Chapter 7

The Merchandising Company

Merchandising

• Sell goods (products)

• Net Income:Revenue – Cost of Goods Sold = Gross Profit

Gross Profit – Expenses = Net Income

• Schedule of Cost of Goods Sold provides details on an income statement

Schedule of Cost of Goods Sold

Inventory, October 1 22,154.00$ Add: Purchases 48,966.00$ Less: Purchase Discounts 2,300.00$ Purchases Returns & Allowances 4,502.00 6,802.00 42,164.00 Add: Transportation on Purchases 1,209.00 Cost of Goods Available for Sale 65,527.00$ Less Inventory October 31 19,877.00 Cost of Goods Sold 45,650.00

Goods CompanySchedule of Cost of Goods Soldmonth ended October 31, 2005

Inventory

• An account that stores the value of goods not yet resold

• Periodic System: count merchandise not sold at the end of the period to determine cost of goods sold

• Perpetual System: record inventory and cost of goods sold when sales made

“Cost” Accounts

• Purchases: debit when buying goods for resale in periodic system

• Purchase Returns and Allowances: credit when returning goods not useful

• Purchase Discounts: credit when making payment for good early

• Transportation on Purchases: debit to receive goods, similar to expense

• Cost of Goods Sold is created at period end in periodic and debited in every sale in perpetual

Revenue Accounts

• Sales: credited to indicate revenue

• Sales Returns and Allowances: debited to show customer not satisfied with goods

• Sales Discounts: debited when customer pays early

Terms of Sale

• COD: customer pays when goods delivered

• Net 30: full amount due in 30 days

• EOM: full amount due at end of the month

• 2/10, n/30: receive 2% discount if paid within 10 days after invoice received

Invoices

• Sales Invoice: dr A/R cr Sales

• Credit Invoice: dr Sales Returns cr A/R

• Purchase Invoice: dr Purchases or Inventory cr A/P

Journal Entries

• Credit Sale

dr A/R 300cr Sales 300

1/10, net 30, invoice #45

dr Sales Returns and Allowance 100cr A/R 100

• Return

Journal Entries (periodic)

• Payment within discount period

dr Cash 297 dr Sales Discounts 3

cr A/R 300

• Payment beyond discount

dr Cash 300cr A/R 300

Journal Entries (periodic)

• Purchase goods for resale (periodic)

dr Purchases 400cr Cash or A/P 400

2/15, n/30, invoice #P398

• Payment within discount period*

dr A/P 400cr Purchase Discounts 8cr Cash 392

Cheque #26 for invoice #P398

* Otherwise A/P and Cash

Journal Entries

• Transportation (for goods for resale) dr Transportation-In 50

cr A/P or Cash 50

• Delivery Charge (for goods sold to customers)

dr Delivery Expense 25cr A/P or Cash 25

Journal Entries (perpetual)

• Sale: dr A/R or Cash 400

cr Sales 400

and

dr Cost of Goods Sold 300cr Inventory 300

• Purchase good for resale:

dr Inventory 300cr A/P or Cash 300

Journal Entries (perpetual)

• Inventory shortage (count at end of period)

dr Inventory Shortage 20cr Inventory 20

Charge shortage to expense

Sales Taxes

• GST: Goods and Services Tax 5%• PST: Provincial Sales Tax 8%• Typical Sale:

dr Cash or A/R 113cr Sales 100cr GST Payable 5cr PST Payable 8

Sales Taxes• GST on Purchases:

dr Purchases (or Inventory, etc.) 200 dr GST Refundable 10

cr Cash or A/P 210

• “Remit” GST if owing:

dr GST Payable 500cr GST Refundable 450cr Cash 50

• Refund of GST is owed:

dr GST Payable 450 dr Cash 50

cr GST Refundable 500

Credit Cards

• Increases sales• Typical Sale:

dr Cash 660dr Visa Discount Expense 18

cr Sales 600cr PST Payable 48cr GST Payable 30

$600 x 3% visa charge

Debit Cards• Charged by banks and as good as cash to retailer

dr Cash 112.75dr Debit Card Expense 0.25

cr Sales 100cr PST Payable 8cr GST Payable 5

Worksheet (perpetual)Six months ending

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

8,952.00 8,952.00 -

7,500.00 7,500.00 -

Allowance for Bad Debts - 215.00 775.00 990.00

Inventory 22,154.00 22,154.00 19,877.00 19,877.00

2,900.00 1,400.00 1,500.00 -

4,800.00 200.00 4,600.00 -

18,650.00 18,650.00 -

Accum. Depreciation 1,800.00 800.00 2,600.00

18,700.00 18,700.00 -

Accum. Depreciation 5,500.00 1,200.00 6,700.00

1,000.00 1,000.00

22,150.00 22,150.00

GST Payable 3,214.00 3,214.00

GST Recoverable 2,155.00 2,155.00

PST Payable 3,996.00 3,996.00

41,997.00 41,997.00

22,559.00 22,559.00 -

119,877.00 119,877.00

Sales Returns and Allow. 2,687.00 2,687.00

Service Revenue 15,899.00 15,899.00

Purchases 48,966.00 48,966.00

Purchases R & A 4,502.00 4,502.00

Freight-in 1,209.00 1,209.00

310.00 310.00

6,500.00 6,500.00

1,350.00 1,350.00

680.00 680.00

18,000.00 18,000.00

2,415.00 2,415.00

29,663.00 29,663.00

220,150.00 220,150.00

Bad Debts Expense 775.00 775.00

Insurance Expense 200.00 200.00

Supplies Expense 1,400.00 1,400.00

800.00 800.00

1,200.00 1,200.00

4,375.00 4,375.00 138,309.00 160,155.00 104,493.00 82,647.00

21,846.00 - - 21,846.00

160,155.00 160,155.00 104,493.00 104,493.00

December 31, 2002

Supplies

Prepaid Insurance

Merch CompanyWorksheet

ADJUSTMENTS INCOME STATEMENT BALANCE SHEET

Accounts Receivable

Cash

ACCOUNTSTRIAL BALANCE

Furniture and Equipment

Automobile

Accounts Payable

Bank Loan

A. Merch, Capital

A. Merch, Drawings

Telephone Expense

Interest Expense

Rent Expense

Wages Expense

Sales

Bank Charges

Car Expense

Miscellaneous Expense

Dep,n Expense, F&E

Dep'n Expense, Auto

Net Income

Original NEW

Close all

Close all

Complete Income StatementSix months ending December 31, 2002

RevenueSales 119,877.00$ Less Sales Returns & Allowances 2,687.00 117,190.00$ Service Revenue 15,899.00 Total Revenue 133,089.00$ Cost of Goods SoldInventory, beginning 22,154.00$ Add: Purchases 48,966.00$ Less: Purchases Returns & Allowances 4,502.00 44,464.00 Add: Freight-in 1,209.00 Cost of Goods Available for Sale 67,827.00$ Less Ending Inventory 19,877.00 Cost of Goods Sold 47,950.00 Gross Margin 85,139.00$ ExpensesBank Charges 310.00$ Car Expense 6,500.00 Interest Expense 1,350.00 Miscellaneous Expense 680.00 Rent Expense 18,000.00 Telephone Expense 2,415.00 Wages Expense 29,663.00 Bad Debts Expense 775.00 Insurance Expense 200.00

Supplies Expense 1,400.00

Dep,n Expense, F&E 800.00

Dep'n Expense, Auto 1,200.00 63,293.00

Net Income 21,846.00$

Merch CompanyIncome Statement

Chart of Accounts

• Assets 100s (e.g. Inventory 130)• Liabilities 200s• Equities 300s• Revenues 400s (e.g. Sales 400, Sales

Returns 401)• Cost Accounts 500s (e.g. Cost of Goods

Sold 500, Purchases 500, Purchase Returns 501, etc.)

• Expenses 600s