accounting for merchandising businesses

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1

6Accounting for Accounting for Merchandising Merchandising

BusinessesBusinesses

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2

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

2. Describe and illustrate the financial statements of a merchandising business.

After studying this chapter, you should be able to:

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3

3. Describe and illustrate the accounting for merchandise transactions including:

sale of merchandise purchase of merchandise transportation costs, sales taxes, trade discounts dual nature of merchandising transactions.

After studying this chapter, you should be able to:

4. Describe the adjusting and closing process for a merchandising business.

4

4

Distinguish between the activities and financial

statements of service and merchandising businesses.

Objective 1Objective 1Objective 1Objective 1

6-1

5

Reporting Financial PerformanceService organizations sell Service organizations sell timetime to earn revenue. to earn revenue.

Examples: accounting firms, law firms, and plumbing Examples: accounting firms, law firms, and plumbing servicesservices

Service organizations sell Service organizations sell timetime to earn revenue. to earn revenue.

Examples: accounting firms, law firms, and plumbing Examples: accounting firms, law firms, and plumbing servicesservices

RevenuesRevenues ExpensesExpensesMinus Net

income

Netincome

Equals

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6

Service Business

Fees earned

$XXX

Operating expenses

–XXX

Net income

$XXX

6-1

7

Reporting Financial PerformanceMerchandising companies sell productsproducts to earn revenue.

Examples: sporting goods, clothing, and auto parts stores

NetSales

Cost Mds SoldGross

ProfitExpenses

NetIncome

Minus Equals Minus Equals

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Merchandising Business

Sales $XXX

Cost of Merchandise Sold –XXX

Gross Profit $XXX

Operating Expenses –XXX

Net Income $XXX

6-1

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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.

6-1

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The cost of merchandise sold is subtracted from sales to arrive at

gross profit. This amount is called gross profit because it is the profit before deducting the

operating expenses.

6-1

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Merchandise on hand (not sold) at the end of an

accounting period is called merchandise inventory.

6-1

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12

On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records?

Follow My Example 1-1

$137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service.

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1-2

During the current year, merchandise is sold for $250,000 cash and for $975,000 on account. The cost of the merchandise sold is $735,000. What is the amount of the gross profit?


The gross profit is $490,000 ($250,000 + $975,000 –$735,000).

6-1

Example Exercise 6-1

10For Practice: PE 6-1A, PE 6-1B

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6-1

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Describe and illustrate the financial statements of a merchandising business.


6-2

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The multiple-step income statement

contains several sections, subsections, and

subtotals.

6-2Multiple-Step Income Statement

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The Sales account provides the total amount charged to customers for

merchandise sold, including cash sales and

sales on account.

6-2

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Sales returns and allowances are granted by the seller to customers for

damaged or defective merchandise.

6-2

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Sales discounts are granted by the seller to customers

for early payment of amounts owed.

6-2

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Net sales is determined by subtracting sales returns and allowances and sales

discounts from sales.

6-2

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20

18(Continued)

Revenue from sales:Sales $720,185Less: Sales returns and allowances $ 6,140

Sales discounts 5,790 11,930 Net sales

$708,255Cost of merchandise sold

525,305

Gross profit $182,950

NetSolutionsNetSolutionsIncome StatementIncome Statement

For the Year Ended December 31, 2009 For the Year Ended December 31, 2009

6-2Multiple-Step Income Statement

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Operating expenses:Selling expenses:

Sales salaries expense $53,430Advertising expense 10,860Depr. Expense–store equipment 3,100Delivery Expense 2,800Miscellaneous selling expense 630 Total selling expenses $ 70,820

Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expense–office equipment 2,490Insurance expense 1,910Office supplies expense 610Misc. administrative expense 760 Total admin. expenses 34,890

Total operating expenses 105,710

Income from operations $ 77,240

Operating expenses:Selling expenses:

Sales salaries expense $53,430Advertising expense 10,860Depr. Expense–store equipment 3,100Delivery Expense 2,800Miscellaneous selling expense 630 Total selling expenses $ 70,820

Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expense–office equipment 2,490Insurance expense 1,910Office supplies expense 610Misc. administrative expense 760 Total admin. expenses 34,890

Total operating expenses 105,710

Income from operations $ 77,24019

(Continued)

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(Concluded)

Other income and expenses:Rent revenue $ 600Interest expense (2,440) (1,840)

Net income $75,400

Other income and expenses:Rent revenue $ 600Interest expense (2,440) (1,840)

Net income $75,400

6-2

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Cost of merchandise sold was discussed earlier. It is the cost of the merchandise

sold to customers.

6-2

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As we discussed in Slide 16, 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.

6-2

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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).

6-2

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Cost of Merchandise Sold

6-2

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6-2 Single-Step Income Statement

An alternative form of income statement is the single-step

income statement. As shown in the next slide, the income statement for NetSolutions

deducts the total of all expenses in one step from the total of all

revenues.

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Revenues:Net sales $708,255Rent revenue 600

Total revenues $708,855Expenses:

Cost of merchandise sold $525,305Selling expenses 70,820Administrative expenses 34,890Interest expense 2,440

Total expenses 633,455

Net income $ 75,400

NetSolutionsNetSolutionsIncome Statement Income Statement

For the Year Ended December 31, 2009For the Year Ended December 31, 2009

6-2Exhibit 3: Single-Step Income Statement

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6-2Exhibit 4: Statement of Owner’s Equity

Chris Clark, capital, 1/1/09 $153,800Net income for year $75,400Less withdrawals 18,000Increase in owner’s equity 57,400Chris Clark, capital, 12/31/09 $211,200

Chris Clark, capital, 1/1/09 $153,800Net income for year $75,400Less withdrawals 18,000Increase in owner’s equity 57,400Chris Clark, capital, 12/31/09 $211,200

NetSolutionsNetSolutionsStatement of Owner’s EquityStatement of Owner’s Equity

For the Year Ended December 31, 2009For the Year Ended December 31, 2009

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NetSolutionsNetSolutionsBalance SheetBalance Sheet

December 31, 2009December 31, 2009

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AssetsCurrent assets:

Cash $52,950Accounts receivable 91,080Merchandise inventory 62,150Office supplies 480Prepaid insurance 2,650 Total current assets $209,310

(Continued)

6-2Exhibit 5: Report Form of Balance Sheet

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Property, plant, and equip.: Land $20,000Store equipment $27,100 Less accumulated

depreciation 5,700 21,400Office equipment $15,570 Less accumulated

depreciation 4,720 10,850Total property, plant,

and equipment 52,250Total assets $261,560

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6-2

(Continued)

Exhibit 5: Report Form of Balance Sheet

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LiabilitiesCurrent liabilities:

Accounts payable $22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800

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

Note payable (final pmt. due 2017) 20,000

Total liabilities $ 50,360 Owner’s Equity

Chris Clark, capital 211,200

Total liabilities and owner’s equity $261,560

LiabilitiesCurrent liabilities:

Accounts payable $22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800

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

Note payable (final pmt. due 2017) 20,000

Total liabilities $ 50,360 Owner’s Equity

Chris Clark, capital 211,200

Total liabilities and owner’s equity $261,560

6-2

(Concluded)

Exhibit 5: Report Form of Balance Sheet

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6-2


Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2.

Merchandise Inventory, May 1 $121,200Merchandise Inventory, May 31 142,000Purchases 985,000Purchases Returns and Allowances 23,500Purchases Discounts 21,000Transportation In 11,300

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Merchandise Inventory, May 1$ 121,200

Purchases $985,000Less: Purchases returns and allowances $23,500 Purchases discounts 21,000 44,500Net purchases $940,500Add transportation in 11,300 Cost of merchandise purchased

951,800Merchandise available for sale

$1,073,000Less merchandise inventory, May 31

142,000Cost of merchandise sold

$ 931,000

6-2

For Practice: PE 6-2A, PE 6-2B

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35

Describe and illustrate the accounting for merchandise transactions including:

sale of merchandise; purchase of merchandise; transportation costs, sales

taxes, trade discounts; dual nature of merchandise transactions.


6-3

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Inventory Systems

Exh. 6-5

+

+

BeginningBeginninginventoryinventory

BeginningBeginninginventoryinventory

Net cost ofNet cost ofpurchasespurchases

Net cost ofNet cost ofpurchasespurchases

MerchandiseMerchandiseavailable for saleavailable for sale

MerchandiseMerchandiseavailable for saleavailable for sale

Ending InventoryEnding InventoryEnding InventoryEnding InventoryCost of GoodsCost of Goods

SoldSold

Cost of GoodsCost of GoodsSoldSold

==

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Inventory Systems

Perpetual MethodGives a continual record of the amount of inventory on hand. When

an item is sold it is recorded in the Cost of Goods Sold account.

Periodic MethodRequires updating the inventory account only at the end of the period.

Acquisition of merchandise inventory is recorded in a temporary Purchases account.





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Inventory Systems

Because of advances in computerBecause of advances in computertechnology, the perpetual methodtechnology, the perpetual method

is widely used in practice and is widely used in practice and will be the focus of our discussion.will be the focus of our discussion.

Because of advances in computerBecause of advances in computertechnology, the perpetual methodtechnology, the perpetual method

is widely used in practice and is widely used in practice and will be the focus of our discussion.will be the focus of our discussion.

39

Merchandising and InventoryMerchandising and Inventory

Merchandising involves selling inventory

Inventory is usually an important asset Inventory must be accounted for periodically or

perpetually Traditional periodic method is often being

replaced by perpetual inventory accounting

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Income Statement ComparisonIncome Statement Comparison

Fees earned $150,000Operating expenses 120,000Net income $ 30,000

Service Business

Sales revenue $600,000Cost of mdse. sold 450,000Gross profit $150,000Operating expenses 120,000Net income $ 30,000


20% of revenues

5% of revenues

41

Income Statement ComparisonIncome Statement Comparison

Fees earned $150,000Operating expenses 120,000Net income $ 30,000

Service Business

Sales revenue $600,000Cost of mdse. sold 450,000Gross profit $150,000Operating expenses 120,000Net income $ 30,000


20% of revenues

5% of revenues

75% of revenues

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Continuous determination of inventory value

Continuous determination of gross profit Affordable with computers, scanners, and bar codes on most products Perpetual inventory accounting provides management controls Managers know which items are selling fastest and the profit margin on those

items

Advantages of Using Perpetual InventoryAdvantages of Using Perpetual Inventory

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

6-3Cash Sales

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6-3

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

Cash Sales (continued)

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6-3

At the end of the month, $48 was sent to pay the service charge on

credit card sales.

Credit Card Sales

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6-3Sales on Account Using a Perpetual Inventory

Jan. 12 Accounts Receivable—Sims Co. 510 00

Sales 510 00

Invoice No. 7172

On January 12, NetSolutions sold Sims Company merchandise on account, $510. The cost of the

merchandise to the seller was $280.

12 Cost of Merchandise Sold 280 00

Merchandise Inventory 280 00Cost of merchandise sold on

Invoice No. 7172.

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Merchandise PurchasesOn June 20, Melton Company purchased $14,000 of On June 20, Melton Company purchased $14,000 of

Merchandise Inventory paying cash.Merchandise Inventory paying cash.On June 20, Melton Company purchased $14,000 of On June 20, Melton Company purchased $14,000 of

Merchandise Inventory paying cash.Merchandise Inventory paying cash.

GENERAL JOURNAL Page 55Date Description PR Debit Credit

Jun 20 Merchandise Inventory 14,000

Cash 14,000

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The terms for when payments for merchandise are to be made, agreed on by the buyer and the seller, are

called credit terms. If buyer is allowed an amount of time to pay, it

is known as the credit period.

6-3Sales Discounts

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Purchase DiscountsA deduction from the invoice price granted to induce A deduction from the invoice price granted to induce

early payment of the amount due.early payment of the amount due.A deduction from the invoice price granted to induce A deduction from the invoice price granted to induce

early payment of the amount due.early payment of the amount due.

Terms

Time

Due

Discount Period

Full amountless discount

Credit Period

Full amount due

Purchase or SalePurchase or Sale

Exh. 6-7

50

2/10,n/302/10,n/30Purchase Discounts

Discount Percent

Discount Percent

Number of Days

Discount Is Available

Number of Days

Discount Is Available

Otherwise, Net (or All)

Is Due

Otherwise, Net (or All)

Is Due CreditPeriod

CreditPeriod

51

Credit Terms, Cash DiscountsCredit Terms, Cash Discounts

Credit Terms: 2/10, n/30Credit Terms: 2/10, n/30

Is invoice paid within 10 days

of invoicedate?

Full amount is due within 30 days of

invoice date.

NoNo

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2% of invoice amount is

allowed as a cash discount.




of invoicedate?

YesYes


invoice date.

NoNo

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2% of invoice amount is

allowed as a cash discount.




of invoicedate?

YesYes


invoice date.

NoNo

Example: Merchandise was purchased for $1,500 with credit

terms of 2/10, n/30. Payment within 10 days is calculated as:

Invoice $1,500 Less 2% discount 30 Net cost paid $1,470

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Managing DiscountsIf we fail to take a 2/10, n/30 If we fail to take a 2/10, n/30 discount, is it really expensive?discount, is it really expensive?If we fail to take a 2/10, n/30 If we fail to take a 2/10, n/30 discount, is it really expensive?discount, is it really expensive?

365 days ÷ 20 days × 2% = 36.5% annual rate36.5% annual rate 365 days ÷ 20 days × 2% = 36.5% annual rate36.5% annual rate

Daysin ayear

Daysin ayear

Numberof additionaldays beforepayment

Numberof additionaldays beforepayment

Percentpaid to keep money

Percentpaid to keep money

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Purchase DiscountsOn May 7, Martin, Inc. purchased $27,000 of Merchandise On May 7, Martin, Inc. purchased $27,000 of Merchandise

Inventory on account, credit terms are 2/10, n/30.Inventory on account, credit terms are 2/10, n/30.On May 7, Martin, Inc. purchased $27,000 of Merchandise On May 7, Martin, Inc. purchased $27,000 of Merchandise

Inventory on account, credit terms are 2/10, n/30.Inventory on account, credit terms are 2/10, n/30.


May 7 Merchandise Inventory 27,000

Accounts Payable 27,000

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May 15

Purchase DiscountsOn May 15, Martin, Inc. paid the amount due on On May 15, Martin, Inc. paid the amount due on

the purchase of May 7.the purchase of May 7.On May 15, Martin, Inc. paid the amount due on On May 15, Martin, Inc. paid the amount due on

the purchase of May 7.the purchase of May 7.

$27,000 × 2% = $540 discount$27,000 × 2% = $540 discount


May 15 Accounts payable 27,000

Cash 26,460

Merchandise inventory 540

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Purchase DiscountsAfter we post these entries, the accounts After we post these entries, the accounts

involved look like this:involved look like this:After we post these entries, the accounts After we post these entries, the accounts

involved look like this:involved look like this:

Merchandise Inventory Accounts Payable 5/7 27,000 5/7 27,0005/15 540 5/15 27,000

Bal. 26,460 Bal. 0

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If invoice is paid within 10 days of

invoice date

Invoice for $1,500Terms:

2/10, n/30

$1,470 paid ($1,500 less a 2% discount)

6-3Credit Terms

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If invoice is NOT paid within 10 days of

invoice date

Invoice for $1,500Terms:

2/10, n/30

Full amount ($1,500) is due within 30 days

of invoice date

6-3

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Sales Discounts 6-3

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

Jan. 22 Cash 1 470 00

Accounts Receivable–Omega Tech. 1 500 00

Sales Discounts 30 00

Collection of Invoice No.

106-8, less 2% discount.

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Jan. 13 Sales Returns and Allowances 225 00

Accounts Receivable—Krier Co. 225 00

Credit Memo No. 32

13 Merchandise Inventory 140 00

Cost of Goods Sold 140 00

Cost of merchandise returned.

Credit Memo No. 32.

6-3

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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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1-2

Journalize the following merchandise transactions:

a. Sold merchandise on account, $7,500 with terms of 2/10, n/30. The cost of the merchandise sold was $5,625.

b. Received payment less the discount.

6-3


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a. Accounts Receivable 7,500Sales

7,500Cost of Merchandise Sold 5,625Merchandise Inventory

5,625b. Cash 7,350

Sales Discounts 150Accounts Receivable

7,500


6-3

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On January 3, NetSolutions purchased merchandise for cash from Alden Company, $2,510.

Purchase Transactions (Perpetual Inventory)

6-3

JOURNAL

Date DescriptionPost. Ref. Dr Cr.

PAGE 24

Jan. 3 Merchandise Inventory 2 510 002009

Cash 2 510 00

Purchased inventory from Bowen Co.

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6-3

Jan. 4 Merchandise Inventory 9 250 00

Accounts Payable—Thomas Corp. 9 250 00

Purchased inventory on

account.

On January 4, NetSolutions purchased merchandise on account from Thomas

Corporation, $9,250.

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Alpha Technologies issues an invoice for $3,000 to

NetSolutions dated March 12, with terms 2/10, n/30.

Purchases Discounts 6-3

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NetSolutions borrows cash at an annual interest rate of 6%. Should the firm borrow cash to pay

the invoice within the discount period?

6-3

Discount of 2% on $3,000 $60.00Interest for 20 days at the rate

of 6% on $2,940 – 9.80Savings from borrowing $50.20

YES

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Mar. 12 Merchandise Inventory 3 000 00

Accounts Payable—Alpha Tech. 3 000 00

Purchased inventory on account.

6-3

On March 12, NetSolutions purchased merchandise on account from Alpha

Technologies, $3,000.

Purchase Transactions (Perpetual Inventory)

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Mar. 22 Accounts Payable—Alpha Technol. 3 000 00

Cash 2 940 00

Merchandise Inventory 60 00Paid Alpha Technologies for

March 12 purchase.

6-3

If payment is made by March 22, NetSolutions records the discount as a reduction in cost. Notice that Merchandise Inventory is credited because NetSolutions maintains a perpetual inventory.

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Apr. 11 Accounts Payable—Alpha Technol. 3 000 00

Cash 3 000 00

Paid Alpha Technologies for

March 12 purchase.

6-3

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If NetSolutions does not pay the invoice until April 11, it would pay the full amount.

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Purchase Returns and Allowances

Purchase Return . . .Purchase Return . . .

Merchandise returned by the purchaser to the Merchandise returned by the purchaser to the supplier.supplier.

Purchase Allowance . . .Purchase Allowance . . .

A reduction in the cost of defective merchandise A reduction in the cost of defective merchandise received by a purchaser from a supplier.received by a purchaser from a supplier.

Purchase Return . . .Purchase Return . . .

Merchandise returned by the purchaser to the Merchandise returned by the purchaser to the supplier.supplier.

Purchase Allowance . . .Purchase Allowance . . .

A reduction in the cost of defective merchandise A reduction in the cost of defective merchandise received by a purchaser from a supplier.received by a purchaser from a supplier.

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Purchase Returns and Allowances

On May 9, Barbee, Inc. purchased $20,000 of Merchandise On May 9, Barbee, Inc. purchased $20,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.Inventory on account, credit terms are 2/10, n/30.

On May 9, Barbee, Inc. purchased $20,000 of Merchandise On May 9, Barbee, Inc. purchased $20,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.Inventory on account, credit terms are 2/10, n/30.


May 9 Merchandise Inventory 20,000

Accounts Payable 20,000

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A purchases return involves actually returning merchandise that is damaged or does not meet the

specifications of the order.

Purchases Return 6-3

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When the defective or incorrect merchandise is kept by the

buyer and the vendor makes a price adjustment, this is a

purchases allowance.

6-3Purchases 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.

6-3

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Mar. 7 Accounts Payable—Maxim Systems 900 00

Debit Memo No. 18

Merchandise Inventory 900 00

6-3

55

On March 7, NetSolutions records the return of the merchandise indicated in

Debit Memorandum No. 18.

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On May 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 Payable—Delta Data 5 000 00

6-3

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On May 4, NetSolutions returns $3,000 of the merchandise.

6-3

4 Accounts Payable—Delta Data Link 3 000 00

Returned portion of the merchandise purchased.

Merchandise Inventory 3 000 00

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On May 12, NetSolutions pays the amount due, $1,960 [$2,000 – ($5,000 –$3,000) x 2%)].

12 Accounts Payable—Delta Data Links 2 000 00

Paid invoice [($5,000 – $3,000) x 2% = $40; $2,000 – $40 = $1,960]

Cash 1 960 00

Merchandise Inventory 40 00

6-3

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6-3

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

b. Merchandise Inventory.


6-3

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Transportation Costs

FOB shipping pointFOB shipping point(buyer pays)(buyer pays)

FOB destinationFOB destination(seller pays)(seller pays)

MerchandiseMerchandise

SellerSeller BuyerBuyer

Exh. 6-9

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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.

6-3Transportation Costs

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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.

June 10 Merchandise Inventory 900 00

Purchased merchandise,

terms FOB shipping point.

Accounts Payable—Magna Data 900 00

10 Merchandise Inventory 50 00 Cash 50 00Paid shipping cost .

6-3

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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.

6-3Transportation Costs

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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.

6-3FOB Destination

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6-3

June 15 Accounts Receivable—Kranz Co. 700 00

Sold merchandise, terms

FOB destination.

Sales 700 00

15 Cost of Merchandise Sold 480 00 Merchandise Inventory 480 00Record cost of merchandise

sold to Kranz Company.

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6-3

On June 15, NetSolutions pays the transportation cost of $40.

June 15 Delivery Expense 40 00

Cash 40 00

Paid shipping cost on merchandise sold.

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On June 20, NetSolutions sells merchandise to Planter Company

on account, $800, terms FOB shipping point. The cost of the

merchandise sold is $360.

6-3FOB Shipping Point

90

90

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6-3

June 20 Accounts Receivable—Planter Co. 800 00

Sold merchandise, terms

FOB shipping point.

Sales 800 00

20 Cost of Merchandise Sold 360 00

Merchandise Inventory 360 00Record cost of merchandise

sold to Planter Company.

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6-3

NetSolutions pays the transportation cost of $45 and adds it to the invoice.

June 20 Accounts Receivable—Planter Co. 45 00

Cash 45 00

Prepaid shipping cost on merchandise sold.

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6-3

Determine 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.


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Transportation Returns andMerchandise Paid by Seller Transportation Terms Allowances

a. $4,500 $200 FOB shipping point, $800

1/10, n/30b. $5,000 $60 FOB destination, $2,500

2/10, n/30

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a. $3,863. Purchase of $4,500 less return of $800 less the discount of $37 [($4,500 – $800) x 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) x 2%].


6-3

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94

1872

6-3

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95

1873

On August 12, merchandise is sold on account to Lemon Company,

$100. The state has a 6% sales tax.

Aug. 12 Accounts Receivable—Lemon Co. 106 00

Sales 100 00

Sales Taxes Payable 6 00

Invoice No. 339

Sales Taxes 6-3

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1874

On September 15, the seller sends in a payment of $2,900 to the taxing unit for

the August taxes collected.

Sept. 15 Sales Tax Payable 2 900 00

Cash 2 900 00 Payment for sales taxes

collected during August.

6-3

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When wholesalers offer special discounts to certain classes of buyers

that order large quantities, these discounts are called trade discounts.

Trade Discounts 6-3

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Dual Nature of Merchandise Transactions

6-3

Each merchandising transaction affects a buyer and a seller. In the following illustrations, we

show how the same transactions would be recorded by both the seller and the buyer.

July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,500.

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1877

Scully Company (Seller)Accounts Receivable—Burton Co. 7,500

Sales 7,500

Cost of Merchandise Sold 4,500Merchandise Inventory 4,500

Burton Company (Buyer)Merchandise Inventory. 7,500

Accounts Payable—Scully Co. 7,500

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July 2 Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.

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1879

Scully Company (Seller)No entry.

Burton Company (Buyer)Merchandise Inventory 150

Cash 150

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July 5 Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.

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1881


Sales 5,000

Cost of Merchandise Sold 3,500Merchandise Inventory 3,500

Burton Company (Buyer)Merchandise Inventory. 5,000


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July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.

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1883

Scully Company (Seller)Delivery Expense 250

Cash 250

Burton Company (Buyer)No entry.

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July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 purchase on account. The cost of the merchandise was $700.

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1885

Scully Company (Seller)Sales Returns and Allowances 1,000

Accounts Receivable—Burton Co. 1,000

Merchandise Inventory 700Cost of Merchandise Sold 700

Burton Company (Buyer)Accounts Payable—Scully Co. 1,000

Merchandise Inventory 1,000

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July 15. Scully Company received payment from Burton Company for purchase of July 5.

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1887

Scully Company (Seller)Cash 4,000


Burton Company (Buyer)Accounts Payable—Scully Co. 4,000

Cash 4,000

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July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.

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1889


Sales 12,000Accounts Receivable—Burton Co. 500

Cash 500Cost of Merchandise Sold 7,200


6-3

Burton Company (Buyer)Merchandise Inventory 12,500


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July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000).

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1891

Scully Company (Seller)Cash 12,260Sales Discounts 240


Burton Company (Buyer)

Accounts Payable—Scully Co. 12,500Merchandise Inventory 240Cash 12,260

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1-2

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 receipt of the check for the amount due from Bray Co.

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6-3


Sievert Company Journal Entries:Cash ($11,500 – $900 – $212) 10,388Sales Discounts [($11,500 – $900) x 2%] 212

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

Bray Company Journal Entries:Accounts Payable—Sievert Co. ($11,500 – $900) 10,600

Merchandise Inventory [($11,500 – $900) x 2%] 212Cash ($11,500 – $900 – $212) 10,388

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Describe the adjusting and closing process for a

merchandising business.


6-4

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6-4

Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory. If the balance of the

Merchandise Inventory account is larger than the total amount of merchandise count, the

difference is often called inventory shrinkage or inventory shortage.

Inventory Shrinkage

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NetSolutions inventory records indicate that $63,950 of merchandise should be

available for sale on December 31, 2009. The physical count reveals that only $62,150 is

actually available.

6-4

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1897

Inventory records $63,950Inventory count 62,150Inventory shortage $ 1,800

Dec. 31 Cost of Merchandise Sold 1 800 00

Merchandise Inventory 1 800 00

Adjusting Entry

Inventory shrinkage (63,950 – $62,150).

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6-4Step 1: Closing Entries

Close the temporary accounts with credit balances to Income Summary.

2009

Date Item PR Debit Credit

Closing Entries

Dec. 31 Sales 410 720 185 00Rent Revenue 610 600 00

Income Summary 312 720 785 00

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6-4

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Close the temporary accounts with debit balances to Income

Summary.


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6-46-4Step 2: Closing Entries

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31 Income Summary 312 645 385 00 Sales Returns and Allow. 411 6 140 00 Sales Discounts 412 5 790 00

Cost of Merchandise Sold 510 525 305 00Sales Salaries Expense 520 53 430 00Advertising Expense 521 10 860 00Depr. Exp.—Store Equip. 522 3 100 00Delivery Expense 523 2 800 00Misc. Selling Expense 529 630 00Office Salaries Expense 530 21 020 00Rent Expense 531 8 100 00Depr. Exp.—Office Equip. 532 2 490 00Insurance Expense 533 1 910 00Office Supplies Expense 534 610 00Misc. Administrative Exp. 539 760 00Interest Expense 710 2 440 00

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Close Income Summary (the balance represents a $75,400 profit for NetSolutions in 2009) to Chris Clark, Capital.

31 Income Summary 312 75 400 00Chris Clark, Capital 310 75 400 00

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6-4

Close Chris Clark, Drawing to Chris Clark, Capital.

Step 4: Closing Entries

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31 Chris Clark, Capital 310 18 000 00Chris Clark, Drawing 311 18 000 00

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1-2

Pulmonary Company’s perpetual inventory records indicate that $382,800 of merchandise should be on hand on March 31, 2008. The physical inventory indicates that $371,250 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Pulmonary Company for the year ended March 31, 2008.

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Mar. 31 Cost of Merchandise Sold ($382,800 –($371,250) 11,550


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The ratio of net sales to assets measures how effectively a business is

using its assets to generate sales.

Financial Analysis 6-4

Net sales

Average total assets

Ratio of Net Sales to Assets =

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105

Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsSears J. C.

PenneyTotal revenue (net sales) $19,701* $18,424*

Total assets:Beginning of year $6,074 $18,300End of year $8,651 $14,127Average $7,362.5 $16,213.5

Ratio of net sales to assetsRatio of net sales to assets 2.68 to 12.68 to 1 1.14 to 11.14 to 1

6-4

*in millions

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6-4Interpretation

Based on these ratios, Sears appears better than J. C.

Penney in utilizing its assets to generate sales.

accounting for merchandising businesses

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