Accounting for Merchandising Businesses Chapter 6 1

Distinguish between the activities and financial statements of service and merchandising businesses. Objective 1 2

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

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

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

Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory. 6

Describe and illustrate the financial statements of a merchandising business. Objective 2 7

The multiple-step income statement contains several sections, subsections, and subtotals. Multiple-Step Income Statement 8

Exhibit 1Multiple-Step Income Statement (continued on Slide 19) 9

The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account. 10

Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. 11

Sales discounts are granted by the seller to customers for early payment of amounts owed. 12

Net sales is determined by subtracting sales returns and allowances and sales discounts from sales. 13

The cost of merchandise sold is the cost of the merchandise sold to customers. 14

Multiple-Step Income Statement (continued) Exhibit 1 (continued on Slide 28) 15

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). 16

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. 17

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. 18

Under the perpetual inventory system of accounting, the amounts of inventory available for sale and sold are continuously (perpetually) updated in the inventory records. 19

Cost of Merchandise Sold Exhibit 2 20

Selling expenses are incurred directly in the selling of merchandise. Sales salaries Store supplies used Depreciation of store equipment Delivery expense Advertising 21

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 22

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. 23

Multiple-Step Income Statement (concluded) Exhibit 1 24

Describe and illustrate the accounting for merchandise transactions including: Objective 3 Sale of merchandise Purchase of merchandise Freight, sales taxes, and trade discounts Dual nature of merchandise transactions 25

On January 3, NetSolutions sold $1,800 of merchandise for cash. Cash Sales 26

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 $1,200. Cash Sales 27

On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280. Sales on Account 28

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 29

Credit TermsExhibit 8 30

On January 22, NetSolutions receives the amount due, less the 2 percent discount. Receipts on Account $1,500 x.02 31

A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable. Credit Memorandum 32

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

Example Exercise 6-3 Sales Transactions Journalize the following merchandise transactions: a.Sold merchandise on account, $7,500 with terms of 2/10, n/30. The cost of the merchandise sold was $5,625. b.Received payment less the discount. 34

Example Exercise 6-3 (continued) a. Accounts Receivable…………….7,500 Sales……………………………..7,500 Cost of Merchandise Sold……….5,625 Merchandise Inventory……….5,625 b. Cash………………………………….7,350 Sales Discounts……………………150 Accounts Receivable………….7,500 35

Purchase Merchandise for Cash * Assumes a perpetual inventory system is used. * 36

Purchase Merchandise on Account * 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. * 37

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

Discount Taken 39

Discount Not Taken Assume that NetSolutions pays the invoice on April

A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. 41

When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, that is a purchases allowance. 42

NetSolutions receives the delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 (also called a debit memo) is issued to Maxim Systems. 43

NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 10 as follows: 44

Price Allowance On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30. 45

NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link on May 4. 46

On May 12, NetSolutions paid for the purchase of May 2 less the return and discount. 47

Example Exercise 6-4 Purchase Transactions Rofles Company purchased merchandise on account from a supplier for $11,500, terms 2/10, n/30. Rofles Company returned $3,000 of the merchandise and received full credit. a. If Rofles Company pays the invoice within the discount period, what is the amount of cash required for the payment? b. Under a perpetual inventory system, what account is credited by Rofles Company to record the return? 48

Example Exercise 6-4 (continued) a. $8,330. Purchase of $11,500 less the return of $3,000 less the discount of $170 [($11,500 – $3,000) × 2%]. b. Merchandise inventory 49

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 50

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. Freight 51

Freight Terms Exhibit 11 52

Example Exercise 6-5 Freight Terms Determine the amount to be paid in full settlement of each of invoices (a) and (b), assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. a. $4,500$200FOB shipping point, $ 800 1/10, n/30 b. $ 5,00060FOB destination, 2,500 2/10, n/30 Merchandise Freight Paid by Seller Freight Terms Returns and Allowances 53

Example Exercise 6-5 (continued) a. $3,863. Purchase of $4,500 less return of $800 less the discount of $37 [($4,500 – $800) × 1%] plus $200 of shipping. b. $2,450. Purchase of $5,000 less return of $2,500 less the discount of $50 [($5,000 – $2,500) × 2%]. 54

When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts. Trade Discounts 55

Each merchandising transaction affects a buyer and a seller. You need to be aware of this when you are recording each transaction. Dual Nature of Merchandise Transactions 56

Example Exercise 6-6 Transactions for Buyer and Seller Sievert Co. sold merchandise to Bray Co. on account, $11,500, terms 2/15, n/30. The cost of the merchandise sold is $6,900. Sievert Co. issued a credit memorandum for $900 for merchandise returned and later received the amount due within the discount period. The cost of the merchandise returned was $540. Journalize Sievert Co.’s and Bray Co.’s entries for the payment of the amount due. 57

Example Exercise 6-6 (continued) Cash ($11,500 – $900 – $212)……………………………..10,388 Sales Discounts [($11,500 – $900) × 2%]… Accounts Receivable—Bray Co ($11,500 – $900)…10,600 Bray Company Journal Entries: Accounts Payable—Sievert Co. ($11,500 – $900)……...10,600 Merchandise Inventory [($11,500 – $900) × 2%]……212 Cash ($11,500 – $900 – $212)…………… ,388 58

Describe the adjusting and closing process for a merchandising business. Objective 4 59

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. 60

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 61

At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry: 62

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