Accounting for Merchandising Businesses

Chapter 6 - Unit 7

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Distinguish between the activities and financial statements of service and merchandising businesses. p252

Objective 1

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Service Business

Fees earned

$XXX

Operating expenses

–XXX

Net income

$XXX

Nature of 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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Merchandising Business

Sales $XXX

Cost of Merchandise Sold –XXX

Gross Profit $XXX

Operating Expenses –XXX

Net Income $XXX

Nature of Merchandising Businesses

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Describe and illustrate the financial statements of a merchandising business.

Objective 2

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The multiple-step income statement contains several sections, subsections, and subtotals. (think classified balance sheet – just more details)

Multiple-Step Income Statement

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Multiple-Step Income Statement

Page 254

Exhibit 1

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The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.

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Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.

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Sales discounts are granted by the seller to customers for early payment of amounts owed.

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Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.

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Multiple-Step Income Statement (continued)Exhibit 1

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The cost of merchandise sold is the cost of the merchandise sold to customers.

Exhibit 2 on page 256, this is how we get the COMS or COGS figure for the income statement. (pic on next slide)

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Cost of Merchandise SoldExhibit 2

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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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Merchandise Available for sale

• You would subtract any returns and discounts from your purchases to get your net purchases.

• To that, add in any cost to get your inventory to you – Freight in.

• This would total to the cost of the merchandise that you purchased this period.

• Add what you purchased to what you had on hand at the beginning of that period and you have the cost of the inventory that you have available to sell.

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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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COMS or COGS

• You need to know what you still have on hand – your ending inventory to figure the dollar amount that you sold.

• What did you have available for sale minus what you have left on hand is the cost of the merchandise sold (the cost of the inventory that is gone).

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Back to the income statement on p 254:

Selling expenses are incurred directly in the selling of merchandise.

• Sales salaries• Store supplies used• Depreciation of store

equipment• Delivery expense• Advertising

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Administrative expenses sometimes called general expenses, are incurred in the administration or general operation of the business.• Office salaries• Depreciation of office equipment• Office supplies used

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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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Describe and illustrate the accounting for merchandise transactions. p260

Objective 3

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On January 3, NetSolutions sold $1,800 of merchandise (they paid $1200 for the merchandise) for cash. Note: If this was a sale on

account the only change would be that the debit would be Accounts Receivable (AR).

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.

Cash Sales

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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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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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Price AllowanceOn 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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Example Exercise 6-4 p 268

Purchase TransactionsRofles Company purchased merchandise on account from a supplier for $11,500, terms 2/10, n/30. Rofles Company returned $3,000 of the merchandise and received full credit.

a. If Rofles Company pays the invoice within the discount period, what is the amount of cash required for the payment?

b. Under a perpetual inventory system, what account is credited by Rofles Company to record the return?

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Example Exercise 6-4 (continued)

a. $8,330. Purchase of $11,500 less the return of $3,000 less the discount of $170 [($11,500 – $3,000) × 2%].

b. Merchandise inventory

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If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, it is said to be FOB (free on board) shipping point.

Freight

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If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB (free on board) destination.

Freight

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Freight TermsExhibit 11

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Example Exercise 6-5

Freight TermsDetermine the amount to be paid in full settlement of each of invoices (a) and (b), assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period.

a. $4,500 $200 FOB shipping point, $ 800 1/10, n/30

b. $5,000 60 FOB destination, 2,500 2/10, n/30

MerchandiseFreight Paid by

Seller Freight TermsReturns and

Allowances

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Example Exercise 6-5 (continued)

a. $3,863. Purchase of $4,500 less return of $800 less the discount of $37 [($4,500 – $800) × 1%] plus $200 of shipping.

b. $2,450. Purchase of $5,000 less return of $2,500 less the discount of $50 [($5,000 – $2,500) × 2%].

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Each merchandising transaction affects a buyer and a seller. You need to be aware

of this when you are recording each transaction.

Page 272 is a great guide to use.

Dual Nature of Merchandise Transactions

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Example Exercise 6-6 p273

Transactions for Buyer and Seller

Sievert Co. sold merchandise to Bray Co. on account, $11,500, terms 2/15, n/30. The cost of the merchandise sold is $6,900. Sievert Co. issued a credit memorandum for $900 for merchandise returned and later received the amount due within the discount period. The cost of the merchandise returned was $540. Journalize Sievert Co.’s and Bray Co.’s entries for the payment of the amount due.

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Example Exercise 6-6 (continued)

Sievert Co. Journal Entries:Cash ($11,500 – $900 – $212)…………………………….. 10,388Sales Discounts [($11,500 – $900) × 2%]…..................... 212

Accounts Receivable—Bray Co ($11,500 – $900)… 10,600

Bray Co. Journal Entries:

Accounts Payable—Sievert Co. ($11,500 – $900)……... 10,600Merchandise Inventory [($11,500 – $900) × 2%]…… 212Cash ($11,500 – $900 – $212)…………….................... 10,388

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Questions???Textbook Exercises for unit 7 are:

Ex 6-4 - Review EE 6-2 Ex 6-7 – Refer to Income Statement p. 254Ex 6-23 – Review EE 6-5Problem 6-5A – Work PR 6-5B first

(remember to work on the B problem first)

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