Accounting for
Merchandising
Activities
CHAPTER
5
PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
© 2013 McGraw-Hill Ryerson Limited.
Learning Objectives
1.
2.
3.
Describe merchandising and identify and
explain the important income statement and
balance sheet components for a
merchandising company. (LO1)
Describe both periodic and perpetual
merchandise inventory systems. (LO2)
Analyze and record transactions for
merchandise purchases and sales using a
perpetual system. (LO3)
2
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Learning Objectives
4.
5.
6.
Prepare adjustments for a merchandising
company. (LO4)
Define, prepare, and use merchandising
income statements. (LO5)
Prepare closing entries for a merchandising
company. (LO6)
3
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Learning Objectives
Record and compare merchandising
transactions using both periodic and
perpetual inventory systems.
(Appendix 5A) (LO7)
Explain and record Provincial Sales Tax
(PST) and Goods and Services Tax
(GST). (Appendix 5B) (LO8)
7.
8.
4
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Merchandising Activities
Merchandiser: A company that earns net
income by buying and selling merchandise.
Wholesaler: A company that buys products
from manufacturers or other wholesalers
and sells them to retailers or other
wholesalers.
5
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LO 1
Computing Net Income
Merchandiser
Service Company
Net Sales
Revenues
Cost of Goods
Sold
Gross Profit
6
Operating
Expenses
Operating
Expenses
Net Income
Net Income
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LO 1
Inventory
Products a company owns for the purpose
of selling to customers.
• It is often referred to as Merchandise
Inventory.
• Is classified as a current asset.
7
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LO 1
Merchandise Inventory
Cost of merchandise inventory
includes:
•
•
•
8
Costs incurred to purchase the goods.
Shipping costs.
Other costs required to make goods
ready for sale.
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LO 1
Merchandising Cost Flow
Beginning
Merchandise
Inventory
Net cost of
Purchases
Merchandise
available for
sale
Ending
Merchandise
inventory
9
Cost of goods
sold
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LO 1
Merchandise Inventory Systems
Perpetual
Provides a continuous record of:
• The amount of merchandise inventory on hand.
• Cost of goods sold to date.
Periodic
Requires a physical count of goods to determine:
• The amount of merchandise inventory on hand.
• Cost of goods sold.
10
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LO 2
Perpetual System-Example
Purchases
Nov. 2
Merchandise Inventory 1,200
Accounts Payable
1,200
Purchased merchandise inv. on account
Purchase Returns and Allowances
Nov.5
Accounts Payable
300
Merchandise Inventory
300
Purchase allowance re: debit memo
11
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LO 3
Purchase/Sales Discounts
A deduction from the invoice price granted to
induce early payment of the amount due.
Example – 2/10, n30
Credit Period = 30 days
Terms
Discount Period
= 10 days
Time
Nov.12
Nov.2
Due
(Full amount minus 2%
discount) due between
Nov.2 and Nov.12
Dec.2
Full amount due
anytime between
Nov.13 and Dec.2
Purchase or Sale
12
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LO 3
Perpetual System — Example
Purchase Discounts- Assume the purchase of
merchandise inventory on November 2 was on the
terms 2/10,n30.
Case 1-Discount taken
Nov.12
Accounts Payable
900
Merchandise Inventory
Cash
2% x (1,200 - 300) = 18
18
882
Case 2-Discount not taken
Nov.12
13
Accounts Payable
Cash
900
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900
LO 3
Mini-Quiz
Prepare journal entries for each of the following
transactions. Assume a perpetual merchandise
inventory system.
October 6: Purchased 650 units of merchandise inventory
at $5 per unit.
The seller offered a cash discount of 2/10, n/30.
October 8: Returned 25 defective units and received full
credit.
October 10:Paid the amount in full, less the returned items.
14
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LO 3
Mini-Quiz
Oct.6
Merchandise Inventory 3,250
A/P
3,250
(650 x 5)
8 A/P
125
Merchandise Inventory
(25 x 5)
11 A/P
125
3,125
Merchandise Inventory
62.50
Cash
3,062.50
(3,250-125) x 2%
15
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LO 3
Transportation Charges –
Perpetual System
Seller
Goods
Buyer
FOB Shipping Point
(Buyer pays
shipping charges)
Carrier
FOB Destination
(Seller pays for
shipping charges)
16
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LO 3
Perpetual System — Example
Transportation Costs
Nov.24 Merchandise Inventory
Cash
75
75
Paid freight charges on purchased merchandise.
17
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LO 3
Perpetual System — Example
Sales of Merchandise
Nov.12
Accounts Receivable
1,000
Sales
1,000
Sold merchandise on terms 2/10,n60
Cost of goods sold
600
Merchandise Inventory
600
To record cost of merchandise sold
18
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LO 3
Perpetual System — Example
Customer Payment
Case 1-Customer pays in 60 days
Jan.11
Cash
1,000
Accounts receivable
1,000
Received payment for Nov. 12 sale
Case 2-Customer pays in 10 days
Nov.22
19
Cash
980
Sales discounts
20
Accounts receivable
1,000
Received payment less the discount
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LO 3
Perpetual System — Example
Sales Returns and Allowances
Nov.6
Sales Returns & Allowance
800
Accounts Receivable
800
Customer returned merchandise
Merchandise Inventory
600
Cost of Goods Sold
600
Returned goods to merchandise inventory
20
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LO 3
AdjustmentsPerpetual Merchandise Inventory
•
•
Perpetual merchandise inventory systems
keep a running total of inventory levels by
recording sales and purchase transactions.
Periodic adjustments must be made to
account for shrinkage (loss due to theft or
deterioration of merchandise inventory).
21
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LO 4
Perpetual System — Example
Inventory per accounting records: $21,250
Inventory per physical count:
-$21,000
Difference (shrinkage)
$250
Adjustment required:
Dec.31
Cost of Goods Sold
Merchandise Inventory
250
250
To record inventory shrinkage revealed by
physical count.
22
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LO 4
Income Statement Formats
Income statements may be formatted
in a variety of ways.
Typical formats are:
•
•
•
23
Classified, Multiple-Step
Multiple-Step
Single-Step
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LO 5
MEC
Income Statement
For Year Ended December 31, 2014
Classified
Multi-step
Format
(for internal
reporting)
24
Sales
Less: Sales discounts
Sales returns and allowances
Net sales
Cost of goods sold
Gross profit
Operating expenses:
Selling expenses:
Sales salaries expense
Advertising expense
Rent expense, selling space
Depreciation expense, store equipment
Store supplies expense
Total selling expenses
General and administrative expenses:
Office salaries expense
Office supplies expense
Rent expense,office space
Depreciation expense, office equipment
Insurance expense
Total general and administrative expenses
Total operating expenses
Income from operations
Other revenues and expenses:
Rent revenue
Interest expense
Net income
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$ 321,000
$
4,300
2,000
6,300
314,700
230,400
84,300
$ 18,500
11,300
8,100
3,000
1,200
$ 42,100
$25,300
1,800
900
700
600
29,300
71,400
$ 12,900
$
2,800
(360)
2,440
$ 15,340
5
Multi-step
Format
(for external
reporting)
25
MEC
Income Statement
For Year Ended December 31, 2014
Sales, net
Cost of goods sold
Gross profit
Operating expenses:
Sales salaries expense
Advertising expense
Rent expense
Depreciation expense
Supplies expense
Insurance expense
Total operating expense
Income from operations
Other revenues and expenses:
Rent revenue
Interest expense
Net income
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$ 314,700
230,400
84,300
$ 43,800
11,300
9,000
3,700
3,000
600
71,400
$ 12,900
2,800
(360)
2,440
$ 15,340
LO 5
Singlestep
Format
(for external
reporting)
26
MEC
Income Statement
For Year Ended December 31, 2014
Revenues:
Net
Rent revenue
Total revenues
Expenses:
Cost of goods sold
Selling expense
General and administrative expense
Interest expense
Total expenses
Net income
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$ 314,700
2,800
317,500
$ 230,400
42,100
29,300
360
302,160
$ 15,340
LO 5
Gross Profit Ratio
•
•
•
The amount of gross profit expressed as a
percentage of net sales.
May be tracked over time and/or compared
to similar businesses.
May be calculated for whole business,
departments, products.
Gross
profit ratio =
Gross profit from sales
X 100%
Net sales
27
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LO 5
Closing Entries-Perpetual System
•
•
The closing process is similar for
merchandising and service companies.
Merchandising companies have additional
temporary accounts that must be closed.
These include:
• Sales
• Sales Returns & Allowances
• Sales Discounts
• Cost of Goods Sold
28
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LO 6
Review
Q Identify and explain the components of income
for a merchandising company.
The basic components of income start with net
sales. From net sales is subtracted the cost of
goods sold. The resulting amount is called
gross profit or gross margin. Selling and
general and administrative expenses are
subtracted from gross profit to determine
income from operations.
A
29
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Review
Q Explain the difference between single-step and
multiple-step income statements.
A A single-step income statement format
includes cost of goods sold as an operating
expense, and shows only one subtotal for total
expenses. Operating expenses are highly
summarized.
A multiple-step income statement shows
intermediate totals between sales and net
income. It also includes detailed computations
of net sales and cost of goods sold.
30
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Appendix 5A- Periodic and Perpetual
Merchandise Inventory Systems
Compared
Periodic systems
Merchandise Inventory is updated at the end
of the period based on a physical count.
Perpetual systems
Merchandise Inventory is updated after each
sale or purchase.
31
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LO 7
Appendix 5A - Example
Periodic System
Perpetual System
Purchase of Merchandise
Purchases
1200
Accounts Payable
1200
Merchandise Inventory
Accounts Payable
1200
1200
Return of Merchandise
Accounts Payable
Purchase Returns
32
300
300
Accounts Payable
300
Merchandise Inventory
300
© 2013 McGraw-Hill Ryerson Limited.
LO 7
Appendix 5A - Example
Periodic System
Perpetual System
Purchase Discount Taken (2/10, n30)
Accounts Payable
900
Purchase Discounts
18
Cash
882
Accounts Payable
900
Merchandise Inventory
18
Cash
882
Transportation Charges
Transportation-in
Cash
33
75
75
Merchandise Inventory
Cash
© 2013 McGraw-Hill Ryerson Limited.
75
75
LO 7
Appendix 5A - Example
Periodic System
Perpetual System
Sale of merchandise
Accounts Receivable
Sales
2400
2400
Accounts Receivable
Sales
2400
2400
Cost of Goods Sold
1600
Merchandise Inventory
1600
34
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LO 7
Appendix 5A - Example
Periodic System
Perpetual System
Sales Return
Sales Returns & Allow.
Accounts Receivable
35
800
800
Sales Returns & Allow.
Accounts Receivable
800
Merchandise Inventory
Cost of Goods Sold
600
© 2013 McGraw-Hill Ryerson Limited.
800
600
LO 7
Appendix 5B – Sales Tax
Provincial Sales Tax (PST)
A consumption tax applied on sales to the
final consumers of products or services.
•Is
not applicable to all sales.
•Varies
from province to province.
•Amount
36
collected is a liability.
© 2013 McGraw-Hill Ryerson Limited.
LO 8
Appendix 5B - Sales Tax
Goods and Services Tax (GST)
A 5% tax on almost all goods and services
provided in Canada.
•Is ultimately paid by the final consumer.
•Is uniform from province to province.
•Amount collected by a business is a liability.
•Amount paid by a business offsets the GST
owing.
37
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LO 8
Appendix 5B - Sales Tax
Harmonized Sales Tax (HST)
Is a combined GST and PST rate applied
to taxable supplies.
38
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LO 8
Appendix 5B - Example
Purchase of Merchandise
Assume: Perpetual system and 5% GST.
Merchandise Inventory
GST Receivable
Accounts Payable
39
600
30
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630
LO 8
Appendix 5B - Example
Sale of Merchandise
Assume: Perpetual system, 7% PST and 5% GST.
Accounts Receivable
1,008
Sales
PST Payable
GST Payable
To record sale of merchandise
900
63
45
Cost of goods sold
600
Merchandise Inventory
600
To record cost of merchandise sold
40
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LO 8
End of Chapter
41
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