BAF3M Accounting

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BAF3M Accounting

• Chapter 11 Accounting for a Merchandising
  Business

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• Merchandising Video

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• So far, weve only studied service businesses,
  now we move on to merchandising businesses
• Major difference is inventory stuff to sell
• Two major categories
• Wholesaler buys from manufacturers and sells to
  retailers
• Retailers buys from wholesalers and sells to
  final consumers

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11.1 Merchandise Inventory

• Merchandise is the name given to items bought by
  a business in order to be sold to consumers
• Merchandising businesses have the extra cost of
  inventory compared to service businesses
• This is an I/S amount called Cost of Goods Sold
  aka COGS

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A SIMPLIFIED PARTIAL BALANCE SHEET SHOWING
MERCHANDINSE INVENTORY AS A CURRENT ASSET
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11.1 Merchandise Inventory
INVENTORY CYCLE

• The goal is to sell inventory quickly thus
  inventory moves in and out of the business
  frequently
• SO
• There is inventory to begin the accounting period
  with.
• Merchandise is sold and moves out throughout the
  inventory period.
• Merchandise is replaced by the purchase of new
  stock from time to time.
• The ending inventory should be more or less the
  same as the beginning inventory.

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11.1 Merchandise Inventory

• COGS on the I/S p.
• formula to calculate the COGS figure
• Cost of Beg. Inv
• Cost of Merch Purchases
• - Cost of Ending inventory
• Cost of Merch sold

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A SIMPLE INCOME STATEMENT FOR A MERCHANDISING
BUSINESS
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OBSERVE THE FOLLOWING ABOUT THE PRECEEDING INCOME
STATMENT

1. The C.O.G.S. is considered to be so significant
   that the statement is prepared in 2 stages.
2. The first stage determines the gross profit.
   Gross profit is the difference between the
   selling price and the cost price of the goods
   sold. It can also been seen as the profit figure
   before deducting expenses.
3. The C.O.G.S. is shown on the income statement.
4. The expense section is now called OPERATING
   EXPENSES.

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CLOSING ENTRIES FOR A MERCHANDISING COMPANY

• The process is the exact same as in a service
  company
• The steps go
• Close revenue/sales to income summary
• Close expenses to income summary
• Close income summary to capital
• Close drawings to capital
• The process neatly cancels out the old inventory
  figure and sets up the new one, so that you will
  have the correct opening balances

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SOME NEW TERMS

• PURCHASE RETURNS ALLOWANCES used to record
  the value of merchandise returned (damaged goods,
  mistaken deliveries, etc.) to the supplier
• PURCHASE DISCOUNTS used to record discounts
  given for early payment
• SALES DISCOUNTS the seller may give discounts
  to credit customers if they pay within a
  specified time period

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FREIGHT IN VS. DELIVERY EXPENSE

• FREIGHT IN - the cost incurred to ship the
  merchandise to the store or warehouse
• DELIVERY EXPENSE this account is used to record
  the cost of shipping the sold merchandise to the
  customer

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JOURNAL ENTRIES

• The merchandise purchased during the fiscal
  period is collected in the Purchases account.
• This account if found in the expense section of
  the ledger.
• HMV purchased 600 CDs for resale at a cost of
  10/cd.

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JOURNAL ENTRIES

• If a customer returns a good because it is
  damaged, not what they expected etc. The entry is
  as follows.
• A customer returned 20 CDs to HMV that were
  purchased for 20 each.