6

Accounting for Merchandising Businesses

Student Version

Distinguish between the activities and financial statements of service and merchandising businesses.

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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.

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Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

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Describe and illustrate the financial statements of a merchandising business.

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The multiple-step income statement contains several sections, subsections, and subtotals.

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Multiple-Step Income Statement

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Exhibit 1 Multiple-Step Income Statement

(continued)

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Multiple-Step Income Statement (continued)Exhibit 1

(continued on Slide 17)

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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).

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You have seen how 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.

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If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand, a periodic inventory system is being used.

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Under the perpetual inventory system of accounting, the amounts of inventory available for sale and sold are continuously (perpetually) updated in the inventory records.

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Cost of Merchandise SoldExhibit 2

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• Selling expenses are incurred directly in the selling of merchandise.

• Administrative expenses sometimes called general expenses , are incurred in the administration or general operation of the business.

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• Other income is revenue from sources other than the primary operating activity of a business.

• Other expense is an expense that cannot be traced directly to the normal operations of the business.

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Multiple-Step Income Statement (concluded)

Exhibit 1

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Single-Step Income StatementExhibit 3

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Statement of Owner’s Equity for Merchandising Business

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Exhibit 4

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Report Form of Balance Sheet

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Exhibit 5

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Report Form of Balance Sheet (continued)Exhibit 5

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Describe and illustrate the accounting for merchandise transactions including:

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3Chart of Accounts for NetSolutions Merchandising Business

Exhibit 6

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On January 3, NetSolutions sold $1,800 of merchandise for cash.

Cash Sales

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Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are recorded. The cost of merchandise sold on January 3 is $1,200.

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Cash Sales

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Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 1.

Credit Card Sales

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On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.

Sales on Account

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The terms for when payments for merchandise are to be made, are called credit terms. If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay.

Sales Discounts

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Credit TermsExhibit 8

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On January 22, NetSolutions receives the amount due, less the 2 percent discount.

Receipts on Account

$1,500 x .02

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A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable.

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Credit Memorandum

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On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.

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Purchase Merchandise for Cash

*Assumes a perpetual inventory system is used.

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*

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Purchase Merchandise on Account

*Assumes a perpetual inventory system is used.

We will assume a perpetual inventory system is used throughout the chapter. The periodic inventory system is discussed in Appendix 2.

*

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Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions pays the amount due, less the discount, on March 22.

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Discount Taken

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Discount Not Taken

Assume that NetSolutions pays the invoice on April 11.

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A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.

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When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, that is a purchases allowance.

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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.

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NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 10 as follows:

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Price Allowance

On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.

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NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link on May 4.

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On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.

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On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50.

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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. NetSolutions pays freight of $40.

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On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost of the merchandise sold is $360.

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Freight TermsExhibit 11

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On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.

Sales Taxes

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On a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected.

Sales Taxes

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When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts.

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Trade Discounts

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Describe the adjusting and closing process for a merchandising business.

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Step 1: Closing EntriesDebit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary.

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Credit each temporary account with a debit balance, such as an expense, for the balance and credit Income Summary.

Step 2: Closing Entries4

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Debit Income Summary for the amount of its balance (net income) and credit the owner’s equity account.

Step 3: Closing Entries

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Debit the owner’s capital account for the balance of the drawing account and credit the drawing account.

Step 4: Closing Entries

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NetSolutions’ Income Summary account after the closing entries have been posted is as follows:

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