
• Advertising
6-25
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
6-26
2
• Other income is revenue from
•
6-27
sources other than the primary
operating activity of a business.
Other expense is an expense that
cannot be traced directly to the
normal operations of the business.
2
Exhibit 1
MultipleStep
Income
Statement
(concluded)
6-28
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 31
142,000
Purchases
985,000
Purchases Returns and Allowances
23,500
Purchases Discounts
21,000
Transportation In
11,300
6-29
6-29
Example Exercise 6-2 (continued)
2
Follow My Example 6-2
Merchandise Inventory, May 1
Purchases
Less: Purchases ret. and allow. $23,500
Purchases discounts
21,000
Net purchases
Add transportation in
Cost of merchandise purchased
Merchandise available for sale
Less merchandise inventory, May 31
Cost of merchandise sold
$ 121,200
$985,000
44,500
$940,500
11,300
951,800
$1,073,000
142,000
$ 931,000
For Practice: PE 6-2A, PE 6-2B
6-30
6-30
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.
6-31
2
Exhibit 3
6-32
Single-Step Income Statement
2
Exhibit 4
6-33
Statement of Owner’s Equity
for Merchandising Business
2
Exhibit 5
6-34
Report Form of Balance Sheet
(Continued)
2
Exhibit 5
6-35
Report Form of Balance Sheet (continued)
3
Describe and illustrate
the accounting for
merchandise
transactions including:
6-36
6-36
3
• Sale of merchandise
• Purchase of merchandise
• Freight, sales taxes, and trade
discounts
• Dual nature of merchandise
transactions
6-37
6-37
3
Exhibit 6
6-38
Chart of Accounts for NetSolutions
Merchandising Business
3
Cash Sales
On January 3, NetSolutions sold $1,800 of
merchandise for cash.
6-39
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.
6-40
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.
6-41
3
Sales on Account
On January 12, NetSolutions sold merchandise
on account for $510. The cost of merchandise
sold was $280.
6-42
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.
6-43
3
Exhibit 7
Invoice
Wireless
PC Card
6-44
3
Exhibit 8
6-45
Credit Terms
3
Receipts on Account
On January 22, NetSolutions receives the
amount due, less the 2 percent discount.
$1,500 x .02
6-46
3
Credit Memorandum
A credit memorandum, often
called a credit memo, authorizes
a credit to (decreases) the
buyer’s account receivable.
6-47
3
Exhibit 9
6-48
Credit Memo
3
On January 13, issued Credit Memo 32 to Krier
Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.
6-49
3
Example Exercise 6-3
Sales Transactions
Journalize the following merchandise
transactions:
a. Sold merchandise on account, $7,500
with terms of 2/10, n/30. The cost of the
merchandise sold was $5,625.
b. Received payment less the discount.
6-50
6-50
Example Exercise 6-3 (continued)
3
Follow My Example 6-3
a. Accounts Receivable……………. 7,500
Sales……………………………..
7,500
Cost of Merchandise Sold………. 5,625
Merchandise Inventory……….
5,625
b. Cash…………………………………. 7,350
Sales Discounts……………………
Accounts Receivable………….
150
7,500
For Practice: PE 6-3A, PE 6-3B
6-51
6-51
3
Purchase Merchandise
for Cash
*
*Assumes a perpetual inventory system is used.
6-52
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.
6-53
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.
6-54
3
NetSolutions borrows cash at an annual interest
rate of 6%. Should the firm borrow cash to pay
the invoice within the discount period?
Discount of 2% on $3,000
Interest for 20 days at the rate
of 6% on $2,940
Savings from borrowing
6-55
YES
$60.00
– 9.80
$50.20
3
3
Discount Taken
6-56
3
Discount Not Taken
Assume that NetSolutions pays the
invoice on April 11.
6-57
3
A purchases return involves
actually returning merchandise
that is damaged or does not meet
the specifications of the order.
6-58
3
When the defective or
incorrect merchandise is
kept by the buyer and
the vendor makes a
price adjustment, that is
a purchases allowance.
6-59
3
Exhibit 10
6-60
Debit Memo
3
NetSolutions receives the delivery
from Maxim Systems and
determines that $900 of the items
are not the merchandise ordered.
Debit memorandum #18 (also
called a debit memo) is issued to
Maxim Systems.
6-61
3
NetSolutions records the return of the
merchandise indicated in the debit
memo in Exhibit 10 as follows:
6-62
3
Price Allowance
On May 2, NetSolutions purchased
$5,000 of merchandise on account from
Delta Data Link, terms 2/10, n/30.
6-63
3
NetSolutions returned $3,000 of the
merchandise purchased from Delta
Data Link on May 4.
6-64
3
On May 12, NetSolutions paid for the
purchase of May 2 less the return and
discount.
6-65
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.
a. If Rofles Company pays the invoice within the
discount period, what is the amount of cash
required for the payment?
b.
6-66
6-66
Under a perpetual inventory system, what account
is credited by Rofles Company to record the
return?
Example Exercise 6-4 (continued)
3
Follow My Example 6-4
a. $8,330. Purchase of $11,500 less the return of
$3,000 less the discount of $170 [($11,500 – $3,000)
× 2%].
b. Merchandise inventory
For Practice: PE 6-4A, PE 6-4B
6-67
6-67
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.
6-68
3
On June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB shipping
point and pays the transportation cost of $50.
6-69
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.
6-70
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.
6-71
3
6-72
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.
6-73
3
6-74
3
Exhibit 11
6-75
Freight Terms
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.
Merchandise
Freight
Paid by Seller
a.
$4,500
$200
b.
$5,000
60
6-76
6-76
Freight Terms
FOB shipping point,
1/10, n/30
FOB destination,
2/10, n/30
Returns and
Allowances
$ 800
2,500
Example Exercise 6-5 (continued)
3
Follow My Example 6-5
a.
$3,863. Purchase of $4,500 less return of $800 less the
discount of $37 [($4,500 – $800) × 1%] plus $200 of
shipping.
b.
$2,450. Purchase of $5,000 less return of $2,500 less
the discount of $50 [($5,000 – $2,500) × 2%].
For Practice: PE 6-5A, PE 6-5B
6-77
6-77
3
Sales Taxes
On August 12, merchandise is sold on account
to Lemon Company, $100. The state has a 6%
sales tax.
6-78
3
Sales Taxes
On a regular basis, the seller pays to the taxing
authority (state) the amount of the sales taxes
collected.
6-79
3
Trade Discounts
When wholesalers offer special
discounts to certain classes of
buyers who order large quantities,
these discounts are called trade
discounts.
6-80
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.
6-81
3
Scully Company (Seller)
Accounts Receivable—Burton Co. 7,500
Sales
7,500
Cost of Merchandise Sold
Merchandise Inventory
4,500
4,500
Burton Company (Buyer)
Merchandise Inventory.
Accounts Payable—Scully Co.
6-82
7,500
7,500
3
July 2. Burton Company paid
transportation charges of
$150 on the July 1 purchase
from Scully Company.
6-83
3
Scully Company (Seller)
No entry.
Burton Company (Buyer)
Merchandise Inventory
Cash
6-84
150
150
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.
6-85
3
Scully Company (Seller)
Accounts Receivable—Burton Co. 5,000
Sales
5,000
Cost of Merchandise Sold
Merchandise Inventory
3,500
3,500
Burton Company (Buyer)
Merchandise Inventory.
Accounts Payable—Scully Co.
6-86
5,000
5,000
3
July 7. Scully Company paid
transportation costs of $250
for delivery of merchandise
sold to Burton Company on
July 5.
6-87
3
Scully Company (Seller)
Delivery Expense
Cash
Burton Company (Buyer)
No entry.
6-88
250
250
3
July 13. Scully Company issued
Burton Company a credit
memorandum for
merchandise returned,
$1,000. The cost of the
merchandise returned was
$700.
6-89
3
Scully Company (Seller)
Sales Returns and Allowances
1,000
Accounts Receivable—Burton Co.
1,000
Merchandise Inventory
Cost of Merchandise Sold
700
700
Burton Company (Buyer)
Accounts Payable—Scully Co.
Merchandise Inventory
6-90
1,000
1,000
3
July 15. Scully Company received
payment from Burton
Company for purchase of
July 5.
6-91
3
Scully Company (Seller)
Cash
4,000
Accounts Receivable—Burton Co.
4,000
Burton Company (Buyer)
Accounts Payable—Scully Co.
Cash
6-92
4,000
4,000
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.
6-93
3
Scully Company (Seller)
Accounts Receivable—Burton Co. 12,000
Sales
12,000
Accounts Receivable—Burton Co.
500
Cash
500
Cost of Merchandise Sold
7,200
Merchandise Inventory
7,200
Burton Company (Buyer)
Merchandise Inventory
12,500
Accounts Payable—Scully Co.
12,500
6-94
3
July 28. Scully Company received
payment from Burton
Company for purchase of July
18, less discount (2% ×
$12,000).
6-95
3
Scully Company (Seller)
Cash
12,260
Sales Discounts
240
Accounts Receivable—Burton Co.
12,500
Burton Company (Buyer)
Accounts Payable—Scully Co.
Merchandise Inventory
Cash
6-96
12,500
240
12,260
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
6-97
Example Exercise 6-6 (continued)
3
Follow My Example 6-6
Cash ($11,500 – $900 – $212)…………………………….. 10,388
Sales Discounts [($11,500 – $900) × 2%]….....................
212
Accounts Receivable—Bray Co ($11,500 – $900)…
10,600
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
6-98
6-98
4
Describe the adjusting
and closing process for
a merchandising
business.
6-99
6-99
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.
6-100
4
NetSolutions’ inventory records indicate the
following on December 31, 2011:
Account balance of Merchandise Inventory
Physical merchandise inventory on hand
Inventory shrinkage
6-101
Dec. 31, 2011
$63,950
62,150
$ 1,800
4
At the end of the accounting period,
inventory shrinkage is recorded by
the following adjusting entry:
6-102
4
Step 1: Closing Entries
Debit each temporary account with a credit balance, such as
Sales, for its balance and credit Income Summary.
6-103
4
Step 2: Closing Entries
Credit each temporary account with a debit balance, such as an
expense, for the balance and credit Income Summary.
6-104
4
Step 3: Closing Entries
Debit Income Summary for the amount of its
balance (net income) and credit the owner’s equity
account.
6-105
4
Step 4: Closing Entries
Debit the owner’s capital account for the balance of
the drawing account and credit the drawing
account.
6-106
4
NetSolutions’ Income Summary account after the
closing entries have been posted is as follows:
6-107
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
6-108
Example Exercise 6-7 (continued)
4
Follow My Example 6-7
Mar. 31 Cost of Merchandise Sold………. 11,550
Merchandise Inventory……….
11,550
Inventory shrinkage
($382,800 – $371,250).
For Practice: PE 6-7A, PE 6-7B
6-109
6-109
Appendix 1:
Accounting Systems for
Merchandisers
6-110
6-110
Manual Accounting Systems
Special Journal
Sales journal
Purchases journal
Cash receipts journal
Cash payments journal
6-111
Type of Transaction
Sales on account
Purchases on
account
Cash receipts
Cash payments
Exhibit 12
6-112
Sales Journal for a Merchandising Business
Exhibit 13
6-113
Purchases Journal for a
Merchandising Business
Exhibit 14
6-114
Cash Receipts Journal for a
Merchandising Business
Exhibit 15
6-115
Cash Payments Journal for a
Merchandising Business
Exhibit 16
6-116
Enter Bills Form
Exhibit 17
6-117
Create Invoice Form
Appendix 2:
The Periodic Inventory
System
6-118
6-118
Exhibit 18
6-119
Determining Cost of Merchandise Sold
Using the Periodic System
Exhibit 19
6-120
Chart of Accounts Under the
Periodic Inventory System
Exhibit 20
6-121
Transactions Using the Periodic
and Perpetual Inventory Systems
Exhibit 20
6-122
Transactions Using the Periodic and
Perpetual Inventory Systems (continued)
Closing Entries for NetSolutions
6-123
6-124