1. 1 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: 6 – Accounting for Merchandising Businesses 4. Describe the adjusting and closing process for a merchandising business 3. Describe and illustrate the accounting for merchandise transactions including:  purchase of merchandise  sale of merchandise  freight costs, sales taxes, trade discounts  dual nature of merchandising transactions.

2. 2 Distinguish between the activities and financial statements of service and merchandising businesses. Objective 1 6-1 Service Business Fees earned$XXX Operating expenses–XXX Net income$XXX Merchandising Business Sales$XXX Cost of Merchandise Sold–XXX Gross Profit$XXX Operating Expenses–XXX Net Income$XXX

3. 3 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold. (this appears on the Income Statement) 6-1 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.(this appears on the balance sheet as a current asset)

4. 4 Describe and illustrate the financial statements of a merchandising business. Objective 2 6-2 The multiple-step income statement contains several sections, subsections, and subtotals. (Continued) Revenue from sales: Sales$720,185 Less: Sales returns and allowances$ 6,140 Sales discounts 5,790 11,930 Net sales$708,255 Cost of merchandise sold525,305 Gross profit$182,950 NetSolutions Income Statement For the Year Ended December 31, 2009

5. 5 Operating expenses: Selling expenses: Sales salaries expense$53,430 Advertising expense10,860 Depr. Expense–store equipment3,100 Delivery Expense2,800 Miscellaneous selling expense 630 Total selling expenses$ 70,820 Administrative expenses: Office salaries expense$21,020 Rent expense8,100 Depr. expense–office equipment2,490 Insurance expense1,910 Office supplies expense610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations$ 77,240 Operating expenses: Selling expenses: Sales salaries expense$53,430 Advertising expense10,860 Depr. Expense–store equipment3,100 Delivery Expense2,800 Miscellaneous selling expense 630 Total selling expenses$ 70,820 Administrative expenses: Office salaries expense$21,020 Rent expense8,100 Depr. expense–office equipment2,490 Insurance expense1,910 Office supplies expense610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations$ 77,240 Other income and expenses: Rent revenue $ 600 Interest expense(2,440) (1,840) Net income $75,400 Other income and expenses: Rent revenue $ 600 Interest expense(2,440) (1,840) Net income $75,400

6. 6 The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account. Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. Sales discounts are granted by the seller to customers for early payment of amounts owed. Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.

7. 7 As we discussed earlier, 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. 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).

8. 8 Cost of merchandise sold was discussed earlier. It is the cost of the merchandise sold to customers. 6-2 In a PERPETUAL ACCOUNTING SYSTEM, there will be an account called Cost of merchandise sold, which is continuously updated whenever inventory is bought or sold. Note – there is another type of accounting system – The Periodic Accounting System. In this system the accounting records for inventory are not updated continuously with each purchase and sale. (We will not be focusing on his type in this course)

9. 9 6-2 NetSolutions deducts the total of all expenses in one step from the total of all revenues. An alternative form of income statement is the single-step income statement. Revenues: Net sales$708,255 Rent revenue 600 Total revenues$708,855 Expenses: Cost of merchandise sold$525,305 Selling expenses70,820 Administrative expenses34,890 Interest expense 2,440 Total expenses 633,455 Net income$ 75,400 NetSolutions Income Statement For the Year Ended December 31, 2009

10. 10 Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; freight costs, sales taxes, trade discounts; dual nature of merchandise transactions. Objective 3 6-3 Recall that we are using the PERPETUAL SYSTEM

11. 11 45 Purchase Transactions (Perpetual Inventory) 6-3 Date Description Post. Ref. Dr Cr. Jan. 3Merchandise Inventory2 510 00 2009 Cash2 510 00 Purchased inventory from Bowen Co. On January 3, NetSolutions purchased merchandise for cash from Alden Company, $2,510. On January 4, NetSolutions purchased merchandise on account from Thomas Corporation, $9,250. Jan. 4 Merchandise Inventory 9 250 00 Accounts Payable—Thomas Corp.9 250 00 Purchased inventory on account.

12. 12 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, with terms 2/10, n/30. Purchases Discounts

13. 13 Mar. 22 Accounts Payable—Alpha Technol. 3 000 00 Cash2 940 00 Merchandise Inventory60 00 Paid Alpha Technologies for March 12 purchase. 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. If NetSolutions does not pay the invoice until April 11, it would pay the full amount. Apr. 11 Accounts Payable—Alpha Technol. 3 000 00 Cash3 000 00 Paid Alpha Technologies for March 12 purchase.

14. 14 A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. Purchases Returns 6-3 When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance. Purchases Allowances

15. 15 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 Purchases Returns and Allowances On March 7, NetSolutions records the return of the merchandise indicated in Debit Memorandum No. 18. Mar. 7Accounts Payable—Maxim Systems 900 00 Debit Memo No. 18 Merchandise Inventory 900 00

16. 16 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. 6-3 Sales (Purchases) Discounts

17. 17 If invoice is paid within 10 days of invoice date $1,470 paid ($1,500 less a 2% discount) 6-3 Credit Terms Invoice for $1,500 Terms: 2/10, n/30 If invoice is NOT paid within 10 days of invoice date Full amount ($1,500) is due within 30 days of invoice date

18. 18 On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30. May 2Merchandise Inventory 5 000 00 Purchased merchandise. Accounts Payable—Delta Data 5 000 00 On May 4, NetSolutions returns $3,000 of the merchandise. 4Accounts Payable—Delta Data Link 3 000 00 Returned portion of the merchandise purchased. Merchandise Inventory 3 000 00

19. 19 On May 12, NetSolutions pays the amount due, $1,960 [$2,000 – (($5,000 –$3,000) x 2%)]. 12Accounts Payable—Delta Data Links 2 000 00 Paid invoice [($5,000 – $3,000) x 2% = $40; $2,000 – $40 = $1,960] Cash1 960 00 Merchandise Inventory 40 00 6-3

20. 20 6-3 Cash Sales The $1,200 cost of the inventory must be recorded. On January 3, NetSolutions sold $1,800 of merchandise for cash.

21. 21 6-3 Assume that at the end of the month, $48 was sent to pay the service charge on credit card sales. Credit Card Sales

22. 22 6-3 Sales on Account Jan. 12Accounts Receivable—Sims Co. 510 00 Sales510 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. 12Cost of Merchandise Sold 280 00 Merchandise Inventory 280 00 Cost of merchandise sold on Invoice No. 7172.

23. 23 Sales Discount (1) Jan. 12Accounts Receivable— Omega Tech 1,500 00 Sales 1,500 00 Invoice No. 106-8 On January 12, NetSolutions sold Omega Tech merchandise on account for $1,500. The cost of the merchandise to the NetSolutions was $1,200. The terms were: 2/10 n/30 12Cost of Merchandise Sold 1, 200 00 Merchandise Inventory 1, 200 00 Cost of merchandise sold on Invoice No. 106-8 First, we record the sale on Jan 12……

24. 24 Sales Discount (2) 6-3 On January 22, NetSolutions receives the amount due, less the 2 percent discount. Jan. 22Cash 1 470 00 Accounts Receivable–Omega Tech. 1 500 00 Sales Discounts 30 00 Collection of Invoice No. 106-8, less 2% discount.

25. 25 Jan. 13Sales Returns and Allowances 225 00 Accounts Receivable—Krier Co. 225 00 Credit Memo No. 32 13Merchandise Inventory 140 00 Cost of Goods Sold 140 00 Cost of merchandise returned. Credit Memo No. 32. On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140. Sales Returns and Allowances

26. 26 June 10 Merchandise Inventory 900 00 Purchased merchandise, terms FOB shipping point. Accounts Payable—Magna Data 900 00 10Merchandise Inventory 50 00 Cash 50 00 Paid shipping cost. On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the freight cost of $50. FOB (free on board) shipping point(1) – Buyer side

27. 27 On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. 6-3 FOB (free on board) destination point – Seller side On June 15, NetSolutions also pays the freight cost of $40.

28. 28 June 15Accounts Receivable—Kranz Co. 700 00 Sold merchandise, terms FOB destination. Sales 700 00 15Cost of Merchandise Sold 480 00 Merchandise Inventory 480 00 Record cost of merchandise sold to Kranz Company. June 15 Delivery Expense 40 00 Cash 40 00 Paid shipping cost on merchandise sold.

29. 29 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 Payable6 00 Invoice No. 339 Sales Taxes 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.

30. 30 Dual Nature of Merchandise Transactions 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. See page 272

31. 31 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 Describe the adjusting and closing process for a merchandising business. Objective 4 Adjusting Entries

32. 32 Inventory records$63,950 Inventory count 62,150 Inventory shortage$ 1,800 Dec.31Cost of Merchandise Sold 1 800 00 Merchandise Inventory 1 800 00 Adjusting Entry Inventory shrinkage (63,950 – $62,150). 6-4 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. Inventory Shrinkage e.g.

33. 33 6-4 Step 1: Close the temporary accounts with credit balances to Income Summary. 2009 DateItemPRDebitCredit Closing Entries Dec. 31Sales 410 720 185 00 Rent Revenue610600 00 Income Summary312720 785 00 Closing Entries

34. 34 6-4 31Income Summary312 645 385 00 Sales Returns and Allow.411 6 140 00 Sales Discounts4125 790 00 Cost of Merchandise Sold510525 305 00 Sales Salaries Expense52053 430 00 Advertising Expense52110 860 00 Depr. Exp.—Store Equip.5223 100 00 Delivery Expense5232 800 00 Misc. Selling Expense529630 00 Office Salaries Expense53021 020 00 Rent Expense5318 100 00 Depr. Exp.—Office Equip.5322 490 00 Insurance Expense5331 910 00 Office Supplies Expense534610 00 Misc. Administrative Exp.539760 00 Interest Expense7102 440 00 Step 2: Close the temporary accounts with debit balances to Income Summary.

35. 35 Step 3: Closing Entries Close Income Summary (the balance represents a $75,400 profit for NetSolutions in 2009) to Chris Clark, Capital. 31Income Summary31275 400 00 Chris Clark, Capital31075 400 00 Step 4: Closing Entries Close Chris Clark, Drawing to Chris Clark, Capital. 31Chris Clark, Capital31018 000 00 Chris Clark, Drawing31118 000 00