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C6 - 1 Learning Objectives 1.Nature of Merchandising Business 2.Accounting for Purchases 3.Accounting for Sales 4.Transportation Costs 5.Merchandise Transactions.

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Presentation on theme: "C6 - 1 Learning Objectives 1.Nature of Merchandising Business 2.Accounting for Purchases 3.Accounting for Sales 4.Transportation Costs 5.Merchandise Transactions."— Presentation transcript:

1 C6 - 1 Learning Objectives 1.Nature of Merchandising Business 2.Accounting for Purchases 3.Accounting for Sales 4.Transportation Costs 5.Merchandise Transactions 6.Merchandising Chart of Accounts 7.Merchandising Income Statement 8.Merchandising Accounting Cycle 9.Financial Analysis and Interpretation Accounting for Merchandising Businesses Chapter 6 Accounting for Merchandising Businesses

2 C6 - 2 Nature of merchandise business Service business –Provide service –Usually it is a small business Merchandise business –Purchase and sell merchandise inventory –Bigger than service business

3 C6 - 3 Service Co. Income Statement Year ended June 30, 20xx Service revenue$xxx Expenses: Salary expense x Depreciation expense x Income tax expense x Net income$ xx Merchandising Co. Income Statement Year ended June 30, 20xx Sales revenue$xxx Cost of goods sold x Gross profit xx Operating expenses: Salary expense x Depreciation expense x Income tax expense x Net income$ xx Comparison of Income Statements: Service Co. And Merchandising Co.

4 C6 - 4 sales revenue or sales – the amount that a business earns from selling merchandise inventory is called sales revenue, or sales. cost of merchandise sold – the major expense of a merchandiser is cost of goods sold. Gross margin or Gross profit – The excess of sales over cost of sales is called gross margin. Merchandise inventory –Merchandise on hand at the end of an account period Special terms

5 C6 - 5 Compute the net income Service business: –Fees earned – operating expenses = net income Merchandise business: –Sales – cost of merchandise sold = gross profit –Gross profit – operating expenses = net income The cost of merchandise sold is the largest expense for the merchandise business, say 70% or more

6 C6 - 6 Income Statement Comparison Fees earned$150,000 Operating expenses120,000 Net income$ 30,000 Service Business Sales revenue$600,000 Cost of mdse. sold450,000 Gross profit$150,000 Operating expenses120,000 Net income$ 30,000 Merchandising Business 20% of revenues 5% of revenues 75% of revenues

7 C6 - 7 Merchandise Inventory  Merchandising involves selling inventory  Inventory is usually an important asset 4 Inventory must be accounted for periodically or perpetually 4 Inventory system 4 Perpetual inventory system 4 Periodic inventory system

8 C6 - 8 Perpetual inventory system In a perpetual inventory system, each purchase and the cost of each sale are recorded in Merchandise Inventory. Most companies using the perpetual inventory system.

9 C6 - 9 Periodic inventory system In a periodic inventory system, the inventory records do not show the amount available for sale or sold during the period. Instead, a detailed listing of merchandise for sale at the end of the accounting period is prepared by the physical count. This physical inventory is used to determine the cost of the merchandise inventory on hand and the cost of merchandise sold.

10 C Continuous determination of inventory value 4 Continuous determination of gross profit 4 Affordable with computers, scanners, and bar codes on most products 4 Perpetual inventory accounting provides management controls 4 Managers know which items are selling fastest and the profit margin on those items Advantages of Using Perpetual Inventory

11 C Accounting for purchase Purchase order Receive the inventory Invoice and payment Exhibit 1 invoice –Netsolutions purchase $1,500 merchandise inventor –Credit term: 2/10; n/30

12 C Purchase and payment Jan. 12 Merchandise inventory1500 Accounts payable1500 Jan. 22 Accounts payable1500 Cash1500 Payment without discount

13 C Purchase and payment Jan. 12 Merchandise inventory1500 Accounts payable1500 Jan. 22 Accounts payable1500 Cash1470 Merchandise inventory 30 Payment with the discount: 1500 *2% = $30

14 C Discount rate Purchase amount: $1500 Discount rate: 2% for 20 days 1500* 2% =30 Interest rate: 12% per year 1470*12%*20/360= 9.80 Savings from borrowing: 30 –9.80 =20.20

15 C What is the due date of the invoice? Question 1: –An invoice dated august 13, has terms n/30. Question 2: –An invoice dated November 22

16 C What is the due date of the invoice? Question 1: –An invoice dated august 13, credit terms n/30. Solution: –Sep. 12 Question 2: –An invoice dated November 22, credit terms:2/10,n/30 Solution: –Dec. 2 –Dec. 22

17 C Purchases returns and allowances Purchase returns –Purchase business return the merchandise inventory to selling business –get a debit memorandum from the sales business Purchase allowances –Purchase business do not return the merchandise inventory to selling business –get a debit memorandum from the sales business

18 C Purchases returns and allowances Example : p May 2, purchases $5,000 of inventory. 2.May 4, returns $3,000 of inventory 3.Credit term: 2/10; n/30 4.Discount: ( ) * 2% = $40 Recording in the journal

19 C Accounting for sales To record: –Sales revenue –Cost of sales –Sales expenses Example: p. 233 –Sales :$ 1000 –Cost of sales: $550 –Credit card charges: $50

20 C Sales discount To set up a separate account: sales discounts –It is a contra account to Sales. –Balance on usually on the debit side. Example : p. 233 –Sales: $1500 –Discount: $30 –Net sales: $1470

21 C Sales returns and allowances To set up a separate account: –Sales returns and allowances –It is a contra account to Sales. –Balance on usually on the debit side. Example : p. 234 –Sales returns: $225, cost $140 –Record the deduction of sales –Record the deduction of cost of sales

22 C Sales taxes Example p.235 –Sales price $100 –Sales tax rate 6% –Total amount $106 of accounts receivable

23 C Sales taxes Example p.235 –Sales price $100 –Sales tax rate 6% –Total amount $106 of accounts receivable Accounts receivable106 Sales100 sales tax payable 6 Sales tax payable6 Cash6

24 C Trade discount Wholesalers give the purchaser the discount for large amount of purchase. P. 235 –30% of discount for $2400 sales –The sales revenue: 2400 * 70%=1680

25 C Transportation cost FOB shipping point FOB destination If FOB shipping point, the buyer pays the transportation costs. If FOB destination, the seller pays the transportation costs. seller Shipping point buyer

26 C Example: FOB shipping point Buyer’s record: –Buy merchandise inventory $ 900 –Transportation cost $ 50

27 C Example: FOB shipping point Buyer’s record: Merchandise inventory900 Accounts payable900 Merchandise inventory50 Cash50

28 C More example Under the term of FOB shipping point, sometimes the seller prepaid the transportation cost, then to get the refund from the buyer. –Selling merchandise inventory $800 –Term: FOB shipping point –Transportation cost $45

29 C More example Accounts receivable800 Sales800 Cost of merchandise sold360 Merchandise inventory360 Transportation out45 Cash45 The seller’s record:

30 C Example : FOB destination seller’s record – selling merchandise inventory $700 –Cost of sales $480 –Transportation cost 40

31 C Example : FOB destination seller’s record Accounts receivable700 Sales700 Cost of merchandise sold48 Merchandise inventory48 Transportation out40 Cash40

32 C Illustration of Accounting for merchandise inventory Seller: Scully company Buyer: Burton company

33 C Selling and Buying Merchandise Inventory DescriptionDebitCredit Accts. Receivable7,500 Sales7,500 Cost of Mdse. Sold4,500 Mdse. Inventory4,500 No entry Mdse. Inventory7,500 Accts. Payable7,500 Mdse. Inventory 150 Cash150 SellerBuyer DescriptionDebitCredit July1. Merchandise was sold with credit terms of n/45. July 2. Paid transportation cost. Recorded at full cost

34 C Accounting for Merchandise Transactions DescriptionDebitCredit Accts. Receivable5,000 Sales5,000 Cost of Mdse. Sold3,500 Mdse. Inventory3,500 Mdse. Inventory5,000 Accts. Payable5,000 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit 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.

35 C Accounting for Merchandise Transactions DescriptionDebitCredit Transportation Out250 Cash250 Mdse. Inventory5,000 Accts. Payable5,000 No entry. Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Co. on July 5. Accts. Receivable5,000 Sales5,000 Cost of Mdse. Sold3,500 Mdse. Inventory3,500

36 C Accts. Receivable5,000 Sales5,000 Cost of Mdse. Sold3,500 Mdse. Inventory3,500 Transportation Out250 Cash250 Accounting for Merchandise Transactions DescriptionDebitCredit Sales Ret. & Allow.1,000 Accts Receivable1,000 Mdse. Inventory700 Cost of Mdse. Sold700 Mdse. Inventory5,000 Accts. Payable5,000 No entry. Accts. Payable1,000 Mdse. Inventory1,000 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 13. Scully Company issued Burton Co. a credit memo for merchandise returned, $1,000. The merchandise cost was $700.

37 C Accounting for Merchandise Transactions DescriptionDebitCredit Cash4,000 Accts. Receivable4,000 Accts. Payable4,000 Cash4,000 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 15. Scully Company received payment from Burton Co. for purchase of July 5.

38 C Cash4,000 Accts. Receivable4,000 Accounting for Merchandise Transactions DescriptionDebitCredit Accts. Receivable12,500 Sales12,000 Cash500 Cost of Mdse. Sold7,200 Mdse. Inventory7,200 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7,200. Accts. Payable4,000 Cash4,000 Mdse. Inventory12,500 Accts. Payable12,500

39 C Cash4,000 Accts. Receivable4,000 Accts. Receivable12,500 Sales12,000 Cash500 Cost of Mdse. Sold7,200 Mdse. Inventory7,200 Accounting for Merchandise Transactions DescriptionDebitCredit Cash12,260 Sales Discounts240 Accts. Receivable12,500 Accts. Payable4,000 Cash4,000 Mdse. Inventory12,500 Accts. Payable12,500 Accts. Payable12,500 Mdse. Inventory240 Cash12,260 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

40 C Chart of accounts for a merchandise business What are new accounts in the chart of accounts? 1.Assets 2.Liabilities 3.Owner’s equity 4.Revenue 5.Costs and expense 6.Other income 7.Other expense

41 C NetSolutions Merchandising Chart of Accounts Balance Sheet Accounts 200 Liabilities 210Accounts Payable 211Salaries Payable 212Unearned Rent 215Notes Payable 300 Owner’s Equity 310Chris Clark, Capital 311Chris Clark, Drawing 312Income Summary 100 Assets 110Cash 111Notes Receivable 112Accounts Receivable 113Interest Receivable 115Merchandise Inventory 116Office Supplies 117Prepaid Insurance 120Land 123Store Equipment 124Accumulated Depreciation— Store Equipment 125Office Equipment 126Accumulated Depreciation— Office Equipment

42 C NetSolutions Merchandising Chart of Accounts Income Statement Accounts 600 Other Income 610Rent Income 611Interest Income 700 Other Expense 710Interest Expense 400 Revenues 410Sales 411Sales Returns and Allowances 412Sales Discounts 500 Costs and Expenses 510Cost of Merchandise Sold 520Sales Salaries Expense 521Advertising Expense 522Depreciation Expense— Store Equipment 523 Transportation Out 529Misc. Selling Expense 530Office Salaries Expense 531Rent Expense 532Depreciation Expense— Office Equipment 533Insurance Expense 534Office Supplies Expense 539Misc. Admin. Expense

43 C Income statement for a merchandise business A service business –Single-step form] A merchandise business –Multiple-step form –Exhibit 7

44 C Revenue from sales: Sales$720,185 Less:Sales returns and allow.$ 6,140 Sales discounts5,79011,930 Net sales$708,255 Cost of merchandise sold525,305 Gross profit$182,950 NetSolutions Income Statement (Multiple-Step) For the Year Ended December 31, 2004 Continued

45 C Operating expenses: Selling expenses: Sales salaries expense$60,030 Advertising expense10,860 Depr. expense–store equip.3,100 Miscellaneous selling expense630 Total selling expenses$ 74,620 Administrative expenses: Office salaries expense$21,020 Rent expense8,100 Depr. expense–office equip.2,490 Insurance expense1,910 Office supplies expense610 Misc. admin. expenses760 Total admin. expenses34,890 Total operating expenses109,510 Income from operations$ 73,440 Continued

46 C Other income: Interest revenue$ 3,800 Rent revenue600 Total other income$ 4,400 Other expense: Interest expense2,4401,960 Net income $75,400

47 C Revenues: Net sales$708,255 Interest revenue3,800 Rent revenue600 Total revenues$712,655 Expenses: Cost of merchandise sold$525,305 Selling expenses74,620 Administrative expenses34,890 Interest expense2,440 Total expenses637,255 Net income$ 75,400 NetSolutions Income Statement (Single-Step) For the Year Ended December 31, 2004

48 C NetSolutions Balance Sheet December 31, 2002 Continued Assets Current assets: Cash$ 52,950 Notes receivable40,000 Accounts receivable60,880 Interest receivable200 Merchandise inventory62,150 Office supplies480 Prepaid insurance2,650 Total current assets$219,310

49 C NetSolutions Balance Sheet December 31, 2002 Property, plant, and equipment: Land$ 10,000 Store equipment$ 27,100 Less accum. depreciation5,70021,400 Office equipment$ 15,570 Less accum. depreciation4,72010,850 Total property, plant, and equipment42,250 Total assets$261,560 Continued

50 C NetSolutions Balance Sheet December 31, 2002 Liabilities Current liabilities: Accounts payable$ 22,420 Note payable (current portion)5,000 Salaries payable1,140 Unearned rent1,800 Total current liabilities$30,360 Long-term liabilities: Note payable (due 2004)20,000 Total liabilities$ 50,360 Owner’s Equity Chris Clark, capital211,200 Total liabilities and owner’s equity$261,560

51 C Merchandise inventory shrinkage Book records: $63,950 Physical inventory : $ 62,150 Inventory shortage: $ 1,800 Adjusting: Cost of merchandise sold 1800 Merchandise inventory 1800

52 C Profitability Analysis Profitability is the ability of an entity to earn profits. This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available. Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.

53 C Profitability Measures — Effective Use of Assets Ratio of Net Sales to Assets Net sales$1,498,000$1,200,000 Total assets: Beginning of year$1,053,000$1,010,000 End of year 1,044,5001,053,000 Total$2,097,500$2,063,000 Average$1,048,750$1,031,500

54 C Ratio of Net Sales to Assets Use:To assess the effectiveness in the use of assets Net sales on account$1,498,000$1,200,000 Total assets: Beginning of year$1,053,000$1,010,000 End of year 1,044,5001,053,000 Total$2,097,500$2,063,000 Average$1,048,750$1,031,500 Ratio of net sales to assets1.4 to 11.2 to 1 Profitability Measures — Effective use of Assets

55 C HOME WORK READING: 1.Illustrative problem 2.Self- examination questions 3.Multiple choice Writing: 1.Exercise: 6-25;6-26; Problem : 6-5B Discussion:

56 C This is the end of Chapter 6.


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