CHAPTER 6
ACCOUNTING FOR MERCHANDISING
OPERATIONS
STUDY OBJECTIVES
After studying this chapter, you should understand:
The differences between a service
company and a merchandiser
Single & multiple step
income statements
Purchase entries—perpetual inventory
How to compute gross profit
Revenue entries--perpetual inventory
COGS -- periodic inventory
Completing the accounting cycle
STUDY OBJECTIVE 1
MERCHANDISER VS. SERVICE COMPANY
A merchandiser
buys and sells goods
to earn a profit.
A service company
provides a service
to earn a profit.
Wholesalers/Retailers
COGS
-
No COGS
INCOME MEASUREMENT
MERCHANDISER
Sales
Revenue
Less
Equals
Cost of
Goods Sold
Gross
Profit
Less
Equals
Operating
Expenses
Net
Income
(Loss)
OPERATING CYCLE COMPARISON
Service Company
Receive
Cash
Cash
Perform
Services
Accounts
Receivable
Merchandising Company
Receive
Cash
Buy
Inventory
Cash
Sell Inventory
Accounts
Receivable
Merchandise
Inventory
INVENTORY SYSTEMS
PERPETUAL INVENTORY
Inventory purchased
Item sold
End of period
No entry
Record purchase
Record revenue & COGS
PERIODIC INVENTORY
Inventory purchased
Record purchase
Item sold
Record revenue only
End of period
Compute
and record
COGS
STUDY OBJECTIVE 2
PURCHASE ENTRIES – PERPETUAL INVENTORY
MERCHANDISE INVENTORY
Cash
purchase
Credit
purchase
COST
MERCHANDISE INVENTORY
COST
CASH
COST
A/P
COST
The purchase is normally recorded when the goods are received
Credit purchases are normally supported by a purchase invoice
STUDY OBJECTIVE 2
PURCHASE ENTRIES – PERPETUAL INVENTORY
GENERAL JOURNAL
Cash
purchase
Date
May 4
Account Titles and Explanation
Merchandise Inventory
Cash
(To record goods purchased and
paid for from Sellers Electronics)
Dr.
Cr.
3800
3800
GENERAL JOURNAL
Credit
purchase
Date
May 4
Account Titles and Explanation
Merchandise Inventory
Accounts Payable
(To record goods purchased on
account from Sellers Electronics)
Dr.
Cr.
3800
3 800
SHIPPING TERMS – FREE ON BOARD
FOB SHIPPING POINT
Title transfers to buyer at
sellers shipping dock
FOB DESTINATION
Title transfers to buyer at
buyers receiving dock
Buyer pays freight costs
Seller pays freight costs
ACCOUNTING FOR FREIGHT COSTS
PAID BY BUYER
GENERAL JOURNAL
Date
May 6
Account Titles and Explanation
Merchandise Inventory
Cash
(To record payment of freight,
terms FOB shipping point)
Dr.
Cr.
150
150
Freight costs are part of the cost of inventory purchased.
ACCOUNTING FOR FREIGHT COSTS
PAID BY SELLER
GENERAL JOURNAL
Date
May 4
Account Titles and Explanation
Freight-out (Delivery Expense)
Cash
(To record payment of freight on
goods sold FOB destination)
Dr.
Cr.
150
Freight costs incurred by the seller are
selling expenses called Freight-out.
150
PURCHASE RETURNS AND ALLOWANCES
GENERAL JOURNAL
Date
May 8
Account Titles and Explanation
Accounts Payable
Merchandise Inventory
(To record return of inoperable
goods received from Highpoint
Electronic, DM No. 126)
Dr.
Cr.
300
300
For purchases returns and allowances, Accounts Payable
is debited and Merchandise Inventory is credited.
Seller
Buyer
PURCHASE DISCOUNTS
PAYMENT WITHIN DISCOUNT PERIOD
Credit terms may permit the buyer to claim a cash discount
for the prompt payment of a balance due.
GENERAL JOURNAL
Date
May 14
Account Titles and Explanation
Accounts Payable
Cash
Merchandise Inventory
(To record payment within
discount period)
Dr.
3,500
Cr.
3,430
70
If payment is made within the discount period,
Merchandise inventory is credited for the discount taken.
PURCHASE DISCOUNTS
PAYMENT AFTER DISCOUNT PERIOD
GENERAL JOURNAL
Date
June 3
Account Titles and Explanation
Accounts Payable
Cash
(To record payment with no
discount taken)
Debit
Credit
3,500
3,500
If payment is made after the discount period, Accounts Payable is
debited and Cash is credited for the full amount.
STUDY OBJECTIVE 3
REVENUE ENTRIES – PERPETUAL INVENTORY
Revenues are reported when earned in
accordance with the revenue recognition principle.
In a merchandising company,
revenues are earned
when the goods are
transferred from seller to buyer.
All sales should be supported by a
cash register tape (cash sales)
or sales invoice (credit sales).
REVENUE ENTRIES – PERPETUAL INVENTORY
GENERAL JOURNAL
Date
May 4
4
Account Titles and Explanation
Accounts Receivable
Sales
(To record credit sales to Chelsea
Video per invoice #731)
Cost of Goods Sold
Merchandise Inventory
(To record cost of merchandise
sold on invoice #731 to Chelsea
Video)
Dr.
Cr.
3,800
3,800
2,400
For cash sales, simply replace the debit
to accounts receivable with a debit to cash.
2,400
SALES RETURNS & ALLOWANCES
SALES RETURN
Customer returns goods to the
seller for credit or a refund.
SALES ALLOWANCE
Seller allows a reduction in selling price.
Goods are not returned.
Seller prepares a CREDIT MEMORANDUM.
RECORDING
SALES RETURNS & ALLOWANCES
GENERAL JOURNAL
Date
May 8
8
Account Titles and Explanation
Sales Returns and Allowances
Accounts Receivable
(To record credit granted to
Beyer Video, for returned goods)
Merchandise Inventory
Cost of Goods Sold
(To record cost of goods returned)
Dr.
Cr.
300
300
140
140
Sales Returns and Allowances is a CONTRA-REVENUE account.
It’s normal balance is a DEBIT.
SALES DISCOUNTS
Seller offers customer a cash discount
for prompt payment of balance due.
Credit terms indicate the discount percent,
Discount period, and final due date.
T E R M S
E X P L A N A T I O N
2/10, n/30
A 2% discount may be taken if payment is made
within 10 days of the invoice date.
1/10 EOM
A 1% discount is available if payment is made
by the 10th of the next month.
RECORDING
SALES DISCOUNTS
GENERAL JOURNAL
Date
May 14
Account Titles and Explanation
Cash
Sales Discounts
Accounts Receivable
(To record collection within 2/10,
n/30 discount period from Beyer
Video)
Dr.
Cr.
3,430
70
3,500
Sales discounts is a CONTRA-REVENUE ACCOUNT.
It’s normal balance is a DEBIT.
COMPLETING THE ACCOUNTING CYCLE
Study Objective 4
After all adjustments have been posted,
closing entries are prepared from the
Income Statement section of the worksheet.
All accounts that affect the determination of
net income are closed to Income Summary.
GENERAL JOURNAL
Date
Dec. 31
Account Titles and Explanation
(1)
Sales
Income Summary
(To close income statement
accounts with credit balances).
Debit
Credit
480,000
480,000
CLOSING ENTRIES
Cost of Goods Sold is closed to Income Summary.
GENERAL JOURNAL
Date
Dec. 31
Account Titles and Explanation
(2)
Income Summary
Sales Returns and Allowances
Sales Discounts
Cost of goods sold
Store Salaries Expense
Rent Expense
Freight -out
Advertising Expense
Utilities Expense
Depreciation Expense
Insurance Expense
(To close income statement
accounts with debit balances)
Debit
Credit
450,000
12,000
8,000
316,000
45,000
19,000
7,000
16,000
17,000
8,000
2,000
CLOSING ENTRIES
GENERAL JOURNAL
Date
2002
Dec. 31
Account Titles and Explanation
(3)
Income Summary
Retained Earnings
(To close net income to retained
earnings )
Debit
Credit
30,000
30,000
(4)
31
Retained Earnings
Dividends
(To close dividends to retained
earnings )
15,000
15,000
After the closing entries are posted, all temporary accounts have zero
balances.
STUDY OBJECTIVE 5
MULTIPLE - STEP INCOME STATEMENT
Illustration 5-6
Computation of Net Sales
Sales revenues
Sales
$480,000
Less: Sales returns & allowances
Sales Discounts
Net Sales
$12,000
8,000
20,000
$460,000
STUDY OBJECTIVES 5 & 6
MULTIPLE - STEP INCOME STATEMENT
The multiple step income statement arrives at net income in stages.
Sellers Electronix
Income Statement
Net Sales
$460,000
Less: Cost of Goods Sold
Gross Profit
Operating Expenses
316,000
$144,000
114,000
Net Income
The multiple step income statement also distinguished between
operating and non-operating activities.
$30,000
MULTIPLE - STEP INCOME STATEMENT
NON-OPERATING ACTIVITIES
NON-OPERATING ACTIVITIES
OTHER REVENUES
& GAINS
OTHER LOSSES
& EXPENSES
Interest revenue
Interest expense
Dividend revenue
Casualty losses
Rent revenue
Loss from employee strikes
Gains on sale of assets
Loss on sale of assets
SINGLE-STEP
INCOME STATEMENT
Sellers Electronix
Income Statement
For the Year Ended December 31, 2006
All data are classified under
Revenues
two categories:
Net sales
1 Revenues
Interest revenue
Gain on sale of equipment 2 Expenses
Total revenues
Only one step is required in
Expenses
determining net income or
net loss.
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Casualty loss from vandalism
Total expenses
Net income
$ 460,000
3,000
600
463,600
$ 316,000
76,000
38,000
1,800
200
432,000
$ 31,600
STUDY OBJECTIVES 7
COST OF GOODS SOLD—PERIODIC INVENTORY
Sellers Electronix
Cost of Goods Sold
For the year ended December 31, 2006
Cost of Goods Sold:
Inventory, January 1
$36,000
Purchases
Less: Purchase returns & allowances
Purchase discounts
Net purchases
Add: Freight-in
$325,000
$10,400
6,800
17,200
307,800
12,200
Cost of Goods Purchased
320,000
Cost of Goods Available for Sale
356,000
Inventory, December 31 (physical
count required)
40,000
Cost of Goods Sold
316,000