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CHAPTER 6
ACCOUNTING FOR
MERCHANDISING BUSINESSES
Lecturer: Mr. Le Ngoc Anh Khoa, MSc.
Objectives
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1.
Identify the differences between service and
merchandising companies.
2.
Explain the recording of sales revenues under a
perpetual inventory system.
3.
Explain the recording of purchases under a perpetual
inventory system.
4.
Explain the steps in the accounting cycle for a
merchandising company.
5.
Distinguish between a multiple-step and a single-step
income statement.
Nature of Merchandising Businesses
3
When merchandise is sold, the revenue is reported as sales, and its
cost is recognized as an expense called cost of merchandise sold.
Ex: During the current year, merchandise is sold for $150,000 cash
and for $205,000 on account. The cost of the merchandise sold is
$225,000, and operating expenses is $100,000. What is the amount
of the gross profit, net income?
Merchandising Operating Cycles
4
Financial Statements for a
Merchandising Business
5

Multiple-Step Income Statement

Contains several sections, subsections, and subtotals.

Shows several steps in determining net income.

Distinguishes between operating and non-operating
activities (other activities).
Illustration 5-13
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Question
7
The multiple-step income statement for a merchandiser
shows each of the following features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.
Financial Statements
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
Sales is the total amount charged customers for merchandise
sold, including cash sales and sales on account.

Sales returns and allowances: The customer may return
merchandise to the seller (Sales returns) or be granted for
damaged or defective merchandise (Sales allowances)

Sales discounts are granted by the seller to customers for early
payment
Financial Statements
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
Cost of Merchandise Sold
Flow
of
Costs
Companies use either a perpetual inventory system or a periodic inventory
system to account for inventory.
Merchandising Operations
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Flow of Costs
Perpetual System

Maintain detailed records of the cost of each inventory
purchase and sale.

Records continuously show inventory that should be on
hand.

Company determines cost of goods sold each time a
sale occurs.
Merchandising Operations
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Flow of Costs
Periodic System

Do not keep detailed records of the goods on hand.

Cost of goods sold determined by count at the end of
the accounting period.

Calculation of Cost of merchandise sold :
Beginning inventory
Add: Purchases, net
Merchandise available for sale
Less: Ending inventory
Cost of merchandise sold
$ 100,000
800,000
900,000
125,000
$ 775,000
LO 1
Merchandising Operations
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Perpetual System:

Traditionally used for merchandise with high unit
values.

Provides better control over inventories.

Requires additional clerical work and additional cost to
maintain inventory records.
Cost of Merchandise Sold
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NetSolutions began its merchandising operations on July 1, 2010.



Purchases July 1–December 31, 2010
$340,000
Merchandise inventory on December 31, 2010
$59,700
Cost of merchandise sold?
Cost of Merchandise Purchased
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Sellers may grant a buyer sales returns and allowances for
returned or damaged merchandise. From a buyer’s
perspective, such allowances are called purchases returns and
allowances
Sellers may grant a buyer a sales discount for early payment.
From a buyer’s perspective, such discounts are called
purchases discounts
Freight in on merchandise purchased: freight cost paid by
the buyer must be added to the cost of merchandise
purchased
Cost of Merchandise Purchased
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
2011 data for NetSolutions:

Purchases of merchandise

Purchases returns and allowances
9,100

Purchases discounts
2,525

Freight in on merchandise purchased
$521,980
17,400
Illustration
16
Operating Expenses
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
Selling expenses are incurred directly in the selling of
merchandise.


Examples: sales salaries, store supplies used, depreciation of store
equipment, delivery expense, and advertising
Administrative expenses or General expenses, are incurred
in the administration or general operations of the business.

Examples : office salaries, depreciation of office equipment, and
office supplies used.
Other Income and Expense
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
Other income is revenue from sources other than the primary
operating activity of a business.


Examples: income from interest, rent, and gains resulting from the
sale of fixed assets.
Other expense is an expense that cannot be traced directly to
the normal operations of the business.

Examples: interest expense and losses from disposing of fixed assets.
Single-Step Income Statement
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Merchandising Transactions
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
Credit terms: the terms for when payments for
merchandise are to be made
2/10, n/30
2% discount if paid within 10 days, otherwise
net amount due within 30 days.
1/5, n/20
1% discount if paid within 5 days, otherwise
net amount due within 20 days.
Illustration
21
Alpha Technologies issues an invoice for $3,000 to
NetSolutions dated Jan 5, with terms 2/10, n/30.
NetSolutions pays the amount due, less the discount,
on Jan 12.
Calculate the payment amount.
Illustration
22
Merchandising Transactions
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Freight Costs – Terms of Sale
Seller places goods Free On
Board the carrier, and buyer
pays freight costs.
Seller places goods Free On
Board to the buyer’s place of
business, and seller pays
freight costs.
Freight costs incurred by the seller are an operating expense
Freight cost paid by the buyer must be added to the cost of merchandise purchased.
Merchandising Transactions
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Illustration
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a.
[($4,500 - $800) x 1%] + $200 = $3,863
b.
($5,000 - $2,500) x 2% = $2,450
Merchandising Transactions
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
Sales Taxes
The liability for the sales tax is
incurred when the sale is made.
The sellers have to collect the
sales tax and submit sales tax to
the taxing authority.
Illustration
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

On Aug 12, NetSolutions sold $100 to Lemon Co. on account, subject
to a sales tax of 6%.
On Sep 15, NetSolutions submited $2,900 sales tax collected during
Aug to the taxing authority
Merchandising Transactions
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
Trade Discounts

special discounts are offered by wholesalers to government agencies or
businesses that order large quantities

sellers and buyers do not normally record the list prices of merchandise
and trade discounts in their accounts.

Ex: list price of $1,000 and a 40% trade discount


The seller records the sale of $1,000 – 40% x $1,000 = $600
The buyer records the purchase at $600
Merchandising Transactions
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Sales Transactions
#1
Cash or Accounts receivable
XXX
Sales revenue
#2
Cost of Merchandise sold
Inventory
XXX
XXX
Selling
Price
Cost
XXX
Merchandising Transactions
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
Sales Transactions

Cash Sales
On January 3, NetSolutions sells merchandise for $1,800, and assume
that the cost of merchandise sold on January 3 is $1,200.
Merchandising Transactions
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
Sales Transactions

Sales on Accounts
On January 12, NetSolutions sale on account of $510. The cost of
merchandise sold was $280
Merchandising Transactions
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
Sales Transactions

Sales Discounts

discounts taken by the buyer for early payment are recorded as sales
discounts by the seller.

sales discounts are recorded in a separate account, which is a contra
(or offsetting) account to Sales.

Ex: NetSolutions receives $1,470 on January 22 for the invoice issued
on Jan. 12, 2011, credit term 2/10, n/30
Merchandising Transactions
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
Sales Transactions

Sales Returns and Allowances
 sales
returns and allowances are recorded in a separate
account, which is a contra (or offsetting) account to Sales.
 the
seller has to record sales returns, the increase of
merchandise inventories and the decrease of cost of
merchandise returned
Merchandising Transactions
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
Sales Transactions

Sales Returns and Allowances
 A credit memo authorizes a credit to (decreases) the buyer’s account
receivable. A credit memo indicates the amount and reason for the
credit.
Merchandising Transactions
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
Ex: On Jan 13, Krier Co. returned the merchandise of $225, cost of
merchandise returned is $140
Merchandising Transactions
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
Sales Transactions
xxx
xxx
xxx
xxx
Merchandising Transactions
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
Purchase Transactions

Cash Purchases
On Jan 3, NetSolutions purchased $2,510 merchandise in cash from
Bowen Co.

Purchases on Account
On Jan 4, NetSolutions purchased $2,510 merchandise on account from
Thomas Corp.
Merchandising Transactions
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
Purchase Transactions

Purchases Discounts taken by a buyer reduce the cost of the
merchandise purchased.
Illustration: NetSolutions purchased merchandise from Alpha Technologies
as follows:
Invoice Date
March 12
Invoice Amount
$3,000
Should discounts be taken when offered?
Terms
2/10, n/30
Merchandising Transactions
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

If NetSolutions takes the discounts and pays the invoice on Mar 22
If NetSolutions doesn’t take the discounts, but instead pays the invoice on
April 11
Merchandising Transactions
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
Purchase Transactions

Purchases Returns and Allowances
 Debit demo informs the seller of the amount the buyer proposes to
debit to the account payable due the seller and states the reasons for
the return or the request for the price allowance.
Merchandising Transactions
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
Illustration:
NetSolutions records the return of the merchandise indicated in the
debit memo as follows
Merchandising Transactions
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Merchandising Transactions
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
May 2. Purchased $5,000 of merchandise on account from Delta Data Link,
terms 2/10, n/30.

May 4. Returned $3,000 of the merchandise purchased on March 2.

May 12. Paid for the purchase of May 2 less the return and discount.
Question
44
In a perpetual inventory system, a return of defective merchandise by
a purchaser is recorded by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Inventory
Question
45
The cost of goods sold is determined and recorded each time a
sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory system.
d. neither a periodic nor perpetual inventory system.
Adjusting Entry
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Inventory shrinkage or inventory shortage: the physical inventory on hand
at the end of the accounting period is less than the balance of Merchandise
Inventory under the perpetual inventory system.
Illustration: NetSolutions’ inventory records indicate the following on
December 31, 2011:
Closing Process
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Debit each temporary account with a credit balance, such as
Sales, for its balance and credit Income Summary.
Closing Process
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Credit each temporary account with a debit balance, such as an
expense, for the balance and credit Income Summary.
Closing Process
49
Debit Income Summary for the amount of its balance (net
income) and credit the owner’s equity account.
Closing Process
50
Debit the owner’s capital account for the balance of the
drawing account and credit the drawing account.
The trial balance of Celine’s Sports Wear Shop at December 31 shows
Inventory $25,000, Sales Revenue $162,400, Sales Returns and
Allowances $4,800, Sales Discounts $3,600, Cost of Goods Sold
$110,000, Rent Revenue $6,000, Freight-Out $1,800, Rent Expense
$8,800, and Salaries and Wages Expense $22,000. Prepare the closing
entries for the above accounts.
5-51
You are presented with the following list of accounts from the adjusted
trial balance for merchandiser Gorman Company. Indicate in which
financial statement and under what classification each of the following
would be reported.
5-52
You are presented with the following list of accounts from the adjusted
trial balance for merchandiser Gorman Company. Indicate in which
financial statement and under what classification each of the following
would be reported.
5-53
You are presented with the following list of accounts from the adjusted
trial balance for merchandiser Gorman Company. Indicate in which
financial statement and under what classification each of the following
would be reported.
5-54
Homework
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

PR 6-5A
PR 6-6A
EX 6-23