Professor Eric Carstensen Merchandising Part 2 Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

Comparison of Income Statements (from Part 1) Service Company Merchandising Company Service Revenue $890,000 Sales Revenue $950,000 Op. Expenses 620,000 less: Sales Discounts (1,000) Op. Income 270,000 less: Sales Returns & Allowances (2,000) Other Income(Expense) (20,000) Net Sales 947,000 Income Before Taxes 250,000 COGS 450,000 Taxes 85,000 Gross Margin 497,000 Net Income $165,000 247,000 5,000 252,000 88,000 $164,000

Example Sale debit A/R - ABC Company 10,000 credit A/P - XYZ Company On May 1st, XYZ Company sold $10,000 worth of merchandise to ABC company on credit; the cost of merchandise was $5,000. The terms are 2/10, n/30 and the invoice is dated May 1st: debit A/R - ABC Company 10,000 credit A/P - XYZ Company debit Cost of Goods Sold 5,000 credit Inventory On May 9th, XYZ Company received payment from ABC Company: debit Cash 9,800 debit Sales Discounts 200 credit A/R - ABC Company

Example Sales Return debit A/R - ABC Company 20,000 credit Sales On May 21st, XYZ Company sold $20,000 more merchandise to ABC Company; the cost of the merchandise was $10,000. The terms are 2/10, n/30 and the invoice is dated May 21st: debit A/R - ABC Company 20,000 credit Sales debit Cost of Goods Sold 10,000 credit Inventory On May 22nd, ABC Company determined that $5,000 of merchandise was defective and returned it to XYZ Company; the cost of the returned merchandise was $2,500: debit Sales Returns & Allowances 5,000 crebit A/R - ABC Company debit Inventory 2,500 credit Cost of Goods Sold On May 31st, XYZ Company received payment from ABC Company: debit Cash 14,700 debit Sales Discounts 300 credit A/R - ABC Company 15,000

Example Sales Allowance On June 7th, XYZ Company sold $12,000 more merchandise to ABC Company on credit; the cost of that merchandise was $6,000. The terms are 2/10, n/30 and the invoice is dated June 7th: debit A/R - ABC Company 12,000 credit Sales debit Cost of Goods Sold 6,000 credit Inventory On June 9th, ABC Company determined that $3,000 of merchandise did not exactly meet design specifications and requested a price reduction: debit Sales Returns & Allowances 3,000 crebit A/R - ABC Company On June 16th, XYZ Company received payment from ABC Company: debit Cash 8,820 debit Sales Discounts 180 credit A/R - ABC Company 9,000

Shipping Terms FOB = Free On Board FOB Shipping Point: Purchaser Responsible for paying shipping from Seller to Purchaser Amount is added to Inventory Cost FOB Destination: Seller Responsible for paying shipping to purchaser Included as part of Operating Expenses

Shipping Terms Comparison On June 21st, XYZ Company sold $14,000 worth of merchandise to ABC company on credit; the cost of the merchandise was $7,000. The terms are 2/10, n/30 and the invoice is dated June 21st: As recorded by the purchaser: As recorded by the seller: debit Inventory 14,000 debit A/R - ABC Company credit A/P - XYZ Company Credit Sales debit Cost of Goods Sold 7,000 credit Inventory The cost to ship the merchandise from XYZ Company to ABC Company is $1,000. The correct journal entry would be If the terms are FOB Shipping Point: If the terms are FOB Destination: 1,000 debit Shipping Expense Credit Cash

Important Note Discounts DO NOT apply to amounts paid for shipping, as another company usually provides that service.

Merchandising Part 2 - Conclusion Remember, Part 1 covered some basics about merchandising businesses and purchases of merchandise, along with discounts, purchase returns and allowances In this part, we covered sales of merchandise, along with sales discounts, sales returns and allowances Also in this Part 2, we covered shipping terms