1 CHAPTER 6 ACCOUNTING FOR MERCHANDISING BUSINESSES Lecturer: Mr. Le Ngoc Anh Khoa, MSc. Objectives 2 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 6 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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 15 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 17 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 18 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 19 Merchandising Transactions 20 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 23 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 24 Illustration 25 a. [($4,500 - $800) x 1%] + $200 = $3,863 b. ($5,000 - $2,500) x 2% = $2,450 Merchandising Transactions 26 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 27 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 28 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 29 Sales Transactions #1 Cash or Accounts receivable XXX Sales revenue #2 Cost of Merchandise sold Inventory XXX XXX Selling Price Cost XXX Merchandising Transactions 30 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 31 Sales Transactions Sales on Accounts On January 12, NetSolutions sale on account of $510. The cost of merchandise sold was $280 Merchandising Transactions 32 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 33 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 34 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 35 Ex: On Jan 13, Krier Co. returned the merchandise of $225, cost of merchandise returned is $140 Merchandising Transactions 36 Sales Transactions xxx xxx xxx xxx Merchandising Transactions 37 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 38 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 39 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 40 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 41 Illustration: NetSolutions records the return of the merchandise indicated in the debit memo as follows Merchandising Transactions 42 Merchandising Transactions 43 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 46 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 47 Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary. Closing Process 48 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 55 PR 6-5A PR 6-6A EX 6-23