Merchandising Activities
Chapter 6
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Operating Cycle of a
Merchandising Company
Cash
Accounts
Receivable
Inventory
2. Sale of goods on
account
6-2
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
6-3
Retailers and Wholesalers
Wholesalers buy goods
from several different
manufacturers and then
sell these goods to
several retailers.
Retailers sell goods
directly to the public.
6-4
Income Statement of a
Merchandising Company
Computer City
Condensed Income Statement
For the Year Ended 31 December 2010
Revenue from sales
$9,000,000
Less: Cost of goods sold 5,400,000
Gross profit
3,600,000
Less: Expenses
2,700,000
Profit
$ 900,000
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.
6-5
Accounting System Requirements for
Merchandising Companies
Control Account
Subsidiary Ledgers
Date
2010
June 1
15
Date
2010
June 1
15
Subsidiary Ledger
Sparks, Inc.
Debit
Credit
3,000
Date
2010
June 1
15
General Ledger
Accounts Receivable
Debit
Credit
10,000
3,000
Balance
10,000
7,000
Balance
3,000
2,000
1,000
Subsidiary Ledger
Heather Jacobs Company
Debit
Credit
Balance
7,000
2,000
7,000
5,000
6-6
Perpetual Inventory Systems
On 5 September, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account.
GENERAL JOURNAL
Date
Account Titles and Explanation
5 Sept Inventory
Accounts Payable (Electronic City)
Debit
Credit
3,000
3,000
6-7
Perpetual Inventory Systems
On 10 September, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.
Retail
GENERAL JOURNAL
Date
Account Titles and Explanation
10 Sept Accounts Receivable (ABC Radios)
Debit
Credit
500
Sales
10
500
Cost of Goods Sold
Inventory
300
Cost
300
10 X $30 = $300
6-8
Perpetual Inventory Systems
On 15 September, Worley Co. paid
Electronic City $3,000 for the
5 September purchase.
GENERAL JOURNAL
Date
Account Titles and Explanation
15 Sept. Accounts Payable (Electronic City)
Cash
Debit
Credit
3,000
3,000
6-9
Perpetual Inventory Systems
On 22 September, Worley Co. received $500
from ABC Radios as payment in full for
their purchase on 10 September.
GENERAL JOURNAL
Date
Account Titles and Explanation
22 Sept Cash
Accounts Receivable (ABC Radios)
Debit
Credit
500
500
6-10
Taking a Physical Inventory
In order to ensure the accuracy of their perpetual
records, most businesses take a complete physical
count of the inventory on hand at least once a year.
Reasonable amounts of inventory shrinkage are viewed as a
normal cost of doing business.
Examples include breakage, spoilage and theft.
On 31 December, Worley Co. counts its inventory.
An inventory
shortage
of $2,000 is discovered.
GENERAL
JOURNAL
Date
Account Titles and Explanation
31 Dec Cost of Goods Sold
Inventory
Debit
Credit
2,000
2,000
6-11
Closing Entries in a Perpetual
Inventory System
 Close Revenue accounts
(including Sales) to Income
Summary.
The closing
entries are the
same!
 Close Expense accounts
(including Cost of Goods
Sold) to Income Summary.
 Close Income Summary
account to Retained Earnings.
 Close Dividends to Retained
Earnings.
6-12
Periodic Inventory System
On 5 September, 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
5 Sept Purchases
Accounts Payable (Electronic City)
Debit
Credit
3,000
3,000
6-13
Periodic Inventory System
On 10 September, Worley Co. sold 10 laser
lights for $50 per unit on account to
ABC Radios.
GENERAL JOURNAL
Date
Account Titles and Explanation
10 Sept. Accounts Receivable (ABC Radios)
Retail
Debit
Credit
500
Sales
500
6-14
Periodic Inventory System
On 15 September, Worley Co. paid
Electronic City $3,000 for the
5 September purchase.
GENERAL JOURNAL
Date
Account Titles and Explanation
15 Sept Accounts Payable (Electronic City)
Cash
Debit
Credit
3,000
3,000
6-15
Periodic Inventory System
On 22 September, Worley Co. received
$500 from ABC Radios as payment in full
for their purchase on 10 September.
GENERAL JOURNAL
Date
Account Titles and Explanation
22 Sept. Cash
Accounts Receivable (ABC Radios)
Debit
Credit
500
500
6-16
Computing Cost of Goods Sold
The accounting records of Party
Supply show the following:
Inventory, 1 Jan.
$ 14,000
Purchases (during year) 130,000
Inventory, 31 Dec.
12,000
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
6-17
Creating a Cost of Goods Sold
Account
Party Supply must create the Cost of Goods Sold
account.
GENERAL JOURNAL
Date
Account Titles and Explanation
31 Dec Cost of Goods Sold
Debit
Credit
144,000
Inventory (beginning of year)
14,000
Purchases
130,000
Party Supply must record the ending
inventory
amount.
GENERAL
JOURNAL
Date
Account Titles and Explanation
31 Dec Inventory (end of year)
Cost of Goods Sold
Debit
Credit
12,000
12,000
6-18
Selecting an Inventory System
Large company with
professional management.
Small company, run by
owner.
Management and employees
wanting information about
items in inventory and the
quantities of specific
products that are selling.
Accounting records of
inventories and specific
product sales not needed in
daily operations; such
information developed
primarily for use in annual
income tax returns.
Inventory with many different
kinds of low-cost items.
Items in inventory with a high
per-unit cost.
Low volume of sales
transactions or a
computerized accounting
system.
Inventories stored at multiple
locations or in warehouses
separate from sales sites.
High volume of sales
transactions and a manual
accounting system.
All inventories stored at the
sales site (for example, in the
store).
6-19
Credit Terms and Cash Discounts
When manufacturers and wholesalers
sell their products on account, the
credit terms are stated in the invoice.
Read as: “Two ten, net thirty”
2/10, n/30
Percentage
of
Discount
# of Days
Discount Is
Available
Otherwise,
the Full
Amount Is
Due
# of Days
when Full
Amount Is
Due
6-20
Recording Purchases at Net Cost
On 6 July, Jack & Jill, Co. purchased $4,000 of
goods on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Jack & Jill, Co.
GENERAL JOURNAL
Date
Account Titles and Explanation
6 July Inventory
Debit
Credit
3,920
Accounts Payable (Kid's Clothes)
3,920
$4,000 X 98% = $3,920
6-21
Recording Purchases at Net Cost
On 15 July, Jack & Jill, Co. pays the full
amount due to Kid’s Clothes. Prepare
the journal entry for Jack & Jill, Co.
GENERAL JOURNAL
Date
Account Titles and Explanation
15 July Accounts Payable (Kid's Clothes)
Cash
Debit
Credit
3,920
3,920
6-22
Recording Purchases at Net Cost
Now, assume that Jack & Jill, Co. waited until
20 July to pay the amount due in full to
Kid’s Clothes.
Prepare the journal entry for Jack & Jill, Co.
GENERAL JOURNAL
Date
Account Titles and Explanation
20 July Accounts Payable (Kid's Clothes)
Debit
3,920
Purchase Discounts Lost
Cash
Credit
Nonoperating Expense
80
4,000
6-23
Recording Purchases at Gross Invoice
Price
On 6 July, Jack & Jill, Co. purchased $4,000
of goods on credit with terms of 2/10, n/30
from Kid’s Clothes.
Prepare the journal entry for Jack & Jill, Co.
GENERAL JOURNAL
Date
Account Titles and Explanation
6 July Inventory
Accounts Payable (Kid's Clothes)
Debit
Credit
4,000
4,000
6-24
Recording Purchases at Gross Invoice
Price
On 15 July, Jack & Jill, Co. pays the full
amount due to Kid’s Clothes.
Prepare the journal entry for Jack & Jill, Co.
Reduces Cost of Goods Sold
$4,000 X 98% = $3,920
GENERAL JOURNAL
Date
Account Titles and Explanation
15 July Accounts Payable (Kid's Clothes)
Cash
Debit
Credit
4,000
3,920
Purchase Discounts Taken
80
6-25
Recording Purchases at Gross Invoice
Price
Now, assume that Jack & Jill, Co. waited until 20
July to pay the full amount due to
Kid’s Clothes.
Prepare the journal entry for Jack & Jill, Co.
GENERAL JOURNAL
Date
Account Titles and Explanation
20 July Accounts Payable (Kid's Clothes)
Cash
Debit
Credit
4,000
4,000
6-26
Returns of Unsatisfactory Goods
On 5 August, Jack & Jill, Co. returned $500 of
unsatisfactory goods purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The
purchase was originally recorded at net cost.
Prepare the entry for Jack & Jill, Co.
GENERAL JOURNAL
Date
Account Titles and Explanation
5 Aug Accounts Payable (Kid's Clothes)
Inventory
$500 X 98% = $490
Debit
Credit
490
490
6-27
Transportation Costs on Purchases
Transportation costs related to
the acquisition of assets are part
of the cost of the asset being
acquired.
6-28
Transactions Related to Sales
Computer City
Partial Income Statement
For the Year Ended 31 December 2010
Revenue
Sales
Less: Sales returns and allowances $ 80,000
Sales discounts
40,000
Net sales
$9,120,000
120,000
$9,000,000
Credit terms and goods returns affect
the amount of revenue earned by the
seller.
6-29
Sales
On 2 August, Kid’s Clothes sold $2,000 of goods to Jack &
Jill, Co. on credit terms 2/10, n/30. Kid’s Clothes
originally paid $1,000 for the goods.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.
GENERAL JOURNAL
Date
Account Titles and Explanation
2 Aug Accounts Receivable (Jack & Jill, Co.)
Debit
2,000
Sales
2
Cost of Goods Sold
Inventory
Credit
2,000
1,000
1,000
6-30
Sales Returns and Allowances
On 5 August, Jack & Jill, Co. returned $500 of
unsatisfactory goods to Kid’s Clothes from the 2
August sale. Kid’s Clothes cost for this goods was
$250.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
GENERAL JOURNAL
Date
Account Titles and Explanation
5 Aug Sales Returns and Allowances
Contra-revenue
Debit
500
Accounts Receivable (Jack & Jill, Co.)
5
Inventory
Cost of Goods Sold
Credit
500
250
250
6-31
Sales Discounts
On 6 July, Kid’s Clothes sold $4,000 of goods to Jack & Jill,
Co. on credit with terms of 2/10, n/30. The goods
originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.
GENERAL JOURNAL
Date
6
Account Titles and Explanation
July Accounts Receivable (Jack & Jill, Co.)
Debit
4,000
Sales
6
Cost of Goods Sold
Inventory
Credit
4,000
2,000
2,000
6-32
Sales Discounts
On 15 July, Kid’s Clothes receives the full
amount due from Jack & Jill, Co. from the
6 July sale.
Prepare the journal entry for Kid’s Clothes.
Contra-revenue
$4,000 X 98% = $3,920
GENERAL JOURNAL
Date
Account Titles and Explanation
15 July Cash
Sales Discounts
Accounts Receivable (Jack & Jill, Co.)
Debit
Credit
3,920
80
4,000
6-33
Sales Discounts
Now, assume that it wasn’t until 20 July that
Kid’s Clothes received the full amount due
from Jack & Jill, Co. from the 6 July sale.
Prepare the journal entry for Kid’s Clothes.
GENERAL JOURNAL
Date
Account Titles and Explanation
20 July Cash
Accounts Receivable (Jack & Jill, Co.)
Debit
Credit
4,000
4,000
6-34
Delivery Expenses
Delivery costs incurred by sellers
are debited to Delivery Expense, an
operating expense.
6-35
Accounting for Sales Taxes
Businesses collect sales tax at the point
of sale.
Then, they remit the tax to the
appropriate governmental agency at
times specified by law.
$10,000 sale x 7% tax = $700 sales tax
GENERAL JOURNAL
Date
Account Titles and Explanation
Cash
Sales Tax Payable
Sales
Debit
Credit
10,700
700
10,000
6-36
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
6-37
Financial Analysis
Net Sales
• Trends over time
• Comparable store sales
• Sales per square foot of
selling space
Gross
Profit
Rates
• Gross profit  Net sales
• Overall gross profit rate
• Gross profit rates by
departments and products
6-38
Ethics, Fraud, and
Corporate Governance
Sales discounts and allowances are contrarevenue accounts. Sales discounts and
allowances reduce gross sales. As such, profit
will be incorrect if discounts and allowances are
not properly recorded.
The pressure brought to bear on
subordinates to implement fraudulent
schemes developed by top management can
often be intense. Top management can
threaten employees with termination if they
fail to participate in the fraud. Unfortunately,
employees who acquiesce to such pressure
face tremendous legal risks.
6-39
End of Chapter 6
6-40