Spring

Introductory Accounting

Merchandising Operations

Spring

Three Basic Types of Companies

Service Organization

Merchandising Organization

Manufacturing Organization

Spring

Comparison of a Service Business and a Merchandising Business

Service– Revenues

– Less Expenses

– Net Income

Merchandising– Net Sales– Less Cost of Goods Sold– Gross Profit– Less Operating Expenses– Net Operating Income– Non-Operating Revenues

and Expenses– Net Income

Spring

New Accounts Associated

With a Merchandising Business

Spring

Cost of Goods Sold= Cost of Inventory Sold Perpetual Method

– Detailed records are kept of each purchase and sale of inventory

– Generally computerized

We will be studying this method in Chapter Five

Periodic Method– No detailed records of

cost of sales is kept. To know inventory one has to count it.

– Used by smaller companies and companies selling lots of low dollar items

We will study this method in Chapter Six

Spring

Advantages of each Inventory System Advantages of

Perpetual– Know how much you

have on hand at all times

– No need to count inventory on a weekly or monthly basis

– No need to estimate inventory

Advantages of Periodic– Simple– Less record-keeping

Spring

Purchasing Inventory using Perpetual Method

Cost of merchandise taken directly to the Inventory Account

Example: Buy $1,000 of merchandise for cash– Debit Inventory for $1,000– Credit Cash for $1,000

If purchased the merchandise on account– Debit Inventory for $1,000– Credit Accounts Payable for

$1,000

Spring

Additional Considerations of Purchasing Merchandise Purchase Returns and Allowances Assume returned $100 of the

merchandise purchased on account

– Debit Accounts Payable 100– Credit Inventory

100

Spring

Additional Considerations of Purchasing Inventory--Maintaining the Records

Item: Widgets

Date Purchases Sales and Returns Balance

Pur. Date 1,000 1,000

Ret. Date 100 900

One must update one of these record for each item or type of inventory one has.

Spring

Additional Considerations of Purchasing Inventory- Adjustments to the Purchase Price Trade or Quantity Discounts

– Given to classes of customers– Given to customers who purchase large quantities– Terms include a 20% quantity discount– These are deducted directly from sales without a

separate account MFX purchased $20,000 of merchandise on account

from Eugene subject to a 20% quantity discount. Entry

– Debit to Inventory for $16,000– Credit to Accounts Payable for $16,000

What would the entry be if discount is 20%-10%? (a string of discounts)

Spring

Additional Considerations of Purchasing Inventory--Adjustments to the Purchase Price Cash or Purchased Discounts

– Given to customers who buy on credit and pay their accounts promptly

– Recorded in the accounts when paid for – Normal terminology is 2/10 n/30

Example– Purchased $1,000 of merchandise on 1/1/1, terms

2/10 n/30– Entry to record purchase

• Debit Inventory for $1,000• Credit Accounts Payable for $1,000

Spring

Additional Considerations of Purchasing Inventory--Adjustment to the Purchase Price

Example Continued– Entry if pay within 10 days

• Debit Accounts Payable for $1,000• Credit Cash for $980• Credit Inventory for $20

– What would your entry be if you paid after the 10th day?

• Debit Accounts Payable for $1,000• Credit Cash for $1,000

Spring

Putting in all together

Buy $5,000 of merchandise subject to a 20% quantity discount---terms 2/10,n/30– Debit Inventory 4,000– Credit Accounts Payable 4,000

Return Merchandise with a list price of $500 purchased above– Debit Accounts Payable 400– Credit Inventory 400

Spring

Putting it all together Paid for the merchandise less return within 10

days– Debit Accounts Payable 3,600– Credit Cash 3,528– Credit Inventory 72

Paid for the merchandise on the 30th day– Debit Accounts Payable 3,600– Credit Cash 3,600

Spring

Does it pay to worry about a 2% discount?

What if you don’t have the cash and have to borrow money at 12% interest?

Spring

Handling Freight Costs FOB rules determines who pays the

shipping costs and when title or ownership transfers

This can be extremely complicated in the real world as some suppliers prepay the freight.

In our simple life--– Shipping point--buyer pays– Destination--seller pays

Spring

Handling Freight Costs

Basic Entries is you are paying – For Merchandise coming in

• Debit Inventory• Credit Cash

– For Merchandise Going out• Debit Freight out or Delivery Expense• Credit Cash

Spring

Sales of merchandise under the Perpetual Method Sale of merchandise for

cash with a selling price of $2,000 and a cost of $800– Debit Cash for $2,000– Credit Sales of $2,000

– Debit Cost of Goods Sold for $800

– Credit Inventory for $800

Spring

Sales of merchandise under the Perpetual Method Sold $2,000 of merchandise on credit.

Cost of merchandise was $800. Collected the account receivable.– Debit Accounts Receivable for $2,000– Credit Sales for $2,000

– Debit Cost of Goods sold for $800– Credit Inventory for $800

– Debit Cash for $2,000– Credit Accounts Receivable $2,000

Spring

Sales Returns and Allowances

Assume sold $1,000 of merchandise, cost $550 on credit. Returned two days later, clerk granted them credit

For Sale– Debit Accounts Receivable 1000– Credit Sales 1,000– Debit Cost of Goods Sold 550– Credit Inventory 550

Spring

Sales Returns Continued For Return on Credit

– Debit Sales Returns 1000

– Credit Accounts Receivable 1000

– Debit Inventory 550

– Credit Cost of Goods Sold 550 For Return for Cash

– Debit Sales Returns 1000

– Credit Cash 1,000

– Debit Inventory 550

– Credit Cost of Goods Sold 550

Spring

Sales Discounts--Trade or Quantity and Sales or Cash Sold $5,000 of merchandise costing $2550

subject to a 10% quantity discount with selling terms of 1/10,n/30 on 9/1– Debit Accounts Receivable4,500– Credit Sales 4,500– Debit Cost of Goods Sold 2,550– Credit Inventory 2,550

Received Payment on 9/10– Debit Cash 4455– Debit Sales Discounts 45– Credit Accounts Receivable 4,500

What would entry be if received on 9/30?

Spring

Answers to Class Exercise

Debit Inventory 25,000

Credit Accounts Payable 25,000

Debit Inventory 16,200

Credit Accounts Payable 16,200

Debit Inventory 300

Credit Cash 300

Spring

Debit Accounts Payable 2000

Credit Inventory 2,000

Debit Accounts Receivable 5,000

Credit Sales 5,000

and

Debit Cost of goods Sold 3,000

Credit Inventory 3,000

Spring

Debit Accounts Receivable 6,000

Credit Sales 6,000

and

Debit Cost of Good Sold 4,000

Credit Inventory 4,000

Debit Freight Out 80

Credit Cash 80

Spring

Debit Accounts Payable 23,000

Credit Cash 22,310

Credit Inventory 690

Debit Sales Returns 2,000

Credit Accounts Receivable 2,000

and

Debit Inventory 1,300

Credit Cost of Goods Sold 1,300

Spring

Debit Inventory 1,000

Credit Cash 1,000

Debit Cash 4,950

Debit Sales Discounts 50

Credit Accounts Receivable 5,000

Debit Accounts Payable 16,200

Credit Cash 16,200

Debit Cash 4,000

Credit Accounts Receivable 4,000

Spring

See how you do on an Income Statement Sales 11,000 L. Sales R (2,000) L. Sales Dis ( 50) Net Sales 8,950 Cost of GS 5,700 Gross Profit 3,250

Spring

The Worksheet for Dalbee is on Excel.

Using Network Applications get excel and you can print the solution.

Spring

Closing entries for Dalbee Debit Sales 97,400 Credit Income Summary 97,400

Debit Income Summary 107,679 Credit Sales Returns 400 Credit Cost of Goods Sold 59,440 Credit Salaries Expense 35,000 Credit Utilities Expense 8,543 Credit Miscellaneous Expense 2,496 Credit Insurance Expense 800 Credit Depreciation Expense 1,000

Spring

Closing Entries for Dalbee

Debit Retained Earnings 10,279 Credit Income Summary 10,279 Notice how this is a net loss.

There were no dividends!!