Chapter 6
Accounting for Merchandising Businesses
Accounting, 21st Edition
Warren Reeve Fess
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1. Distinguish the activities of a service business from those of a merchandising business.
2. Describe and illustrate the financial statements of a merchandising business.
3. Describe the accounting for the sale of merchandise.
4. Describe the accounting for the purchase of merchandise.
Objectives
After studying this chapter, you should be able to:
5. Describe the accounting for transportation costs, sales taxes, and trade discounts.
6. Illustrate the dual nature of merchandising transactions.
7. Prepare a chart of accounts for a merchandising business.
8. Describe the accounting cycle for a merchandising business.
9. Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets.
Objectives
Service Business
Fees earned $XXX
Operating expenses –XXX
Net income $XXX
Nature of Businesses
Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX
Nature of Businesses
Multiple-Step Income Statement
NetSolutions
Income Statement For the Year Ended December 31, 2007
Revenue from sales:
Sales $720,185
Less:Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
Continued
Operating expenses:
Selling expenses:
Sales salaries expense $56,230
Advertising expense 10,860
Depr. Expense–store equipment 3,100
Miscellaneous selling expense 630
Total selling expenses $ 70,820
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr. expense–office equipment 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. administrative expense 760
Total admin. expenses 34,890
Total operating expenses 105,710
Income from operations $ 77,240
Continued
Other income and expenses:
Rent revenue $ 600
Interest expense (2,440) (1,840)
Net income $75,400
Concluded
Periodic vs. Perpetual Methods of Accounting
Periodic Method
A method of determining the cost of merchandise sold and the amount of merchandise on hand
Under this method, the inventory records do not show the amount available for sale or the amount sold during the period
Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts.
The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records.
Periodic vs. Perpetual Methods of Accounting
Perpetual Method
Cost of Merchandise Purchased
Purchases $521,980
Less: Purchase returns and allowances $9,100
Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased $527,755
Cost of Merchandise Sold
Merchandise inventory, 1/1/07 $ 59,700
Purchases $521,980
Less: Purchase returns and allowances $9,100
Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased 527,755
Merchandise available for sale $587,455
Less merchandise inventory, 12/31/07 62,150
Cost of merchandise sold $525,305
Single-Step Income Statement for a Merchandising Business
NetSolutions
Income Statement
For the Year Ended December 31, 2007
Revenues:
Net sales $708,255
Rent revenue 600
Total revenues $708,855
Expenses:
Cost of merchandise sold $525,305
Selling expenses 70,820
Administrative expenses 34,890
Interest expense 2,440
Total expenses 633,455
Net income $ 75,400
Statement of Owner’s Equity for a Merchandising Business
Chris Clark, capital, 1/1/07 $153,800
Net income for year $75,400
Less withdrawals 18,000
Increase in owner’s equity 57,400
Chris Clark, capital, 12/31/07 $211,200
NetSolutions
Statement of Owner’s Equity
For the Year Ended December 31, 2007
Balance Sheet
NetSolutions
Balance Sheet
December 31, 2007
Assets
Current assets:
Cash $52,950
Accounts receivable 91,080
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650 Total current assets $209,310
Continued
Property, plant, and equipment:
Land $20,000
Store equipment $27,100
Less accumulated
depreciation 5,700 21,400
Office equipment $15,570
Less accumulated
depreciation 4,720 10,850 Total property, plant, and
equipment 52,250
Total assets $261,560
Continued
Liabilities
Current liabilities:
Accounts payable $22,420
Note payable (current portion) 5,000
Salaries payable 1,140
Unearned rent 1,800
Total current liabilities $ 30,360
Long-term liabilities:
Note payable (due 2017) 20,000
Total liabilities $ 50,360
Owner’s Equity
Chris Clark, capital 211,200
Total liabilities and owner’s equity $261,560
Concluded
Sales Transactions
JOURNAL
Date
Description
Post. Ref.
Dr Cr.
1
2
3
4
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5
Jan. 3 Cash 1 800 00
2007
Sales 1 800 00
To record cash sales.
On January 3, a firm sold $1,800 of merchandise for cash.
Cash Sales
Cash Sales
Using a perpetual inventory, the inventory cost of $1,200 must be recorded.
6
7
8
9
3 Cost of Merchandise Sold 1 280 00
Merchandise Inventory 1 280 00
To record the cost of
merchandise sold.
10
Credit card sales (MasterCard or Visa) are recorded as cash sales.
At the end of the month, $48 was sent to cover this service charge.
JOURNAL
Date
Description
Post. Ref.
Dr Cr.
1
2
3
4
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5
Cash 48 00
Jan. 31 Credit Card Expense 48 00
2007
Cash Sales
To record service charges
on credit card sales for the
month.
Jan. 12 Accounts Receivable—Sims Co. 510 00
Invoice No. 7172.
Sales 510 00
12 Cost of Merchandise Sold 280 00
Merchandise Inventory 280 00
Cost of merchandise sold on Invoice No. 7172.
Sales on Account
On January 12, a firm sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $280.
Sales Discounts
The terms for when payments for merchandise are to be made are called credit terms.
If buyer is allowed an amount of time to pay, it is known as the credit period.
If invoice is paid within 10 days of invoice date
Sales Discounts
Credit Terms
Invoice for $1,500
Terms:
2/10, n/30
$1,470 paid (less 2% as a cash discount)
If invoice is NOT paid within 10 days of invoice date
Sales Discounts
Credit Terms
Invoice for $1,500
Terms:
2/10, n/30
$1,500 PAID
Sales Discounts
On January 21, the firm receives the amount due from Sims (refer to Slide 25), less the 2 percent discount.
Jan. 21 Cash 499 80
Accounts Receivable—Sims Co. 510 00
Sales Discounts 10 20
Collection of Invoice No. 7172, less discount.
Sales Returns and Allowances
Merchandise that is returned to the vendor is referred to as a sales return.
If there is a defect in the product or the wrong item was shipped, the seller may reduce the initial price at which the goods were sold. This is known as a sales allowance.
Jan. 13 Sales Returns and Allowances 225 00
Credit Memo No. 32.
Accounts Receivable—Krier Co. 225 00
13 Merchandise Inventory 140 00
Cost of Merchandise Sold 140 00
Cost of merchandise returned—Credit Memo 32.
Sales Returns and Allowances
On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.
Purchase Transactions
Date
Description
Post. Ref.
Dr Cr.
1
2
3
4
5
Jan. 3 Merchandise Inventory 2 510 00
2007
Cash 2 510 00
Purchased inventory from Bowen Co.
Purchase Transactions
On January 3, Purchased merchandise for cash from Bowen Company, $2,510.
What’s the last day the invoice can be paid?
Purchase Discounts
Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30.
Invoice period 30
Days in March 31
Date of invoice 12
Remaining days 19
April 11
Let’s do a simple calculation.
The full amount is due on April 11.
Purchase Discounts
We can borrow at an annual interest rate of 6%. Should we borrow to pay the invoice within the discount period?
Purchase Discounts
$60 discount (2% x $3,000)?
Discount $
Interest for 20 days at the rate of 6% on $2,940 –
Savings from borrowing $
Let’s see… Interest on the amount due of $3,000 less the 2 percent…
Purchase Discounts
Looks like we should take advantage of the discount even if we have to borrow the money.
Purchase Discounts
Discount $
Interest for 20 days at the rate of 6% on $2,940 –
Savings from borrowing $
JOURNAL
Date
Description
Post. Ref.
Dr Cr.
1
2
3
4
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5
On March 12, NetSolutions purchased merchandise on account from Alpha Technologies, $3,000.
Mar. 12 Merchandise Inventory 3 000 00
2007
Accounts Payable—Alpha
Technologies 3 000 00
Purchase Discounts
JOURNAL
Date
Description
Post. Ref.
Dr Cr.
1
2
3
4
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5
If payment is made by March 22 NetSolutions records the discount as a reduction in cost.
Mar. 22 Accounts Payable—Alpha Technol. 3 000 00
Cash 2 940 00
Merchandise Inventory 60 00
2007
Purchase Discounts
JOURNAL
Date
Description
Post. Ref.
Dr Cr.
1
2
3
4
PAGE 27
5
If NetSolutions does not pay the invoice until April 11, it would pay the full amount.
Apr. 11 Accounts Payable—Alpha Technol. 3 000 00
Cash 3 000 00
2007
Purchase Discounts
Purchases Returns and Allowances
A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.
When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.
NetSolutions received the delivery from Maxim Systems and determined that $900 of the items were not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems.
Purchases Returns and Allowances
You sent me the wrong interface cards. We’ll send a debit memorandum with the returned items.
Mar. 7 Accounts Payable—Maxim Systems 900 00
Debit Memo No. 18
Merchandise Inventory 900 00
Purchases Returns and Allowances
Purchases Returns and Allowances
On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30.
May 2 Merchandise Inventory 5 000 00
Purchased merchandise.
Accounts Payable—Delta Data 5 000 00
Purchases Returns and Allowances
On May 4, NetSolutions returns $3,000 of the merchandise.
May 4 Accounts Payable—Delta Data Links 3 000 00
Returned portion of merchandise purchased.
Merchandise Inventory 3 000 00
Purchases Returns and Allowances
On May 12, NetSolutions pays the amount due.
May 12 Accounts Payable—Delta Data Links 2 000 00
Paid invoice.
Cash 1 960 00
Merchandise Inventory 40 00
($5,000 – $3,000) x 2%
Transportation Costs
FOB Shipping Point
Buyer pays freight costs and debits Merchandise Inventory
Fruit Express
Title passes to buyer as shipment leaves shipping point.
June 10 Merchandise Inventory 900 00
Purchased merchandise, terms FOB shipping point.
Accounts Payable—Magna Data 900 00
10 Merchandise Inventory 50 00
Cash 50 00
Paid shipping cost .
On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50.
FOB Shipping Point
FOB Destination
Title passes to buyer upon arrival at destination.
Seller pays freight costs and debits Transportation Out
Fruit Express
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 the transportation cost of $40.
FOB Destination
June 15 Accounts Receivable—Kranz Co. 700 00
Sold merchandise, terms FOB destination.
Sales 700 00
15 Cost of Merchandise Sold 480 00
Merchandise Inventory 480 00
Cost of sale of Kranz Co .
FOB Destination
June 15 Transportation Out 40 00
Cash 40 00
Paid shipping cost on merchandise sold.
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 the transportation cost of $40.
Sales Taxes
On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.
Aug. 12 Accounts Receivable—Lemon Co. 106 00
Sales 100 00
Sales Taxes Payable 6 00
Invoice No. 339
Sales Taxes
On September 15, the seller sends in a payment of $2,900 to the taxing unit for the August taxes collected.
Sales Tax Payable 2 900 00
Cash 2 900 00
Payment for sales taxes collected during August.
Illustration of Accounting for Merchandise Transactions
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.
Scully Company (Seller)
Accounts Receivable—Burton Co. 7,500
Sales 7,500
Cost of Merchandise Sold 4,500
Merchandise Inventory 4,500
Burton Company (Buyer)
Merchandise Inventory. 7,500
Accounts Payable—Scully Co. 7,500
Illustration of Accounting for Merchandise Transactions
Scully Company (Seller)
No entry.
Burton Company (Buyer)
Merchandise Inventory 150
Cash 150
July 2. Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.
Illustration of Accounting for Merchandise Transactions
July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB shipping point, n/30. The cost of the merchandise sold was $3,500.
Scully Company (Seller)
Accounts Receivable—Burton Co. 5,000
Sales 5,000
Cost of Merchandise Sold 3,500
Merchandise Inventory 3,500
Burton Company (Buyer)
Merchandise Inventory. 5,000
Accounts Payable—Scully Co. 5,000
Illustration of Accounting for Merchandise Transactions
July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.
Scully Company (Seller)
Transportation Out 250
Cash 250
Burton Company (Buyer)
No entry.
Illustration of Accounting for Merchandise Transactions
July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 purchase on account. The cost of the merchandise was $700.
Scully Company (Seller)
Sales Returns and Allowances 1,000
Accounts Receivable—Burton Co. 1,000
Merchandise Inventory 700
Cost of Merchandise Sold 700
Burton Company (Buyer)
Accounts Payable—Scully Co. 1,000
Merchandise Inventory 1,000
Illustration of Accounting for Merchandise Transactions
July 15. Scully Company received payment from Burton Company for purchase of July 5.
Scully Company (Seller)
Cash 4,000
Accounts Receivable—Burton Co. 4,000
Burton Company (Buyer)
Accounts Payable—Scully Co. 4,000
Cash 4,000
Illustration of Accounting for Merchandise Transactions
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.
Scully Company (Seller)
Accounts Receivable—Burton Co. 12,000
Sales 12,000
Accounts Receivable—Burton Co. 500
Cash 500
Burton Company (Buyer)
Merchandise Inventory 12,500
Accounts Payable—Scully Co. 12,500
Illustration of Accounting for Merchandise Transactions
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.
Continued (Seller)
Cost of Merchandise Sold 7,200
Merchandise Inventory 7,200
Burton Company (Buyer)
Illustration of Accounting for Merchandise Transactions
July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000).
Scully Company (Seller)
Cash 12,260
Sales Discounts 240
Accounts Receivable—Burton Co. 12,500
Burton Company (Buyer)
Accounts Payable—Scully Co. 12,500
Merchandise Inventory 240
Cash 12,260
Balance Sheet Accounts
200 Liabilities
210 Accounts Payable
211 Salaries Payable
212 Unearned Rent
215 Notes Payable
300 Owner’s Equity
310 Chris Clark, Capital
311 Chris Clark, Drawing
312 Income Summary
100 Assets
110 Cash
112 Accounts Receivable
115 Merchandise Inventory
116 Office Supplies
117 Prepaid Insurance
120 Land
123 Store Equipment
124 Accumulated Depreciation—
Store Equipment
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
NetSolutions
Chart of Accounts
Income Statement Accounts
600 Other Income
610 Rent Revenue
700 Other Expense
710 Interest Expense
400 Revenues
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
500 Costs and Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense—
Store Equipment
523 Transportation Out
529 Miscellaneous Selling Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Miscellaneous Admin. Expense
NetSolutions
Chart of Accounts
Merchandise Inventory Shrinkage
NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, 2007. The physical count reveals that only $62,150 is actually available.
Merchandise Inventory Shrinkage
Dec. 31 Cost of Merchandise Sold 1 800 00
Merchandise Inventory 1 800 00
Adjusting Entry
Inventory records $63,950
Inventory count 62,150
Inventory shortage $ 1,800
Profitability Measures -- Effective Use of Assets
Ratio of Net Sales to Assets
Sears Penney
Net sales $41,366,000 $31,846,000
Total assets:
Beginning of year $50,409,000 $19,742,000
End of year $44,317,000 $20,908,000
Average $47,363,000 $20,325,000
Ratio of net sales to assets .87 to 1 to 1
Ratio Use: To assess the effectiveness in the use of assets to generate sales.
The End
Chapter 6
