1. Merchandising accounting procedures

2. The Classified Income Statement
Subtotals used to provide more specific information to the reader as to the different components involved in calculating net income

3. New “Sales” Section of Income Statement
250,000 $
Less:
Sales Discounts
3,000
Sales Ret. & Allow.
1,500
4,500
Net Sales
245,500

4. Cost of Goods Sold Section from Last Class
Beginning Inventory
55,000 $
Purchases
176,500
Cost of Goods Avail. for Sale
231,500
Less:
Ending Inventory
64,000
Cost of Goods Sold
167,500

5. Eventual Cost of Goods Sold section
Beginning Inventory
55,000 $
Purchases
175,000
Less:
Purchase Discounts
6,000
Purchase Ret. & Allow.
2,500
8,500
Net Purchases
166,500
Add:
Transportation-in
10,000
Net Cost of Purchases
176,500
Cost of Goods Avail. for Sale
231,500
Ending Inventory
64,000
Cost of Goods Sold
167,500

6. Income from operations
Gross margin
78,000 $
Operating expenses:
Selling expenses:
Sales salaries
26,000
Delivery expense
3,000
Advertising expense
2,000
Rent - store building
4,000
Depreciation - store equip.
2,500
37,500
Administrative expenses:
Executive salaries
29,000
Rent - office building
1,600
Insurance expense
1,500
Supplies expense
1,100
33,200
Total operating expenses
70,700
Income from operations
7,300

7. NON-Operating Section
Income from operations $
7,300
Non-operating revenues and expenses
Non-operating revenues:
Interest revenue
400
Rent Revenue
2,000
Non-operating expenses:
Interest expense
(700)
Safe deposit box rental
100
Net income $
9,100

8. Our Scope
We will focus most of our attention in this Unit on the “Gross Profit” section
Net sales
COGS

9. Returns & Allowances Of course, we might:
Have unhappy customers returning bad, incorrect or unwanted products
Return our own purchased product for similar reasons
Let’s look at how we as accountants are to deal with these scenarios…

10. Cash Refunds
Cash refund – return of money to the buyer from the seller when merchandise is returned.
We may want to instead be able to quickly find exact “Cancelled Sales” rather than only a single “Sales” account DR CR
Sales
$$$$
HST Payable
Bank

11. Sales Returns and AllowancesDR CR
Sales Returns and Allowances
$$$$
HST Payable
Accounts Receivable/ Cash
Returns: Entire order is reversed
Allowance: Some portion of original cost is returned to customer

12. Sales Returns and Allowances Much easier to identify “Bad” Sales

13. Purchase Returns AND Allowances
Likewise we could return our own purchase, again we would like to separate this from the rest of the Purchase account: DR CR
Accounts Payable
$$$$
HST Recoverable
Purchases Returns & Allowances

14. Purchase Returns and Allowancesor

15. The Freight-in Account
The freight-in account is for the expense of shipping in goods for sale (from suppliers).
Freight in is considered a cost of a goods sold account.
Used to accumulate transportation charges on incoming goods.
The delivery expense account is for the expense of shipping out goods that have been sold to customers.
Appears with the rest of the “Operating Expenses”

16. Gross Profit Section

17. Revised Cost of Goods Formula