1. Accounting for Merchandising Businesses
Chapter 6
Accounting for Merchandising Businesses
Accounting, 21st Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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3. After studying this chapter, you should be able to:
Objectives
1. Distinguish the activities of a service business from those of a merchandising business.
2. Describe and illustrate the financial statements of a merchandising business.
3. Describe the accounting for the sale of merchandise.
4. Describe the accounting for the purchase of merchandise.
After studying this chapter, you should be able to:

4. Objectives
5. Describe the accounting for transportation costs, sales taxes, and trade discounts.
6. Illustrate the dual nature of merchandising transactions.
7. Prepare a chart of accounts for a merchandising business.
8. Describe the accounting cycle for a merchandising business.
9. Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets.

5. Nature of Businesses Service Business Fees earned $XXX
Operating expenses –XXX
Net income $XXX

6. Merchandising Business
Nature of Businesses
Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX

7. Multiple-Step Income Statement

8. NetSolutions Income Statement For the Year Ended December 31, 2007
Revenue from sales:
Sales $720,185
Less:Sales returns and allowances $ 6, Sales discounts 5, ,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
Continued

9. Continued Operating expenses: Selling expenses:
Sales salaries expense $56,230
Advertising expense 10,860
Depr. Expense–store equipment 3,100
Miscellaneous selling expense
Total selling expenses $ 70,820
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr. expense–office equipment 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. administrative expense
Total admin. expenses ,890
Total operating expenses ,710
Income from operations $ 77,240
Continued

10. Other income and expenses:
Rent revenue $ 600
Interest expense (2,440) (1,840)
Net income $75,400
Concluded

11. Periodic vs. Perpetual Methods of Accounting
Periodic Method
A method of determining the cost of merchandise sold and the amount of merchandise on hand
Under this method, the inventory records do not show the amount available for sale or the amount sold during the period

12. Periodic vs. Perpetual Methods of Accounting
Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts.
The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records.

13. Cost of Merchandise Purchased
Purchases $521,980
Less: Purchase returns and allowances $9,100
Purchase discounts 2, ,625
Net purchases $510,355
Add transportation-in ,400
Cost of merchandise purchased $527,755

14. Cost of Merchandise Sold
Merchandise inventory, 1/1/07 $ 59,700
Purchases $521,980
Less: Purchase returns and allowances $9,100
Purchase discounts 2, ,625
Net purchases $510,355
Add transportation-in ,400
Cost of merchandise purchased ,755
Merchandise available for sale $587,455
Less merchandise inventory, 12/31/ ,150
Cost of merchandise sold $525,305

15. Single-Step Income Statement for a Merchandising Business

16. NetSolutions Income Statement For the Year Ended December 31, 2007
Revenues:
Net sales $708,255
Rent revenue
Total revenues $708,855
Expenses:
Cost of merchandise sold $525,305
Selling expenses 70,820
Administrative expenses 34,890
Interest expense ,440
Total expenses ,455
Net income $ 75,400

17. Statement of Owner’s Equity for a Merchandising Business

18. Chris Clark, capital, 1/1/07 $153,800 Net income for year $75,400
NetSolutions Statement of Owner’s Equity For the Year Ended December 31, 2007
Chris Clark, capital, 1/1/07 $153,800
Net income for year $75,400
Less withdrawals 18,000
Increase in owner’s equity ,400
Chris Clark, capital, 12/31/07 $211,200

19. Balance Sheet

20. NetSolutions Balance Sheet December 31, 2007
Assets
Current assets:
Cash $52,950
Accounts receivable 91,080
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2, Total current assets $209,310
Continued

21. Property, plant, and equipment: Land $20,000 Store equipment $27,100
Less accumulated
depreciation 5,700 21,400
Office equipment $15,570
depreciation ,720 10,850 Total property, plant, and
equipment ,250
Total assets $261,560
Continued

22. Note payable (current portion) 5,000 Salaries payable 1,140
Liabilities
Current liabilities:
Accounts payable $22,420
Note payable (current portion) 5,000
Salaries payable 1,140
Unearned rent ,800
Total current liabilities $ 30,360
Long-term liabilities:
Note payable (due 2017) ,000
Total liabilities $ 50,360
Owner’s Equity
Chris Clark, capital ,200
Total liabilities and owner’s equity $261,560
Concluded