Chapter 6
Accounting for
Merchandising Businesses
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Objectives
1. Distinguish the activities of a service
Afterthose
studying
business from
of athis
merchandising
business. chapter, you should
be able to:the financial
2. Describe and illustrate
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. Expense–store equipment 3,100
Miscellaneous selling expense
630
Total selling expenses
$ 70,820
Administrative expenses:
Office salaries expense
$21,020
Rent expense
8,100
Depr. expense–office 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
Concluded
$ 600
(2,440)
(1,840)
$75,400
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
Owner’s Equity for
a Merchandising
Business
NetSolutions
Statement of Owner’s Equity
For the Year Ended December 31, 2007
Chris Clark, capital, 1/1/07
Net income for year
Less withdrawals
Increase in owner’s 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
Continued
$52,950
91,080
62,150
480
2,650
$209,310
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
Owner’s Equity
Chris Clark, capital
211,200
Total liabilities and owner’s equity
$261,560
Concluded
Sales Transactions
Cash Sales
JOURNAL
Description
Date
2007
1 Jan. 3 Cash
2
3
4
PAGE 26
Post.
Ref.
Dr
Cr.
1 800 00
Sales
To record cash sales.
5
On January 3, a firm sold $1,800
of merchandise for cash.
1 800 00
Cash Sales
6
3 Cost of Merchandise Sold
7
Merchandise Inventory
8
9
1 280 00
1 280 00
To record the cost of
merchandise sold.
10
Using a perpetual inventory, the inventory
cost of $1,200 must be recorded.
Cash Sales
JOURNAL
Description
Date
2007
1 Jan. 31 Credit Card Expense
2
3
4
5
PAGE 28
Post.
Ref.
Dr
Cr.
48 00
Cash
To record service charges
on credit card sales for the
month.
At
Credit
the end
cardofsales
the month,
(MasterCard
$48 was
or
sent
Visa)toare
cover
recorded
this service
as cashcharge.
sales.
48 00
Sales on Account
Jan. 12 Accounts Receivable—Sims Co.
510 00
Sales
510 00
Invoice No. 7172.
12 Cost of Merchandise Sold
Merchandise Inventory
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.
280 00
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
Invoice for
$1,500
Terms:
2/10, n/30
If invoice is
NOT paid
within 10
days of
invoice date
$1,500 PAID
Sales Discounts
Jan. 21 Cash
499 80
Sales Discounts
10 20
Accounts Receivable—Sims Co.
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.
510 00
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 Receivable—Krier Co.
225 00
Credit Memo No. 32.
13 Merchandise Inventory
Cost of Merchandise Sold
Cost of merchandise
returned—Credit Memo 32.
140 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
Description
Date
2007
1 Jan. 3 Merchandise Inventory
2
3
4
Post.
Ref.
Dr
Cr.
2 510 00
Cash
Purchased inventory from
Bowen Co.
5
On January 3, Purchased merchandise
for cash from Bowen Company, $2,510.
2 510 00
Purchase Discounts
What’s 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
Let’s
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
Let’s 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
Description
2007
1 Mar. 12 Merchandise Inventory
2
3
4
PAGE 27
Post.
Ref.
Dr
Cr.
3 000 00
Accounts Payable—Alpha
Technologies
5
On March 12, NetSolutions purchased
merchandise on account from Alpha
Technologies, $3,000.
3 000 00
Purchase Discounts
JOURNAL
Description
Date
2007
1 Mar. 22 Accounts Payable—Alpha Technol.
2
Cash
3
4
Merchandise Inventory
PAGE 27
Post.
Ref.
Dr
Cr.
3 000 00
2 940 00
60 00
5
If payment is made by March 22 NetSolutions
records the discount as a reduction in cost.
Purchase Discounts
JOURNAL
Description
Date
2007
1 Apr. 11 Accounts Payable—Alpha Technol.
2
Cash
PAGE 27
Post.
Ref.
Dr
Cr.
3 000 00
3 000 00
3
4
5
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.
We’ll 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 Payable—Maxim 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 Payable—Delta 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 Payable—Delta 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 Payable—Delta Data Links
Cash
Merchandise Inventory
Paid invoice.
2 000 00
($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 Payable—Magna Data
Purchased merchandise, terms
FOB shipping point.
10 Merchandise Inventory
Cash
Paid shipping cost .
900 00
900 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.
50 00
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 Receivable—Kranz Co.
Sales
Sold merchandise, terms FOB
destination.
15 Cost of Merchandise Sold
Merchandise Inventory
700 00
700 00
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 Receivable—Lemon Co.
106 00
Sales
Sales Taxes Payable
Invoice No. 339
On August 12, merchandise is sold on
account to Lemon Company, $100. The
state has a 6% sales tax.
100 00
6 00
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 Receivable—Burton Co.
Sales
7,500
Cost of Merchandise Sold
Merchandise Inventory
4,500
7,500
4,500
Burton Company (Buyer)
Merchandise Inventory.
Accounts Payable—Scully Co.
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.
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 Receivable—Burton Co.
Sales
5,000
Cost of Merchandise Sold
Merchandise Inventory
3,500
5,000
3,500
Burton Company (Buyer)
Merchandise Inventory.
Accounts Payable—Scully Co.
5,000
5,000
July 5. Scully Company sold merchandise on account
to Burton Co., $5,000, terms FOB shipping point,
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 Receivable—Burton Co.
Merchandise Inventory
Cost of Merchandise Sold
1,000
1,000
700
700
Burton Company (Buyer)
Accounts Payable—Scully Co.
Merchandise Inventory
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.
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Cash
Accounts Receivable—Burton Co.
4,000
4,000
Burton Company (Buyer)
Accounts Payable—Scully 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 Receivable—Burton Co.
Sales
12,000
Accounts Receivable—Burton Co.
Cash
500
12,000
500
Burton Company (Buyer)
Merchandise Inventory
Accounts Payable—Scully Co.
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.
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 Receivable—Burton Co.
12,260
240
12,500
Burton Company (Buyer)
Accounts Payable—Scully Co.
Merchandise Inventory
Cash
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 Owner’s 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
1 800 00
Merchandise Inventory
Inventory records $63,950
Inventory count
62,150
Inventory shortage $ 1,800
1 800 00
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