Accounting for Merchandising Businesses

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5
Accounting for Merchandising Businesses
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1
Distinguish between the activities and financial
statements of service and merchandising
businesses.
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1
Nature of Merchandising Businesses
Service Business
Fees earned XXX Operating expenses XXX Net
income XXX
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Nature of Merchandising Businesses
Merchandising Business
Sales XXX Cost of Merchandise Sold XXX Gross
Profit XXX Operating Expenses XXX Net
Income XXX
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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.
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Nature of Merchandising Businesses
Merchandise on hand (not sold) at the end of an
accounting period is called merchandise inventory.
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Example Exercise 5-1
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?
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Describe and illustrate the financial statements
of a merchandising business.
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Multiple-Step Income Statement
The multiple-step income statement contains
several sections, subsections, and subtotals.
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Multiple-Step Income Statement
(continued on Slide 17)
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Multiple-Step Income Statement
The Sales account provides the total amount
charged to customers for merchandise sold,
including cash sales and sales on account.
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Multiple-Step Income Statement
Sales returns and allowances are granted by the
seller to customers for damaged or defective
merchandise.
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Multiple-Step Income Statement
Sales discounts are granted by the seller to
customers for early payment of amounts owed.
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Multiple-Step Income Statement
Net sales is determined by subtracting sales
returns and allowances and sales discounts from
sales.
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Multiple-Step Income Statement
Cost of merchandise sold is the cost of the
merchandise sold to customers.
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Multiple-Step Income Statement (continued)
(continued on Slide 28)
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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).
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Multiple-Step Income Statement
You have seen how sellers may offer customers
sales discounts for early payment of their bills.
From the buyers perspective, such discounts are
referred to as purchase discounts.
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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.
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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.
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Cost of Merchandise Sold
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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

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2
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

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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.

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Multiple-Step Income Statement (concluded)
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Example Exercise 5-2
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 31 142,000 Purchases 985,000 Purcha
ses Returns and Allowances 23,500 Purchases
Discounts 21,000 Transportation In 11,300
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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
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2
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.
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Single-Step Income Statement
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Retained Earnings Statement for Merchandising
Business
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Report Form of Balance Sheet
(continued)
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Report Form of Balance Sheet (continued)
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3
Describe and illustrate the accounting for
merchandise transactions including
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Chart of Accounts for NetSolutions Merchandising
Business
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3
Cash Sales
On January 3, NetSolutions sold 1,800 of
merchandise for cash.
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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.
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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.
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Sales on Account
On January 12, NetSolutions sold merchandise on
account for 510. The cost of merchandise sold
was 280.
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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.
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Invoice
Wireless
PC Card
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Credit Terms
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Receipts on Account
On January 22, NetSolutions receives the amount
due, less the 2 percent discount.
1,500 .02
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Credit Memorandum
A credit memorandum, often called a credit memo,
authorizes a credit to (decreases) the buyers
account receivable.
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Credit Memo
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On January 13, issued Credit Memo 32 to Krier
Company for merchandise returned to NetSolutions.
Selling price, 225 cost to NetSolutions, 140.
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Example Exercise 5-3
Sales Transactions
Journalize the following merchandise transactions

1. Sold merchandise on account, 7,500 with terms of
   2/10, n/30. The cost of the merchandise sold was
   5,625.
2. Received payment less the discount.

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Example Exercise 5-3 (continued)

• Accounts Receivable. 7,500
• Sales.. 7,500

Cost of Merchandise Sold. 5,625 Merchandise
Inventory. 5,625

• Cash. 7,350
• Sales Discounts 150
• Accounts Receivable. 7,500

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Purchase Transactions

Assumes a perpetual inventory system is used.
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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.
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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.
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NetSolutions borrows cash at an annual interest
rate of 6. Should the firm borrow cash to pay
the invoice within the discount period?
YES
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Discount Taken
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Discount Not Taken
Assume that NetSolutions pays the invoice on
April 11.
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Purchase Returns and Allowances
A purchases return involves actually returning
merchandise that is damaged or does not meet the
specifications of the order.
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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.
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Debit Memo
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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.
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NetSolutions records the return of the
merchandise indicated in the debit memo in
Exhibit 10 as follows
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Price Allowance
On May 2, NetSolutions purchased 5,000 of
merchandise on account from Delta Data Link,
terms 2/10, n/30.
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NetSolutions returned 3,000 of the merchandise
purchased from Delta Data Link on May 4.
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On May 12, NetSolutions paid for the purchase of
May 2 less the return and discount.
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Example Exercise 5-4
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.

1. If Rofles Company pays the invoice within the
   discount period, what is the amount of cash
   required for the payment?
2. Under a perpetual inventory system, what account
   is credited by Rofles Company to record the
   return?

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Example Exercise 5-4 (continued)

1. 8,330. Purchase of 11,500 less the return of
   3,000 less the discount of 170 (11,500
   3,000) 2.

1. Merchandise inventory

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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.
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On June 10, NetSolutions buys merchandise from
Magna Data on account, 900, terms FOB shipping
point and pays the transportation cost of 50.
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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.
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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.
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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.
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Freight Terms
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Example Exercise 5-5
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.
Returns and Allowances
Freight Paid by Seller
Merchandise
Freight Terms
a. 4,500 200 FOB shipping point, 800
1/10, n/30

1. 5,000 60 FOB destination, 2,500 2/10, n/30

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Example Exercise 5-5 (continued)

1. 3,863. Purchase of 4,500 less return of 800
   less the discount of 37 (4,500 800) 1
   plus 200 of shipping.

1. 2,450. Purchase of 5,000 less return of 2,500
   less the discount of 50 (5,000 2,500) 2.

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Sales Taxes
On August 12, merchandise is sold on account to
Lemon Company, 100. The state has a 6 sales tax.
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Sales Taxes
On a regular basis, the seller pays to the taxing
authority (state) the amount of the sales taxes
collected.
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Trade Discounts
When wholesalers offer special discounts to
certain classes of buyers who order large
quantities, these discounts are called trade
discounts.
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Example Exercise 5-6
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.
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Example Exercise 5-6 (continued)
Cash (11,500 900 212).. 10,388
Sales Discounts (11,500 900)
2..................... 212 Accounts
ReceivableBray Co (11,500 900) 10,600
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Describe the adjusting and closing process for a
merchandising business.
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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.
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NetSolutions inventory records indicate the
following on December 31, 2011
Dec. 31, 2011
Account balance of Merchandise Inventory 63,950 P
hysical merchandise inventory on hand
62,150 Inventory shrinkage 1,800
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At the end of the accounting period, inventory
shrinkage is recorded by the following adjusting
entry
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Step 1 Closing Entries
Debit each temporary account with a credit
balance, such as Sales, for its balance and
credit Income Summary.
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Step 2 Closing Entries
Credit each temporary account with a debit
balance, such as an expense, for the balance and
credit Income Summary.
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Step 3 Closing Entries
Debit Income Summary for the amount of its
balance (net income) and credit Retained Earnings.
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Step 4 Closing Entries
Debit Retained Earnings for the balance of the
Dividends account and credit the Dividends
account.
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NetSolutions Income Summary account after the
closing entries have been posted is as follows
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Example Exercise 5-7
Inventory Shrinkage
Pulmonary Companys 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.
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Example Exercise 5-7 (continued)
Mar. 31 Cost of Merchandise Sold. 11,550
Merchandise Inventory. 11,550
Inventory shrinkage (382,800
371,250).
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