Transcript Accounting for Merchandising Business ACG 2021: Chapter 5

Accounting for Merchandising
Business
ACG 2021: Chapter 5
Merchandising Business
Revenue activities of
a merchandising
business involve the
buying and selling of
merchandise
Comparison to
service business
Service Business
Merchandising
Business
Fees earned
Sales
Less Operating
expenses
Less Cost of
merchandise
sold
=Net income
=Gross Profit
Less Operating
expenses
=Net Income
New Accounts on the Income
Statement
– SALES – revenues collected from the sale of merchandise
– COST OF MERCHANDISE SOLD – the purchase price plus
incidentals of merchandise available for resale
– GROSS PROFIT – Sales – Cost of merchandise sold
Income Statement
INCOME STATEMENT
Gem City Music
Income Statement
For the Year Ended December 31, 20—
Revenue from sales:
Sales
Less:: Sales returns and allowances
Sales discounts
Net sales
Cost of merchandise sold XXXX
Gross profit
Operating expenses:
Selling expenses:
Sales salaries expense
Administrative expenses:
Rent expense
7,800
Office salaries expense
Depreciation expense—office equipment
Total operating expenses
Income from operations
Other expense:
Interest expense
Net income
$189,300
$1,700
500
2,200
$187,100
100,000
$
$17,700
22,550
2,800
33,150
50,850
$36,250
2,000
$ 34,250
87,100
Computation of Costs
Computation of Cost of Merchandise Sold
Purchases
Less merchandise inventory, December 31
=Cost of merchandise sold
Computation of Cost of Merchandise Purchased
Purchases
Less: purchases returns and allowances
Less: purchases discount
=Net purchases
Add: transportation in
=Cost of merchandise purchased
Balance Sheet Accounts
Merchandise inventory – merchandise on hand
at the end of an accounting period.
Merchandising Terms
Sales – total amount charged
to customers for
merchandise sold
Sales returns and allowances
– are granted by the seller to
customers for damaged or
defective merchandise
Sales discount – are granted
by the seller to customers for
early
Net sales = Sales –returns discount
Merchandising Terms
Cost of goods sold
– Cost of merchandise sold to customers
Purchases discounts
– Offered by the seller to buyer
– For early payment
Purchases allowances and returns
– Buyer may receive a reduction in the intial price at
which the merchandise is purchased.
Merchandising Terms
Merchandise available for sale =
– Beginning merchandise inventory + net purchases
Net purchases =
– Purchases minus discounts – returns and
allowances
Accounting for Sales
Under the perpetual inventory system, all sales
require the reporting of the removal of inventory
from the books at the same time.
Accounting for Sales
CASH SALES
Example 1: Sold merchandise for cash $5,000.
Cost of merchandise sold $3,200
Date
Account
Cash
PR
Debit
$5,000
Sales
Cost of merchandise sold
Merchandise inventory
Credit
$5,000
3,200
3,200
Credit sales
Bank cards
– Master card
– Visa
– Monies directly deposited
in business account
– Requires a debit to CASH
Service charge must be
later recorded as
expense
Bank cards
Example 9: Sold merchandise on VISA $10,000. Cost of
merchandise sold is $4,000. Credit card expense is 3% of
sales.
Date
Account
Cash
PR
Debit
$10,000
Sales
Cost of merchandise sold
$10,000
4,000
Merchandise inventory
Credit card expense
Cash
Credit
4,000
300
300
Bank cards
Example 3: Sold merchandise on VISA $6,000.
Cost of merchandise sold is $3,000. Credit card
expense is 3% of sales.
Example 10
Cash 6,000
Sales
6,000
Cost of merchandise 3,000
Merchandise inventory 3,000
Credit card expense
180
Cash
180
Credit sales
Two types:
– American express
– On account
Results in debit to
ACCOUNTS
RECEIVABLE
Sales of Account
Example 4: Sold merchandise on account $6,000. Cost of
merchandise sold is $3,000.
Date
Account
Accounts receivable
PR
Debit
$6,000
Sales
Cost of merchandise
Merchandise inventory
Credit
6,000
3,000
3,000
Recap
Under the perpetual inventory system, all sales
transactions consist of at least two entries.
The first entry records the sale at the selling price with a
debit to how it will be paid and credit to sales.
The second entry records the merchandise leaving the
business with a debit to cost of merchandise sold and
credit to merchandise inventory for the cost of the
merchandise.
Sales discounts
A reduction in the price of the good for early payment.
This account is a contra – SALES
Upon payment of the account receivable, if the payment is within the
discount period, we record the discount.
Credit terms – terms of when payments for merchandise are to be
made.
– Net 30 days – full amount due in 30 days
– 2/10 – 2% discount if paid within 10 days
Example on Sales Discount
Example 5: Sold merchandise on account $5,000, terms 2/10,
n/30. Cost of merchandise sold is $4,000.
Sales
Discount
Discount $
Sales
Less discount
Net amount
$5,000
2%
$100
$5,000
100
4,900
Sales discount
Date
Account
PR
Debit
Cash
4900
Sales discount
100
Accounts receivable
Credit
5000
Sales Returns and Allowances
Merchandise sold may be returned to the seller
Merchandise sold may be reduced in price due
to defects
This account is CONTRA – sales
Increases with a debit
Sales returns & allowances
Example 6: Sold merchandise on account $7,000,
terms 1/15, n/30. Cost of merchandise sold is
$3,800
Date
Account
Accounts receivable
PR
Debit
$7,000
Sales
Cost of merchandise
Merchandise inventory
Credit
7,000
3,800
3,800
Sales returns & allowances
Return merchandise with sales price of $2,000 and
cost of $1,000.
Date
Account
Sales returns
PR
Debit
2,000
Accounts receivable
Merchandise inventory
Cost of merchandise sold
Credit
2,000
1,000
1,000
Recap of Sales Example
Example 7: ABC Merchandising had the following transactions:
Sold merchandise and received payment by VISA at $6,000, cost
of merchandise sold is $4,000.
Sold merchandise on account for $7,500 with credit terms 1/10,
n/30. Cost of the merchandise is $4,500.
Sold merchandise on account for $4,000, cost of merchandise is
$2,500.
Received a return of the merchandise in (c ) of sales price of
$2,000 and cost of $1,750.
Received payment within the discount period for merchandise in
(b).
Received payment for merchandise in (c ).
Accounting for Purchases
Assume a perpetual inventory system
– Each purchase and sale of merchandise is recorded as it occurs
– Example 1: purchase merchandise for resale $4,000 on
account
Date
Account
Mar 1 Merchandise inventory
Accounts payable
PR
Debit
Credit
$4,000
$4,000
Purchases Discount
Credit terms
– Purchases discounts are
discounts taken by the buyer for
early payment of an invoice.
– These discounts reduce the cost
of the merchandise purchased.
– Should be taken when offered if
not it is a LOSS to the business.
Purchase discount
Example 9: Purchase merchandise for resale
$4,000, terms 2/10, n/30 on account.
Invoice:
$4,000
Discount (2% x $4,000)
80
Net of discount
3,920
Purchase discount
Date
Account
Mar 1
Merchandise inventory
PR
Debit
$4,000
Accounts payable
Mar 10
Accounts payable
Cash
Merchandise
inventory
Credit
$4,000
$4,000
$3,920
80
Purchase Discount
Reduction of the cost of the merchandise is
reflected in the merchandise inventory account.
Example 10: Purchase merchandise for resale
$6,000, terms 1/15, n/30 on account.
Purchases Returns and Allowances
Purchase returns – merchandise is returned to
the seller
Purchase allowances – price adjustment
Debit memorandum – notification of the return or
allowance by seller
Purchases Returns and Allowances
Example 11: Returned
merchandise on account
$2,500.
Date
Mar 09
Account
Accounts payable
Cash
PR
Debit
Credit
$2,500
$2,500
Example
Example 12: Purchased merchandise of
$8,000 on terms 2/10,n/30. Ennis pays the
original invoice less a return of $2,500
within the discount period. Record the
above entries
Recap of Purchases Example
Example 7: ABC Merchandising had the following transactions:
Purchased merchandise and received payment by VISA at
$6,000.
Purchased merchandise on account for $7,500 with credit terms
1/10, n/30.
Purchased merchandise on account for $4,000.
Return of the merchandise in (c ) of sales price of $2,000.
Paid within the discount period for merchandise in (b).
Paid for merchandise in (c ).
Transportation Costs
The terms of a sale should indicate when the
ownership of the merchandise passes to the buyer.
• This point determines which party, the buyer or the seller must pay
the transportation costs.
Transportation Costs
– FOB – shipping point
• The ownership of the merchandise passes to the buyer
when the seller delivers the merchandise to the
transportation company.
• Buyer pays the transportation costs
Example 13: Purchased merchandise for $4,000
with shipping costs of $50 FOB shipping point.
FOB – shipping point
Date
Account
Merchandise inventory
PR
Debit
$4,000
Accounts payable
Merchandise Inventory
Cash
Credit
$4,000
$50
$50
Transportation Costs
– FOB – destination point
• The ownership of the merchandise passes to the buyer
when the seller delivers the merchandise to the buyer.
• Seller pays the transportation costs
Example 14: Sold merchandise for $4,000 with
shipping costs of $50 FOB destination. Cost of
merchandise sold is $2,000.
FOB – destination point
Date
Account
Accounts receivable
PR
Debit
$4,000
Sales
Cost of merchandise sold
$4,000
2000
Merchandise inventory
Delivery expense
Cash
Credit
2000
50
50
Transportation costs
FREIGHT TERMS
FOB
Shipping Point
FOB
Destination
Ownership (title)
passes to buyer
when merchandise
is freight
Delivered to
carrier
Received
by buyer
Transportation
costs are paid
by
Buyer
Seller
Risk of loss during
transportation
belongs to
Buyer
Seller
Sales Taxes
Liability to the business
Create a SALES TAX PAYABLE account
Example 15: Sold merchandise on account
$7,000, plus 5% sales tax. Cost of merchandise
sold is $3,800.
Sales Taxes
Date
Account
Accounts receivable
PR
Debit
$7,350
Sales
7,000
Sales tax payable
Cost of merchandise
Merchandise inventory
Credit
350
3,800
3,800
Recap of Transactions
Seller
Buyer
Sold merchandise on account:
Accounts receivable
DR
Sales
CR
Cost of merchandise sold DR
Merchandise inventory
CR
Purchased merchandise on account:
Merchandise Inventory DR
Accounts Payable
CR
Transportation costs Shipping point
Transportation costs Shipping point:
Merchandise Inventory DR
Cash
CR
Transportation costs – Destination:
Delivery Expense
DR
Cash
CR
Transportation costs - Destination
Merchandise returned:
Sales Returns & Allowances
Accounts receivable
Merchandise inventory
Cost of merchandise sold
Merchandise returned:
Merchandise inventory DR
Accounts payable
Payment :
Cash
Accounts receivable
Payment with discount:
Cash
DR
Sales discount
DR
Accounts receivable
DR
CR
DR
CR
DR
CR
Payment:
Accounts payable
Cash
CR
DR
CR
Payment with discount:
Merchandise inventory DR
Cash
CR
CR
Adjusting Entries
Inventory Shrinkage
– Difference between physical count and books
Example 16: Suppose that physical inventory shows balance of
$20,000 and books show balance of $23,000. Record the
shrinkage.
Date
Account
Cost of merchandise sold
Merchandise inventory
PR
Debit
Credit
3,000
3,000
Closing Entries
– Accounts that must be closed
•
•
•
•
•
•
•
Sales
Rent revenue
Sales returns and allowances
Sales discounts
Cost of merchandise sold
All expenses and revenues
Dividends