Chapter F5
Power Notes
Accounting for Merchandising Businesses
Learning Objectives
1. Nature of Merchandising Business
2a. Accounting for Purchases
2b. Accounting for Sales
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2c. Transportation Costs
2d. Merchandise Transactions
3. Merchandising Chart of Accounts
4. Merchandising Income Statement
5. Merchandising Accounting Cycle
6. Financial Analysis and Interpretation
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Chapter F5
Power Notes
Accounting for Merchandising Businesses
Slide # Power Note Topics
3
6
8
13
25
27
34
• Nature of Merchandising Businesses
• Inventory Costs and Relationships
• Perpetual Inventory Systems
• Merchandising Transactions
• Merchandising Chart of Accounts
• Merchandising Financial Statements
• Ratio of Net Sales to Assets
Note: To select a topic, type the slide # and press Enter.
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Merchandising and Inventory

Merchandising involves selling inventory

Inventory is usually an important asset

Inventory must be accounted for
periodically or perpetually

Traditional periodic method is often being
replaced by perpetual inventory accounting
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Income Statement Comparison
Service Business
Fees earned
Operating expenses
Net income
$150,000
120,000
$ 30,000
20% of revenues
Merchandising Business
Sales revenue
Cost of mdse. sold
Gross profit
Operating expenses
Net income
$600,000
450,000
$150,000
120,000
$ 30,000
5% of revenues
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Income Statement Comparison
Service Business
Fees earned
Operating expenses
Net income
$150,000
120,000
$ 30,000
20% of revenues
Merchandising Business
Sales revenue
Cost of mdse. sold
Gross profit
Operating expenses
Net income
$600,000
450,000
$150,000
120,000
$ 30,000
75% of revenues
5% of revenues
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Inventory Costs and Relationships
LIABILITIES
Merchandise
Inventory
ASSETS
OWNER’S
EQUITY
Net Income
Cost of
Mdse. Sold
COSTS
&EXPENSES
REVENUES
If merchandise inventory is . . . . . . . overstated
Cost of merchandise sold is . . . . . . understated
Gross profit and net income are . . . overstated
Ending owner’s equity is . . . . . . . . . overstated
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Inventory Costs and Relationships
LIABILITIES
Merchandise
Inventory
ASSETS
OWNER’S
EQUITY
Net Income
Cost of
Mdse. Sold
COSTS
&EXPENSES
REVENUES
If merchandise inventory is . . . . . . . understated
Cost of merchandise sold is . . . . . . overstated
Gross profit and net income are . . . understated
Ending owner’s equity is . . . . . . . . . understated
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Advantages of Using Perpetual Inventory

Continuous determination of inventory value

Continuous determination of gross profit

Affordable with computers, scanners, and bar
codes on most products

Perpetual inventory accounting provides
management controls

Managers know which items are selling fastest
and the profit margin on those items
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Accounting for Merchandise Transactions
Scully Company (Seller)
Description
Debit Credit
Burton Co. (Buyer)
Description
Debit Credit
Cash
4,000
Accts. Receivable
4,000
Accts. Payable
Cash
4,000
Accts. Receivable 12,500
Sales
12,000
Cash
500
Cost of Mdse. Sold 7,200
Mdse. Inventory
7,200
Mdse. Inventory
Accts. Payable
Cash
12,260
Sales Discounts
240
Accts. Receivable
12,500
Accts. Payable
12,500
Mdse. Inventory
240
Cash
12,260
4,000
12,500
12,500
July 28. Scully Company received payment from
Burton Co. less discount (2% x $12,000).
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Perpetual Inventory System
General Journal
Description
A
Mdse. Inventory
Accts. Payable
General Ledger
Debit Credit
5,000
5,000
Mdse. Inventory
A 5,000
Cost of Mdse. Sold
A Purchase on account
B Return of merchandise
In a perpetual system,
Mdse. Inventory is an
active asset account.
All changes are recorded
as they occur.
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NetSolutions
Income Statement (Multiple-Step)
For Year Ended December 31, 2004
Revenue from sales:
Sales
Less:Sales returns and allow.
Sales discounts
Net sales
Cost of merchandise sold
Gross profit
$ 720,185
$ 6,140
5,790
11,930
$708,255
525,305
$182,950
Continued
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NetSolutions
Merchandising Chart of Accounts
Income Statement Accounts
400 Revenue
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
600 Other Income
610 Rent Revenue
611 Interest Revenue
700 Other Expense
710 Interest Expense
500
510
520
521
522
Costs and Expenses
Cost of Merchandise Sold
Sales Salaries Expense
Advertising Expense
Depreciation Expense—
Store Equipment
523 Transportation Out
529 Misc. Selling Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Misc. Admin. Expense
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Perpetual Inventory System
General Journal
Description
A
Mdse. Inventory
Accts. Payable
B Accts. Payable
General Ledger
Debit Credit
5,000
5,000
A 5,000
1,000
B
Bal 4,000
1,000
Mdse. Inventory
Mdse. Inventory
1,000
Cost of Mdse. Sold
A Purchase on account
B Return of merchandise
C Sale of merchandise
In a perpetual system,
Mdse. Inventory is an
active asset account.
All changes are recorded
as they occur.
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NetSolutions
Income Statement (Single-Step)
For Year Ended December 31, 2004
Revenues:
Net sales
Interest revenue
Rent revenue
Total revenues
Expenses:
Cost of merchandise sold
Selling expenses
Administrative expenses
Interest expense
Total expenses
Net income
$708,255
3,800
600
$712,655
$525,305
74,620
34,890
2,440
637,255
$ 75,400
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NetSolutions
Balance Sheet
December 31, 2004
Assets
Current assets:
Cash
Notes receivable
Accounts receivable
Interest receivable
Merchandise inventory
Office supplies
Prepaid insurance
Total current assets
$ 52,950
35,000
55,880
200
62,150
480
2,650
$209,310
Continued
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NetSolutions
Balance Sheet
December 31, 2004
Assets
Property, plant, and equipment:
Land
$ 20,000
Store equipment
$ 27,100
Less accum. depreciation
5,700 21,400
Office equipment
$ 15,570
Less accum. depreciation
4,720 10,850
Total property, plant, and
equipment
52,250
Total assets
$261,560
Continued
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NetSolutions
Balance Sheet
December 31, 2004
Liabilities
Current liabilities:
Accounts payable
Note payable (current portion)
Salaries payable
Unearned rent
Total current liabilities
Long-term liabilities:
Note payable (due 2001)
Total liabilities
Owner’s Equity
Capital stock
Retained earnings
Total liabilities and owner’s equity
$ 22,420
5,000
1,140
1,800
$30,360
20,000
$ 50,360
$ 25,000
186,200
211,200
$261,560
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Perpetual Inventory System
General Journal
Description
A
Mdse. Inventory
Accts. Payable
General Ledger
Debit Credit
5,000
5,000
B Accts. Payable
1,000
Accts. Receivable
Sales
C
Cost of Mdse. Sold
Mdse. Inventory
3,250
Mdse. Inventory
1,000
Mdse. Inventory
A 5,000
1,000 B
2,500 C
Bal 1,500
Cost of Mdse. Sold
3,250
C 2,500
2,500
A Purchase on account
B Return of merchandise
C Sale of merchandise
2,500
In a perpetual system,
Mdse. Inventory is an
active asset account.
All changes are recorded
as they occur.
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Perpetual Inventory System
General Journal
Description
A
Mdse. Inventory
Accts. Payable
General Ledger
Debit Credit
5,000
5,000
B Accts. Payable
1,000
Accts. Receivable
Sales
C
Cost of Mdse. Sold
Mdse. Inventory
3,250
Mdse. Inventory
1,000
Mdse. Inventory
A 5,000
1,000 B
2,500 C
Bal 1,500
Cost of Mdse. Sold
3,250
C 2,500
2,500
A Purchase on account
B Return of merchandise
C Sale of merchandise
2,500
In a perpetual system,
Mdse. Inventory is an
active asset account.
All changes are recorded
as they occur.
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Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice
paid within 10
days of
invoice
date?
Full amount is due
No within 30 days of
invoice date.
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Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice
paid within 10
days of
invoice
date?
Full amount is due
No within 30 days of
invoice date.
Yes
2% of invoice
amount is
allowed as a
cash discount.
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Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice
paid within 10
days of
invoice
date?
Yes
2% of invoice
amount is
allowed as a
cash discount.
Full amount is due
No within 30 days of
invoice date.
Example: Merchandise was
purchased for $1,500 with credit
terms of 2/10, n/30. Payment
within 10 days is calculated as:
Invoice
$1,500
Less 2% discount
30
Net cost paid
$1,470
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Selling and Buying Merchandise Inventory
Seller
Description
Accts. Receivable
Sales
Cost of Mdse. Sold
Mdse. Inventory
Buyer
Debit Credit
1,500
1,500
900
900
Description
Mdse. Inventory
Accts. Payable
Debit Credit
1,470
1,470
Recorded at net cost
$1,500 - $30 (discount)
Jan 12. Merchandise was sold with credit terms of 2/10, n/30.
Jan 22. Payment was made within the discount period.
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Selling and Buying Merchandise Inventory
Seller
Description
Accts. Receivable
Sales
Cost of Mdse. Sold
Mdse. Inventory
Buyer
Debit Credit
1,500
1,500
900
900
Description
Mdse. Inventory
Accts. Payable
Debit Credit
1,470
1,470
Recorded at net cost
$1,500 - $30 (discount)
Jan 12. Merchandise was sold with credit terms of 2/10, n/30.
Cash
1,470
Sales Discounts
30
Accts. Receivable
1,500
Accts. Payable
Cash
1,470
1,470
Jan 22. Payment was made within the discount period.
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Selling and Buying Merchandise Inventory
Seller
Description
Accts. Receivable
Sales
Cost of Mdse. Sold
Mdse. Inventory
Buyer
Debit Credit
1,500
1,500
Description
Mdse. Inventory
Accts. Payable
Debit Credit
1,500
1,500
Recorded at full cost
900
900
Jan 12. Merchandise was sold with credit terms of 2/10, n/30.
Cash
1,470
Sales Discounts
30
Accts. Receivable
1,500
Accts. Payable
Mdse. Inventory
Cash
1,500
30
1,470
Jan 22. Payment was made within the discount period.
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Accounting for Merchandise Transactions
Scully Company (Seller)
Description
Accts. Receivable
Sales
Cost of Mdse. Sold
Mdse. Inventory
Debit Credit
5,000
5,000
Burton Co. (Buyer)
Description
Mdse. Inventory
Accts. Payable
Debit Credit
5,000
5,000
3,500
3,500
July 5. Scully Company sold merchandise on account to
Burton Co., $5,000, terms FOB destination, n/30. The cost
of the merchandise sold was $3,500.
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Accounting for Merchandise Transactions
Scully Company (Seller)
Description
Accts. Receivable
Sales
Cost of Mdse. Sold
Mdse. Inventory
Transportation Out
Cash
Debit Credit
5,000
5,000
3,500
Burton Co. (Buyer)
Description
Mdse. Inventory
Accts. Payable
Debit Credit
5,000
5,000
3,500
250
No entry.
250
July 7. Scully Company paid transportation costs of $250,
for delivery of merchandise sold to Burton Co.
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Accounting for Merchandise Transactions
Scully Company (Seller)
Description
Debit Credit
Accts. Receivable
Sales
Cost of Mdse. Sold
Mdse. Inventory
5,000
Transportation Out
Cash
250
5,000
Burton Co. (Buyer)
Description
Mdse. Inventory
Accts. Payable
Debit Credit
5,000
5,000
3,500
3,500
No entry.
250
Sales Ret. & Allow. 1,000
Accts Receivable
1,000
Mdse. Inventory
700
Cost of Mdse. Sold
700
Accts. Payable
Mdse. Inventory
1,000
1,000
July 13. Scully Company issued Burton Co. a credit memo for
merchandise returned, $1,000. The merchandise cost was $700.
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Accounting for Merchandise Transactions
Scully Company (Seller)
Description
Debit Credit
Cash
4,000
Accts. Receivable
4,000
Burton Co. (Buyer)
Description
Accts. Payable
Cash
Debit Credit
4,000
4,000
July 15. Scully Company received payment from
Burton Co. for purchase of July 1.
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Accounting for Merchandise Transactions
Scully Company (Seller)
Description
Debit Credit
Burton Co. (Buyer)
Description
Cash
4,000
Accts. Receivable
4,000
Accts. Payable
Cash
Accts. Receivable 12,500
Sales
12,000
Cash
500
Cost of Mdse. Sold 7,200
Mdse. Inventory
7,200
Mdse. Inventory
Accts. Payable
Debit Credit
4,000
4,000
12,500
12,500
July 18. Scully Company sold merchandise on
account to Burton Co., $12,000, terms FOB
shipping point, 2/10, n/eom. Scully Company
prepaid transportation costs of $500. Cost of
merchandise sold was $7,200.
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NetSolutions
Merchandising Chart of Accounts
Balance Sheet Accounts
100 Assets
110 Cash
111 Notes Receivable
112 Accounts Receivable
113 Interest Receivable
115 Merchandise Inventory
116 Office Supplies
117 Prepaid Insurance
120 Land
123 Store Equipment
124 Accumulated Depreciation—
Store Equipment
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
200 Liabilities
210 Accounts Payable
211 Salaries Payable
212 Unearned Rent
215 Notes Payable
300 Stockholders’ Equity
310 Capital Stock
311 Retained Earnings
312 Dividends
313 Income Summary
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Operating expenses:
Selling expenses:
Sales salaries expense
$60,030
Advertising expense
10,860
Depr. expense–store equip.
3,100
Miscellaneous selling expense
630
Total selling expenses
$ 74,620
Administrative expenses:
Office salaries expense
$21,020
Rent expense
8,100
Depr. expense–office equip.
2,490
Insurance expense
1,910
Office supplies expense
610
Misc. admin. expenses
760
Total admin. expenses
34,890
Total operating expenses
109,510
Income from operations
$ 73,440
Continued
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Other income:
Interest revenue
Rent revenue
Total other income
Other expense:
Interest expense
Net income
$ 3,800
600
$ 4,400
2,440
1,960
$75,400
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Profitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the
effectiveness and efficiency of operations as well
as resources available.
Profitability analysis focuses primarily on the
relationship between operating results reported in
the income statement and resources reported in
the balance sheet.
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Profitability Measures — Effective Use of Assets
Ratio of Net Sales to Assets
Net sales
Total assets:
Beginning of year
End of year
Total
Average
2003
1992
$1,498,000 $1,200,000
$1,053,000 $1,010,000
1,044,500
1,053,000
$2,097,500 $2,063,000
$1,048,750 $1,031,500
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Profitability Measures — Effective Use of Assets
Ratio of Net Sales to Assets
2003
2002
$1,498,000 $1,200,000
Net sales
Total assets:
Beginning of year
$1,053,000 $1,010,000
End of year
1,044,500
1,053,000
Total
$2,097,500 $2,063,000
Average
$1,048,750 $1,031,500
Ratio of net sales to assets
1.4
1.2
Use: To assess the effectiveness
in the use of assets.
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Chapter F5
Power Notes
Accounting for Merchandising Businesses
This is the last slide in Chapter F5.
Note: To see the topic slide, type 2 and press Enter.
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