Accounting For Merchandising Businesses
Accounting For Merchandising Businesses
Accounting For Merchandising Businesses
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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
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
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
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
57,400 $211,200
Balance Sheet
Current assets: Cash Accounts receivable Merchandise inventory Office supplies Prepaid insurance Total current assets
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
Cash Sales
6 7 8 9 10
1 280 00
1 280 00
Cash Sales
JOURNAL
Date
2007
PAGE 28
Post. Ref.
Description
Cash
Dr
Cr.
48 00
48 00
3 4
5
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
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.
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
Sales Discounts
Jan. 21 Cash Sales Discounts Accounts ReceivableSims Co. 499 80 10 20 510 00
On January 21, the firm receives the amount due from Sims (refer to Slide 25), less the 2 percent discount.
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.
2 510 00 2 510 00
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.
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.
3 000 00 2 940 00 60 00
Purchase Discounts
JOURNAL
Date
2007
PAGE 27
Post. Ref.
Description
Cash
Dr
Cr.
3 000 00 3 000 00
If NetSolutions does not pay the invoice until April 11, it would pay the full amount.
3 000 00
3 000 00
2 000 00
Cash
Merchandise Inventory Paid invoice.
($5,000 $3,000) x 2%
1 960 00
40 00
Transportation Costs
Fruit Express
900 00
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
FOB Destination
June 15 Accounts ReceivableKranz Co. Sales Sold merchandise, terms FOB destination. 700 00
700 00
480 00
480 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.
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.
7,500
7,500 4,500
4,500
7,500
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.
No entry.
150
150
July 2. Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.
5,000
5,000 3,500
3,500
5,000
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.
250
250
No entry.
July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.
1,000
1,000 700
700
1,000
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.
4,000
4,000
4,000
4,000
July 15. Scully Company received payment from Burton Company for purchase of July 5.
12,000
12,000 500
500
12,500
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.
7,200
7,200
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.
12,260 240
12,500
July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000).
300 Owners Equity 310 Chris Clark, Capital 311 Chris Clark, Drawing 312 Income Summary
Ratio Use: To assess the effectiveness in the use of assets to generate sales.
Chapter 6
The End