Chapter 6
Accounting for Merchandising Businesses
Learning Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
Nature of Merchandising Business
Accounting for Purchases
Accounting for Sales
Transportation Costs
Merchandise Transactions
Merchandising Chart of Accounts
Merchandising Income Statement
Merchandising Accounting Cycle
Financial Analysis and Interpretation
C6 - 1
Nature of merchandise business
Service business
– Provide service
– Usually it is a small business
Merchandise business
– Purchase and sell merchandise inventory
– Bigger than service business
C6 - 2
Comparison of Income Statements:
Service Co. And Merchandising Co.
Service Co.
Income Statement
Year ended June 30, 20xx
Service revenue
$xxx
Expenses:
Salary expense
x
Depreciation expense
x
Income tax expense
x
Net income
$ xx
Merchandising Co.
Income Statement
Year ended June 30, 20xx
Sales revenue
$xxx
Cost of goods sold
x
Gross profit
xx
Operating expenses:
Salary expense
x
Depreciation expense
x
Income tax expense
x
Net income
$C6xx
-3
Special terms
• sales revenue or sales
– the amount that a business earns from selling
merchandise inventory is called sales revenue, or sales.
• cost of merchandise sold
– the major expense of a merchandiser is cost of goods
sold.
• Gross margin or Gross profit
– The excess of sales over cost of sales is called gross
margin.
• Merchandise inventory
– Merchandise on hand at the end of an account period
C6 - 4
Compute the net income
• Service business:
– Fees earned – operating expenses = net income
• Merchandise business:
– Sales – cost of merchandise sold = gross profit
– Gross profit – operating expenses = net income
The cost of merchandise sold is the largest expense for the
merchandise business, say 70% or more
C6 - 5
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
C6 - 6
Merchandise Inventory

Merchandising involves selling inventory

Inventory is usually an important asset

Inventory must be accounted for periodically or
perpetually

Inventory system

Perpetual inventory system

Periodic inventory system
C6 - 7
Perpetual inventory system
• In a perpetual inventory system, each
purchase and the cost of each sale are
recorded in Merchandise Inventory.
• Most companies using the perpetual
inventory system.
C6 - 8
Periodic inventory system
• In a periodic inventory system, the inventory
records do not show the amount available for sale
or sold during the period. Instead, a detailed listing
of merchandise for sale at the end of the
accounting period is prepared by the physical
count.
• This physical inventory is used to determine the
cost of the merchandise inventory on hand and the
cost of merchandise sold.
C6 - 9
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
C6 - 10
Accounting for purchase
• Purchase order
• Receive the inventory
• Invoice and payment
• Exhibit 1 invoice
– Netsolutions purchase $1,500 merchandise inventor
– Credit term: 2/10; n/30
C6 - 11
Purchase and payment
Payment without discount
Jan. 12
Jan. 22
Merchandise inventory
Accounts payable
1500
Accounts payable
Cash
1500
1500
1500
C6 - 12
Purchase and payment
Payment with the discount: 1500 *2% = $30
Jan. 12
Jan. 22
Merchandise inventory
Accounts payable
1500
Accounts payable
Cash
Merchandise inventory
1500
1500
1470
30
C6 - 13
Discount rate
• Purchase amount: $1500
• Discount rate: 2% for 20 days
1500* 2% =30
• Interest rate: 12% per year
1470*12%*20/360= 9.80
• Savings from borrowing:
30 –9.80 =20.20
C6 - 14
What is the due date of the
invoice?
• Question 1:
– An invoice dated august 13, has terms n/30.
• Question 2:
– An invoice dated November 22
C6 - 15
What is the due date of the
invoice?
• Question 1:
– An invoice dated august 13, credit terms n/30.
Solution:
– Sep. 12
• Question 2:
– An invoice dated November 22, credit terms:2/10,n/30
Solution:
– Dec. 2
– Dec. 22
C6 - 16
Purchases returns and allowances
• Purchase returns
– Purchase business return the merchandise inventory to
selling business
– get a debit memorandum from the sales business
• Purchase allowances
– Purchase business do not return the merchandise
inventory to selling business
– get a debit memorandum from the sales business
•
C6 - 17
Purchases returns and allowances
Example : p.231
1. May 2, purchases $5,000 of inventory.
2. May 4, returns $3,000 of inventory
3. Credit term: 2/10; n/30
4. Discount: (5000-3000) * 2% = $40
Recording in the journal
C6 - 18
Accounting for sales
• To record:
– Sales revenue
– Cost of sales
– Sales expenses
• Example: p. 233
– Sales :$ 1000
– Cost of sales: $550
– Credit card charges: $50
C6 - 19
Sales discount
To set up a separate account: sales discounts
– It is a contra account to Sales.
– Balance on usually on the debit side.
• Example : p. 233
– Sales: $1500
– Discount: $30
– Net sales: $1470
C6 - 20
Sales returns and allowances
To set up a separate account:
– Sales returns and allowances
– It is a contra account to Sales.
– Balance on usually on the debit side.
• Example : p. 234
– Sales returns: $225, cost $140
– Record the deduction of sales
– Record the deduction of cost of sales
C6 - 21
Sales taxes
Example p.235
– Sales price $100
– Sales tax rate 6%
– Total amount $106 of accounts receivable
C6 - 22
Sales taxes
Example p.235
– Sales price $100
– Sales tax rate 6%
– Total amount $106 of accounts receivable
Accounts receivable
106
Sales
100
sales tax payable
Sales tax payable
Cash
6
6
6
C6 - 23
Trade discount
• Wholesalers give the purchaser the discount
for large amount of purchase.
• P. 235
– 30% of discount for $2400 sales
– The sales revenue: 2400 * 70%=1680
C6 - 24
Transportation cost
• FOB shipping point
• FOB destination
seller
Shipping
point
buyer
• If FOB shipping point, the buyer pays the
transportation costs.
• If FOB destination, the seller pays the
transportation costs.
C6 - 25
Example: FOB shipping point
• Buyer’s record:
– Buy merchandise inventory $ 900
– Transportation cost $ 50
C6 - 26
Example: FOB shipping point
• Buyer’s record:
Merchandise inventory
Accounts payable
900
Merchandise inventory
Cash
50
900
50
C6 - 27
More example
• Under the term of FOB shipping point,
sometimes the seller prepaid the
transportation cost, then to get the refund
from the buyer.
– Selling merchandise inventory $800
– Term: FOB shipping point
– Transportation cost $45
C6 - 28
More example
The seller’s record:
Accounts receivable
Sales
800
Cost of merchandise sold
Merchandise inventory
360
Transportation out
Cash
45
800
360
45
C6 - 29
Example : FOB destination
• seller’s record
– selling merchandise inventory $700
– Cost of sales $480
– Transportation cost 40
C6 - 30
Example : FOB destination
• seller’s record
Accounts receivable
Sales
700
Cost of merchandise sold
Merchandise inventory
48
Transportation out
Cash
40
700
48
40
C6 - 31
Illustration of Accounting for
merchandise inventory
Seller: Scully company
Buyer: Burton company
C6 - 32
Selling and Buying Merchandise Inventory
Seller
Description
Buyer
Debit Credit
Accts. Receivable
Sales
7,500
Cost of Mdse. Sold
Mdse. Inventory
4,500
7,500
Description
Mdse. Inventory
Accts. Payable
Debit Credit
7,500
7,500
Recorded at full cost
4,500
July1. Merchandise was sold with credit terms of n/45.
No entry
Mdse. Inventory
Cash
150
150
July 2. Paid transportation cost.
C6 - 33
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.
C6 - 34
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. on July 5.
C6 - 35
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.
C6 - 36
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 5.
C6 - 37
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.
C6 - 38
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).
C6 - 39
Chart of accounts for a
merchandise business
•
What are new accounts in the chart of accounts?
1.
2.
3.
4.
5.
6.
7.
Assets
Liabilities
Owner’s equity
Revenue
Costs and expense
Other income
Other expense
C6 - 40
NetSolutions
Merchandising Chart of Accounts
Balance Sheet Accounts
110
111
112
113
115
116
117
120
123
124
125
126
100 Assets
Cash
Notes Receivable
Accounts Receivable
Interest Receivable
Merchandise Inventory
Office Supplies
Prepaid Insurance
Land
Store Equipment
Accumulated Depreciation—
Store Equipment
Office Equipment
Accumulated Depreciation—
Office Equipment
210
211
212
215
200 Liabilities
Accounts Payable
Salaries Payable
Unearned Rent
Notes Payable
300 Owner’s Equity
310 Chris Clark, Capital
311 Chris Clark, Drawing
312 Income Summary
C6 - 41
NetSolutions
Merchandising Chart of Accounts
Income Statement Accounts
400 Revenues
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
600 Other Income
610 Rent Income
611 Interest Income
700 Other Expense
710 Interest Expense
500 Costs and Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 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
C6 - 42
Income statement for a
merchandise business
• A service business
– Single-step form]
• A merchandise business
– Multiple-step form
– Exhibit 7
C6 - 43
NetSolutions
Income Statement (Multiple-Step)
For the 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
C6 - 44
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
C6 - 45
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
C6 - 46
NetSolutions
Income Statement (Single-Step)
For the 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
C6 - 47
NetSolutions
Balance Sheet
December 31, 2002
Assets
Current assets:
Cash
Notes receivable
Accounts receivable
Interest receivable
Merchandise inventory
Office supplies
Prepaid insurance
Total current assets
$ 52,950
40,000
60,880
200
62,150
480
2,650
$219,310
Continued
C6 - 48
NetSolutions
Balance Sheet
December 31, 2002
Property, plant, and
equipment:
Land
Store equipment
Less accum. depreciation
Office equipment
Less accum. depreciation
Total property, plant, and
equipment
Total assets
$ 10,000
$ 27,100
5,700
$ 15,570
4,720
21,400
10,850
42,250
$261,560
Continued
C6 - 49
NetSolutions
Balance Sheet
December 31, 2002
Liabilities
Current liabilities:
Accounts payable
Note payable (current portion)
Salaries payable
Unearned rent
Total current liabilities
Long-term liabilities:
Note payable (due 2004)
Total liabilities
Owner’s Equity
Chris Clark, capital
Total liabilities and owner’s equity
$ 22,420
5,000
1,140
1,800
$30,360
20,000
$ 50,360
211,200
$261,560
C6 - 50
Merchandise inventory shrinkage
• Book records:
$63,950
• Physical inventory : $ 62,150
• Inventory shortage: $ 1,800
• Adjusting:
Cost of merchandise sold
1800
Merchandise inventory
1800
C6 - 51
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.
C6 - 52
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
2002
$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
C6 - 53
Profitability Measures — Effective use of Assets
Ratio of Net Sales to Assets
2003
2002
$1,498,000 $1,200,000
Net sales on account
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 to 1
1.2 to 1
Use: To assess the effectiveness
in the use of assets
C6 - 54
HOME WORK
READING:
1. Illustrative problem
2. Self- examination questions
3. Multiple choice
Writing:
1. Exercise: 6-25;6-26;6-27
2. Problem : 6-5B
Discussion:
C6 - 55
This is the end of Chapter 6.
C6 - 56