1. Merchandising Operations Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University Chapter 5

2. Copyright © Houghton Mifflin Company. All rights reserved.5–2 Learning Objectives 1.Identify the management issues related to merchandising businesses. 2.Compare the income statements for service and merchandising concerns, and define the components of the merchandising income statement. 3.Define and distinguish the terms of sale for merchandising transactions. 4.Prepare an income statement and record merchandising transactions under the perpetual inventory system.

3. Copyright © Houghton Mifflin Company. All rights reserved.5–3 Supplemental Objectives 5.Prepare an income statement and record merchandising transactions under the periodic inventory system. 6.Prepare a work sheet and closing entries for a merchandising concern using the perpetual inventory system. 7.Prepare a work sheet and closing entries for a merchandising concern using the periodic inventory system. 8.Apply sales and purchases discounts to merchandising transactions.

4. Copyright © Houghton Mifflin Company. All rights reserved.5–4 Management Issues in Merchandising Businesses Objective 1 –Identify the management issues related to merchandising businesses

5. Copyright © Houghton Mifflin Company. All rights reserved.5–5 Merchandising Businesses … earn income by buying and selling products or merchandise Can be wholesalers or retailers Use the same basic accounting methods as service companies –The process is more complex than for service companies because of the buying and selling of merchandise The goods on hand for sale to customers are called merchandise inventory

6. Copyright © Houghton Mifflin Company. All rights reserved.5–6 Management Issues in Merchandising Businesses Cash flow management Profitability management Choice of inventory system Control of merchandising operations

7. Copyright © Houghton Mifflin Company. All rights reserved.5–7 Cash Flow Management … involves managing a company’s receipts and payments of cash If bills cannot be paid when due, the company may be forced out of business Merchandising businesses engage in a series of transactions called the operating cycle

8. Copyright © Houghton Mifflin Company. All rights reserved.5–8 The Operating Cycle Transactions in the operating cycle include –Purchase of merchandise inventory for cash or credit –Payment for purchases made on credit –Sales of merchandise inventory for cash or on credit –Collection of cash from credit sales

9. Copyright © Houghton Mifflin Company. All rights reserved.5–9 1.Merchandise inventory is purchased for cash or on credit Cash Accounts Payable Merchandise Inventory Purchase for cash Purchase on credit The Operating Cycle of Merchandising Concerns Accounts Receivable 2.Payments are made for purchases on credit Payment of cash 3.Merchandise is sold for cash or on credit Sales for cash Sales on credit 4.Cash is collected from credit sales Collection of cash

10. Copyright © Houghton Mifflin Company. All rights reserved.5–10 The Financing Period … is the time period from the purchase of inventory until it is ultimately sold and collected less the amount of time creditors give the company to pay for the inventory Also called the cash gap This is the period of time the company will be without cash from a particular series of transactions The company will need to have funds available or borrow from the bank This is why cash flow management is important

11. Copyright © Houghton Mifflin Company. All rights reserved.5–11 The Financing Period Illustrated 4.Average days to collect on receivables is 60 days (Cash is received) 1.Inventory is purchased on credit (Accounts Payable) Inventory purchased Cash received Inventory sold Cash paid 2.Terms for payment are 30 days (Cash is paid) 3.Average days to sell inventory is 60 days – sold on credit (Accounts Receivable) The financing period, or cash gap, is 90 days (120 days – 30 days)

12. Copyright © Houghton Mifflin Company. All rights reserved.5–12 Target’s financing period is shorter because it sells most of its merchandise for cash The Financing Period (cont’d) The financing period –Varies for different companies –Can be 120 days, or even longer, for merchandising companies Example

13. Copyright © Houghton Mifflin Company. All rights reserved.5–13 Types of payments for purchases Cash Bank credit card Store credit Funds from these sales are available to the merchandiser immediately Merchandiser must wait a period of time before receiving cash Cash Versus Credit Retailers reduce their financing period (improve their cash flow) by selling as much as possible for cash –Encourage sales by cash or bank credit card

14. Copyright © Houghton Mifflin Company. All rights reserved.5–14 Profitability Management … is a complex activity that includes achieving a satisfactory gross margin and maintaining acceptable levels of operating expenses

15. Copyright © Houghton Mifflin Company. All rights reserved.5–15 Profitability Management (cont’d) Achieving a satisfactory gross margin depends on –Setting appropriate prices for merchandise –Purchasing merchandise at favorable prices and terms Maintaining acceptable levels of operating costs depends on –Controlling expenses Using an operating budget is an efficient way to control expenses –Operating efficiently

16. Copyright © Houghton Mifflin Company. All rights reserved.5–16 Operating Budgets … consist of detailed listings of projected selling expenses and general and administrative expenses for a company Reflect management’s operating plans At year-end and key times during the year, management should compare actual and budgeted expenses and make adjustments to operations

17. Copyright © Houghton Mifflin Company. All rights reserved.5–17 Choice of Inventory System Two basic systems –Perpetual inventory system –Periodic inventory system Management must choose the system or combination of systems that is best for achieving the company’s goals

18. Copyright © Houghton Mifflin Company. All rights reserved.5–18 Perpetual Inventory System …determines inventory by keeping continuous records of the quantity and, usually, the cost of individual items as they are bought and sold

19. Copyright © Houghton Mifflin Company. All rights reserved.5–19 Perpetual Inventory System (cont’d) Detailed data enable management to –Determine product availability Can respond to customers’ inquiries –Avoid running out of stock Able to order inventory more effectively –Control financial costs associated with investments in inventory

20. Copyright © Houghton Mifflin Company. All rights reserved.5–20 Accounting for Inventory Under the Perpetual System Purchases –The cost of each item is recorded in the Merchandise Inventory account Sales –The cost of each item is transferred from the Merchandise Inventory account to the Cost of Goods Sold account Therefore –Merchandise Inventory account balance = Cost of goods on hand –Cost of Goods Sold account balance = Cost of merchandise sold to customers

21. Copyright © Houghton Mifflin Company. All rights reserved.5–21 Periodic Inventory System … determines inventory by a physical count taken at the end of the accounting period No detailed records of the actual inventory on hand are maintained during the accounting period Amount of inventory on hand is accurate only on the balance sheet date

22. Copyright © Houghton Mifflin Company. All rights reserved.5–22 Periodic Inventory System Used to reduce the amount of clerical work Lack of records could lead to lost sales or high operating costs More likely to be used by –Smaller companies –Companies that sell high volumes of low value items Drugstores Automobile parts stores Department stores Discount stores Grain companies

23. Copyright © Houghton Mifflin Company. All rights reserved.5–23 Perpetual Inventory System More likely to be used by –Larger companies –Companies that sell high-value items Automobiles Appliances

24. Copyright © Houghton Mifflin Company. All rights reserved.5–24 Control of Merchandising Operations Principal transactions of merchandising businesses are –Buying assets –Selling assets Involve cash, accounts receivable, and merchandise inventory These assets are vulnerable to theft and embezzlement –Management must use internal controls to protect these assets

25. Copyright © Houghton Mifflin Company. All rights reserved.5–25 Internal Control Internal control is created by establishing –An environment of control –Accounting systems –Control procedures

26. Copyright © Houghton Mifflin Company. All rights reserved.5–26 Physical Inventory A physical count of all merchandise on hand –Required under both the perpetual and periodic inventory systems –Under the perpetual inventory system, the actual count is compared to accounting records to determine any shortages that may exist Used to facilitate control over merchandise inventory

27. Copyright © Houghton Mifflin Company. All rights reserved.5–27 Merchandise Inventory …includes all goods intended for sale that are owned by a business Includes all goods intended for sale, regardless of where they are located, such as –Goods in transit if title has passed to the merchant –Damaged or obsolete goods that can be sold at reduced prices Does not include –Merchandise that has been sold –Damaged or obsolete goods that cannot be sold

28. Copyright © Houghton Mifflin Company. All rights reserved.5–28 Inventory Losses Result from spoilage, shoplifting, and theft by employees Periodic inventory system –No means to identify losses because the costs are automatically included in cost of goods sold Perpetual inventory system –Losses equal the difference between the inventory records and the physical count –Update inventory by crediting Merchandise Inventory and debiting Cost of Goods Sold

29. Copyright © Houghton Mifflin Company. All rights reserved.5–29 Discussion Q.What four issues must managers of merchandising businesses face? A.The four issues that managers of merchandising businesses face are 1.Cash flow management 2.Profitability management 3.Choosing between the periodic and the perpetual inventory systems, and 4.Establishing an internal control structure that protects the business’s assets

30. Copyright © Houghton Mifflin Company. All rights reserved.5–30 Income Statement for a Merchandising Concern Objective 2 –Compare the income statements for service and merchandising concerns, and define the components of the merchandising income statement

31. Copyright © Houghton Mifflin Company. All rights reserved.5–31 Income Statement for a Merchandiser Consists of three major parts 1.Net sales 2.Cost of goods sold 3.Operating expenses There is also a subtotal for gross margin (Net Sales – Cost of Goods Sold) Income statements for service businesses do not include gross margin computations

32. The Components of Income Statements for Service and Merchandising Companies

33. Copyright © Houghton Mifflin Company. All rights reserved.5–33 Net Sales …consists of the gross proceeds from sales of merchandise Also simply called sales Amount of sales and trends in net sales over time are used to analyze a company’s progress

34. Copyright © Houghton Mifflin Company. All rights reserved.5–34 Net Sales Net Sales = Gross Sales – Sales Returns and Allowances – Discounts Gross Sales = Total Cash Sales + Total Credit Sales during a given accounting period This follows the revenue recognition rule –Revenue is recognized even though cash may not be collected until the following accounting period Sales Returns and Allowances A contra-revenue account Used to accumulate cash refunds, credits on account, and allowances off selling prices for defective or unsatisfactory merchandise

35. Copyright © Houghton Mifflin Company. All rights reserved.5–35 Cost of Goods Sold … is the amount paid for merchandise sold, or the cost to manufacture products that were sold, during an accounting period Also called cost of sales

36. Copyright © Houghton Mifflin Company. All rights reserved.5–36 Gross Margin …is the difference between net sales and cost of goods sold Net Sales – Cost of Goods Sold = Gross Margin Also called gross profit

37. Copyright © Houghton Mifflin Company. All rights reserved.5–37 Both are useful in planning business operations Gross Margin Management is interested in both the amount of gross margin and the percentage of gross margin

38. Copyright © Houghton Mifflin Company. All rights reserved.5–38 Operating Expenses … are the expenses other than cost of goods sold that are incurred in running a business Operating expenses are grouped into categories –Selling expenses –General and administrative expenses Careful planning and control of operating expenses can improve a company’s profitability

39. Copyright © Houghton Mifflin Company. All rights reserved.5–39 Selling Expenses Include –Cost of storing goods –Cost of preparing goods for sale –Advertising and promoting sales –Delivering goods to the buyer Called freight out expense or delivery expense –General occupancy expenses (may be allocated among selling expenses and general and administrative expenses) Rent expense Utilities expense Insurance expense

40. Copyright © Houghton Mifflin Company. All rights reserved.5–40 General and Administrative Expenses Include –General office expenses Accounting Personnel Credit and collections Expenses that apply to overall operations –General occupancy expenses (may be allocated among general and administrative expenses and selling expenses) Rent expense Utilities expense Insurance expense

41. Copyright © Houghton Mifflin Company. All rights reserved.5–41 Net Income … is what remains of gross margin after operating expenses are deducted It is the final figure, or “bottom line,” of the income statement Represents the amount of business earnings that accrue to the owners Management and owners use net income to measure whether a business has operated successfully during the past accounting period

42. Copyright © Houghton Mifflin Company. All rights reserved.5–42 Discussion Q.What are the three major parts of an income statement for a merchandising company? –Net sales –Cost of goods sold –Operating expenses

43. Copyright © Houghton Mifflin Company. All rights reserved.5–43 Terms of Sale Objective 3 –Define and distinguish the terms of sale for merchandising transactions

44. Copyright © Houghton Mifflin Company. All rights reserved.5–44 Trade Discounts … are reductions off list or catalog prices Offered by manufacturers and wholesalers Usually 30 percent or more Example –An article is listed at $1,000 with a trade discount of 40 percent –Sale price = $1,000(1.00 – 0.40) = $600

45. Copyright © Houghton Mifflin Company. All rights reserved.5–45 Trade Discount Terms n/10 (net 10) Amount is due 10 days after the invoice date n/10 eom (net 10 end-of-month) Amount is due 10 days after the end of the month in which the invoice is dated

46. Copyright © Houghton Mifflin Company. All rights reserved.5–46 Sales Discounts …give buyers discounts for early payment Are intended to increase the seller’s liquidity by reducing the amount of money tied up in accounts receivable It is usually advantageous for buyers to take advantage of sales discounts

47. Copyright © Houghton Mifflin Company. All rights reserved.5–47 Sales Discount Terms 2/10, n/30 Amount may be paid within 10 days of the invoice date with a 2 percent discount Or wait up to 30 days and pay the full amount

48. Copyright © Houghton Mifflin Company. All rights reserved.5–48 Shipping Terms Seller pays shipping costs Buyer pays shipping costs FOB destination FOB Shipping Point FOB means “free on board” Title of merchandise passes from seller to buyer at the point merchandise is shipped Title of merchandise passes from seller to buyer when the merchandise reaches its destination

49. Copyright © Houghton Mifflin Company. All rights reserved.5–49 Credit Card Sales If seller accepts a credit card payment, the customer signs a sales invoice The sale is communicated to the seller’s bank and a cash deposit is made in the seller’s account –Seller does not have to establish customer's credit, collect from the customer, or tie up money in accounts receivable The seller pays the lender (credit card company) from 2 to 6 percent of the sale amount for the service

50. Copyright © Houghton Mifflin Company. All rights reserved.5–50 Accounting for Credit Card Sales Example –A customer charges a $1,000 purchase on a Visa credit card –Visa charges a 4 percent discount on sales –The seller will pay Visa $40 ($1,000 x.40) Journal entry

51. Copyright © Houghton Mifflin Company. All rights reserved.5–51 Discussion Q.What is the difference between a trade discount and a sales discount? A.Trade discount A deduction off a list or catalog price Sales discount A discount given to a buyer for early payment for sales made on credit

52. Copyright © Houghton Mifflin Company. All rights reserved.5–52 Applying the Perpetual Inventory System Objective 4 –Prepare an income statement and record merchandising transactions under the perpetual inventory system

53. Copyright © Houghton Mifflin Company. All rights reserved.5–53 The Merchandise Inventory account on the balance sheet is updated at the same time The Cost of Goods Sold account is continually updated during the accounting period Income Statement When Using the Perpetual Inventory System

54. Copyright © Houghton Mifflin Company. All rights reserved.5–54 Transactions Related to the Purchase of Merchandise Purchases of merchandise on credit Transportation costs on purchases Purchases returns and allowances Payments on account

55. Copyright © Houghton Mifflin Company. All rights reserved.5–55 Under the perpetual inventory system, the cost of merchandise purchased is placed in the Merchandise Inventory account at the time of purchase Oct. 3: Received merchandise purchased on credit from Neebok Company, invoice dated October 1, terms n/10, FOB shipping point, $4,890 Purchases of Merchandise on Credit

56. Copyright © Houghton Mifflin Company. All rights reserved.5–56 Freight In, or Transportation In, is the transportation cost of receiving merchandise Oct. 4: Received bill from Transfer Freight Company for transportation costs on October 3 shipment, invoice dated October 1, terms n/10, $160 Transportation costs are accumulated in the Freight In account, which is a component of cost of goods sold Transportation Costs on Purchases

57. Copyright © Houghton Mifflin Company. All rights reserved.5–57 Oct. 6: Returned merchandise received from Neebok Company on October 3 for credit, $480 Under the perpetual inventory system, the returned merchandise is removed from the Merchandise Inventory account Purchases Returns and Allowances

58. Copyright © Houghton Mifflin Company. All rights reserved.5–58 Oct. 10: Paid in full the amount due to Neebok Company for the purchase of October 3, part of which was returned on October 6 Payments on Account

59. Copyright © Houghton Mifflin Company. All rights reserved.5–59 Transactions Related to Sales of Merchandise Sales of merchandise on credit Payment of delivery costs Returns of merchandise sold Receipts on account

60. Copyright © Houghton Mifflin Company. All rights reserved.5–60 Sales of Merchandise on Credit Under the perpetual inventory system, two entries are necessary. Oct. 7: Sold merchandise on credit to Gonzales Distributors, terms n/30, FOB destination, $1,200; the cost of the merchandise was $720 The sale is recorded and Cost of Goods Sold is updated by a transfer from Merchandise Inventory

61. Copyright © Houghton Mifflin Company. All rights reserved.5–61 Freight Out Expense, or Delivery Expense, is often paid by the seller to facilitate sales Oct. 8: Paid transportation costs for the sale on October 7, $78 Delivery costs are accumulated in the Freight Out Expense account, which is shown as a selling expense on the income statement Payment of Delivery Costs

62. Copyright © Houghton Mifflin Company. All rights reserved.5–62 Returns of Merchandise Sold Oct. 9: Return of merchandise sold on October 7 accepted from Gonzales Distributors for full credit and returned to merchandise inventory, $300; the cost of the merchandise was $180 The Sales Returns and Allowances account gives management a readily available measure of unsatisfactory products or customer dissatisfaction, which can be indicated by returns and allowances

63. Copyright © Houghton Mifflin Company. All rights reserved.5–63 If merchandise is not returned or will not be resold, this transaction is not recorded Returns of Merchandise Sold Oct. 9: Return of merchandise sold on October 7 accepted from Gonzales Distributors for full credit and returned to merchandise inventory, $300; the cost of the merchandise was $180 Under the perpetual inventory system, the cost of the returned merchandise must be transferred from Cost of Goods Sold to Merchandise Inventory

64. Copyright © Houghton Mifflin Company. All rights reserved.5–64 Nov. 5: Received payment in full from Gonzales Distributors for sale of merchandise on October 7, less the return on October 9 Receipts on Account

65. Copyright © Houghton Mifflin Company. All rights reserved.5–65 Discussion Q.How are merchandising transactions recorded under the perpetual inventory system? A.Merchandising transactions are recorded during the accounting periods, as purchases, sales, and other inventory transactions take place

66. Copyright © Houghton Mifflin Company. All rights reserved.5–66 Applying the Periodic Inventory System Supplemental Objective 5 –Prepare an income statement and record merchandising transactions under the periodic inventory system

67. Copyright © Houghton Mifflin Company. All rights reserved.5–67 Applying the Periodic Inventory System Cost of goods sold must be computed in the income statement when using the periodic inventory system –It is not updated for purchases, sales, and other transactions during the accounting period

68. Copyright © Houghton Mifflin Company. All rights reserved.5–68 The Components of Cost of Goods Sold

69. Copyright © Houghton Mifflin Company. All rights reserved.5–69 Cost of goods available for sale must be determined first Income Statement When Using the Periodic Inventory System Under the periodic inventory system, cost of goods sold must be computed

70. Copyright © Houghton Mifflin Company. All rights reserved.5–70 Cost of Goods Available for Sale … is the sum of two factors, beginning inventory and the net cost of purchases during the year

71. Copyright © Houghton Mifflin Company. All rights reserved.5–71 Net Cost of Purchases

72. Copyright © Houghton Mifflin Company. All rights reserved.5–72 Transactions Related to Purchases of Merchandise Purchases of merchandise on credit Transportation costs on purchase Purchases returns and allowances Payments on account

73. Copyright © Houghton Mifflin Company. All rights reserved.5–73 Purchases of Merchandise on Credit Under the periodic inventory system, the total cost of merchandise purchased for resale during the period is accumulated in the Purchases account Oct. 3: Received merchandise purchased on credit from Neebok Company, invoice dated October 1, terms n/10, FOB shipping point, $4,890 The Purchases account does not indicate whether merchandise has been sold or is still on hand

74. Copyright © Houghton Mifflin Company. All rights reserved.5–74 Transportation Costs on Purchases Freight In, or Transportation In, is the transportation cost of receiving merchandise Oct. 4: Received bill from Transfer Freight Company for transportation costs on October 3 shipment, invoice dated October 1, terms n/10, $160 Transportation costs are accumulated in the Freight In account, which is included in cost of goods sold

75. Copyright © Houghton Mifflin Company. All rights reserved.5–75 Purchases Returns and Allowances Oct. 6: Returned merchandise received from Neebok Company on October 3 for credit, $480 Under the periodic inventory system, the amount of the allowance or returned merchandise is recorded in the Purchases Returns and Allowances account The Purchases Returns and Allowances account Is a contra-purchases account Carries a normal credit balance Is deducted from purchases on the income statement

76. Copyright © Houghton Mifflin Company. All rights reserved.5–76 Payments on Account Oct. 10: Paid in full the amount due to Neebok Company for the purchase of October 3, part of which was returned on October 6

77. Copyright © Houghton Mifflin Company. All rights reserved.5–77 Transactions Related to Sales of Merchandise Sales of merchandise on credit Payment of delivery costs Returns of merchandise sold Receipts on account

78. Copyright © Houghton Mifflin Company. All rights reserved.5–78 Sales of Merchandise on Credit Under the periodic inventory system, only one entry is necessary. The Cost of Goods Sold account is not used because the Merchandise Inventory account is not updated until the end of the accounting period. Oct. 7: Sold merchandise on credit to Gonzales Distributors, terms n/30, FOB destination, $1,200

79. Copyright © Houghton Mifflin Company. All rights reserved.5–79 Payment of Delivery Costs Freight Out Expense, or Delivery Expense, is often paid by the seller to facilitate sales Oct. 8: Paid transportation costs for the sale on October 7, $78 Delivery costs are accumulated in the Freight Out Expense account, which is shown as a selling expense on the income statement

80. Copyright © Houghton Mifflin Company. All rights reserved.5–80 Returns of Merchandise Sold Oct. 9: Return of merchandise sold on October 7 accepted from Gonzales Distributors for full credit and returned to merchandise inventory, $300 The Sales Returns and Allowances account is used to accumulate returns and allowances to customers for wrong or unsatisfactory merchandise. The Sales Returns and Allowances account –Is a contra-revenue account –Carries a normal debit balance –Is deducted from sales on the income statement

81. Copyright © Houghton Mifflin Company. All rights reserved.5–81 Receipts on Account Nov. 5: Received payment in full from Gonzales Distributors for sale of merchandise on October 7, less the return on October 9

82. Copyright © Houghton Mifflin Company. All rights reserved.5–82 Discussion Q.How are merchandising transactions recorded under the periodic system? A.Merchandising transactions are recorded at the end of the accounting period; therefore, Costs of Goods Sold and Inventory must be computed at that time

83. Copyright © Houghton Mifflin Company. All rights reserved.5–83 The Merchandising Work Sheet and Closing Entries: The Perpetual Inventory System Supplemental Objective 6 –Prepare a work sheet and closing entries for a merchandising concern using the perpetual inventory system

84. Copyright © Houghton Mifflin Company. All rights reserved.5–84 Work Sheet and Closing Accounts for a Merchandising Company Basically the same as for a service company but includes accounts needed to handle merchandising transactions –Treatment of these accounts depends on whether perpetual or periodic inventory system is used

85. Copyright © Houghton Mifflin Company. All rights reserved.5–85 Comparison of Merchandising Accounts to be Closed at End of Period Perpetual Inventory SystemPeriodic Inventory System Sales Sales Returns and Allowances Cost of Goods Sold Freight In Sales Sales Returns and Allowances Sales Discounts Purchases Purchases Returns and Allowances Purchases Discounts Freight In Merchandise Inventory Notice that the Merchandise Inventory account is not involved in the closing process under the perpetual inventory system

86. Copyright © Houghton Mifflin Company. All rights reserved.5–86 Merchandise Inventory Account Under the perpetual system, the Merchandise Inventory account is not involved in the closing process because it is up to date at the end of the accounting period Under the periodic system, no entries are made to the Merchandise Inventory account until the closing process at the end of the accounting period

87. Copyright © Houghton Mifflin Company. All rights reserved.5–87 Work Sheet Columns 1.Enter balances from ledger accounts to trial balance columns 2.Enter adjusting entries in the Adjustments columns 3.Total columns to prove debits equal credits 4.Extend balances to Income Statement and Balance Sheet columns 5.Record adjusting entries from work sheet to general journal, then post to ledger XXX XXX The Adjusted Trial Balance columns have been omitted because only a few adjusting entries are required for Fenwick Fashions Company

88. Copyright © Houghton Mifflin Company. All rights reserved.5–88 Balance Sheet Columns Perpetual Inventory System Ending Merchandise Inventory is in both the Trial Balance and Balance Sheet columns

89. Copyright © Houghton Mifflin Company. All rights reserved.5–89 Income Statement Columns Perpetual Inventory System The difference between the Income Statement column totals is net income

90. Copyright © Houghton Mifflin Company. All rights reserved.5–90 Closing Entries Perpetual Inventory System Debit Income Summary and credit the accounts in the Income Statement Debit column

91. Copyright © Houghton Mifflin Company. All rights reserved.5–91 Closing Entries Perpetual Inventory System (cont.)

92. Copyright © Houghton Mifflin Company. All rights reserved.5–92 Closing Entries Perpetual Inventory System (cont.) Debit the accounts in the Income Statement Credit column and credit Income Summary

93. Copyright © Houghton Mifflin Company. All rights reserved.5–93 Closing Entries Perpetual Inventory System (cont.) Next, the balances in the Income Summary and Withdrawal accounts are closed to the Capital account Notice that the amount required to close the Income Summary account is equal to net income for the period

94. Copyright © Houghton Mifflin Company. All rights reserved.5–94 Discussion Q.Under the perpetual inventory system, is the Merchandise Inventory account involved in the closing process? A.No. Under the perpetual system, the Merchandise Inventory account is not involved in the closing process because it is up to date at the end of the accounting period

95. Copyright © Houghton Mifflin Company. All rights reserved.5–95 The Merchandising Work Sheet and Closing Entries: The Periodic Inventory System Supplemental Objective 7 –Prepare a work sheet and closing entries for a merchandising concern using the periodic inventory system

96. Copyright © Houghton Mifflin Company. All rights reserved.5–96 Merchandise Inventory Account Under the periodic inventory system, the Merchandise Inventory account requires special treatment –Because merchandise purchases are accumulated in the Purchases account No entries are made to the Merchandise Inventory account during the accounting period

97. Copyright © Houghton Mifflin Company. All rights reserved.5–97 Merchandise Inventory Account Periodic Inventory System The beginning balance of the Merchandise Inventory account, which appears in the Trial Balance Debit column, is extended to the Income Statement Debit column

98. Copyright © Houghton Mifflin Company. All rights reserved.5–98 Merchandise Inventory Account Periodic Inventory System This has the effect of adding beginning inventory to net purchases because the Purchases account is also in the Income Statement Debit column

99. Copyright © Houghton Mifflin Company. All rights reserved.5–99 Merchandise Inventory Account Periodic Inventory System The ending balance of the Merchandise Inventory account is then inserted in the Income Statement Credit column Determined by a physical count

100. Copyright © Houghton Mifflin Company. All rights reserved.5–100 Merchandise Inventory Account Periodic Inventory System This has the effect of subtracting ending inventory from goods available for sale in order to calculate cost of goods sold

101. Copyright © Houghton Mifflin Company. All rights reserved.5–101 Merchandise Inventory Account Periodic Inventory System Finally, the ending Merchandise Inventory is inserted in the Balance Sheet Debit column because it will appear on the balance sheet

102. Copyright © Houghton Mifflin Company. All rights reserved.5–102 Closing Entries Periodic Inventory System Debit Income Summary and credit the accounts in the Income Statement Debit column

103. Copyright © Houghton Mifflin Company. All rights reserved.5–103 Closing Entries Periodic Inventory System (cont.)

104. Copyright © Houghton Mifflin Company. All rights reserved.5–104 Closing Entries Periodic Inventory System (cont.) Debit the accounts in the Income Statement Credit column and credit Income Summary

105. Copyright © Houghton Mifflin Company. All rights reserved.5–105 Closing Entries Periodic Inventory System (cont.)

106. Copyright © Houghton Mifflin Company. All rights reserved.5–106 Closing Entries Periodic Inventory System (cont.) Next, the balances in the Income Summary and Withdrawal accounts are closed to the Capital account

107. Copyright © Houghton Mifflin Company. All rights reserved.5–107 Accounting for Discounts Supplemental Objective 8 –Apply sales and purchases discounts to merchandising transactions

108. Copyright © Houghton Mifflin Company. All rights reserved.5–108 Sales Discounts …are discounts given to buyers for early payment for sales made on credit Are recorded only at the time the customer pays The Sales Discounts account –Is a contra-revenue account –Carries a normal debit balance –Is deducted from sales on the income statement

109. Copyright © Houghton Mifflin Company. All rights reserved.5–109 Sept. 20: Sold merchandise to a customer, terms 2/10, n/60, $300 Nov. 19: Customer pays on account for September 20 sale The customer paid the full sale amount of $300 because payment was made after the 10 day sales discount period Transactions Involving No Sales Discounts

110. Copyright © Houghton Mifflin Company. All rights reserved.5–110 Sept. 20: Sold merchandise to a customer, terms 2/10, n/60, $300 Sept. 29: Customer pays on account for September 20 sale The customer paid only $294 [$300 – ($300 x.02)] because payment was made within the 10-day sales discount period Transactions Involving Sales Discounts

111. Copyright © Houghton Mifflin Company. All rights reserved.5–111 Purchases Discounts …are discounts taken by merchants for early payment for merchandise purchased on credit Usually do not apply to freight, postage, taxes, or other charges appearing on the invoice The Purchases Discounts account –Is a contra-purchases account –Carries a normal credit balance –Is deducted from purchases on the income statement

112. Copyright © Houghton Mifflin Company. All rights reserved.5–112 Nov. 12: Made a credit purchase of merchandise, terms 2/10, n/30, $1,500 Dec. 12: Paid on account for November 12 sale, less amount for returned merchandise The full sale amount of $1,500, less $200 for returned merchandise, was paid because payment was made after the 10-day purchases discount period Nov. 14: Returned merchandise purchased November 12 on credit, $200 Transactions Involving No Purchases Discounts

113. Copyright © Houghton Mifflin Company. All rights reserved.5–113 Nov. 12: Made a credit purchase of merchandise, terms 2/10, n/30, $1,500 Nov. 22: Paid on account for November 12 sale, less amount for returned merchandise A purchases discount of $26 [($1,500 - $200) x.02] was recorded, because payment was made within the 10-day purchases discount period Nov. 14: Returned merchandise purchased November 12 on credit, $200 Transactions Involving Purchases Discounts

114. Copyright © Houghton Mifflin Company. All rights reserved.5–114 Discussion Q.What is the normal balance of the Sales Discounts account? Is it an asset, a liability, an expense, or a contra-revenue account? A.The normal balance of the Sales Discounts account is a debit balance Sales Discounts is a contra-revenue account. It is deducted from gross sales on the income statement

115. Copyright © Houghton Mifflin Company. All rights reserved.5–115 Time for Review… 1.Identify the management issues related to merchandising businesses 2.Compare the income statements for service and merchandising concerns, and define the components of the merchandising income statement 3.Define and distinguish the terms of sale for merchandising transactions 4.Prepare an income statement and record merchandising transactions under the perpetual inventory system

116. Copyright © Houghton Mifflin Company. All rights reserved.5–116 And Finally … 5.Prepare an income statement and record merchandising transactions under the periodic inventory system 6.Prepare a work sheet and closing entries for a merchandising concern using the perpetual inventory system 7.Prepare a work sheet and closing entries for a merchandising concern using the periodic inventory system 8.Apply sales and purchases discounts to merchandising transactions