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Transcript of 1 1. Distinguish between the activities and financial statements of service and merchandising...
1
1. Distinguish between the activities and financial statements of service and merchandising businesses.
2. Describe and illustrate the financial statements of a merchandising business.
After studying this chapter, you should be able to:
6 – Accounting for Merchandising 6 – Accounting for Merchandising BusinessesBusinesses
4. Describe the adjusting and closing process for a merchandising business
3. Describe and illustrate the accounting for merchandise transactions including: purchase of merchandise sale of merchandise freight costs, sales taxes, trade discounts dual nature of merchandising transactions.
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Distinguish between the activities and financial statements of service and
merchandising businesses.Objective 1Objective 1Objective 1Objective 1 6-1
Service Business
Fees earned
$XXX
Operating expenses
–XXX
Net income
$XXX
Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX
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When merchandise is sold, the revenue is reported as sales, and its cost is
recognized as an expense called cost of merchandise sold. (this appears on the
Income Statement)
6-1
Merchandise on hand (not sold) at the end of an accounting period is
called merchandise inventory.(this appears on the balance sheet as a
current asset)
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Describe and illustrate the financial statements of a merchandising business.Objective 2Objective 2Objective 2Objective 2
6-2
The multiple-step income statement contains several sections, subsections, and subtotals.
(Continued)
Revenue from sales:Sales $720,185Less: Sales returns and allowances $ 6,140
Sales discounts 5,790 11,930 Net sales
$708,255Cost of merchandise sold
525,305
Gross profit $182,950
NetSolutionsNetSolutionsIncome StatementIncome Statement
For the Year Ended December 31, 2009 For the Year Ended December 31, 2009
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Operating expenses:Selling expenses:
Sales salaries expense $53,430Advertising expense 10,860Depr. Expense–store equipment 3,100Delivery Expense 2,800Miscellaneous selling expense 630 Total selling expenses $ 70,820
Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expense–office equipment 2,490Insurance expense 1,910Office supplies expense 610Misc. administrative expense 760 Total admin. expenses 34,890
Total operating expenses 105,710
Income from operations $ 77,240
Operating expenses:Selling expenses:
Sales salaries expense $53,430Advertising expense 10,860Depr. Expense–store equipment 3,100Delivery Expense 2,800Miscellaneous selling expense 630 Total selling expenses $ 70,820
Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expense–office equipment 2,490Insurance expense 1,910Office supplies expense 610Misc. administrative expense 760 Total admin. expenses 34,890
Total operating expenses 105,710
Income from operations $ 77,240
Other income and expenses:Rent revenue $ 600Interest expense (2,440) (1,840)
Net income $75,400
Other income and expenses:Rent revenue $ 600Interest expense (2,440) (1,840)
Net income $75,400
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The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.
Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.
Sales discounts are granted by the seller to customers for early payment of amounts owed.
Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.
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As we discussed earlier, 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.
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).
8
Cost of merchandise sold was discussed earlier. It is the cost of the merchandise sold to customers.
6-2In a PERPETUAL ACCOUNTING
SYSTEM, there will be an account called Cost of merchandise sold, which
is continuously updated whenever inventory is bought or sold.
Note – there is another type of accounting system – The Periodic Accounting System. In this system the accounting records for inventory are not updated continuously with each purchase and sale. (We will not be focusing on his type in this course)
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6-2
NetSolutions deducts the total of all expenses in one step from the total of all revenues.
An alternative form of income statement is the single-step income statement.
Revenues:Net sales $708,255Rent revenue 600
Total revenues $708,855Expenses:
Cost of merchandise sold $525,305Selling expenses 70,820Administrative expenses 34,890Interest expense 2,440
Total expenses 633,455
Net income $ 75,400
NetSolutionsNetSolutionsIncome Statement Income Statement For the Year Ended December 31, 2009For the Year Ended December 31, 2009
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Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; freight costs, sales taxes, trade discounts;
dual nature of merchandise transactions.
Objective 3Objective 3Objective 3Objective 36-3
Recall that we are using the PERPETUAL SYSTEM
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Purchase Transactions (Perpetual Inventory)6-3
Date DescriptionPost. Ref. Dr Cr.
Jan. 3 Merchandise Inventory 2 510 002009
Cash 2 510 00
Purchased inventory from Bowen Co.
On January 3, NetSolutions purchased merchandise for cash from Alden Company, $2,510.
On January 4, NetSolutions purchased merchandise on account from Thomas Corporation, $9,250.
Jan. 4 Merchandise Inventory 9 250 00
Accounts Payable—Thomas Corp. 9 250 00
Purchased inventory on
account.
12
Mar. 12 Merchandise Inventory 3 000 00
Accounts Payable—Alpha Tech. 3 000 00
Purchased inventory on account.
6-3
On March 12, NetSolutions purchased merchandise on account from Alpha
Technologies, $3,000, with terms 2/10, n/30.
Purchases Discounts
13
Mar. 22 Accounts Payable—Alpha Technol. 3 000 00
Cash 2 940 00
Merchandise Inventory 60 00Paid Alpha Technologies for
March 12 purchase.
If payment is made by March 22, NetSolutions records the discount as a reduction in cost. Notice that Merchandise Inventory is credited
because NetSolutions maintains a perpetual inventory.
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
Paid Alpha Technologies for
March 12 purchase.
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A purchases return involves actually returning merchandise that is damaged or does not meet the
specifications of the order.
Purchases Returns
6-3
When the defective or incorrect merchandise is kept by the
buyer and the vendor makes a price adjustment, this is a
purchases allowance.
Purchases Allowances
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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.
6-3
Purchases Returns and Allowances
On March 7, NetSolutions records the return of the merchandise indicated in
Debit Memorandum No. 18.
Mar. 7 Accounts Payable—Maxim Systems 900 00
Debit Memo No. 18
Merchandise Inventory 900 00
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The terms for when payments for merchandise are to be made, agreed on by the buyer and the seller, are
called credit terms. If buyer is allowed an amount of time to pay, it
is known as the credit period.
6-3Sales (Purchases) Discounts
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If invoice is paid within 10 days of
invoice date
$1,470 paid ($1,500 less a 2%
discount)
6-3
Credit Terms
Invoice for $1,500Terms:
2/10, n/30
If invoice is NOT paid within 10 days
of invoice date
Full amount ($1,500) is due within 30 days
of invoice date
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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
On May 4, NetSolutions returns $3,000 of the merchandise.
4 Accounts Payable—Delta Data Link 3 000 00
Returned portion of the merchandise purchased.
Merchandise Inventory 3 000 00
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On May 12, NetSolutions pays the amount due, $1,960 [$2,000 – (($5,000 –$3,000) x 2%)].
12 Accounts Payable—Delta Data Links 2 000 00
Paid invoice [($5,000 – $3,000) x 2% = $40; $2,000 – $40 = $1,960]
Cash 1 960 00
Merchandise Inventory 40 00
6-3
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6-3
Cash Sales
The $1,200 cost of the inventory must be recorded.
On January 3, NetSolutions sold $1,800 of merchandise for cash.
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6-3
Assume that at the end of the month, $48 was sent to pay the service
charge on credit card sales.
Credit Card Sales
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6-3
Sales on Account
Jan. 12 Accounts Receivable—Sims Co. 510 00
Sales 510 00
Invoice No. 7172
On January 12, NetSolutions sold Sims Company merchandise on account, $510. The cost of the
merchandise to the seller was $280.
12 Cost of Merchandise Sold 280 00
Merchandise Inventory 280 00Cost of merchandise sold on
Invoice No. 7172.
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Sales Discount (1)
Jan. 12 Accounts Receivable— Omega Tech 1,500 00
Sales 1,500 00
Invoice No. 106-8
On January 12, NetSolutions sold Omega Tech merchandise on account for $1,500. The cost of the merchandise to the
NetSolutions was $1,200. The terms were: 2/10 n/30
12 Cost of Merchandise Sold 1, 200 00
Merchandise Inventory 1, 200 00Cost of merchandise sold on
Invoice No. 106-8
First, we record the sale on Jan 12……
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Sales Discount (2)
6-3On January 22, NetSolutions receives the amount due, less the 2 percent discount.
Jan. 22 Cash 1 470 00
Accounts Receivable–Omega Tech. 1 500 00
Sales Discounts 30 00
Collection of Invoice No.
106-8, less 2% discount.
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Jan. 13 Sales Returns and Allowances 225 00
Accounts Receivable—Krier Co. 225 00
Credit Memo No. 32
13 Merchandise Inventory 140 00
Cost of Goods Sold 140 00
Cost of merchandise returned.
Credit Memo No. 32.
On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to
NetSolutions. Selling price, $225; cost to NetSolutions, $140.
Sales Returns and Allowances
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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 00Paid shipping cost .
On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping
point and pays the freight cost of $50.
FOB (free on board) shipping point(1) – Buyer side
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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.
6-3
FOB (free on board) destination point – Seller side
On June 15, NetSolutions also pays the freight cost of $40.
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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 00Record cost of merchandise
sold to Kranz Company.
June 15 Delivery Expense 40 00
Cash 40 00
Paid shipping cost on merchandise sold.
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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.
Sept. 15 Sales Tax Payable 2 900 00
Cash 2 900 00 Payment for sales taxes
collected during August.
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Dual Nature of Merchandise Transactions
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.
See page 272
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6-4
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 merchandise count, the difference is often called inventory
shrinkage or inventory shortage.
Inventory Shrinkage
Describe the adjusting and closing process for a merchandising business.
Objective 4Objective 4Objective 4Objective 4
Adjusting Entries
32
Inventory records $63,950Inventory count 62,150Inventory shortage $ 1,800
Dec. 31 Cost of Merchandise Sold 1 800 00
Merchandise Inventory 1 800 00
Adjusting Entry
Inventory shrinkage (63,950 – $62,150).
6-4
NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31,
2009. The physical count reveals that only $62,150 is actually available.
Inventory Shrinkage e.g.
33
6-4Step 1:
Close the temporary accounts with credit balances to Income Summary.
2009
Date Item PR Debit Credit
Closing Entries
Dec. 31 Sales 410 720 185 00Rent Revenue 610 600 00
Income Summary 312 720 785 00
Closing Entries
34
6-46-4
31 Income Summary 312 645 385 00 Sales Returns and Allow. 411 6 140 00 Sales Discounts 412 5 790 00
Cost of Merchandise Sold 510 525 305 00Sales Salaries Expense 520 53 430 00Advertising Expense 521 10 860 00Depr. Exp.—Store Equip. 522 3 100 00Delivery Expense 523 2 800 00Misc. Selling Expense 529 630 00Office Salaries Expense 530 21 020 00Rent Expense 531 8 100 00Depr. Exp.—Office Equip. 532 2 490 00Insurance Expense 533 1 910 00Office Supplies Expense 534 610 00Misc. Administrative Exp. 539 760 00Interest Expense 710 2 440 00
Step 2: Close the temporary accounts with debit balances to Income Summary.
35
Step 3: Closing Entries
Close Income Summary (the balance represents a $75,400 profit for NetSolutions in 2009) to Chris Clark, Capital.
31 Income Summary 312 75 400 00Chris Clark, Capital 310 75 400 00
Step 4: Closing Entries
Close Chris Clark, Drawing to Chris Clark, Capital.
31 Chris Clark, Capital 310 18 000 00Chris Clark, Drawing 311 18 000 00