Unit 4 Chapter 10: Accounting for Merchandising Business Thursday : Summative review Friday : Summative

Merchandising Company Merchandising Company: Enterprise that buys and sells goods (or inventory) to earn a profit E.g. clothing stores, convenience stores, restaurants, etc. Primary source of revenue for merchansise company= Sales account Service company’s primary source of revenue = Fees earned account

Merchandising Company Expenses: (there are two types of expenses) Cost of goods sold For manufacturer: How much you paid for the raw materials or For retailer: How much you paid for the finished goods or inventory Operating expenses Advertising expense Salary expense Rent expense Utility expense

Operating Cycle: Accounts Receivable Cash Receive Cash Perform Services Service Company

Operating Cycle: Cash Merchandising Company Sell Inventory Accounts Receivable Receive Cash Buy Inventory Merchandise Inventory

Returns & Allowances Why do customers/purchasers return merchandise after couple days of their purchase? Damages or defects Poor quality Doesn’t fit specifications that customers were looking for. Change of heart? Can you return the diamond ring after she said, “no”????

Recording Sales of Merchandise When is revenue earned? Revenue Recognition principle: When seller has delivered the merchandise to the buyer (not when cash is exchanged) The seller issues sales invoice to the supplier when they sell their item. If a request for merchandise return comes to the seller then the seller will issue a “credit invoice”.

Recording Sales of Merchandise When a business sells their items, an entry is required at time of sale. You debit AR and credit Sales account and HST payable.

Sales Returns & Allowances If a customer wants to return the item, then we just have to reverse the original entry. The first type of business is small businesses, which would just reverse the original entry. The second type of business is a big corporation, which would use a separate account called, “sales returns and allowances” account, which is a contra account of sales account. Since sales account normally has a credit balance, this contra account normally has a debit balance.

Example – Small Business If Samsung sells 2 units of $2500 worth of laptop to Bestbuy on credit If Bestbuy returns one of the laptop, then we make the following entry: (small business) Accounts receivable5,650 Sales5,000 HST Payable650 Sales2,500 HST Payable325 Accounts Receivable2825

Example – Big Corporation Samsung sells 2 units of $2500 worth of laptop to Bestbuy on credit If Bestbuy returns one of the laptop, then Samsung makes the following entry: (big business) Accounts receivable5,650 Sales5,000 HST Payable650 Sales Returns and Allowance2,500 HST Payable325 Accounts Receivable2825

Sales Taxes In Ontario, businesses must pay HST to the CRA. Are sales taxes a revenue or a liability for the business? Whenever we collect HST from customer, the business must record this amount under “HST Payable” which is a Current Liability until it is remitted to the government (usually monthly) What do we do when we pay HST to a supplier? The business must record the HST payment as “HST Recoverable”, which is a contra account of “HST Payable” account.

Recording Purchases of Merchandise When a business buys goods, the purchaser (Bestbuy in this example) has to Debit “Purchase” account and credit “Accounts Payable” or “Bank”. If the purchaser (Bestbuy) wants to return the goods, then (small businesses) the purchaser will simply debit “Accounts Payable” and credit “Purchase” account. (= reversing original entry)

Recording Purchases of Merchandise If the purchaser wants to return the goods (big coporation) then they would debit “Accounts Payable” and credit “Purchase Returns and Allowance”

Example On Feb 1, Bestbuy purchases 100 Panasonic DVD players from Samsung at $ HST. On Feb 15, Bestbuy (small business) returns the purchased items to Samsung. Purchase1147 HST Recoverable149 Accounts Payable1296 Accounts Payable1296 Purchase1147 HST Recoverable149

Example On Feb 1, Bestbuy purchases 100 Panasonic DVD players from Samsung at $ HST. On Feb 15, Bestbuy (big business) returns the purchased items to Samsung. Purchase1147 HST Recoverable149 Accounts Payable1296 Accounts Payable1296 Purchase Returns and Allowances1147 HST Recoverable149

Why Why would big corporations want to record sales return and purchase returns separately instead of using same “sales” account or “purchase” account? Answer: It is easier to track sales return amounts. If sales return amount was too large number, then owner or manager will want to look into it. How does the Returns and Allowances (contra account) show on income statement? Answer: Fig (page 423) Sales Revenue2.2M Sales return and allowance (0.2M)

Classwork / Homework Page 424 Review Q # 11, 12 Page Ex #1, #2, and #4