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1 6 Merchandising Merchandisers need additional accounts BALANCE SHEET Assets Liabilities Learning Objectives INCOME STATEMENT Revenue Expenses 1. Describe selected merchandising activities 2. Account for the purchase and sale of merchandise inventory 3. Account for purchase and sales returns and allowances Equity Profit Debit Credit or Loss ©CourseCollege.com 2 Income Statement Service vs Merchandising Service Firm Sales No COGS Merchandising Firm Sales (Cost of Goods Sold) Gross Profit (Expenses) Net Income (Expenses) Net Income ©CourseCollege.com 3 Merchandising accounts Merchandising firms need: Inventory Cost of Goods Sold* accounts. *perpetual inventory method BALANCE SHEET Assets Liabilities INCOME STATEMENT Revenue Expenses Equity Profit Debit Credit or Loss ©CourseCollege.com 4 Merchandising firms sell physical inventory Merchandising Firms Manufacturer Wholesaler Retailer Customer ©CourseCollege.com 5 Objective 6.1: Describe selected merchandising activities Freight In Terms Wind Supply Overland Trucking Santana Sailboards FOB SHIPPING POINT Buyer pays freight-in Buyer owns merchandise on carrier at this point O6.1 FOB DESTINATION Seller pays freight-in Buyer owns merchandise when unloaded at this point ©CourseCollege.com Describe selected merchandising activities – trade discounts Trade discounts are used by merchandisers to simplified their publications of prices. Rather than producing many different price lists, a list price publication is prepared. From the list price, various trade discounts are then negotiated with customers. Wind Supply List Prices __________ __________ __________ __________ O6.1 ______ _______________ ______ ______ ______ 6 For example Santana Sailboard gets a 25% trade discount off of Wind Supply’s list prices. $500 list price – (.25 *$500) = $375 purchase price Trade Discount 25% ©CourseCollege.com 7 Describe selected merchandising activities Periodic Formula BALANCE SHEET Assets Liabilities INCOME STATEMENT Revenue Expenses Equity O6.1 Debit The periodic method keeps track of purchases using a temporary purchases account. Adding net purchases to beginning inventory provides the total available that could have been sold. Subtracting the physical count of inventory reveals the Cost of Goods Sold only after the ending inventory has been tallied. Profit Credit or Loss ©CourseCollege.com Describe selected merchandising activities – periodic formula Beginning Inventory Determined with a physical count. Ending Inventory O6.1 + Net Purchases Goods Available For sale + 8 Periodic Formula Cost of Goods Sold ©CourseCollege.com Describe selected merchandising activities – operating cycle 9 If credit terms are offered to customers, an increased operating cycle results. The merchandiser is obliged to wait longer before cash is received from each credit sale. Cash Sale Credit Sale Accounts Receivable Inventory O6.1 Inventory ©CourseCollege.com 10 Describe selected merchandising activities – sales invoice Shipping terms FOB shipping point Wind Supply 34177 W. Indust rial Rd Malvern, WI 54409 Invoice No. Dat e 38764-3 3/14/2010 Sold to: Santana Sailboards E. 2600 Beverly Drive Vantage, WA 99001 Shipping Terms Carrier Credit Terms Purchase Order Quant it y Product No. Unit Price Descript ion FOB Malvern Overland 2/10/n30 SS7621 Tot al 12 Air Born boards J348 $ 985.00 $ 11,820.00 12 Wind Master Kites b220 $ 612.00 $ 7,344.00 12 $ 78.00 $ 468.00 6 Rigging kits Sub t o t al $ 19,632.00 Freight (no discount) $ 325.00 To t al $ 19,957.00 O6.1 ©CourseCollege.com 11 Describe selected merchandising activitiessales invoice Credit terms are described here Wind Supply 34177 W. Indust rial Rd Malvern, WI 54409 Invoice No. Dat e 38764-3 3/14/2010 Sold to: Santana Sailboards E. 2600 Beverly Drive Vantage, WA 99001 Shipping Terms Carrier Credit Terms Purchase Order Quant it y Product No. Unit Price Descript ion FOB Malvern Overland 2/10/n30 SS7621 Tot al 12 Air Born boards J348 $ 985.00 $ 11,820.00 12 Wind Master Kites b220 $ 612.00 $ 7,344.00 12 $ 78.00 $ 468.00 6 Rigging kits Sub t o t al $ 19,632.00 Freight (no discount) $ 325.00 To t al $ 19,957.00 O6.1 ©CourseCollege.com 12 Describe selected merchandising activities credit terms Discount percentage Discount period Credit period 2/10/n30 O6.1 ©CourseCollege.com 13 Objective 6.2: Account for the purchase and sale of merchandise inventory Reminder We will use the perpetual inventory method and record purchases at gross amounts Accounting rules direct the cost of inventory to include all the costs of purchasing inventory, transporting it to the buyer’s place of business and bringing it to a saleable condition O6.2 ©CourseCollege.com 14 Example –purchase of merchandise March 14, 2010, Santana Sailboards completed the purchase on account (per previous invoice shown) of inventory costing$19,632 plus $325 for freight in charges. Credit terms are 2/10/n30. The journal entry to record the purchase is shown below. GENERAL JOURNAL BUYER Date 3/14/10 Description ¢Accounts Payable Assets Liabilities PR Debit Credit 19,957 ¢Inventory BALANCE SHEET Page 19 19,957 INCOME STATEMENT Revenue The asset account Inventory is increased. Expenses Equity O6.2 Profit Debit Credit or Loss ©CourseCollege.com 15 Buyer pays invoice Santana pays the Wind Supply invoice within the discount period. Following the Cost Concept, the totals in the Inventory account must be reduced by the amount of the discount. BUYER Date GENERAL JOURNAL Description PR Page 20 Debit Credit 3/22/10 ¢Accounts Payable 210 19,957.00 ¢Cash 100 19,564.36 ¢Inventory 150 392.64 Cost of merchandise inventory $19,632 * .02 = $392.64 O6.2 Cost Concept Per the invoice terms, the purchase discount of 2% is not applied to the shipping charges. ©CourseCollege.com 16 Seller –needs contra revenue accounts BALANCE SHEET Asset s 100 Cash 130 Accounts Receivable 150 Merchandise Inventory 180 Equipment 185 Ac c umulated Deprec iation Liabilit ies 200 Accounts Payable 210 Payroll Taxes Payable Equipment Equit y 300 Ow ner, Capital 310 Ow ner, Draw ing INCOME STATEMENT Revenue 400 Sales 415 Sales Discounts 420 Sales Returns and Allow ances Expenses 520 Cost of Goods Sold 530 Depreciation Expense 540 Utilities Expense 550 Rent Expense 560 Payroll Tax Expense 565 Salaries Expense Pro fit Debit Credit or 100 Sales Sales Discounts (4) Sales Returns & Allowances (2) Net Sales Lo ss 94 ©CourseCollege.com 17 Seller records payment from buyer Wind Supply records the payment on account received from Santana Sailboards. SELLER Date GENERAL JOURNAL Description PR 3/25/10 ¢Sales Discounts Page 74 Debit 392.64 19,564.36 ¢Cash ¢Accounts Receivable BALANCE SHEET Assets Liabilities INCOME STATEMENT Revenue Expenses Equity O6.2 Debit Credit 19,957.00 Sales price of merchandise inventory, $19,632 * .02 = $392.64 Remember that the entire receivable is satisfied (paid) with the payment made within the discount period. Profit Credit or Loss ©CourseCollege.com 18 Gross vs net method of recording purchase A buyer could choose to record the initial purchase on account at the net amount due within the discount period. Consider a $10,000 purchase of merchandise on account with 2/10/n30 credit terms. GENERAL JOURNAL Page54 BUYER records GROSS amount due Date 6/4/11 Description ¢Inventory PR Debit Credit 10,000.00 ¢Accounts Payable 10,000.00 BUYER records NET amount due 6/4/11 ¢Inventory 9,800.00 ¢Accounts Payable O6.2 9,800.00 Purchase price of merchandise inventory, $10,000 * .98 = $9,800 ©CourseCollege.com 19 Payments using net method of recording purchases BUYER pays NET amount due within discount period GENERAL JOURNAL Date 6/13/11 Description PR Page 17 Debit ¢Accounts Payable Credit 9,800.00 9,800.00 ¢Cash BUYER pays NET amount due after discount period 6/30/11 ¢Accounts Payable 9,800.00 ¢Discounts Lost 200.00 10,000.00 ¢Cash BALANCE SHEET Assets Liabilities INCOME STATEMENT Revenue Expenses Equity O6.2 Debit Profit Credit The Discounts Lost must be reported as an expense, immediately bringing attention to the failure to achieve the discount. or Loss ©CourseCollege.com 20 Recording sales using the perpetual method The sale on account below requires a two step journal entry. . . SELLER Date GENERAL JOURNAL Description 3/25/10 ¢Accounts Receivable 1 ¢Cost of Goods Sold Assets Liabilities 4,344.00 4,344.00 PERPETUAL INVENTORY SYSTEM 1. Record the sale itself 2. Record the affect on inventory Revenue Equity Debit 7,240.00 INCOME STATEMENT Expenses O6.2 515 Credit 7,240.00 150 ¢Inventory BALANCE SHEET 125 Debit 410 ¢Sales 2 PR Page 17 Profit Credit or Loss ©CourseCollege.com 21 Objective 6.3: Account for purchase and sales returns and allowances A return occurs when the buyer gives purchased merchandise back to the seller. An allowance occurs when the seller agrees to reduce the amount the buyer owes the seller for a variety of reasons including damage, late delivery, incorrect merchandise etc O6.3 ©CourseCollege.com 22 Account for purchase and sales returns and allowances In a return, the inventory is given back to the seller In an allowance, the buyer does not return the inventory to the seller. To document a return or allowance the seller often issues a credit memo to the buyer O6.3 ©CourseCollege.com 23 Account for purchase and sales returns and allowances Below is the buyer’s recording of a return of $1,585 of merchandise to the seller. GENERAL JOURNAL BUYER Date Description 6/8/10 PR ¢Accounts Payable Assets Liabilities INCOME STATEMENT Revenue Expenses Debit Credit 1,585.00 1,585.00 ¢Inventory BALANCE SHEET Page 19 The buyer receives and records a $1,585 credit memo from the seller for merchandise returned Equity O6.3 Debit Profit Credit or Loss ©CourseCollege.com 24 The same return from the seller’s perspective Seller’s two step process 1. Undo the sale using a contra revenue account 2. Update the inventory if the merchandise is saleable GENERAL JOURNAL SELLER Date Description 6/15/10 ¢Sales Returns & Allowances 1 PR Page 19 Debit 1,585.00 ¢Accounts Receivable 2 1,585.00 951.00 ¢Inventory ¢Cost of Goods Sold BALANCE SHEET Assets Liabilities Revenue The seller uses a contra revenue account to eliminate the effect of the sale Equity Debit 951.00 INCOME STATEMENT Expenses O6.3 Credit Profit Credit or Loss ©CourseCollege.com Recording an allowance in a merchandise transaction 25 Assume that buyer and seller agree to a $350 allowance involving a previous inventory purchase. The journal entries to record the allowance by the buyer and seller are shown. . . BUYER Date 6/8/10 GENERAL JOURNAL Description PR ¢Accounts Payable Page 81 Debit 350.00 350.00 ¢Inventory SELLER Date GENERAL JOURNAL Description 6/11/10 ¢Sales Returns and Allowances ¢Accounts Receivable O6.3 Credit PR Page 19 Debit Credit 350.00 350.00 ©CourseCollege.com 26 End Unit 6 ©CourseCollege.com
