1. 5 Accounting for Merchandising Businesses

2. Click to edit Master title style Click to edit Master text styles –Second level Third level –Fourth level »Fifth level Accounting for Merchandising Businesses 1 Distinguish between the activities and financial statements of service and merchandising businesses. 2 Describe and illustrate the financial statements of a merchandising business. 5-2 After studying this chapter, you should be able to: 3 Describe and illustrate the accounting for merchandising transactions including: sale of merchandise; purchase of merchandise; freight, sales taxes, and trade discounts; dual nature of merchandising transactions.

3. After studying this chapter, you should be able to: Accounting for Merchandising Businesses (continued) 4 Describe the adjusting and closing process for a merchandising business. 5-3

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

5. 5-5 Service Business Fees earned$XXX Operating expenses–XXX Net income$XXX Nature of Merchandising Businesses 1

6. 5-6 Merchandising Business Sales$XXX Cost of Merchandise Sold–XXX Gross Profit$XXX Operating Expenses–XXX Net Income$XXX Nature of Merchandising Businesses 1

7. 5-7 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold. 1 Nature of Merchandising Businesses

8. 5-8 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory. 1 Nature of Merchandising Businesses

9. 5-9 1 Gross Profit During the current year, merchandise is sold for $250,000 cash and for $975,000 on account. The cost of the merchandise sold is $735,000. What is the amount of the gross profit? 5-9 For Practice: PE 5-1A, PE 5-1B Example Exercise 5-1 Follow My Example 6-1 The gross profit is $490,000 ($250,000 + $975,000 – $735,000). Follow My Example 5-1

10. 5-10 1

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

12. 5-12 The multiple-step income statement contains several sections, subsections, and subtotals. 2 Multiple-Step Income Statement

13. 5-13 2 Exhibit 1Multiple-Step Income Statement (continued on Slide 19)

14. 5-14 The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account. 2 Multiple-Step Income Statement

15. 5-15 Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. 2 Multiple-Step Income Statement

16. 5-16 Sales discounts are granted by the seller to customers for early payment of amounts owed. 2 Multiple-Step Income Statement

17. 5-17 Net sales is determined by subtracting sales returns and allowances and sales discounts from sales. 2 Multiple-Step Income Statement

18. 5-18 Cost of merchandise sold is the cost of the merchandise sold to customers. 2 Multiple-Step Income Statement

19. 5-19 2 Multiple-Step Income Statement (continued) Exhibit 1 (continued on Slide 28)

20. 5-20 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). 2 Multiple-Step Income Statement

21. 5-21 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. 2 Multiple-Step Income Statement

22. 5-22 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. 2 Multiple-Step Income Statement

23. 5-23 Under the perpetual inventory system of accounting, the amounts of inventory available for sale and sold are continuously (perpetually) updated in the inventory records. 2 Multiple-Step Income Statement

24. 5-24 2 Cost of Merchandise Sold Exhibit 2

25. 5-25 Selling expenses are incurred directly in the selling of merchandise. Sales salaries Store supplies used Depreciation of store equipment Delivery expense Advertising 2 Multiple-Step Income Statement

26. 5-26 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 2 Multiple-Step Income Statement

27. 5-27 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. 2 Multiple-Step Income Statement

28. 5-28 2 Multiple- Step Income Statement (concluded) Exhibit 1

29. 5-29 Example Exercise 5-2 2 Cost of Merchandise Sold Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2. Merchandise Inventory, May 1$121,200 Merchandise Inventory, May 31142,000 Purchases985,000 Purchases Returns and Allowances23,500 Purchases Discounts21,000 Transportation In11,300 5-29

30. 5-30 2 Example Exercise 5-2 (continued) Merchandise Inventory, May 1$ 121,200 Purchases$985,000 Less: Purchases ret. and allow.$23,500 Purchases discounts 21,000 44,500 Net purchases$940,500 Add transportation in 11,300 Cost of merchandise purchased 951,800 Merchandise available for sale$1,073,000 Less merchandise inventory, May 31 142,000 Cost of merchandise sold$ 931,000 5-30 For Practice: PE 5-2A, PE 5-2B Follow My Example 5-2

31. 5-31 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. 2 Single-Step Income Statement

32. 5-32 2 Single-Step Income Statement Exhibit 3

33. 5-33 Retained Earnings Statement for Merchandising Business 2 Exhibit 4

34. 5-34 (continued) Report Form of Balance Sheet 2 Exhibit 5

35. 5-35 2 Report Form of Balance Sheet (continued) Exhibit 5

36. 5-36 Describe and illustrate the accounting for merchandise transactions including: 3 5-36

37. 5-37 3 Sale of merchandise Purchase of merchandise Freight, sales taxes, and trade discounts Dual nature of merchandise transactions

38. 5-38 3 Chart of Accounts for NetSolutions Merchandising Business Exhibit 6

39. 5-39 On January 3, NetSolutions sold $1,800 of merchandise for cash. Cash Sales 3

40. 5-40 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. 3 Cash Sales

41. 5-41 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. Credit Card Sales 3

42. 5-42 On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280. Sales on Account 3

43. 5-43 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. Sales Discounts 3

44. 5-44 3 Invoice Exhibit 7 Wireless PC Card

45. 5-45 3 Credit TermsExhibit 8

46. 5-46 On January 22, NetSolutions receives the amount due, less the 2 percent discount. Receipts on Account $1,500 ×.02 3

47. 5-47 A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable. 3 Credit Memorandum

48. 5-48 3 Credit MemoExhibit 9

49. 5-49 On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140. 3

50. 5-50 Example Exercise 5-3 3 Sales Transactions Journalize the following merchandise transactions: a.Sold merchandise on account, $7,500 with terms of 2/10, n/30. The cost of the merchandise sold was $5,625. b.Received payment less the discount. 5-50

51. 5-51 3 Example Exercise 5-3 (continued) a. Accounts Receivable…………….7,500 Sales……………………………..7,500 Cost of Merchandise Sold……….5,625 Merchandise Inventory……….5,625 b. Cash………………………………….7,350 Sales Discounts……………………150 Accounts Receivable………….7,500 5-51 For Practice: PE 5-3A, PE 5-3B Follow My Example 5-3

52. 5-52 Purchase Transactions *Assumes a perpetual inventory system is used. 3 *

53. 5-53 * 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. * 3 Purchase Transactions

54. 5-54 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. 3 Purchase Transactions

55. 5-55 NetSolutions borrows cash at an annual interest rate of 6%. Should the firm borrow cash to pay the invoice within the discount period? Discount of 2% on $3,000$60.00 Interest for 20 days at the rate of 6% on $2,940 – 9.80 Savings from borrowing$50.20 YES 3

56. 5-56 Discount Taken 3

57. 5-57 Discount Not Taken Assume that NetSolutions pays the invoice on April 11. 3

58. 5-58 A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. 3 Purchase Returns and Allowances

59. 5-59 When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, that is a purchases allowance. 3 Purchase Returns and Allowances

60. 5-60 3 Debit Memo Exhibit 10

61. 5-61 NetSolutions receives the delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 (also called a debit memo) is issued to Maxim Systems. 3

62. 5-62 NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 10 as follows: 3

63. 5-63 Price Allowance On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30. 3

64. 5-64 NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link on May 4. 3

65. 5-65 On May 12, NetSolutions paid for the purchase of May 2 less the return and discount. 3

66. 5-66 Example Exercise 5-4 3 Purchase Transactions Rofles Company purchased merchandise on account from a supplier for $11,500, terms 2/10, n/30. Rofles Company returned $3,000 of the merchandise and received full credit. a. If Rofles Company pays the invoice within the discount period, what is the amount of cash required for the payment? b. Under a perpetual inventory system, what account is credited by Rofles Company to record the return? 5-66

67. 5-67 3 Example Exercise 5-4 (continued) a. $8,330. Purchase of $11,500 less the return of $3,000 less the discount of $170 [($11,500 – $3,000) × 2%]. 5-67 For Practice: PE 5-4A, PE 5-4B b. Merchandise inventory Follow My Example 5-4

68. 5-68 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. Freight 3

69. 5-69 On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50. 3

70. 5-70 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. 3 Freight

71. 5-71 On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. NetSolutions pays freight of $40. 3

72. 5-72 3

73. 5-73 On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost of the merchandise sold is $360. 3

74. 5-74 3

75. 5-75 3 Freight Terms Exhibit 11

76. 5-76 Example Exercise 5-5 3 Freight Terms Determine the amount to be paid in full settlement of each of invoices (a) and (b), assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. a. $4,500$200FOB shipping point, $ 800 1/10, n/30 b. $ 5,00060FOB destination, 2,500 2/10, n/30 5-76 Merchandise Freight Paid by Seller Freight Terms Returns and Allowances

77. 5-77 3 Example Exercise 5-5 (continued) a. $3,863. Purchase of $4,500 less return of $800 less the discount of $37 [($4,500 – $800) × 1%] plus $200 of shipping. b. $2,450. Purchase of $5,000 less return of $2,500 less the discount of $50 [($5,000 – $2,500) × 2%]. 5-77 For Practice: PE 5-5A, PE 5-5B Follow My Example 5-5

78. 5-78 On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax. Sales Taxes 3

79. 5-79 On a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected. Sales Taxes 3

80. 5-80 When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts. 3 Trade Discounts

81. 5-81 Each merchandising transaction affects a buyer and a seller. In the following illustrations, we show how the same transactions would be recorded by both the seller and the buyer. July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,500. Dual Nature of Merchandise Transactions 3

82. 5-82 Scully Company (Seller) Accounts Receivable—Burton Co.7,500 Sales7,500 Cost of Merchandise Sold4,500 Merchandise Inventory4,500 Burton Company (Buyer) Merchandise Inventory.7,500 Accounts Payable—Scully Co.7,500 3

83. 5-83 July 2. Burton Company paid transportation charges of $150 on the July 1 purchase from Scully Company. 3

84. 5-84 Scully Company (Seller ) No entry. Burton Company (Buyer ) Merchandise Inventory150 Cash150 3

85. 5-85 July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500. 3

86. 5-86 Scully Company (Seller) Accounts Receivable—Burton Co.5,000 Sales5,000 Cost of Merchandise Sold3,500 Merchandise Inventory3,500 Burton Company (Buyer) Merchandise Inventory.5,000 Accounts Payable—Scully Co.5,000 3

87. 5-87 July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5. 3

88. 5-88 Scully Company (Seller) Delivery Expense250 Cash250 Burton Company (Buyer) No entry. 3

89. 5-89 July 13. Scully Company issued Burton Company a credit memorandum for merchandise returned, $1,000. The cost of the merchandise returned was $700. 3

90. 5-90 Scully Company (Seller) Sales Returns and Allowances1,000 Accounts Receivable—Burton Co.1,000 Merchandise Inventory700 Cost of Merchandise Sold700 Burton Company (Buyer) Accounts Payable—Scully Co.1,000 Merchandise Inventory1,000 3

91. 5-91 July 15. Scully Company received payment from Burton Company for purchase of July 5. 3

92. 5-92 Scully Company (Seller) Cash4,000 Accounts Receivable—Burton Co.4,000 Burton Company (Buyer) Accounts Payable—Scully Co.4,000 Cash4,000 3

93. 5-93 July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200. 3

94. 5-94 Scully Company (Seller) Accounts Receivable—Burton Co.12,000 Sales12,000 Accounts Receivable—Burton Co.500 Cash500 Cost of Merchandise Sold7,200 Merchandise Inventory7,200 Burton Company (Buyer) Merchandise Inventory12,500 Accounts Payable—Scully Co.12,500 3

95. 5-95 July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% × $12,000). 3

96. 5-96 Scully Company (Seller) Cash12,260 Sales Discounts240 Accounts Receivable— Burton Co.12,500 Burton Company (Buyer) Accounts Payable—Scully Co.12,500 Merchandise Inventory240 Cash12,260 3

97. 5-97 Example Exercise 5-6 3 Transactions for Buyer and Seller Sievert Co. sold merchandise to Bray Co. on account, $11,500, terms 2/15, n/30. The cost of the merchandise sold is $6,900. Sievert Co. issued a credit memorandum for $900 for merchandise returned and later received the amount due within the discount period. The cost of the merchandise returned was $540. Journalize Sievert Co.’s and Bray Co.’s entries for the payment of the amount due. 5-97

98. 5-98 3 Example Exercise 5-6 (continued) Cash ($11,500 – $900 – $212)……………………………..10,388 Sales Discounts [($11,500 – $900) × 2%]….....................212 Accounts Receivable—Bray Co ($11,500 – $900)…10,600 Bray Company Journal Entries: Accounts Payable—Sievert Co. ($11,500 – $900)……...10,600 Merchandise Inventory [($11,500 – $900) × 2%]……212 Cash ($11,500 – $900 – $212)……………....................10,388 For Practice: PE 5-6A, PE 5-6B 5-98 Follow My Example 5-6

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

100. 5-100 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. 4

101. 5-101 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 4

102. 5-102 At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry: 4

103. 5-103 Step 1: Closing Entries Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary. 4

104. 5-104 Credit each temporary account with a debit balance, such as an expense, for the balance and credit Income Summary. Step 2: Closing Entries 4

105. 5-105 Debit Income Summary for the amount of its balance (net income) and credit Retained Earnings. Step 3: Closing Entries 4

106. 5-106 Debit Retained Earnings for the balance of the Dividends account and credit the Dividends account. Step 4: Closing Entries 4

107. 5-107 NetSolutions’ Income Summary account after the closing entries have been posted is as follows: 4

108. 5-108 Example Exercise 5-7 4 Inventory Shrinkage Pulmonary Company’s perpetual inventory records indicate that $382,800 of merchandise should be on hand on March 31, 2010. The physical inventory indicates that $371,250 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Pulmonary Company for the year ended March 31, 2010. 5-108

109. 5-109 4 Example Exercise 5-7 (continued) Mar. 31 Cost of Merchandise Sold………. 11,550 Merchandise Inventory……….11,550 Inventory shrinkage ($382,800 – $371,250). For Practice: PE 5-7A, PE 5-7B Follow My Example 5-7 5-109

110. 5-110 Appendix The Periodic Inventory System 5-110

111. 5-111 Determining Cost of Merchandise Sold Using the Periodic System Exhibit 12

112. 5-112 Chart of Accounts Under the Periodic Inventory System Exhibit 13

113. 5-113 Exhibit 14 Transactions Using the Periodic and Perpetual Inventory Systems (continued)

114. 5-114 Transactions Using the Periodic and Perpetual Inventory Systems (concluded) Exhibit 14

115. 5-115 Closing Entries for NetSolutions

116. 5-116