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5 Accounting for Merchandising Businesses. Distinguish between the activities and financial statements of service and merchandising businesses. 1 5-4.

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Presentation on theme: "5 Accounting for Merchandising Businesses. Distinguish between the activities and financial statements of service and merchandising businesses. 1 5-4."— Presentation transcript:

1 5 Accounting for Merchandising Businesses

2 Distinguish between the activities and financial statements of service and merchandising businesses

3 5-3 Service Business Fees earned$XXX Operating expenses–XXX Net income$XXX Nature of Merchandising Businesses 1

4 5-4 Merchandising Business Sales$XXX Cost of Merchandise Sold–XXX Gross Profit$XXX Operating Expenses–XXX Net Income$XXX Nature of Merchandising Businesses 1

5 5-5 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold. 1 Nature of Merchandising Businesses

6 5-6 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory. 1 Nature of Merchandising Businesses

7 5-7 1

8 5-8 Describe and illustrate the financial statements of a merchandising business

9 5-9 The multiple-step income statement contains several sections, subsections, and subtotals. 2 Multiple-Step Income Statement

10 Exhibit 1Multiple-Step Income Statement (continued on Slide 19)

11 5-11 The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account. 2 Multiple-Step Income Statement

12 5-12 Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. 2 Multiple-Step Income Statement

13 5-13 Sales discounts are granted by the seller to customers for early payment of amounts owed. 2 Multiple-Step Income Statement

14 5-14 Net sales is determined by subtracting sales returns and allowances and sales discounts from sales. 2 Multiple-Step Income Statement

15 5-15 Cost of merchandise sold is the cost of the merchandise sold to customers. 2 Multiple-Step Income Statement

16 Multiple-Step Income Statement (continued) Exhibit 1 (continued on Slide 28)

17 5-17 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). 2 Multiple-Step Income Statement

18 5-18 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. 2 Multiple-Step Income Statement

19 5-19 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. 2 Multiple-Step Income Statement

20 5-20 Under the perpetual inventory system of accounting, the amounts of inventory available for sale and sold are continuously (perpetually) updated in the inventory records. 2 Multiple-Step Income Statement

21 Cost of Merchandise Sold Exhibit 2

22 5-22 Selling expenses are incurred directly in the selling of merchandise. Sales salaries Store supplies used Depreciation of store equipment Delivery expense Advertising 2 Multiple-Step Income Statement

23 5-23 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 2 Multiple-Step Income Statement

24 5-24 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. 2 Multiple-Step Income Statement

25 Multiple- Step Income Statement (concluded) Exhibit 1

26 5-26 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. 2 Single-Step Income Statement

27 Single-Step Income Statement Exhibit 3

28 5-28 Retained Earnings Statement for Merchandising Business 2 Exhibit 4

29 5-29 (continued) Report Form of Balance Sheet 2 Exhibit 5

30 Report Form of Balance Sheet (continued) Exhibit 5

31 5-31 On January 3, NetSolutions sold $1,800 of merchandise for cash. Cash Sales 3

32 5-32 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, Cash Sales

33 5-33 Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 1. Credit Card Sales 3

34 5-34 On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280. Sales on Account 3

35 5-35 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 3

36 Credit TermsExhibit 8

37 5-37 On January 22, NetSolutions receives the amount due, less the 2 percent discount. Receipts on Account $1,500 ×.02 3

38 5-38 On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140. 3

39 5-39 Purchase Transactions *Assumes a perpetual inventory system is used. 3 *

40 5-40 * 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. * 3 Purchase Transactions

41 5-41 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 Purchase Transactions

42 5-42 Discount Taken 3

43 5-43 Discount Not Taken Assume that NetSolutions pays the invoice on April 11. 3

44 5-44 A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. 3 Purchase Returns and Allowances

45 5-45 When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, that is a purchases allowance. 3 Purchase Returns and Allowances

46 5-46 NetSolutions receives the delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. 3

47 5-47 NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 10 as follows: 3

48 5-48 Price Allowance On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30. 3

49 5-49 NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link on May 4. 3

50 5-50 On May 12, NetSolutions paid for the purchase of May 2 less the return and discount. 3

51 5-51 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 3

52 5-52 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. 3 Freight

53 Freight Terms Exhibit 11

54 5-54 On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax. Sales Taxes 3

55 5-55 On a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected. Sales Taxes 3

56 5-56 When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts. 3 Trade Discounts

57 5-57 Describe the adjusting and closing process for a merchandising business

58 5-58 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 the merchandise count, the difference is often called inventory shrinkage or inventory shortage. 4

59 5-59 NetSolutions’ inventory records indicate the following on December 31, 2011: Dec. 31, 2011 Account balance of Merchandise Inventory$63,950 Physical merchandise inventory on hand 62,150 Inventory shrinkage$ 1,800 4

60 5-60 At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry: 4

61 5-61 Step 1: Closing Entries Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary. 4

62 5-62 Credit each temporary account with a debit balance, such as an expense, for the balance and credit Income Summary. Step 2: Closing Entries 4

63 5-63 Debit Income Summary for the amount of its balance (net income) and credit Retained Earnings. Step 3: Closing Entries 4

64 5-64 Debit Retained Earnings for the balance of the Dividends account and credit the Dividends account. Step 4: Closing Entries 4

65 5-65 NetSolutions’ Income Summary account after the closing entries have been posted is as follows: 4


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