2 Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.
3 After studying this chapter, you should be able to: Objectives1. Distinguish the activities of a service business from those of a merchandising business.2. Describe and illustrate the financial statements of a merchandising business.3. Describe the accounting for the sale of merchandise.4. Describe the accounting for the purchase of merchandise.After studying this chapter, you should be able to:
4 Objectives5. Describe the accounting for transportation costs, sales taxes, and trade discounts.6. Illustrate the dual nature of merchandising transactions.7. Prepare a chart of accounts for a merchandising business.8. Describe the accounting cycle for a merchandising business.9. Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets.
5 Nature of Businesses Service Business Fees earned $XXX Operating expenses –XXXNet income $XXX
6 Merchandising Business Nature of BusinessesMerchandising BusinessSales $XXXCost of Merchandise Sold –XXXGross Profit $XXXOperating Expenses –XXXNet Income $XXX
8 NetSolutions Income Statement For the Year Ended December 31, 2007 Revenue from sales:Sales $720,185Less:Sales returns and allowances $ 6, Sales discounts 5, ,930Net sales $708,255Cost of merchandise sold 525,305Gross profit $182,950Continued
10 Other income and expenses: Rent revenue $ 600Interest expense (2,440) (1,840)Net income $75,400Concluded
11 Periodic vs. Perpetual Methods of Accounting Periodic MethodA method of determining the cost of merchandise sold and the amount of merchandise on handUnder this method, the inventory records do not show the amount available for sale or the amount sold during the period
12 Periodic vs. Perpetual Methods of Accounting Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts.The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records.
13 Cost of Merchandise Purchased Purchases $521,980Less: Purchase returns and allowances $9,100Purchase discounts 2, ,625Net purchases $510,355Add transportation-in ,400Cost of merchandise purchased $527,755
14 Cost of Merchandise Sold Merchandise inventory, 1/1/07 $ 59,700Purchases $521,980Less: Purchase returns and allowances $9,100Purchase discounts 2, ,625Net purchases $510,355Add transportation-in ,400Cost of merchandise purchased ,755Merchandise available for sale $587,455Less merchandise inventory, 12/31/ ,150Cost of merchandise sold $525,305
15 Single-Step Income Statement for a Merchandising Business
16 NetSolutions Income Statement For the Year Ended December 31, 2007 Revenues:Net sales $708,255Rent revenueTotal revenues $708,855Expenses:Cost of merchandise sold $525,305Selling expenses 70,820Administrative expenses 34,890Interest expense ,440Total expenses ,455Net income $ 75,400
17 Statement of Owner’s Equity for a Merchandising Business
18 Chris Clark, capital, 1/1/07 $153,800 Net income for year $75,400 NetSolutions Statement of Owner’s Equity For the Year Ended December 31, 2007Chris Clark, capital, 1/1/07 $153,800Net income for year $75,400Less withdrawals 18,000Increase in owner’s equity ,400Chris Clark, capital, 12/31/07 $211,200
20 NetSolutions Balance Sheet December 31, 2007 AssetsCurrent assets:Cash $52,950Accounts receivable 91,080Merchandise inventory 62,150Office supplies 480Prepaid insurance 2, Total current assets $209,310Continued
21 Property, plant, and equipment: Land $20,000 Store equipment $27,100 Less accumulateddepreciation 5,700 21,400Office equipment $15,570depreciation ,720 10,850 Total property, plant, andequipment ,250Total assets $261,560Continued
24 On January 3, a firm sold $1,800 of merchandise for cash. Cash SalesJOURNALPAGE 26Post. Ref.DescriptionDr Cr.Date20071Jan. 3 Cash2SalesTo record cash sales.345On January 3, a firm sold $1,800 of merchandise for cash.
25 Cash Sales63 Cost of Merchandise Sold7Merchandise Inventory8To record the cost ofmerchandise sold.910Using a perpetual inventory, the inventory cost of $1,200 must be recorded.
26 Cash SalesJOURNALPAGE 28Post. Ref.DescriptionDr Cr.Date20071Jan. 31 Credit Card Expense2Cash3To record service chargeson credit card sales for themonth.45Credit card sales (MasterCard or Visa) are recorded as cash sales.At the end of the month, $48 was sent to cover this service charge.
27 Sales on AccountJan. 12 Accounts Receivable—Sims CoSalesInvoice No12 Cost of Merchandise SoldMerchandise InventoryCost of merchandise sold on Invoice NoOn January 12, a firm sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $280.
28 Sales DiscountsThe terms for when payments for merchandise are to be made are called credit terms.If buyer is allowed an amount of time to pay, it is known as the credit period.
29 Sales Discounts Credit Terms Invoice for $1,500Terms:2/10, n/30If invoice is paid within 10 days of invoice date$1,470 paid (less 2% as a cash discount)
30 If invoice is NOT paid within 10 days of invoice date Sales DiscountsCredit TermsIf invoice is NOT paid within 10 days of invoice dateInvoice for $1,500Terms:2/10, n/30$1,500 PAID
31 Sales DiscountsJan. 21 CashSales DiscountsAccounts Receivable—Sims CoCollection of Invoice No. 7172, less discount.On January 21, the firm receives the amount due from Sims (refer to Slide 25), less the 2 percent discount.
32 Sales Returns and Allowances Merchandise that is returned to the vendor is referred to as a sales return.If there is a defect in the product or the wrong item was shipped, the seller may reduce the initial price at which the goods were sold. This is known as a sales allowance.
33 Sales Returns and Allowances Jan. 13 Sales Returns and AllowancesAccounts Receivable—Krier CoCredit Memo No. 32.13 Merchandise InventoryCost of Merchandise SoldCost of merchandise returned—Credit Memo 32.On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.
35 Purchase Transactions Post. Ref.DescriptionDr Cr.Date20071Jan. 3 Merchandise Inventory2CashPurchased inventory from Bowen Co.345On January 3, Purchased merchandise for cash from Bowen Company, $2,510.
36 What’s the last day the invoice can be paid? Purchase DiscountsWhat’s the last day the invoice can be paid?Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30.
37 Purchase Discounts The full amount is due on April 11. Let’s do a simple calculation.Invoice period 30Days in March 31Date of invoice 12Remaining days 19April 11
38 Purchase DiscountsWe can borrow at an annual interest rate of 6%. Should we borrow to pay the invoice within the discount period?$60 discount (2% x $3,000)?
39 Let’s see… Interest on the amount due of $3,000 less the 2 percent… Purchase DiscountsLet’s see… Interest on the amount due of $3,000 less the 2 percent…Discount $60.00Interest for 20 days at the rate of 6% on $2,940 –9.80Savings from borrowing $50.20
40 Purchase DiscountsLooks like we should take advantage of the discount even if we have to borrow the money.Discount $60.00Interest for 20 days at the rate of 6% on $2,940 –9.80Savings from borrowing $50.20
41 Purchase DiscountsJOURNALPAGE 27Post. Ref.DescriptionDr Cr.Date20071Mar. 12 Merchandise Inventory2Accounts Payable—AlphaTechnologies345On March 12, NetSolutions purchased merchandise on account from Alpha Technologies, $3,000.
42 Purchase DiscountsJOURNALPAGE 27Post. Ref.DescriptionDr Cr.Date20071Mar. 22 Accounts Payable—Alpha TechnolCashMerchandise Inventory2345If payment is made by March 22 NetSolutions records the discount as a reduction in cost.
43 Purchase DiscountsJOURNALPAGE 27Post. Ref.DescriptionDr Cr.Date20071Apr. 11 Accounts Payable—Alpha TechnolCash2345If NetSolutions does not pay the invoice until April 11, it would pay the full amount.
44 Purchases Returns and Allowances A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.
45 Purchases Returns and Allowances You sent me the wrong interface cards. We’ll send a debit memorandum with the returned items.NetSolutions received the delivery from Maxim Systems and determined that $900 of the items were not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems.
46 Purchases Returns and Allowances Mar. 7 Accounts Payable—Maxim SystemsMerchandise InventoryDebit Memo No. 18
47 Purchases Returns and Allowances On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30.May 2 Merchandise InventoryPurchased merchandise.Accounts Payable—Delta Data
48 Purchases Returns and Allowances On May 4, NetSolutions returns $3,000 of the merchandise.May 4 Accounts Payable—Delta Data LinksReturned portion of merchandise purchased.Merchandise Inventory
49 Purchases Returns and Allowances On May 12, NetSolutions pays the amount due.May 12 Accounts Payable—Delta Data LinksPaid invoice.CashMerchandise Inventory($5,000 – $3,000) x 2%
51 FOB Shipping PointBuyer pays freight costs and debits Merchandise InventoryFruit ExpressTitle passes to buyer as shipment leaves shipping point.
52 FOB Shipping PointJune 10 Merchandise InventoryAccounts Payable—Magna DataPurchased merchandise, terms FOB shipping point.10 Merchandise InventoryCashPaid shipping cost .On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50.
53 FOB DestinationSeller pays freight costs and debits Transportation OutFruit ExpressTitle passes to buyer upon arrival at destination.
54 FOB DestinationJune 15 Accounts Receivable—Kranz CoSalesSold merchandise, terms FOB destination.15 Cost of Merchandise SoldMerchandise InventoryCost of sale of Kranz Co .On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.
55 FOB DestinationJune 15 Transportation OutCashPaid shipping cost on merchandise sold.On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.
56 Sales TaxesAug. 12 Accounts Receivable—Lemon CoSalesSales Taxes PayableInvoice No. 339On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.
57 Sales TaxesSept.15 Sales Tax PayableCashPayment for sales taxes collected during August.On September 15, the seller sends in a payment of $2,900 to the taxing unit for the August taxes collected.
58 Illustration of Accounting for Merchandise Transactions Scully Company (Seller)Accounts Receivable—Burton Co. 7,500Sales 7,500Cost of Merchandise Sold 4,500Merchandise Inventory 4,500Burton Company (Buyer)Merchandise Inventory. 7,500Accounts Payable—Scully Co. 7,500July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,500.
59 Illustration of Accounting for Merchandise Transactions Scully Company (Seller)No entry.Burton Company (Buyer)Merchandise Inventory 150Cash 150July 2. Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.
60 Illustration of Accounting for Merchandise Transactions Scully Company (Seller)Accounts Receivable—Burton Co. 5,000Sales 5,000Cost of Merchandise Sold 3,500Merchandise Inventory 3,500Burton Company (Buyer)Merchandise Inventory. 5,000Accounts Payable—Scully Co. 5,000July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB shipping point, n/30. The cost of the merchandise sold was $3,500.
61 Illustration of Accounting for Merchandise Transactions Scully Company (Seller)Transportation Out 250Cash 250Burton Company (Buyer)No entry.July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.
62 Illustration of Accounting for Merchandise Transactions Scully Company (Seller)Sales Returns and Allowances 1,000Accounts Receivable—Burton Co. 1,000Merchandise Inventory 700Cost of Merchandise Sold 700Burton Company (Buyer)Accounts Payable—Scully Co. 1,000Merchandise Inventory 1,000July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 purchase on account. The cost of the merchandise was $700.
63 Illustration of Accounting for Merchandise Transactions Scully Company (Seller)Cash 4,000Accounts Receivable—Burton Co. 4,000Burton Company (Buyer)Accounts Payable—Scully Co. 4,000Cash 4,000July 15. Scully Company received payment from Burton Company for purchase of July 5.
64 Illustration of Accounting for Merchandise Transactions Scully Company (Seller)Accounts Receivable—Burton Co. 12,000Sales 12,000Accounts Receivable—Burton Co. 500Cash 500Burton Company (Buyer)Merchandise Inventory 12,500Accounts Payable—Scully Co. 12,500July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.
65 Illustration of Accounting for Merchandise Transactions Continued (Seller)Cost of Merchandise Sold 7,200Merchandise Inventory 7,200Burton Company (Buyer)July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.
66 Illustration of Accounting for Merchandise Transactions Scully Company (Seller)Cash 12,260Sales Discounts 240Accounts Receivable—Burton Co. 12,500Burton Company (Buyer)Accounts Payable—Scully Co. 12,500Merchandise Inventory 240Cash 12,260July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000).
67 Balance Sheet Accounts NetSolutionsChart of AccountsBalance Sheet Accounts200 Liabilities210 Accounts Payable211 Salaries Payable212 Unearned Rent215 Notes Payable300 Owner’s Equity310 Chris Clark, Capital311 Chris Clark, Drawing312 Income Summary100 Assets110 Cash112 Accounts Receivable115 Merchandise Inventory116 Office Supplies117 Prepaid Insurance120 Land123 Store Equipment124 Accumulated Depreciation—Store Equipment125 Office Equipment126 Accumulated Depreciation—Office Equipment
68 Income Statement Accounts NetSolutionsChart of AccountsIncome Statement Accounts500 Costs and Expenses510 Cost of Merchandise Sold520 Sales Salaries Expense521 Advertising Expense522 Depreciation Expense—Store Equipment523 Transportation Out529 Miscellaneous Selling Expense530 Office Salaries Expense531 Rent Expense532 Depreciation Expense—Office Equipment533 Insurance Expense534 Office Supplies Expense539 Miscellaneous Admin. Expense400 Revenues410 Sales411 Sales Returns andAllowances412 Sales Discounts600 Other Income610 Rent Revenue700 Other Expense710 Interest Expense
69 Merchandise Inventory Shrinkage NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, The physical count reveals that only $62,150 is actually available.
70 Merchandise Inventory Shrinkage Adjusting EntryDec. 31 Cost of Merchandise SoldMerchandise InventoryInventory records $63,950Inventory count 62,150Inventory shortage $ 1,800
71 Profitability Measures -- Effective Use of Assets Ratio of Net Sales to AssetsSears PenneyNet sales $41,366,000 $31,846,000Total assets:Beginning of year $50,409,000 $19,742,000End of year $44,317,000 $20,908,000Average $47,363,000 $20,325,000Ratio of net sales to assets .87 to to 1Ratio Use: To assess the effectiveness in the use of assets to generate sales.