Section 1 Accounting for a Merchandising Business What You’ll Learn  The purpose of a merchandising business.  The difference between a retailer and a wholesaler.  Uses of the Merchandise Inventory account, and its rules of debit and credit.  Uses of the Sales account, and its rules of debit and credit. What You’ll Learn  The purpose of a merchandising business.  The difference between a retailer and a wholesaler.  Uses of the Merchandise Inventory account, and its rules of debit and credit.  Uses of the Sales account, and its rules of debit and credit.

Why It’s Important As consumers, we buy goods from merchandising businesses daily. You need to understand the nature of these transactions to maintain accounting records for a merchandising business. Why It’s Important As consumers, we buy goods from merchandising businesses daily. You need to understand the nature of these transactions to maintain accounting records for a merchandising business. Section 1Accounting for a Merchandising Business (cont'd.) Key Terms  retailer  wholesaler  merchandise Key Terms  retailer  wholesaler  merchandise  inventory  sales  inventory  sales

The Operating Cycle of a Merchandising Business Section 1Accounting for a Merchandising Business (cont'd.)

Merchandise Inventory Account Goods bought for resale are called merchandise. The items of merchandise the business has in stock are referred to as inventory. The inventory is represented in the general ledger by the asset account, Merchandise Inventory. Section 1Accounting for a Merchandising Business (cont'd.) Merchandise Inventory Credit – Decrease Side Debit + Increase Side Normal Balance

Sales Account When a retail merchandising business sells goods to a customer, the amount of the merchandise sold is recorded in the Sales account. Section 1Accounting for a Merchandising Business (cont'd.) Sales Debit – Decrease Side Credit + Increase Side Normal Balance

The Sales Slip A sales slip lists the details of a sale: The Sales Slip A sales slip lists the details of a sale:  The date of the sale.  The name of the customer.  The description, quantity, and price of the item(s) sold.  The date of the sale.  The name of the customer.  The description, quantity, and price of the item(s) sold. Section 2Analyzing Sales Transactions (cont'd.)

Sales Tax  Most states and some cities tax the retail sale of goods and services. This tax is called a sales tax.  The sales tax rate is usually stated as a percentage of the sale, such as 6%.  The business keeps a record of the sales tax owed to the state in a liability account called Sales Tax Payable.  Most states and some cities tax the retail sale of goods and services. This tax is called a sales tax.  The sales tax rate is usually stated as a percentage of the sale, such as 6%.  The business keeps a record of the sales tax owed to the state in a liability account called Sales Tax Payable. Sales Tax Payable Debit – Decrease Side Credit + Increase Side Normal Balance Section 2Analyzing Sales Transactions (cont'd.)

Credit Terms  Credit terms state the time allowed for payment.  The credit terms for the sale to Casey Klein are n/30.  The “ n ” stands for the net, or total, amount of the sale.  The “ 30 ” stands for the number of days the customer has to pay for the merchandise.  Credit terms state the time allowed for payment.  The credit terms for the sale to Casey Klein are n/30.  The “ n ” stands for the net, or total, amount of the sale.  The “ 30 ” stands for the number of days the customer has to pay for the merchandise. Section 2Analyzing Sales Transactions (cont'd.)

The Accounts Receivable Ledger The accounts receivable subsidiary ledger contains an account for each charge customer. Section 2Analyzing Sales Transactions (cont'd.) General Ledger Accounts Receivable—controlling account$10,000 Accounts Receivable Subsidiary Ledger Individual Accounts Within Ledger: Brown, Joshua$2,000 Clark, Gillian3,000 Greene, Jason1,000 Perez, Sarita4,000 Total$10,000 General Ledger Accounts Receivable—controlling account$10,000 Accounts Receivable Subsidiary Ledger Individual Accounts Within Ledger: Brown, Joshua$2,000 Clark, Gillian3,000 Greene, Jason1,000 Perez, Sarita4,000 Total$10,000 Controlling account balance equals total of accounts in subsidiary ledger.

The Accounts Receivable Subsidiary Ledger Form  The subsidiary ledger account form has lines at the top for the name and address of the customer. Section 2Analyzing Sales Transactions (cont'd.)

Business Transaction ANALYSIS Identify1.The accounts affected are Accounts Receivable (controlling), Accounts Receivable—Casey Klein (subsidiary), Sales, and Sales Tax Payable. Section 2Analyzing Sales Transactions (cont'd.) Recording Sales on Account Recording Sales on Account On December 1, On Your Mark sold merchandise on account to Casey Klein for $200 plus sales tax of $12, Sales Slip 50.

Business Transaction (cont'd.) ANALYSIS Classify2.Accounts Receivable (controlling) and Accounts Receivable—Casey Klein (subsidiary) are asset accounts. Sales is a revenue account. Sales Tax Payable is a liability account. Section 2Analyzing Sales Transactions (cont'd.) Recording Sales on Account (cont'd.) On December 1, On Your Mark sold merchandise on account to Casey Klein for $200 plus sales tax of $12, Sales Slip 50.

Business Transaction (cont'd.) ANALYSIS + / –3.Accounts Receivable (controlling) and Accounts Receivable—Casey Klein (subsidiary) are increased by the total amount, $212 (dollar amount of merchandise sold plus sales tax). Sales is increased by the dollar amount of merchandise sold, $200. Sales Tax Payable is increased by the amount of sales tax charged, $12. Section 2Analyzing Sales Transactions (cont'd.) Recording Sales on Account (cont'd.) On December 1, On Your Mark sold merchandise on account to Casey Klein for $200 plus sales tax of $12, Sales Slip 50.

Business Transaction (cont'd.) Section 2Analyzing Sales Transactions (cont'd.) Recording Sales on Account (cont'd.) On December 1, On Your Mark sold merchandise on account to Casey Klein for $200 plus sales tax of $12, Sales Slip 50. DEBIT-CREDIT RULE 4.Increases to asset accounts are recorded as debits. Debit Accounts Receivable (controlling) for $212. Also debit Accounts Receivable—Casey Klein (subsidiary) for $ Increases to revenue and liability accounts are recorded as credits. Credit Sales for $200 and Sales Tax Payable for $12.

T ACCOUNTS 6. Accounts ReceivableSales Section 2Analyzing Sales Transactions (cont'd.) Recording Sales on Account (cont'd.) Business Transaction (cont'd.) On December 1, On Your Mark sold merchandise on account to Casey Klein for $200 plus sales tax of $12, Sales Slip 50. Debit Credit Credit – Debit – Accounts Receivable Subsidiary LedgerSales Tax Casey KleinPayable Debit Credit – Debit – Credit + 12

Business Transaction (cont'd.) Section 2Analyzing Sales Transactions (cont'd.) Recording Sales on Account (cont'd.) On December 1, On Your Mark sold merchandise on account to Casey Klein for $200 plus sales tax of $12, Sales Slip 50. JOURNAL ENTRY 7.

Sales Returns and Allowances  Any merchandise returned for credit or a cash refund is called a sales return.  A price reduction granted for damaged goods kept by the customer is called a sales allowance.  Any merchandise returned for credit or a cash refund is called a sales return.  A price reduction granted for damaged goods kept by the customer is called a sales allowance. Section 2Analyzing Sales Transactions (cont'd.)

Sales Returns and Allowances (cont'd.)  A credit memorandum lists the details of a sales return or allowance. Section 2Analyzing Sales Transactions (cont'd.)

The Sales Returns and Allowances Account  decreases the total revenue earned by a business ;  summarizes the total returns and allowances for damaged, defective, or other otherwise unsatisfactory merchandise;  is a contra account.  decreases the total revenue earned by a business ;  summarizes the total returns and allowances for damaged, defective, or other otherwise unsatisfactory merchandise;  is a contra account. Sales Returns and Allowances Debit + Increase Side Normal Balance Credit – Decrease Side Section 2Analyzing Sales Transactions (cont'd.)

Business Transaction Section 2Analyzing Sales Transactions (cont'd.) On December 4, On Your Mark issued Credit Memorandum 124 to Gabriel Ramos for the return of merchandise purchased on account, $150 plus $9 sales tax. JOURNAL ENTRY 7. The Sales Returns and Allowances Account

Kinds of Cash Receipts  payments from charge customers  cash sales  bankcard sales  payments from charge customers  cash sales  bankcard sales Section 3Analyzing Cash Receipt Transactions (cont'd.)

Cash Sales  The business receives full payment for merchandise sold at the time of the sale.  Most retailers use a cash register to record cash sales.  The business receives full payment for merchandise sold at the time of the sale.  Most retailers use a cash register to record cash sales. Section 3Analyzing Cash Receipt Transactions (cont'd.) Cash Sales Sales Tax

Cash from Charge Customers  Businesses record cash received on account from charge customers by preparing receipts.  Receipts are pre-numbered and may be prepared in multiple copies.  The receipt is a source document for the journal entry.  Businesses record cash received on account from charge customers by preparing receipts.  Receipts are pre-numbered and may be prepared in multiple copies.  The receipt is a source document for the journal entry. Section 3Analyzing Cash Receipt Transactions (cont'd.)

Bankcard Sales  A bankcard is issued by a bank and honored by many businesses.  Bankcard sales are recorded as though they are cash sales.  A bankcard is issued by a bank and honored by many businesses.  Bankcard sales are recorded as though they are cash sales. Section 3Analyzing Cash Receipt Transactions (cont'd.) Bankcard Sales Sales Tax

Cash Discounts  A cash discount, or sales discount, is the amount a customer can deduct from the amount owed for purchased merchandise if payment is made within a certain time.  Terms 2/10, n/30 means that the customer can deduct 2% of the cost of merchandise if payment is made within 10 days of the sale date. Otherwise, the full (net) amount is due within 30 days.  A cash discount, or sales discount, is the amount a customer can deduct from the amount owed for purchased merchandise if payment is made within a certain time.  Terms 2/10, n/30 means that the customer can deduct 2% of the cost of merchandise if payment is made within 10 days of the sale date. Otherwise, the full (net) amount is due within 30 days. Section 3Analyzing Cash Receipt Transactions (cont'd.)

Cash Discount Transactions On December 3, On Your Mark sold $1,500 worth of merchandise on account to South Branch High School Athletics. If South Branch pays within 10 days (by December 13), On Your Mark will receive $1,470, or the original price less the cash discount of $30. On December 3, On Your Mark sold $1,500 worth of merchandise on account to South Branch High School Athletics. If South Branch pays within 10 days (by December 13), On Your Mark will receive $1,470, or the original price less the cash discount of $30. Section 3Analyzing Cash Receipt Transactions (cont'd.)

Cash Discount Transactions (cont'd.) 1. MerchandiseDiscount SoldX Rate=Discount 1. MerchandiseDiscount SoldX Rate=Discount Section 3Analyzing Cash Receipt Transactions (cont'd.) 2. Amount Paid Within Sales SlipDiscountDiscount Amount – Amount = Period 2. Amount Paid Within Sales SlipDiscountDiscount Amount – Amount = Period $1,500 X.02 = $30 $1,500 X.02 = $30 $1,500 – $30 = $1,470 $1,500 – $30 = $1,470

Cash Discount Transactions (cont'd.) Section 3Analyzing Cash Receipt Transactions (cont'd.) Journal Entry for Cash Received on Account with a Cash Discount: On December 12 On Your Mark received $1470 from South Branch High School Athletics in payment of Sales Slip 51 for $1,500 less the discount of $30, Receipt 302. Cash in Bank 1470 Sales Discounts 30 Accts. Rec./South Br. H.S. 1500

Business Transaction ANALYSIS Identify1.The accounts affected are Cash in Bank, Accounts Receivable (controlling), and Accounts Receivable—Casey Klein (subsidiary). On December 5, On Your Mark received $212 from Casey Klein to apply to her account, Receipt 301. Recording Cash Received from Charge Customers Section 3Analyzing Cash Receipt Transactions (cont'd.)

Business Transaction (cont'd.) ANALYSIS Classify2.Cash in Bank, Accounts Receivable (controlling), and Accounts Receivable—Casey Klein (subsidiary) are asset accounts. Section 3Analyzing Cash Receipt Transactions (cont'd.) Recording Cash Received from Charge Customers (cont'd.) On December 5, On Your Mark received $212 from Casey Klein to apply to her account, Receipt 301.

Business Transaction (cont'd.) ANALYSIS + / –3.Cash in Bank is increased by $212. Accounts Receivable (controlling) and Accounts Receivable—Casey Klein (subsidiary) are decreased by $212. Section 3Analyzing Cash Receipt Transactions (cont'd.) Recording Cash Received from Charge Customers (cont'd.) On December 5, On Your Mark received $212 from Casey Klein to apply to her account, Receipt 301.

Business Transaction (cont'd.) DEBIT-CREDIT RULE 4.Increases to asset accounts are recorded as debits. Debit Cash in Bank for $ Decreases to asset accounts are recorded as credits. Credit Accounts Receivable (controlling) for $212. Also credit Accounts Receivable—Casey Klein (subsidiary) for $212. Section 3Analyzing Cash Receipt Transactions (cont'd.) Recording Cash Received from Charge Customers (cont'd.) On December 5, On Your Mark received $212 from Casey Klein to apply to her account, Receipt 301.

T ACCOUNTS 6. Cash inAccounts BankReceivable Business Transaction (cont'd.) Debit Credit – 212 Credit – Accounts Receivable Subsidiary Ledger Casey Klein Debit + Credit – 212 Section 3Analyzing Cash Receipt Transactions (cont'd.) Recording Cash Received from Charge Customers (cont'd.) On December 5, On Your Mark received $212 from Casey Klein to apply to her account, Receipt 301. Debit +

Business Transaction (cont'd.) JOURNAL ENTRY 7. Section 3Analyzing Cash Receipt Transactions (cont'd.) Recording Cash Received from Charge Customers (cont'd.) On December 5, On Your Mark received $212 from Casey Klein to apply to her account, Receipt 301.