6 – Accounting for Merchandising
Businesses
After studying this chapter, you should be able to:
1.
Distinguish between the activities and financial statements of service and
merchandising businesses.
2.
Describe and illustrate the financial statements of
a merchandising business.
3.
Describe and illustrate the accounting for merchandise
transactions including:

purchase of merchandise

sale of merchandise

freight costs, sales taxes, trade discounts

dual nature of merchandising transactions.
4.
Describe the adjusting and closing process for a merchandising business
1
Objective 1
Distinguish between the activities and
financial statements of service and 6-1
merchandising businesses.
Service Business
Fees earned
Operating expenses
Net income
$XXX
–XXX
$XXX
Merchandising Business
Sales
Cost of Merchandise Sold
Gross Profit
Operating Expenses
Net Income
$XXX
–XXX
$XXX
–XXX
$XXX
2
6-1
When merchandise is sold, the revenue is
reported as sales, and its cost is
recognized as an expense called cost of
merchandise sold. (this appears on the
Income Statement)
Merchandise on hand (not sold) at
the end of an accounting period is
called merchandise inventory.(this
appears on the balance sheet as a
current asset)
3
Objective 2
Describe and illustrate the financial
statements of a merchandising business.
6-2
The multiple-step income statement contains several sections,
subsections, and subtotals.
NetSolutions
Income Statement
For the Year Ended December 31, 2009
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)
4
Operating expenses:
Selling expenses:
Sales salaries expense
Advertising expense
Depr. Expense–store equipment
Delivery Expense
Miscellaneous selling expense
Total selling expenses
Administrative expenses:
Office salaries expense
Rent expense
Depr. expense–office equipment
Insurance expense
Office supplies expense
Misc. administrative expense
Total admin. expenses
Total operating expenses
Income from operations
Other income and expenses:
Rent revenue
Interest expense
Net income
$53,430
10,860
3,100
2,800
630
$ 70,820
$21,020
8,100
2,490
1,910
610
760
34,890
105,710
$ 77,240
$ 600
(2,440)
(1,840)
$75,400
5
The Sales account provides the total amount
charged to customers for merchandise sold,
including cash sales and sales on account.
Sales returns and allowances are granted by the seller to
customers for damaged or defective merchandise.
Sales discounts are granted by the seller to
customers for early payment of amounts owed.
Net sales is determined by subtracting sales returns and
allowances and sales discounts from sales.
6
As we discussed earlier, sellers may offer customers
sales discounts for early payment of their bills. From
the buyer’s perspective, such discounts are referred
to as purchase discounts.
The buyer may return merchandise to the seller (a
purchase return), or the buyer may receive a
reduction in the initial price at which the merchandise
was purchased (a purchase allowance).
7
Cost of merchandise sold was discussed earlier. It is
the cost of the merchandise sold to customers.
6-2
In a PERPETUAL ACCOUNTING
SYSTEM, there will be an account
called Cost of merchandise sold, which
is continuously updated whenever
inventory is bought or sold.
Note – there is another type of accounting system –
The Periodic Accounting System. In this system the
accounting records for inventory are not updated
continuously with each purchase and sale. (We will not
be focusing on his type in this course)
8
An alternative form of income statement
is the single-step income statement.
6-2
NetSolutions
Income Statement
For the Year Ended December 31, 2009
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
NetSolutions deducts the total of all expenses in one step from the total of all revenues.
9
Objective 3
6-3
Describe and illustrate the accounting for merchandise
transactions including: sale of merchandise; purchase of
merchandise; freight costs, sales taxes, trade discounts;
dual nature of merchandise transactions.
Recall that we are using the
PERPETUAL SYSTEM
10
Purchase Transactions (Perpetual Inventory)
On January 3, NetSolutions purchased merchandise for cash from Alden
Company, $2,510.
Description
2009
Jan. 3 Merchandise Inventory
Cash
Purchased inventory from
Bowen Co.
Date
Post.
Ref.
Dr
6-3
Cr.
2 510 00
2 510 00
On January 4, NetSolutions purchased merchandise on
account from Thomas Corporation, $9,250.
Jan. 4 Merchandise Inventory
Accounts Payable—Thomas Corp.
Purchased inventory on
account.
9 250 00
45
9 250 00
11
Purchases Discounts
Mar. 12 Merchandise Inventory
Accounts Payable—Alpha Tech.
6-3
3 000 00
3 000 00
Purchased inventory on
account.
On March 12, NetSolutions purchased
merchandise on account from Alpha
Technologies, $3,000, with terms 2/10, n/30.
12
If payment is made by March 22, NetSolutions records the discount as a
reduction in cost. Notice that Merchandise Inventory is credited
because NetSolutions maintains a perpetual inventory.
Mar. 22 Accounts Payable—Alpha Technol.
3 000 00
Cash
2 940 00
Merchandise Inventory
Paid Alpha Technologies for
March 12 purchase.
60 00
If NetSolutions does not pay the invoice until April
11, it would pay the full amount.
Apr. 11 Accounts Payable—Alpha Technol.
Cash
Paid Alpha Technologies for
March 12 purchase.
3 000 00
3 000 00
13
Purchases Returns
A purchases return involves actually
returning merchandise that is
damaged or does not meet the
specifications of the order.
6-3
Purchases Allowances
When the defective or incorrect
merchandise is kept by the
buyer and the vendor makes a
price adjustment, this is a
purchases allowance.
14
Purchases Returns and Allowances
NetSolutions receives the delivery from Maxim Systems and
determines that $900 of the items are not the merchandise
ordered. Debit memorandum #18 (also called a debit memo)
is issued to Maxim Systems.
6-3
On March 7, NetSolutions records the
return of the merchandise indicated in
Debit Memorandum No. 18.
Mar. 7 Accounts Payable—Maxim Systems
Merchandise Inventory
Debit Memo No. 18
900 00
900 00
15
Sales (Purchases) Discounts
6-3
The terms for when payments for
merchandise are to be made, agreed
on by the buyer and the seller, are
called credit terms. If buyer is
allowed an amount of time to pay, it
is known as the credit period.
16
Credit Terms
6-3
Invoice for
$1,500
Terms:
2/10, n/30
If invoice is paid
within 10 days of
invoice date
If invoice is NOT
paid within 10 days
of invoice date
$1,470 paid
($1,500 less a 2%
discount)
Full amount ($1,500)
is due within 30 days
of invoice date
17
On May 2, NetSolutions purchased $5,000 of merchandise
from Delta Data Link, subject to terms 2/10, n/30.
May 2 Merchandise Inventory
5 000 00
Accounts Payable—Delta Data
Purchased merchandise.
5 000 00
On May 4, NetSolutions returns
$3,000 of the merchandise.
4 Accounts Payable—Delta Data Link
Merchandise Inventory
3 000 00
3 000 00
Returned portion of the
merchandise purchased.
18
6-3
On May 12, NetSolutions pays the amount due,
$1,960 [$2,000 – (($5,000 –$3,000) x 2%)].
12 Accounts Payable—Delta Data Links
Cash
Merchandise Inventory
Paid invoice [($5,000 –
$3,000) x 2% = $40;
$2,000 – $40 = $1,960]
2 000 00
1 960 00
40 00
19
Cash Sales
On January 3, NetSolutions sold
$1,800 of merchandise for cash.
6-3
The $1,200 cost of the inventory must be recorded.
20
Credit Card Sales
6-3
Assume that at the end of the month,
$48 was sent to pay the service
charge on credit card sales.
21
Sales on Account
6-3
On January 12, NetSolutions sold Sims Company
merchandise on account, $510. The cost of the
merchandise to the seller was $280.
Jan. 12 Accounts Receivable—Sims Co.
Sales
510 00
510 00
Invoice No. 7172
12 Cost of Merchandise Sold
Merchandise Inventory
Cost of merchandise sold on
Invoice No. 7172.
280 00
280 00
22
Sales Discount (1)
On January 12, NetSolutions sold Omega Tech merchandise
on account for $1,500. The cost of the merchandise to the
NetSolutions was $1,200. The terms were: 2/10 n/30
First, we record the sale on Jan 12……
Jan. 12 Accounts Receivable— Omega Tech
1,500 00
Sales
1,500 00
Invoice No. 106-8
12 Cost of Merchandise Sold
Merchandise Inventory
Cost of merchandise sold on
Invoice No. 106-8
1, 200 00
1, 200 00
23
Sales Discount (2)
On January 22, NetSolutions receives the
amount due, less the 2 percent discount.
Jan. 22 Cash
Sales Discounts
Accounts Receivable–Omega Tech.
Collection of Invoice No.
106-8, less 2% discount.
6-3
1 470 00
30 00
1 500 00
24
Sales Returns and Allowances
On January 13, issued Credit Memo 32 to Krier
Company for merchandise returned to
NetSolutions. Selling price, $225; cost to
NetSolutions, $140.
Jan. 13 Sales Returns and Allowances
Accounts Receivable—Krier Co.
225 00
225 00
Credit Memo No. 32
13 Merchandise Inventory
Cost of Goods Sold
Cost of merchandise returned.
Credit Memo No. 32.
140 00
140 00
25
FOB (free on board) shipping point(1) – Buyer side
On June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB shipping
point and pays the freight cost of $50.
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
50 00
26
6-3
FOB (free on board) destination point – Seller side
On June 15, NetSolutions sells
merchandise to Kranz Company on
account, $700, terms FOB
destination. The cost of the
merchandise sold is $480.
On June 15, NetSolutions also pays
the freight cost of $40.
27
June 15 Accounts Receivable—Kranz Co.
Sales
Sold merchandise, terms
FOB destination.
15 Cost of Merchandise Sold
Merchandise Inventory
Record cost of merchandise
sold to Kranz Company.
June 15 Delivery Expense
Cash
Paid shipping cost on
merchandise sold.
700 00
700 00
480 00
480 00
40 00
40 00
28
Sales Taxes
On August 12, merchandise is sold on account to Lemon
Company, $100. The state has a 6% sales tax.
Aug. 12 Accounts Receivable—Lemon Co.
106 00
Sales
Sales Taxes Payable
Invoice No. 339
100 00
6 00
On September 15, the seller sends in a payment of $2,900 to the
taxing unit for the August taxes collected.
Sept. 15 Sales Tax Payable
Cash
Payment for sales taxes
collected during August.
2 900 00
2 900 00
29
Dual Nature of Merchandise Transactions
Each merchandising transaction affects a buyer
and a seller. In the following illustrations, we
show how the same transactions would be
recorded by both the seller and the buyer.
See page 272
30
Objective 4
Describe the adjusting and closing
process for a merchandising business.
6-4
Adjusting Entries
Inventory Shrinkage
Merchandising businesses may experience some loss of
inventory due to shoplifting, employee theft, or errors in
recording or counting inventory. If the balance of the
Merchandise Inventory account is larger than the total amount
of merchandise count, the difference is often called inventory
shrinkage or inventory shortage.
31
Inventory Shrinkage e.g.
NetSolutions inventory records indicate that $63,950 of
merchandise should be available for sale on December 31,
6-4
2009. The physical count reveals that only $62,150 is actually
available.
Adjusting Entry
Dec. 31 Cost of Merchandise Sold
Merchandise Inventory
Inventory shrinkage (63,950
– $62,150).
Inventory records
Inventory count
Inventory shortage
1 800 00
1 800 00
$63,950
62,150
$ 1,800
32
Closing Entries
6-4
Step 1:
Close the temporary accounts with credit
balances to Income Summary.
Date
Item
Closing Entries
2009
Dec. 31 Sales
Rent Revenue
Income Summary
PR
Debit
Credit
410 720 185 00
610
600 00
312
720 785 00
33
Step 2: Close the temporary accounts with
debit balances to Income Summary.
31 Income Summary
Sales Returns and Allow.
Sales Discounts
Cost of Merchandise Sold
Sales Salaries Expense
Advertising Expense
Depr. Exp.—Store Equip.
Delivery Expense
Misc. Selling Expense
Office Salaries Expense
Rent Expense
Depr. Exp.—Office Equip.
Insurance Expense
Office Supplies Expense
Misc. Administrative Exp.
Interest Expense
312
411
412
510
520
521
522
523
529
530
531
532
533
534
539
710
6-4
645 385 00
6 140 00
5 790 00
525 305 00
53 430 00
10 860 00
3 100 00
2 800 00
630 00
21 020 00
8 100 00
2 490 00
1 910 00
610 00
760 00
2 440 00
34
Step 3: Closing Entries
Close Income Summary (the balance represents a $75,400
profit for NetSolutions in 2009) to Chris Clark, Capital.
31 Income Summary
Chris Clark, Capital
312
310
75 400 00
75 400 00
Step 4: Closing Entries
Close Chris Clark, Drawing to Chris Clark, Capital.
31 Chris Clark, Capital
Chris Clark, Drawing
310
311
18 000 00
18 000 00
35