1. Accounting for Merchandising Businesses5
Accounting for Merchandising Businesses

2. 1
Distinguish between the activities and financial statements of service and merchandising businesses.
5-4

3. Nature of Merchandising Businesses1
Nature of Merchandising Businesses
Service Business
Fees earned $XXX
Operating expenses –XXX
Net income $XXX

4. Nature of Merchandising Businesses Merchandising Business1
Nature of Merchandising Businesses
Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX

5. Nature of Merchandising Businesses1
Nature of Merchandising Businesses
When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold.

6. Nature of Merchandising Businesses1
Nature of Merchandising Businesses
Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

7. 1

8. 2
Describe and illustrate the financial statements of a merchandising business.
5-11

9. Multiple-Step Income Statement2
Multiple-Step Income Statement
The multiple-step income statement contains several sections, subsections, and subtotals.

10. 2
Exhibit 1
Multiple-Step Income Statement
(continued on Slide 19)

11. Multiple-Step Income Statement2
Multiple-Step Income Statement
The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.

12. Multiple-Step Income Statement2
Multiple-Step Income Statement
Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.

13. Multiple-Step Income Statement2
Multiple-Step Income Statement
Sales discounts are granted by the seller to customers for early payment of amounts owed.

14. Multiple-Step Income Statement2
Multiple-Step Income Statement
Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.

15. Multiple-Step Income Statement2
Multiple-Step Income Statement
Cost of merchandise sold is the cost of the merchandise sold to customers.

16. 2 Exhibit 1 Multiple-Step Income Statement (continued)
(continued on Slide 28)

17. Multiple-Step Income Statement2
Multiple-Step Income Statement
The buyer may return merchandise to the seller (a purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (a purchase allowance).

18. Multiple-Step Income Statement2
Multiple-Step Income Statement
You have seen how sellers may offer customers sales discounts for early payment of their bills. From the buyer’s perspective, such discounts are referred to as purchase discounts.

19. Multiple-Step Income Statement2
Multiple-Step Income Statement
If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand, a periodic inventory system is being used.

20. Multiple-Step Income Statement2
Multiple-Step Income Statement
Under the perpetual inventory system of accounting, the amounts of inventory available for sale and sold are continuously (perpetually) updated in the inventory records.

21. 2
Exhibit 2
Cost of Merchandise Sold

22. Multiple-Step Income Statement2
Multiple-Step Income Statement
Selling expenses are incurred directly in the selling of merchandise.
Sales salaries
Store supplies used
Depreciation of store equipment
Delivery expense
Advertising

23. Multiple-Step Income Statement2
Multiple-Step Income Statement
Administrative expenses sometimes called general expenses, are incurred in the administration or general operation of the business.
Office salaries
Depreciation of office equipment
Office supplies used

24. Multiple-Step Income Statement2
Multiple-Step Income Statement
Other income is revenue from sources other than the primary operating activity of a business.
Other expense is an expense that cannot be traced directly to the normal operations of the business.

25. 2
Exhibit 1
Multiple-Step Income Statement (concluded)

26. Single-Step Income Statement2
Single-Step Income Statement
An alternative form of income statement is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues.

27. 2
Exhibit 3
Single-Step Income Statement

28. 2
Retained Earnings Statement for Merchandising Business
Exhibit 4

29. 2
Exhibit 5
Report Form of Balance Sheet
(continued)

30. 2
Exhibit 5
Report Form of Balance Sheet (continued)

31. 3
Cash Sales
On January 3, NetSolutions sold $1,800 of merchandise for cash.

32. 3
Cash Sales
Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are recorded. The cost of merchandise sold on January 3 is $1,200.

33. 3
Credit Card Sales
Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 1.

34. 3
Sales on Account
On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.

35. 3
Sales Discounts
The terms for when payments for merchandise are to be made, are called credit terms. If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay.

36. 3
Exhibit 8
Credit Terms

37. 3
Receipts on Account
On January 22, NetSolutions receives the amount due, less the 2 percent discount.
$1,500 × .02

38. 3
On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.

39. Purchase Transactions3
Purchase Transactions *
*Assumes a perpetual inventory system is used.

40. Purchase Transactions3
Purchase Transactions *
*Assumes a perpetual inventory system is used.
We will assume a perpetual inventory system is used throughout the chapter. The periodic inventory system is discussed in Appendix 2.

41. Purchase Transactions3
Purchase Transactions
Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions pays the amount due, less the discount, on March 22.

42. 3
Discount Taken

43. Assume that NetSolutions pays the invoice on April 11.3
Discount Not Taken
Assume that NetSolutions pays the invoice on April 11.

44. Purchase Returns and Allowances3
Purchase Returns and Allowances
A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.

45. Purchase Returns and Allowances3
Purchase Returns and Allowances
When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, that is a purchases allowance.

46. 3
NetSolutions receives the delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered.

47. 3
NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 10 as follows:

48. 3
Price Allowance
On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.

49. 3
NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link on May 4.

50. 3
On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.

51. 3
Freight
If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, it is said to be FOB (free on board) shipping point.

52. 3
Freight
If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB (free on board) destination.

53. 3
Exhibit 11
Freight Terms

54. 3
Sales Taxes
On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.

55. 3
Sales Taxes
On a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected.

56. 3
Trade Discounts
When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts.

57. 4
Describe the adjusting and closing process for a merchandising business.
5-99

58. 4
Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory. If the balance of the Merchandise Inventory account is larger than the total amount of the merchandise count, the difference is often called inventory shrinkage or inventory shortage.

59. 4
NetSolutions’ inventory records indicate the following on December 31, 2011:
Dec. 31, 2011
Account balance of Merchandise Inventory $63,950
Physical merchandise inventory on hand 62,150
Inventory shrinkage $ 1,800

60. 4
At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry:

61. 4
Step 1: Closing Entries
Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary.

62. 4
Step 2: Closing Entries
Credit each temporary account with a debit balance, such as an expense, for the balance and credit Income Summary.

63. 4
Step 3: Closing Entries
Debit Income Summary for the amount of its balance (net income) and credit Retained Earnings.

64. 4
Step 4: Closing Entries
Debit Retained Earnings for the balance of the Dividends account and credit the Dividends account.

65. 4
NetSolutions’ Income Summary account after the closing entries have been posted is as follows: