Presentation on theme: "The Merchandising Business"— Presentation transcript:
1 The Merchandising Business The retailer, the wholesaler, the manufacturer and you
2 What is a Merchandising Business A business that buys goods from a supplier and sells them back at a higher priceTwo types of merchandise business:A wholesaler is the business that buys goods from manufacturers and sells them to retailersA retailer is the business that buys goods from wholesalers and manufactures and sells it back to the public at a higher price
3 What is a Merchandising Inventory Businesses that buy goods and sell them at a higher price are dealing with a merchandise businessThe number of merchandise on hand is known as merchandise inventory
4 Two Aspects of Merchandising Inventory The merchandise inventory goes on the Balance SheetThe cost of goods sold goes on Income Statement
5 The Periodic Inventory Most commonly usedThe periodic inventory system is where the cost of goods sold is determined at the end of the fiscal periodBusinesses use this inventory system because, businesses do not have to keep-up-to-date on everything
6 The Inventory CycleThere is inventory at the beginning of the accounting periodMerchandise is sold during accounting periodMerchandise is replaced by purchased new stock from time to timeThe inventory at the end of the accounting period is almost the same as at the beginning
7 The Cost of Ending Inventory The formula for calculating the cost of ending inventory is:Cost of beginning inventory + cost of merchandise purchased – cost of merchandise sold = cost of ending inventory
8 Physical InventoryThe physical inventory is used to create financial statementsIt is a procedure where the unsold merchandise goods are accounted forAn important current assetNeeded to calculate the costs of goods sold figure on the income statementWill be used as the beginning inventory for the next accounting period
9 Merchandise Inventory Merchandise inventory is a current asset under accounts receivable because it will be normally sold and turned into cash within that fiscal periodIt is listed as its cost price and not its selling price (GAAP: The Cost Principle)
10 Cost of Goods Sold on the Income Statement The total cost of all the items sold is usually the biggest expense figure for a merchandising businessThe formula for finding the cost of goods sold is as follows:Cost of beginning inventory + cost of merchandise purchased - cost of ending inventory= cost of merchandise soldThere are now six new headings on the income statement
11 Cost of Goods Sold on the Income Statement The inventory, the purchases, the cost of good available for sale (after adding both the purchases and the inventor) , the less inventory and the cost of goods soldAfter subtracting the cost of goods available for sale from the less inventory (the ending inventory) you will get your cost of goods sold which is subtracted from the sales and you will get your gross profitMost companies try to reach a specific target gross profit percentage (try to reach a percentage divided from sales)
12 Limitations of the Periodic Inventory System Physical inventory check is a time-consuming procedureGood for small businesses but not accurate and convenient for other larger businesses
13 Merchandise Inventory Account Merchandise inventory of a business is kept in two accountsOne is the merchandise inventory account, it shows inventory figure as of the beginning of the accounting periodAt the fiscal year-end inventory is counted and valued at cost price at to arrive at merchandise inventory grand totalMerchandise inventory will now appear in the assets section of most of your trail balance.
14 The Purchase AccountPurchases is the other account where merchandise inventory of a business is keptPurchases is a short version of “Purchases of Merchandise for Resale”Found in the assets section of the ledger.
15 Merchandise for Resale Purchased for Cash Dr CrPurchase $$$Hst Recoverable $$$Bank $$$
16 If Merchandise for Resale purchased on Account Dr CrPurchases $$$Hst Recoverable $$$A/P $$$
17 The Sales AccountRevenue account for a merchandising business is called “Sales”
18 If Goods sold for CashDr CrBank $$$Hst Payable $$$Sales $$$
19 If Goods sold on Account Dr CrAccounts Receivable $$$Hst Payable $$$Sales $$$When a business sells its goods, the inventory is reduced. No accounting entries are made to show this when the Periodic System is used.
20 Worksheet for merchandising business You must know how to put the merchandising inventory, purchase and freight-in.The 3 steps to enter the new accountsThe beginning inventory is extended to the debit column of the income statement.Ending inventory was entered in both the credit column of the income statement and in the debut column of the balance sheetThe amounts for the freight-in and purchases were transferred to the debit column of the income statement.
22 Income StatementThe beginning inventory, purchases and freight-in are represents cost and they are all shown as debits on the worksheet.The ending inventory is shown as a credit because it’s a deduction in the calculation, Ending inventory represents goods purchased but not sold.The higher the ending inventory the lower the cost of goods sold.
26 Merchandise Returns and Allowances Section 11.4
27 SalesIn the books of a seller, a sales invoice would be recorded as follows:DR CRAccounts Receivable $565Sales $500HST Payable $65Sometimes the seller will issue the customer a Credit Invoice. Such as defective merchandise or goods that the customer keeps but is not happy with, and or to correct an invoice that is not correct.
28 SalesExample of an adjustment: The seller would then make the following adjustment DR CRSales $150HST Payable $19.50Accounts Receivable $169.50A/R Customer HST Payable Sales
29 SalesSome businesses may want to know part of their sales is being returned. Businesses use a special account called Sales Returns and Allowances.DR CRSales Returns and Allowance $150HST Payable $ 19.50Accounts Receivable $169.50
30 Purchases In the books of a purchaser, a purchase invoice: DR CR HST Recoverable $65Accounts Payable - Vendor $565If the customers get a credit invoice because they found a flaw or that some of the merchandise they purchased was defective. The seller is going to reduce their payment by debiting accounts payable.
32 PurchasesSome businesses may want to know part of their sales is being returned. Businesses use a special account called Purchase Returns and Allowances.DR CRAccounts Payable $169.50Purchase Returns and Allowances $150HST Recoverable $19.50
33 PurchasesRevenue – The business needs to subtract all of the credit that they gave to customers:Sales – Sales Returns and Allowances = Net SalesCost of Goods Sold – The business needs to subtract all of the merchandise that they purchased but returned because it was not satisfactory to them:Purchases – Purchase Returns and Allowances = Net Purchases
34 Sales DiscountsHow to use sales discounts and put them in accounting entries
35 Terms of SaleThe arrangements made with the customers (when the goods or services are paid for and a cash discount is offered)Standards Terms of SaleC.O.D- Cash on delivery. The goods or merchandise must be paid right when the delivery is madeOn Account or Charge. The full amount of the invoice is due at the time the invoice is received but is usually given a set of days to pay it off, such as 30 days
36 Terms of Sale cont.30 Days or Net 30. The full amount of the invoice is due 30 days after the date of the invoice2/10, n/30. Two percent discount when paid in ten days or full amount due in 30 days
37 Accounting for Cash Discounts In the Books of the BuyerWhen the invoice is received the purchases is debited, the HST recoverable is debited and the Accounts Payable is creditedIf the buyer pays the amount but is offered a cash discount then the accounts payable is debited, the discounts earned is credited and the bank is credited
38 Accounting for Cash Discounts In the Books of the SellerIt is switched with the buyerThe accounts receivable is deducted, the sales is credited and the HST recoverable is credited because you made a sellWhen the buyer pays the amount with the discount offered then theDebit bankDebit discounts allowedCredit accounts receivable
39 It’s easier, better and lazier Perpetual InventoryIt’s easier, better and lazier
40 How does it work?In bigger companies they use perpetual inventory system as faster alternative compared to the Periodic Inventory System.Example50 portable stereo units were sold by sound wave electronics, a wholesaler. The purchaser is Fidelity sound, a retailer. The units cost sound wave electronics $45 each, they were sold on account to Fidelity Sound for $90.
41 Journal Entries from Seller View Sales Invoice50 portable stereos costing $45 each are sold to Fidelity Sound for $90; terms 2/10, net 30. Total $4, plus Hst.Dr CrAccounts ReceivableCost of Goods SoldMerchandise InventorySalesHst PayableCredit InvoiceFidelity Sounds finds 10 of the portable stereos to be defective and returns them to sound wave electronics.Sales Returns & AllowHst PayableMerchandise InventoryCost of Goods SoldAccounts Receivable
42 Remittance SlipFidelity sound pays the amount owned ($5085 less the return of $1017 equals $4068). Also, prompt payment earned a 2% discount.DR CRBankSales DiscountA/R
43 Journal Entries Purchaser View Purchase Invoice50 stereos are bought from sound wave electronics for $90; terms 2/10, net 30, total $4500, plus HstDR CRMerchandise InventoryHst RecoverableAccounts Payable
44 Purchaser View Cont. Credit Invoice Fidelity sounds finds 10 of the portable stereos to be defective and returns them to sound wave electronicsDr CrAccounts PayableMerchandise InventoryHst Recoverable
45 Cheque Copy Cheque Copy Fidelity Sound pays the amount owned ($5085 less the return of $1117 equals $4068). Also, prompt payment earns a 2% discount.Dr CrAccounts PayableBankDiscounts Earned