Previous Lecture
• Closing the Books
• Temporary Accounts
– All Revenue Accounts
– All Expenses Accounts
– All Dividend Accounts
• Permanent Accounts
– All Assets Accounts
– All Liabilities Accounts
– Shareholder Equity Accounts
1
Chapter
6
ACCOUNTING FOR
MERCHANDISING
ACTIVITIES
2
Operating Cycle of a Business
The series of transaction through which a
business generate its revenue and its cash
receipts from customers is called the operating
cycle
3
Types of Businesses
Merchandising Business
Product
Wal-Mart
Toys “R” Us
Circuit City
Lands’ End
Amazon.com
General merchandise
Toys
Consumer electronics
Apparel
Internet books, music, video
retailer
4
Operating Cycle of a Merchandising
Company
Cash
Accounts
Receivable
Inventory
2. Sale of merchandise
on account
5
Comparing Merchandising Activities with
Manufacturing Activities
Purchase
inventory in
ready-to-sell
condition.
Merchandising
Company
Manufacture
inventory and
have a longer
and more
complex
operating cycle
Manufacturing
Company
6
Retailers and Wholesalers
Wholesalers buy
merchandise from
several different
manufacturers and
then sell this
merchandise to
several retailers.
Retailers sell
merchandise directly
to the public. 7
Income Statement of a Merchandising
Company
Computer Barn
Condensed Income Statement
For the Year Ended December 31, 2002
$ 900,000
Revenue from sales
540,000
Less: Cost of goods sold
$ 360,000
Gross profit
270,000
Less: Expenses
$ 90,000
Net income
Cost of
goods sold
represents
the expense
of goods
that are
sold to
customers.
Gross profit is a useful means of measuring
the profitability of sales transactions.
8
What Accounting Information Does a
Merchandising Company Need?
Financial Reporting
Requirements
Daily Business Operating
Requirements
Special Reporting
Requirements
Examples
• Revenues
• Expenses
• Customer
Ledgers
•Tax Reports
9
General Ledger Accounts
Although general ledger accounts provide
useful information, they do not provide
much of the detailed information needed in
the daily business operations.
Date
2001
June 1
15
General Ledger
Accounts Receivable
Debit
Credit
10,000
3,000
Who
owes us
money?
Balance
10,000
7,000
Subsidiary Ledgers: A Source of
Needed Details
Controlling Account
Date
2001
June 1
15
Date
2001
June 1
15
Subsidiary Ledger
Jake Sparks
Debit
Credit
3,000
Date
2001
June 1
15
General Ledger
Accounts Receivable
Debit
Credit Balance
10,000
3,000
10,000
7,000
Balance
3,000
2,000
1,000
Subsidiary Ledger
Heather Jacobs
Debit
Credit Balance
7,000
2,000
7,000
5,000
11
Controlling Account in
Unit of Organization Within the
the General Ledger
Subsidiary Ledger
Inventory
Each type of product offered for
sale
Plant assets
Each asset (or group of similar
assets)
Accounts payable
Each creditor
Capital stock
Each stockholder
Sales
Each department, branch
location, or product line
Cost of goods sold
Same organization as the sales
ledger
Many expense accounts Each department incurring these
types of expenses
12
Payroll expenses
Each employee
Two Approaches Used in Accounting for
Merchandise Transactions
Perpetual
Inventory
System
Periodic
Inventory
System
13
Perpetual Inventory System
The inventory account is continuously
updated to reflect items on hand.
Let’s look
at some
entries!
14
Perpetual Inventory System
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account .
GENERAL JOURNAL
Date
Account Titles and Explanation
Sept. 5 Inventory
Accounts Payable (Electronic City)
Debit
Credit
3,000
3,000
15
Perpetual Inventory System
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.
GENERAL JOURNAL
Date
Account Titles and Explanation
Sept. 10 Accounts Receivable (ABC Radios)
10  $30 = $300
Debit
500
Sales
10 Cost of Goods Sold
Inventory
Credit
500
300
300
16
Perpetual Inventory System
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.
Retail
GENERAL JOURNAL
Date
Account Titles and Explanation
Sept. 10 Accounts Receivable (ABC Radios)
Debit
500
Sales
500
10 Cost of Goods Sold
Inventory
Credit
300
Cost
300
17
Perpetual Inventory System
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.
GENERAL JOURNAL
Date
Account Titles and Explanation
Sept. 15 Accounts Payable (Electronic City)
Cash
Debit
Credit
3,000
3,000
18
Perpetual Inventory System
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.
GENERAL JOURNAL
Date
Account Titles and Explanation
Sept. 22 Cash
Accounts Receivable (ABC Radios)
Debit
Credit
500
500
19
The Inventory Subsidiary Ledger
Item LL002
Description Laser Light
Location Storeroom 2
Purchased
Date
Sept. 5
Sept. 10
Units
100
Unit
Cost
Total
$ 30 $
3,000
Units
10
Primary supplier Electronic City
Secondary supplier Electric Company
Inventory level: Min: 25 Max: 200
Sold
Balance
Cost of
Unit
Goods
Unit
Cost
Sold
Units
Cost
Total
100
$
30 $ 3,000
$
30 $
300
90
30
2,700
At the end of the period, management
compares the physical inventory count with
the inventory ledger to determine inventory
shrinkage.
20
Taking a Physical Inventory
In order to ensure
the accuracy of
their perpetual
records, most
businesses take a
complete physical
count of the
merchandise on
hand at least once
a year.
Taking a Physical Inventory
Reasonable amounts of inventory shrinkage are viewed as
a normal cost of doing business. Examples include
breakage, spoilage and theft.
On December 31, Worley Co. counts its inventory.
An inventory shortage of $2,000 is discovered.
GENERAL JOURNAL
Date
Account Titles and Explanation
Dec. 31 Cost of Goods Sold
Inventory
Debit
Credit
2,000
2,000
22
Closing Entries in a Perpetual
Inventory System
Close Revenue accounts
(including Sales) to
Income Summary.
Close Expense accounts
The closing
entries are the
same!
(including Cost of
Goods Sold) to Income
Summary.
Close Income Summary
account to Retained
Earnings.
Close Dividends to
Retained Earnings.
23
Next is the
periodic
inventory
system!
24
Periodic Inventory System
No effort is made to keep up-to-date
records of either inventory or cost of
goods sold.
Let’s look
at some
entries!
25
Periodic Inventory System
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account .
Notice that no entry is
made to Inventory.
GENERAL JOURNAL
Date
Account Titles and Explanation
Sept. 5 Purchases
Accounts Payable (Electronic City)
Debit
Credit
3,000
3,000
26
Periodic Inventory System
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.
Retail
GENERAL JOURNAL
Date
Account Titles and Explanation
Sept. 10 Accounts Receivable (ABC Radios)
Sales
Debit
Credit
500
500
27
Periodic Inventory System
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.
GENERAL JOURNAL
Date
Account Titles and Explanation
Sept. 15 Accounts Payable (Electronic City)
Cash
Debit
Credit
3,000
3,000
28
Periodic Inventory System
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.
GENERAL JOURNAL
Date
Account Titles and Explanation
Sept. 22 Cash
Accounts Receivable (ABC Radios)
Debit
Credit
500
500
29
Computing Cost of Goods Sold in a
Periodic Inventory System
The accounting records of Party
Supply show the following:
Inventory, Jan. 1, 2003
$ 14,000
Purchases (during 2003) 130,000
At December 31, 2003, Party
Supply counted the merchandise
on hand at $12,000.
Calculate Party Supply’s cost of goods sold
for 2003.
30
Computing Cost of Goods Sold in a
Periodic Inventory System
Cost of Goods Sold can be
calculated as follows:
Inventory (beginning of the year)
Add: Purchases
Cost of goods available for sale
Less: Inventory (end of year)
Cost of goods sold
$ 14,000
130,000
144,000
12,000
$ 132,000
31
Creating Cost of Goods Sold in a
Periodic Inventory System
Now, Party Supply must
create the Cost of Goods
Sold account.
GENERAL JOURNAL
Date
Account Titles and Explanation
Dec. 31 Cost of Goods Sold
Inventory (beginning of year)
Purchases
Debit
Credit
144,000
14,000
130,000
32
Creating Cost of Goods Sold in a
Periodic Inventory System
Now, Party Supply must
record the ending inventory
amount.
GENERAL JOURNAL
Date
Account Titles and Explanation
Dec. 31 Inventory (end of year)
Cost of Goods Sold
Debit
Credit
12,000
12,000
33
Completing the Closing Process
Close Revenue accounts
(including Sales) to
Income Summary.
Close Expense accounts
The closing
entries are the
same!
(including Cost of
Goods Sold) to Income
Summary.
Close Income Summary
account to Retained
Earnings.
Close Dividends to
Retained Earnings.
34
Comparison of Perpetual and Periodic
Inventory Systems
Perpetual Inventory
System
Periodic Inventory
System
Large Department
Stores
Jo’s Dress Shop
35
Modifying an Accounting System
Most businesses use special journals
rather than a general journal to record
routine transactions that occur
frequently.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
36
End of Todays Session
37