Accounting for Merchandising Businessesss 1224048145696217 8

8/8/2019 Accounting for Merchandising Businessesss 1224048145696217 8

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Accounting forAccounting forMerchandising BusinessesMerchandising Businesses

Financial and Managerial Accounting


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1. Distinguish the activities of a servicebusiness from those of a merchandisingbusiness.

2. Describe and illustrate the financialstatements of a merchandisingbusiness.

3. Describe the accounting for the sale of

merchandise.4. Describe the accounting for the

purchase of merchandise.

ObjectivesObjectives

After studying thisAfter studying this

chapter, you shouldchapter, you should

be able to:be able to:


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5. Describe the accounting for transportationcosts, sales taxes, and trade discounts.

6. Illustrate the dual nature of merchandisingtransactions.

7. Prepare a chart of accounts for amerchandising business.

8. Describe the accounting cycle for amerchandising business.

9. Compute the ratio of net sales to assetsas a measure of how effectively abusiness is using its assets.

ObjectivesObjectives


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Service Business

Fees earned $XXX

Operating expenses XXX

Net income $XXX

Nature of BusinessesNature of Businesses


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Merchandising Business

Sales $XXX

Cost ofMerchandise Sold XXX

Gross Profit $XXX

Operating Expenses XXX

Net Income $XXX

Nature of BusinessesNature of Businesses


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PurchasingPurchasing

ActivityActivity

Raw Materials

ProductionProduction

ActivityActivity

Products

SalesSales

ActivityActivity

AccountsReceivable

CollectionCollection

ActivityActivityCash


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Multiple-Step

Income

Statement


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NetSolutions

Income Statement For the Year Ended December 31,

2007

Revenue from sales:

Sales $720,185Less: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

ContinuedContinued


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Operating expenses:

Selling expenses:Sales salaries expense $56,230Advertising expense 10,860Depr. Expensestore equipment 3,100Miscellaneous selling expense 630

Total selling expenses $ 70,820

Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expenseoffice equipment 2,490Insurance expense 1,910Office supplies expense 610Misc. administrative expense 760

Total admin. expenses 34,890Total operating expenses 105,710

Income from operations $ 77,240

ContinuedContinued


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Other income and expenses:

Rent revenue $ 600Interest expense (2,440) (1,840)

Net income $75,400

ConcludedConcluded


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Periodic vs. PerpetualMethods ofPeriodic vs. PerpetualMethods of

AccountingAccounting

Periodic Method

A method of determining the cost of merchandisesold and the amount of merchandise on hand

Under this method, the inventory records do not

show the amount available for sale or the amountsold during the period


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Under this method, each purchase and sale ofmerchandise 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 inthe inventory records.

Periodic vs. PerpetualMethods ofPeriodic vs. PerpetualMethods of

AccountingAccounting

Perpetual Method


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Cost ofMerchandise PurchasedCost ofMerchandise Purchased

Purchases $521,980

Less: Purchase returns and

allowances $9,100Purchase discounts 2,525 11,625

Net purchases $510,355

Add transportation-in 17,400

Cost of merchandise purchased $527,755


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Cost ofMerchandise SoldCost ofMerchandise 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


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Single-Step Income

Statement for a

MerchandisingBusiness


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NetSolutions

Income Statement

For the Year Ended December 31, 2007

Revenues:

Net sales $708,255

Rent revenue 600

Total revenues $708,855Expenses:

Cost of merchandise sold $525,305

Selling expenses 70,820

Administrative expenses 34,890

Interest expense 2,440Total expenses 633,455

Net income $ 75,400


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Retained Earnings

Statement


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Retained earnings, 1/1/07 $128800

Net income for year $75,400Less dividends 18,000Increase in owners equity 57,400Retained earnings, 12/31/07 $186,200

NetSolutionsRetained Earnings Statement

For the Year Ended December 31, 2007


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Balance Sheet


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NetSolutions

Balance Sheet

December 31, 2007

Assets

Current assets:

Cash $52,950

Accounts receivable 91,080Merchandise inventory 62,150

Office supplies 480

Prepaid insurance 2,650

Total current assets $209,310

ContinuedContinued


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Property, plant, and equipment:Land $20,000Store equipment $27,100

Less accumulateddepreciation 5,700 21,400

Office equipment $15,570

Less accumulateddepreciation 4,720 10,850Total property, plant, andequipment 52,250

Total assets $261,560

ContinuedContinued


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Liabilities

Current liabilities:Accounts payable $22,420

Note payable (current portion) 5,000

Salaries payable 1,140

Unearned rent 1,800

Total current liabilities $ 30,360Long-term liabilities:

Note payable (due 2017) 20,000

Total liabilities $ 50,360

Stockholders EquityCapital stock $ 25,000

Retained earnings 186,200 211,200

Total liab. and stockholders equity $261,560


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Sales TransactionsSales Transactions


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JOURNAL

Date DescriptionPost.

Ref. Dr Cr.

1

2

3

4

PAGE 26

5

Jan. 3 Cash 1 800 002007

Sales 1 800 00

To record cash sales.

On January 3, a firm sold $1,800On January 3, a firm sold $1,800

of merchandise for cash.of merchandise for cash.

Cash SalesCash Sales


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Using a perpetual inventory, the inventoryUsing a perpetual inventory, the inventorycost of $1,200 must be recorded.cost of $1,200 must be recorded.

6

7

8

9

3 Cost of Merchandise Sold 1 200 00

Merchandise Inventory 1 200 00

To record the cost of

merchandise sold.

10


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Credit card sales (MasterCard orCredit card sales (MasterCard or

Visa) are recorded as cash sales.Visa) are recorded as cash sales.

At the end of the month, $48 wasAt the end of the month, $48 was

sent to cover this service charge.sent to cover this service charge.

JOURNAL


Ref. Dr Cr.

12

3

4

PAGE 28

5

Cash 48 00Jan. 31 Credit Card Expense 48 00

2007


To record service charges

on credit card sales for the

month.


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Jan. 12 Accounts ReceivableSims Co. 510 00

Invoice No. 7172.

Sales 510 00

12 Cost ofMerchandise Sold 280 00

Merchandise Inventory 280 00

Cost of merchandise sold

on Invoice No. 7172.

Sales on AccountSales on Account

On January 12, a firm sold Sims CompanyOn January 12, a firm sold Sims Company

merchandise on account, $510. The cost ofmerchandise on account, $510. The cost of

the merchandise to the seller was $280.the merchandise to the seller was $280.


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Sales DiscountsSales 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.


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If invoice is

paid within

10 days of

invoice date


Credit Terms

Invoice for$1,500

Terms:

2/10, n/30

$1,470 paid (less2% as a cash

discount)


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If invoice is

NOTpaid

within 10

days of

invoice date


Credit Terms

Invoice for

$1,500

Terms:

2/10, n/30

$1,500 PAID


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On January 22, the firm receives $1,470On January 22, the firm receives $1,470

from Sims Co. which is the amount due offrom Sims Co. which is the amount due of

$1,500 less a 2 percent discount.$1,500 less a 2 percent discount.

Jan. 22 Cash 1 470 00

Accounts ReceivableSims Co. 1 500 00

Sales Discounts 30 00

Collection of Invoice

No. 7172, less discount.


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Sales Returns and AllowancesSales 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 asa sales allowance.


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Jan. 13 Sales Returns and Allowances 225 00

CreditMemo No. 32.

Accounts ReceivableKrier Co. 225 00

13 Merchandise Inventory 140 00

Cost ofMerchandise Sold 140 00

Cost of merchandise

returnedCreditMemo 32.

Sales Returns and AllowancesSales Returns and Allowances

On January 13, issued Credit Memo 32 to KrierOn January 13, issued Credit Memo 32 to Krier

Company for merchandise returned to NetSolutions.Company for merchandise returned to NetSolutions.

Selling price, $225; cost to NetSolutions, $140.Selling price, $225; cost to NetSolutions, $140.


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PurchasePurchaseTransactionsTransactions


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Ref. Dr Cr.

1

2

3

4

5

Jan. 3 Merchandise Inventory 2 510 002007

Cash 2 510 00

Purchased inventory from

Bowen Co.

Purchase Transactions

On January 13, Purchased merchandiseOn January 13, Purchased merchandise

for cash from Alden Company, $2,510.for cash from Alden Company, $2,510.


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Whats the last

day the invoice

can be paid?

Purchase DiscountsPurchase Discounts

Alpha Technologies

issues an invoice for

$3,000 to

NetSolutions datedMarch 12, with terms

2/10, n/30.


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Invoice period 30

Days in March 31

Date of invoice 12Remaining days 19

April 11

Lets do a simplecalculation.

The full amount is

due on April 11.



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We can borrow at an annual interest rate of

6%. Should we borrow the to pay the

invoice within the discount period?


$60 discount

(2% x

$3,000)?


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Discount $60.00

Interest for 20 days

at the rate of 6%on $2,940 9.80

Savings from

borrowing $50.20

Lets see Interest on the

amount due of $3,000 lessthe 2 percent



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Looks like we should take

advantage of the discount even if we

have to borrow the money.


Discount $60.00

Interest for 20 days

at the rate of 6%on $2,940 9.80

Savings from

borrowing $50.20


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JOURNAL


Ref. Dr Cr.

1

2

3

4

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OnMarch 12, NetSolutions purchasedOnMarch 12, NetSolutions purchased

merchandise on account from Alphamerchandise on account from Alpha

Technologies, $3,000.Technologies, $3,000.

Mar. 12 Merchandise Inventory 3 000 002007

Accounts PayableAlpha

Technologies 3 000 00



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JOURNAL


Ref. Dr Cr.

1

2

3

4

PAGE 27

5

If payment is made by March 22 NetSolutionsIf payment is made by March 22 NetSolutions

records the discount as a reduction in cost.records the discount as a reduction in cost.

Mar. 22 Accounts PayableAlpha Technol. 3 000 00

Cash 2 940 00


2007



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JOURNAL


Ref. Dr Cr.

1

2

3

4

PAGE 27

5

If NetSolutions does not pay the invoice untilIf NetSolutions does not pay the invoice until

April 11, it would pay the full amount.April 11, it would pay the full amount.

Apr. 11 Accounts PayableAlpha Technol. 3 000 00

Cash 3 000 00

2007



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Purchases Returns and AllowancesPurchases Returns and Allowances

Apurchases 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 andthe vendor makes a price adjustment,

this is apurchases allowance.


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NetSolutions received theNetSolutions received the

delivery from Maximdelivery from Maxim

Systems and determined thatSystems and determined that

$900 of the items were not$900 of the items were notthe merchandise ordered.the merchandise ordered.

DebitDebit memorandummemorandum #18 is#18 is

issued toM

axim Systems.issued toM

axim Systems.


You sent me the wrong interface cards.

Well send a debit memorandum with the

returned items.


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Mar. 7 Accounts PayableMaxim Systems 900 00

DebitMemo No. 18




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OnMay 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 PayableDelta Data 5 000 00


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OnMay 4, NetSolutions returns

$3,000 of the merchandise.

May 4 Accounts PayableDelta Data Links 3 000 00

Returned portion of

merchandise purchased.



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OnMay 12, NetSolutions pays the amount due.

May 12 Accounts PayableDelta Data Links 2 000 00

Paid invoice.

Cash 1 960 00


($5,000($5,000

$3,000) x$3,000) x

2%2%


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TransportationTransportationCostsCosts


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FOB Shipping PointFOB Shipping Point

Buyer pays freight costs and debits

Merchandise Inventory

Fruit Express

Title passes to buyer as

shipment leaves

shipping point.


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June 10 Merchandise Inventory 900 00

Purchased merchandise, terms

FOB shipping point.

Accounts PayableMagna Data 900 00

10 Merchandise Inventory 50 00

Cash 50 00

Paid shipping cost on

merchandise purchased.

On June 10, NetSolutions buys merchandise fromOn June 10, NetSolutions buys merchandise from

Magna Data on account, $900, terms FOB shippingMagna Data on account, $900, terms FOB shipping

point and pays the transportation cost of $50.point and pays the transportation cost of $50.

FOB Shipping PointFOB Shipping Point


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FOB DestinationFOB Destination

Title passes to buyer

upon arrival at

destination.

Seller pays freight costs and debits

Transportation Out

Fruit Express


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On June 15, NetSolutions sells merchandise to KranzOn June 15, NetSolutions sells merchandise to Kranz

Company on account, $700, terms FOB destination.Company on account, $700, terms FOB destination.

The cost of the merchandise sold is $480.The cost of the merchandise sold is $480.

NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.


June 15 Accounts ReceivableKranz Co. 700 00

Sold merchandise, terms FOB

destination.

Sales 700 00

15 Cost ofMerchandise Sold 480 00


Cost of sale of Kranz Co .


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June 15 Transportation Out 40 00

Cash 40 00

Paid shipping cost on

merchandise sold.

On June 15, NetSolutions sells merchandise to KranzOn June 15, NetSolutions sells merchandise to Kranz

Company on account, $700, terms FOB destination.Company on account, $700, terms FOB destination.

The cost of the merchandise sold is $480.The cost of the merchandise sold is $480.

NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.


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Sales TaxesSales Taxes

On August 12, merchandise is sold onOn August 12, merchandise is sold onaccount to Lemon Company, $100. Theaccount to Lemon Company, $100. The

state has a 6% sales tax.state has a 6% sales tax.

Aug. 12 Accounts ReceivableLemon Co. 106 00

Sales 100 00

Sales Taxes Payable 6 00Invoice No. 339


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Sales TaxesSales Taxes

On September 15, the seller sends in aOn September 15, the seller sends in apayment of $2,900 to the taxing unit forpayment of $2,900 to the taxing unit for

the August taxes collected.the August taxes collected.

Sept.15 Sales Tax Payable 2 900 00

Cash 2 900 00

Payment for sales taxescollected during August.


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Illustration of Accounting forIllustration of Accounting for

Merchandise TransactionsMerchandise Transactions

July 1. Scully Company sold merchandise on accountJuly 1. Scully Company sold merchandise on account

to Burton Co., $7,500, terms FOB shipping point, n/45.to Burton Co., $7,500, terms FOB shipping point, n/45.

The cost of the merchandise sold was $4,500.The cost of the merchandise sold was $4,500.

Scully Company (Seller)

Accounts ReceivableBurton Co. 7,500Sales 7,500

Cost ofMerchandise Sold 4,500Merchandise Inventory 4,500

Burton Company (Buyer)

Merchandise Inventory. 7,500

Accounts PayableScully Co. 7,500


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No entry.


Merchandise Inventory 150

Cash 150

July 2. Burton Company paid transportation charges ofJuly 2. Burton Company paid transportation charges of

$150 on July 1 purchase from Scully Company.$150 on July 1 purchase from Scully Company.


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July 5. Scully Company sold merchandise on accountJuly 5. Scully Company sold merchandise on account

to Burton Co., $5,000, terms FOB shipping point,to Burton Co., $5,000, terms FOB shipping point,

n/30. The cost of the merchandise sold was $3,500.n/30. The cost of the merchandise sold was $3,500.


Accounts ReceivableBurton Co. 5,000Sales 5,000

Cost ofMerchandise Sold 3,500Merchandise Inventory 3,500


Merchandise Inventory. 5,000



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July 7. Scully Company paid transportation costsJuly 7. Scully Company paid transportation costs

of $of $250250 for delivery of merchandise sold tofor delivery of merchandise sold toBurton Company on July 5.Burton Company on July 5.


Transportation Out 250Cash 250


No entry.


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July 13. Scully Company issued Burton Company a creditJuly 13. Scully Company issued Burton Company a credit

memorandum for $1,000 of merchandise returned from a July 5memorandum for $1,000 of merchandise returned from a July 5

purchase on account. The cost of the merchandise was $700.purchase on account. The cost of the merchandise was $700.


Sales Returns and Allowances 1,000Accounts ReceivableBurton Co. 1,000

Merchandise Inventory 700Cost ofMerchandise Sold 700



Merchandise Inventory 1,000


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July 15. Scully Company received paymentJuly 15. Scully Company received payment

from Burton Company for purchase ofJuly 5.from Burton Company for purchase ofJuly 5.


Cash 4,000Accounts ReceivableBurton Co. 4,000



Cash 4,000


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July 18. Scully Company sold merchandise on account to BurtonJuly 18. Scully Company sold merchandise on account to Burton

Company, $12,000, terms FOB shipping point, 2/10, n/eom. ScullyCompany, $12,000, terms FOB shipping point, 2/10, n/eom. Scully

prepaid transportation costs of $500, which were added to theprepaid transportation costs of $500, which were added to the

invoice. The cost of the merchandise sold was $7,200.invoice. The cost of the merchandise sold was $7,200.

Continued (Seller)Cost ofMerchandise Sold 7,200Merchandise Inventory 7,200



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July 18. Scully Company sold merchandise on account to BurtonJuly 18. Scully Company sold merchandise on account to Burton

Company, $12,000, terms FOB shipping point, 2/10, n/eom. ScullyCompany, $12,000, terms FOB shipping point, 2/10, n/eom. Scully

prepaid transportation costs of $500, which were added to theprepaid transportation costs of $500, which were added to the

invoice. The cost of the merchandise sold was $7,200.invoice. The cost of the merchandise sold was $7,200.

Scully Company (Seller)Cost ofMerchandise Sold 7,200Merchandise Inventory 7,200


Merchandise Inventory 12,500



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July 28. Scully Company received paymentJuly 28. Scully Company received payment

from Burton Company for purchase ofJulyfrom Burton Company for purchase ofJuly

18, less discount (2% x $12,000).18, less discount (2% x $12,000).


Cash 12,260Sales Discounts 240

Accounts ReceivableBurton Co. 12,500


Accounts PayableScully Co. 12,500Merchandise Inventory 240

Cash 12,260


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Balance Sheet Accounts

200 Liabilities

210 Accounts Payable

211 Salaries Payable

212 Unearned Rent

215 Notes Payable

300 Stockholders Equity

310 Capital Stock

311 Retained Earnings

312 Dividends

313 Income Summary

100 Assets

110 Cash

112 Accounts Receivable

115 Merchandise Inventory

116 Office Supplies

117 Prepaid Insurance120 Land

123 Store Equipment

124 Accumulated Depreciation

Store Equipment

125 Office Equipment

126 Accumulated DepreciationOffice Equipment

NetSolutions

Chart of Accounts


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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 TransportationOut

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


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Merchandise InventoryMerchandise Inventory

ShrinkageShrinkage

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.


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Merchandise InventoryMerchandise Inventory

ShrinkageShrinkage

Dec. 31 Cost ofMerchandise Sold 1 800 00


Adjusting Entry

Inventory records $63,950Inventory count 62,150

Inventory shortage $ 1,800


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Profitability MeasuresProfitability Measures ---- Effective Use of AssetsEffective Use of Assets

Ratio ofNet Sales to AssetsRatio ofNet Sales to AssetsRatio ofNet Sales to AssetsRatio ofNet Sales to AssetsSears Penney

Net sales $41,366,000 $31,846,000

Total assets:

Beginning of year $50,409,000 $19,742,000End of year $44,317,000 $20,908,000

Average $47,363,000 $20,325,000

Ratio of net sales to assetsRatio of net sales to assets .87 to 1.87 to 1 1.57 to 11.57 to 1

Ratio Use: To assess the effectiveness in the

use of assets to generate sales.


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The EndThe End

Accounting for Merchandising Businessesss 1224048145696217 8

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