Presentation on theme: "Accounting for Merchandising Businesses"— Presentation transcript:
1 Accounting for Merchandising Businesses 5Accounting for Merchandising Businesses
2 1Distinguish between the activities and financial statements of service and merchandising businesses.5-4
3 Nature of Merchandising Businesses 1Nature of Merchandising BusinessesService BusinessFees earned $XXXOperating expenses –XXXNet income $XXX
4 Nature of Merchandising Businesses Merchandising Business 1Nature of Merchandising BusinessesMerchandising BusinessSales $XXXCost of Merchandise Sold –XXXGross Profit $XXXOperating Expenses –XXXNet Income $XXX
5 Nature of Merchandising Businesses 1Nature of Merchandising BusinessesWhen merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold.
6 Nature of Merchandising Businesses 1Nature of Merchandising BusinessesMerchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.
8 2Describe and illustrate the financial statements of a merchandising business.5-11
9 Multiple-Step Income Statement 2Multiple-Step Income StatementThe multiple-step income statement contains several sections, subsections, and subtotals.
10 2Exhibit 1Multiple-Step Income Statement(continued on Slide 19)
11 Multiple-Step Income Statement 2Multiple-Step Income StatementThe Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.
12 Multiple-Step Income Statement 2Multiple-Step Income StatementSales returns and allowances are granted by the seller to customers for damaged or defective merchandise.
13 Multiple-Step Income Statement 2Multiple-Step Income StatementSales discounts are granted by the seller to customers for early payment of amounts owed.
14 Multiple-Step Income Statement 2Multiple-Step Income StatementNet sales is determined by subtracting sales returns and allowances and sales discounts from sales.
15 Multiple-Step Income Statement 2Multiple-Step Income StatementCost of merchandise sold is the cost of the merchandise sold to customers.
16 2 Exhibit 1 Multiple-Step Income Statement (continued) (continued on Slide 28)
17 Multiple-Step Income Statement 2Multiple-Step Income StatementThe 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).
18 Multiple-Step Income Statement 2Multiple-Step Income StatementYou 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.
19 Multiple-Step Income Statement 2Multiple-Step Income StatementIf 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.
20 Multiple-Step Income Statement 2Multiple-Step Income StatementUnder the perpetual inventory system of accounting, the amounts of inventory available for sale and sold are continuously (perpetually) updated in the inventory records.
22 Multiple-Step Income Statement 2Multiple-Step Income StatementSelling expenses are incurred directly in the selling of merchandise.Sales salariesStore supplies usedDepreciation of store equipmentDelivery expenseAdvertising
23 Multiple-Step Income Statement 2Multiple-Step Income StatementAdministrative expenses sometimes called general expenses, are incurred in the administration or general operation of the business.Office salariesDepreciation of office equipmentOffice supplies used
24 Multiple-Step Income Statement 2Multiple-Step Income StatementOther 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.
25 2Exhibit 1Multiple-Step Income Statement (concluded)
26 Single-Step Income Statement 2Single-Step Income StatementAn 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.
28 2Retained Earnings Statement for Merchandising BusinessExhibit 4
29 2Exhibit 5Report Form of Balance Sheet(continued)
30 2Exhibit 5Report Form of Balance Sheet (continued)
31 3Cash SalesOn January 3, NetSolutions sold $1,800 of merchandise for cash.
32 3Cash SalesUsing 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.
33 3Credit Card SalesSales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 1.
34 3Sales on AccountOn January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.
35 3Sales DiscountsThe 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.
37 3Receipts on AccountOn January 22, NetSolutions receives the amount due, less the 2 percent discount.$1,500 × .02
38 3On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.
39 Purchase Transactions 3Purchase Transactions**Assumes a perpetual inventory system is used.
40 Purchase Transactions 3Purchase Transactions**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.
41 Purchase Transactions 3Purchase TransactionsAlpha 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.
43 Assume that NetSolutions pays the invoice on April 11. 3Discount Not TakenAssume that NetSolutions pays the invoice on April 11.
44 Purchase Returns and Allowances 3Purchase Returns and AllowancesA purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.
45 Purchase Returns and Allowances 3Purchase Returns and AllowancesWhen the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, that is a purchases allowance.
46 3NetSolutions receives the delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered.
47 3NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 10 as follows:
48 3Price AllowanceOn May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.
49 3NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link on May 4.
50 3On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.
51 3FreightIf 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.
52 3FreightIf 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.
54 3Sales TaxesOn August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.
55 3Sales TaxesOn a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected.
56 3Trade DiscountsWhen wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts.
57 4Describe the adjusting and closing process for a merchandising business.5-99
58 4Merchandising 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 the merchandise count, the difference is often called inventory shrinkage or inventory shortage.
59 4NetSolutions’ inventory records indicate the following on December 31, 2011:Dec. 31, 2011Account balance of Merchandise Inventory $63,950Physical merchandise inventory on hand 62,150Inventory shrinkage $ 1,800
60 4At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry:
61 4Step 1: Closing EntriesDebit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary.
62 4Step 2: Closing EntriesCredit each temporary account with a debit balance, such as an expense, for the balance and credit Income Summary.
63 4Step 3: Closing EntriesDebit Income Summary for the amount of its balance (net income) and credit Retained Earnings.
64 4Step 4: Closing EntriesDebit Retained Earnings for the balance of the Dividends account and credit the Dividends account.
65 4NetSolutions’ Income Summary account after the closing entries have been posted is as follows: