Accounting For Merchandising Businesses

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Chapter 6

Accounting for Merchandising Businesses


Accounting, 21st Edition
Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud


Professor Emeritus of Accounting Pepperdine University

Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

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Objectives
1. Distinguish the activities of a service After studying business from those of athis merchandising business. chapter, you should be able to: 2. Describe and illustrate the financial statements of a merchandising business. 3. Describe the accounting for the sale of merchandise. 4. Describe the accounting for the purchase of merchandise.

Objectives
5. Describe the accounting for transportation costs, sales taxes, and trade discounts. 6. Illustrate the dual nature of merchandising transactions. 7. Prepare a chart of accounts for a merchandising business. 8. Describe the accounting cycle for a merchandising business. 9. Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets.

Nature of Businesses
Service Business
Fees earned Operating expenses Net income $XXX XXX $XXX

Nature of Businesses
Merchandising Business
Sales Cost of Merchandise Sold Gross Profit Operating Expenses Net Income $XXX XXX $XXX XXX $XXX

Multiple-Step Income Statement

NetSolutions Income Statement For the Year Ended December 31, 2007

Revenue from sales: Sales $720,185 Less:Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930 Net sales $708,255 Cost of merchandise sold 525,305 Gross profit $182,950

Continued

Operating expenses: Selling expenses: Sales salaries expense $56,230 Advertising expense 10,860 Depr. Expensestore equipment 3,100 Miscellaneous selling expense 630 Total selling expenses $ 70,820 Administrative expenses: Office salaries expense $21,020 Rent expense 8,100 Depr. expenseoffice equipment 2,490 Insurance expense 1,910 Office supplies expense 610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations $ 77,240

Continued

Other income and expenses: Rent revenue Interest expense Net income

$ 600 (2,440)

(1,840) $75,400

Concluded

Periodic vs. Perpetual Methods of Accounting


Periodic Method
A method of determining the cost of merchandise sold and the amount of merchandise on hand Under this method, the inventory records do not show the amount available for sale or the amount sold during the period

Periodic vs. Perpetual Methods of Accounting


Perpetual Method
Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records.

Cost of Merchandise Purchased


Purchases Less: Purchase returns and allowances $9,100 Purchase discounts 2,525 Net purchases Add transportation-in Cost of merchandise purchased $521,980

11,625 $510,355 17,400 $527,755

Cost of Merchandise Sold


Merchandise inventory, 1/1/07 $ 59,700 Purchases $521,980 Less: Purchase returns and allowances $9,100 Purchase discounts 2,525 11,625 Net purchases $510,355 Add transportation-in 17,400 Cost of merchandise purchased 527,755 Merchandise available for sale $587,455 Less merchandise inventory, 12/31/07 62,150 Cost of merchandise sold $525,305

Single-Step Income Statement for a Merchandising Business

NetSolutions Income Statement For the Year Ended December 31, 2007 Revenues: Net sales Rent revenue Total revenues Expenses: Cost of merchandise sold Selling expenses Administrative expenses Interest expense Total expenses Net income

$708,255 600 $708,855


$525,305 70,820 34,890 2,440 633,455 $ 75,400

Statement of Owners Equity for a Merchandising Business

NetSolutions Statement of Owners Equity For the Year Ended December 31, 2007

Chris Clark, capital, 1/1/07 Net income for year Less withdrawals Increase in owners equity Chris Clark, capital, 12/31/07

$153,800 $75,400 18,000

57,400 $211,200

Balance Sheet

NetSolutions Balance Sheet December 31, 2007 Assets

Current assets: Cash Accounts receivable Merchandise inventory Office supplies Prepaid insurance Total current assets

$52,950 91,080 62,150 480 2,650 $209,310

Continued

Property, plant, and equipment: Land $20,000 Store equipment $27,100 Less accumulated depreciation 5,700 21,400 Office equipment $15,570 Less accumulated depreciation 4,720 10,850 Total property, plant, and equipment 52,250 Total assets $261,560

Continued

Liabilities Current liabilities: Accounts payable $22,420 Note payable (current portion) 5,000 Salaries payable 1,140 Unearned rent 1,800 Total current liabilities $ 30,360 Long-term liabilities: Note payable (due 2017) 20,000 Total liabilities $ 50,360 Owners Equity Chris Clark, capital 211,200 Total liabilities and owners equity $261,560
Concluded

Sales Transactions

Cash Sales
JOURNAL
Date
1 Jan. 3 Cash 2 3 4 5
2007

PAGE 26
Post. Ref.

Description
Sales

Dr

Cr.

1 800 00 1 800 00

To record cash sales.

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

Cash Sales
6 7 8 9 10

3 Cost of Merchandise Sold


Merchandise Inventory

1 280 00
1 280 00

To record the cost of merchandise sold.

Using a perpetual inventory, the inventory cost of $1,280 must be recorded.

Cash Sales
JOURNAL
Date
2007

PAGE 28
Post. Ref.

Description
Cash

Dr

Cr.

1 Jan. 31 Credit Card Expense 2

48 00

48 00

3 4
5

To record service charges on credit card sales for the month.

At Credit the end cardof sales the month, (MasterCard $48 was or sent Visa) to are cover recorded this service as cash charge. sales.

Sales on Account
Jan. 12 Accounts ReceivableSims Co. 510 00

Sales

510 00

Invoice No. 7172.


12 Cost of Merchandise Sold Merchandise Inventory 280 00
280 00

Cost of merchandise sold on Invoice No. 7172.

On January 12, a firm sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $280.

Sales Discounts
The terms for when payments for merchandise are to be made are called credit terms.

If buyer is allowed an amount of time to pay, it is known as the credit period.

Sales Discounts
Credit Terms If invoice is paid within 10 days of invoice date $1,470 paid (less 2% as a cash discount)
Invoice for $1,500 Terms: 2/10, n/30

Sales Discounts
Credit Terms If invoice is NOT paid within 10 days of invoice date $1,500 PAID

Invoice for $1,500 Terms: 2/10, n/30

Sales Discounts
Jan. 21 Cash Sales Discounts Accounts ReceivableSims Co. 499 80 10 20 510 00

Collection of Invoice No. 7172, less discount.

On January 21, the firm receives the amount due from Sims (refer to Slide 25), less the 2 percent discount.

Sales Returns and Allowances


Merchandise that is returned to the vendor is referred to as a sales return. If there is a defect in the product or the wrong item was shipped, the seller may reduce the initial price at which the goods were sold. This is known as a sales allowance.

Sales Returns and Allowances


Jan. 13 Sales Returns and Allowances 225 00

Accounts ReceivableKrier Co.


Credit Memo No. 32. 13 Merchandise Inventory Cost of Merchandise Sold Cost of merchandise returnedCredit Memo 32. 140 00

225 00

140 00

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

Purchase Transactions

Purchase Transactions
Date
2007

Description
Cash

Post. Ref.

Dr

Cr.

1 Jan. 3 Merchandise Inventory 2 3 4 5

2 510 00 2 510 00

Purchased inventory from


Bowen Co.

On January 3, Purchased merchandise for cash from Bowen Company, $2,510.

Purchase Discounts
Whats the last day the invoice can be paid? Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30.

Purchase Discounts
The full amount is Lets do a simple due on April 11. calculation.
Invoice period Days in March 31 Date of invoice 12 Remaining days April 30

19 11

Purchase Discounts
We can borrow at an annual interest rate of 6%. Should we borrow to pay the invoice within the discount period? $60 discount (2% x $3,000)?

Purchase Discounts
Lets see Interest on the amount due of $3,000 less the 2 percent
Discount $60.00 Interest for 20 days at the rate of 6% on $2,940 9.80 Savings from borrowing $50.20

Purchase Discounts
Looks like we should take advantage of the discount even if we have to borrow the money.
Discount $60.00 Interest for 20 days at the rate of 6% on $2,940 9.80 Savings from borrowing $50.20

Purchase Discounts
JOURNAL
Date
2007

PAGE 27
Post. Ref.

Description
Accounts PayableAlpha

Dr

Cr.

1 Mar. 12 Merchandise Inventory 2 3 4 5

3 000 00

Technologies

3 000 00

On March 12, NetSolutions purchased merchandise on account from Alpha Technologies, $3,000.

Purchase Discounts
JOURNAL
Date
2007

PAGE 27
Post. Ref.

Description
Cash Merchandise Inventory

Dr

Cr.

1 Mar. 22 Accounts PayableAlpha Technol. 2 3 4 5

3 000 00 2 940 00 60 00

If payment is made by March 22 NetSolutions records the discount as a reduction in cost.

Purchase Discounts
JOURNAL
Date
2007

PAGE 27
Post. Ref.

Description
Cash

Dr

Cr.

1 Apr. 11 Accounts PayableAlpha Technol. 2 3 4 5

3 000 00 3 000 00

If NetSolutions does not pay the invoice until April 11, it would pay the full amount.

Purchases Returns and Allowances


A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.

Purchases Returns and Allowances


You sent me the wrong interface cards. Well send a debit memorandum with the returned items. NetSolutions received the delivery from Maxim Systems and determined that $900 of the items were not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems.

Purchases Returns and Allowances


Mar. 7 Accounts PayableMaxim Systems Merchandise Inventory Debit Memo No. 18 900 00 900 00

Purchases Returns and Allowances


On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30.
May 2 Merchandise Inventory Accounts PayableDelta Data Purchased merchandise. 5 000 00 5 000 00

Purchases Returns and Allowances


On May 4, NetSolutions returns $3,000 of the merchandise.
May 4 Accounts PayableDelta Data Links
Merchandise Inventory Returned portion of merchandise purchased.

3 000 00
3 000 00

Purchases Returns and Allowances


On May 12, NetSolutions pays the amount due.

May 12 Accounts PayableDelta Data Links

2 000 00

Cash
Merchandise Inventory Paid invoice.

($5,000 $3,000) x 2%

1 960 00
40 00

Transportation Costs

FOB Shipping Point


Buyer pays freight costs and debits Merchandise Inventory

Fruit Express

Title passes to buyer as shipment leaves shipping point.

FOB Shipping Point


June 10 Merchandise Inventory Accounts PayableMagna Data Purchased merchandise, terms FOB shipping point. 900 00

900 00

10 Merchandise Inventory Cash Paid shipping cost .

50 00
50 00

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

FOB Destination
Seller pays freight costs and debits Transportation Out

Fruit Express

Title passes to buyer upon arrival at destination.

FOB Destination
June 15 Accounts ReceivableKranz Co. Sales Sold merchandise, terms FOB destination. 700 00

700 00

15 Cost of Merchandise Sold Merchandise Inventory

480 00
480 00

Cost of sale of Kranz Co .

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 the transportation cost of $40.

FOB Destination
June 15 Transportation Out Cash Paid shipping cost on merchandise sold. 40 00 40 00

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 the transportation cost of $40.

Sales Taxes
Aug. 12 Accounts ReceivableLemon Co. Sales Sales Taxes Payable Invoice No. 339 106 00 100 00 6 00

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

Sales Taxes
Sept.15 Sales Tax Payable Cash Payment for sales taxes collected during August. 2 900 00 2 900 00

On September 15, the seller sends in a payment of $2,900 to the taxing unit for the August taxes collected.

Illustration of Accounting for Merchandise Transactions


Scully Company (Seller)

Accounts ReceivableBurton Co. Sales


Cost of Merchandise Sold Merchandise Inventory
Burton Company (Buyer)

7,500
7,500 4,500

4,500
7,500

Merchandise Inventory. Accounts PayableScully Co.

7,500

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.

Illustration of Accounting for Merchandise Transactions


Scully Company (Seller)

No entry.

Burton Company (Buyer)

Merchandise Inventory Cash

150

150

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

Illustration of Accounting for Merchandise Transactions


Scully Company (Seller)

Accounts ReceivableBurton Co. Sales


Cost of Merchandise Sold Merchandise Inventory
Burton Company (Buyer)

5,000
5,000 3,500

3,500
5,000

Merchandise Inventory. Accounts PayableScully Co.

5,000

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.

Illustration of Accounting for Merchandise Transactions


Scully Company (Seller)

Transportation Out Cash

250
250

Burton Company (Buyer)

No entry.
July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.

Illustration of Accounting for Merchandise Transactions


Scully Company (Seller)

Sales Returns and Allowances Accounts ReceivableBurton Co.


Merchandise Inventory Cost of Merchandise Sold
Burton Company (Buyer)

1,000
1,000 700

700
1,000

Accounts PayableScully Co. Merchandise Inventory

1,000

July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 purchase on account. The cost of the merchandise was $700.

Illustration of Accounting for Merchandise Transactions


Scully Company (Seller)

Cash Accounts ReceivableBurton Co.

4,000
4,000

Burton Company (Buyer)

Accounts PayableScully Co. Cash

4,000

4,000

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

Illustration of Accounting for Merchandise Transactions


Scully Company (Seller)

Accounts ReceivableBurton Co. Sales


Accounts ReceivableBurton Co. Cash

12,000
12,000 500

500
12,500

Burton Company (Buyer)

Merchandise Inventory Accounts PayableScully Co.

12,500

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.

Illustration of Accounting for Merchandise Transactions


Continued (Seller)

Cost of Merchandise Sold Merchandise Inventory

7,200
7,200

Burton Company (Buyer)

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.

Illustration of Accounting for Merchandise Transactions


Scully Company (Seller)

Cash Sales Discounts Accounts ReceivableBurton Co.

12,260 240
12,500

Accounts PayableScully Co. Merchandise Inventory Cash

Burton Company (Buyer)

12,500 240 12,260

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

NetSolutions Chart of Accounts


Balance Sheet Accounts
110 112 115 116 117 120 123 124 125 126 100 Assets Cash Accounts Receivable Merchandise Inventory Office Supplies Prepaid Insurance Land Store Equipment Accumulated Depreciation Store Equipment Office Equipment Accumulated Depreciation Office Equipment 210 211 212 215 200 Liabilities Accounts Payable Salaries Payable Unearned Rent Notes Payable

300 Owners Equity 310 Chris Clark, Capital 311 Chris Clark, Drawing 312 Income Summary

NetSolutions Chart of Accounts


Income Statement Accounts
400 Revenues 410 Sales 411 Sales Returns and Allowances 412 Sales Discounts 600 Other Income 610 Rent Revenue 700 Other Expense 710 Interest Expense 500 Costs and Expenses 510 Cost of Merchandise Sold 520 Sales Salaries Expense 521 Advertising Expense 522 Depreciation Expense Store Equipment 523 Transportation Out 529 Miscellaneous Selling Expense 530 Office Salaries Expense 531 Rent Expense 532 Depreciation Expense Office Equipment 533 Insurance Expense 534 Office Supplies Expense 539 Miscellaneous Admin. Expense

Merchandise Inventory Shrinkage


NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, 2007. The physical count reveals that only $62,150 is actually available.

Merchandise Inventory Shrinkage


Adjusting Entry Dec. 31 Cost of Merchandise Sold Merchandise Inventory 1 800 00 1 800 00

Inventory records $63,950 Inventory count 62,150 Inventory shortage $ 1,800

Profitability Measures -- Effective Use of Assets


Ratio of Net Sales to Assets Net sales Total assets: Beginning of year End of year Average Ratio of net sales to assets

Sears Penney $41,366,000 $31,846,000


$50,409,000 $19,742,000 $44,317,000 $20,908,000 $47,363,000 $20,325,000 .87 to 1 1.57 to 1

Ratio Use: To assess the effectiveness in the use of assets to generate sales.

Chapter 6

The End

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