Accounting for Merchandising Business ACG 2021: Chapter 5

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

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

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 500 2,200 Net sales $187,100 Cost of merchandise sold XXXX 100,000 Gross profit $ 87,100 Operating expenses: Selling expenses: Sales salaries expense $17,700 Administrative expenses: Rent expense 7,800 Office salaries expense 22,550 Depreciation expense—office equipment 2,800 33,150 Total operating expenses 50,850 Income from operations $ 36,250 Other expense: Interest expense 2,000 Net income $ 34,250

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

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

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

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.

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

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.

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

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

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

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

Example 10 Cash 6,000 Sales 6,000 Cost of merchandise 3,000 Merchandise inventory 3,000 Credit card expense 180 Cash 180

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

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

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.

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

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 2% Discount $ $100 Sales $5,000 Less discount 100 Net amount 4,900

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

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

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

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

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 ).

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

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.

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) 80 Net of discount 3,920

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

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.

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

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

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

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 ).

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.

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.

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

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.

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

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

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.

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

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

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

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