1. Accounting for Merchandising Business
ACG 2021: Chapter 5

2. Merchandising Business
Revenue activities of a merchandising business involve the buying and selling of merchandise
Comparison to service business
Service Business
Merchandising Business
Fees earned
Sales
Less Operating expenses
Less Cost of merchandise sold
=Net income
=Gross Profit
=Net Income

3. New Accounts on the Income Statement
SALES – revenues collected from the sale of merchandise
COST OF MERCHANDISE SOLD – the purchase price plus incidentals of merchandise available for resale
GROSS PROFIT – Sales – Cost of merchandise sold

4. For the Year Ended December 31, 20—
Income Statement
INCOME STATEMENT
Gem City Music
Income Statement
For the Year Ended December 31, 20—
Revenue from sales:
Sales $189,300
Less:: Sales returns and allowances $ 1,700
Sales discounts ,200
Net sales $187,100
Cost of merchandise sold XXXX ,000
Gross profit $ 87,100
Operating expenses:
Selling expenses:
Sales salaries expense $17,700
Administrative expenses:
Rent expense ,800
Office salaries expense ,550
Depreciation expense—office equipment 2, ,150
Total operating expenses ,850
Income from operations $ 36,250
Other expense:
Interest expense ,000
Net income $ 34,250

5. Computation of Costs Computation of Cost of Merchandise Sold Purchases
Less merchandise inventory, December 31
=Cost of merchandise sold
Computation of Cost of Merchandise Purchased
Less: purchases returns and allowances
Less: purchases discount
=Net purchases
Add: transportation in
=Cost of merchandise purchased

6. Balance Sheet Accounts
Merchandise inventory – merchandise on hand at the end of an accounting period.

7. Merchandising Terms
Sales – total amount charged to customers for merchandise sold
Sales returns and allowances – are granted by the seller to customers for damaged or defective merchandise
Sales discount – are granted by the seller to customers for early
Net sales = Sales –returns - discount

8. Merchandising Terms Cost of goods sold Purchases discounts
Cost of merchandise sold to customers
Purchases discounts
Offered by the seller to buyer
For early payment
Purchases allowances and returns
Buyer may receive a reduction in the intial price at which the merchandise is purchased.

9. Merchandising Terms Merchandise available for sale = Net purchases =
Beginning merchandise inventory + net purchases
Net purchases =
Purchases minus discounts – returns and allowances

10. Accounting for Sales
Under the perpetual inventory system, all sales require the reporting of the removal of inventory from the books at the same time.

11. Accounting for Sales CASH SALES
Example 1: Sold merchandise for cash $5,000. Cost of merchandise sold $3,200
Date
Account PR
Debit
Credit
Cash
$5,000
Sales
Cost of merchandise sold
3,200
Merchandise inventory

12. Credit sales Bank cards
Master card
Visa
Monies directly deposited in business account
Requires a debit to CASH
Service charge must be later recorded as expense

13. Bank cards
Example 9: Sold merchandise on VISA $10,000. Cost of merchandise sold is $4,000. Credit card expense is 3% of sales.
Date
Account PR
Debit
Credit
Cash
$10,000
Sales
Cost of merchandise sold
4,000
Merchandise inventory
Credit card expense
300

14. Bank cards
Example 3: Sold merchandise on VISA $6,000. Cost of merchandise sold is $3,000. Credit card expense is 3% of sales.

15. Example 10 Cash 6,000 Sales 6,000 Cost of merchandise 3,000
Merchandise inventory 3,000
Credit card expense
Cash

16. Credit sales Two types: Results in debit to ACCOUNTS RECEIVABLE
American express
On account
Results in debit to ACCOUNTS RECEIVABLE

17. Sales of Account
Example 4: Sold merchandise on account $6,000. Cost of merchandise sold is $3,000.
Date
Account PR
Debit
Credit
Accounts receivable
$6,000
Sales
6,000
Cost of merchandise
3,000
Merchandise inventory

18. Recap
Under the perpetual inventory system, all sales transactions consist of at least two entries.
The first entry records the sale at the selling price with a debit to how it will be paid and credit to sales.
The second entry records the merchandise leaving the business with a debit to cost of merchandise sold and credit to merchandise inventory for the cost of the merchandise.

19. Sales discounts
A reduction in the price of the good for early payment.
This account is a contra – SALES
Upon payment of the account receivable, if the payment is within the discount period, we record the discount.
Credit terms – terms of when payments for merchandise are to be made.
Net 30 days – full amount due in 30 days
2/10 – 2% discount if paid within 10 days

20. Example on Sales Discount
Example 5: Sold merchandise on account $5,000, terms 2/10, n/30. Cost of merchandise sold is $4,000.
Sales $5,000
Discount %
Discount $ $100
Sales $5,000
Less discount
Net amount ,900

21. Sales discount Date Account PR Debit Credit Cash 4900 Sales discount
100
Accounts receivable
5000

22. Sales Returns and Allowances
Merchandise sold may be returned to the seller
Merchandise sold may be reduced in price due to defects
This account is CONTRA – sales
Increases with a debit

23. Sales returns & allowances
Example 6: Sold merchandise on account $7,000, terms 1/15, n/30. Cost of merchandise sold is $3,800
Date
Account PR
Debit
Credit
Accounts receivable
$7,000
Sales
7,000
Cost of merchandise
3,800
Merchandise inventory

24. Sales returns & allowances
Return merchandise with sales price of $2,000 and cost of $1,000.
Date
Account PR
Debit
Credit
Sales returns
2,000
Accounts receivable
Merchandise inventory
1,000
Cost of merchandise sold

25. Recap of Sales Example
Example 7: ABC Merchandising had the following transactions:
Sold merchandise and received payment by VISA at $6,000, cost of merchandise sold is $4,000.
Sold merchandise on account for $7,500 with credit terms 1/10, n/30. Cost of the merchandise is $4,500.
Sold merchandise on account for $4,000, cost of merchandise is $2,500.
Received a return of the merchandise in (c ) of sales price of $2,000 and cost of $1,750.
Received payment within the discount period for merchandise in (b).
Received payment for merchandise in (c ).

26. Accounting for Purchases
Assume a perpetual inventory system
Each purchase and sale of merchandise is recorded as it occurs
Example 1: purchase merchandise for resale $4,000 on account
Date
Account PR
Debit
Credit
Mar 1
Merchandise inventory
$4,000
Accounts payable

27. Purchases Discount Credit terms
Purchases discounts are discounts taken by the buyer for early payment of an invoice.
These discounts reduce the cost of the merchandise purchased.
Should be taken when offered if not it is a LOSS to the business.

28. Purchase discount
Example 9: Purchase merchandise for resale $4,000, terms 2/10, n/30 on account.
Invoice: $4,000
Discount (2% x $4,000)
Net of discount 3,920

29. Purchase discount Date Account PR Debit Credit Mar 1
Merchandise inventory
$4,000
Accounts payable
Mar 10
Cash
$3,920 80

30. Purchase Discount
Reduction of the cost of the merchandise is reflected in the merchandise inventory account.
Example 10: Purchase merchandise for resale $6,000, terms 1/15, n/30 on account.

31. Purchases Returns and Allowances
Purchase returns – merchandise is returned to the seller
Purchase allowances – price adjustment
Debit memorandum – notification of the return or allowance by seller

32. Purchases Returns and Allowances
Example 11: Returned merchandise on account $2,500.
Date
Account PR
Debit
Credit
Mar 09
Accounts payable
$2,500
Cash

33. Example
Example 12: Purchased merchandise of $8,000 on terms 2/10,n/30. Ennis pays the original invoice less a return of $2,500 within the discount period. Record the above entries

34. Recap of Purchases Example
Example 7: ABC Merchandising had the following transactions:
Purchased merchandise and received payment by VISA at $6,000.
Purchased merchandise on account for $7,500 with credit terms 1/10, n/30.
Purchased merchandise on account for $4,000.
Return of the merchandise in (c ) of sales price of $2,000.
Paid within the discount period for merchandise in (b).
Paid for merchandise in (c ).

35. Transportation Costs
The terms of a sale should indicate when the ownership of the merchandise passes to the buyer.
This point determines which party, the buyer or the seller must pay the transportation costs.

36. Transportation Costs
FOB – shipping point
The ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the transportation company.
Buyer pays the transportation costs
Example 13: Purchased merchandise for $4,000 with shipping costs of $50 FOB shipping point.

37. FOB – shipping point Date Account PR Debit Credit
Merchandise inventory
$4,000
Accounts payable
Merchandise Inventory
$50
Cash

38. Transportation Costs
FOB – destination point
The ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the buyer.
Seller pays the transportation costs
Example 14: Sold merchandise for $4,000 with shipping costs of $50 FOB destination. Cost of merchandise sold is $2,000.

39. FOB – destination point
Date
Account PR
Debit
Credit
Accounts receivable
$4,000
Sales
Cost of merchandise sold
2000
Merchandise inventory
Delivery expense 50
Cash

40. Transportation costs FREIGHT TERMS FOB FOB Shipping Point Destination
Ownership (title)
passes to buyer
when merchandise Delivered to Received
is freight carrier by buyer
Transportation
costs are paid
by Buyer Seller
Risk of loss during
transportation
belongs to Buyer Seller

41. Sales Taxes Liability to the business
Create a SALES TAX PAYABLE account
Example 15: Sold merchandise on account $7,000, plus 5% sales tax. Cost of merchandise sold is $3,800.

42. Sales Taxes Date Account PR Debit Credit Accounts receivable $7,350
7,000
Sales tax payable
350
Cost of merchandise
3,800
Merchandise inventory

43. Recap of Transactions Seller Buyer Sold merchandise on account:
Accounts receivable DR
Sales CR
Cost of merchandise sold DR
Merchandise inventory CR
Purchased merchandise on account:
Merchandise Inventory DR
Accounts Payable CR
Transportation costs Shipping point
Transportation costs Shipping point:
Merchandise Inventory DR
Cash CR
Transportation costs – Destination:
Delivery Expense DR
Cash CR
Transportation costs - Destination
Merchandise returned:
Sales Returns & Allowances DR
Accounts receivable CR
Merchandise inventory DR
Cost of merchandise sold CR
Merchandise inventory DR
Accounts payable CR
Payment :
Cash DR
Payment:
Accounts payable DR
Cash CR
Payment with discount:
Cash DR
Sales discount DR
Accounts receivable CR
Cash CR

44. Adjusting Entries Inventory Shrinkage
Difference between physical count and books
Example 16: Suppose that physical inventory shows balance of $20,000 and books show balance of $23,000. Record the shrinkage.
Date
Account PR
Debit
Credit
Cost of merchandise sold
3,000
Merchandise inventory

45. Closing Entries Accounts that must be closed Sales Rent revenue
Sales returns and allowances
Sales discounts
Cost of merchandise sold
All expenses and revenues
Dividends