Accounting for Merchandising Businesses 6 Accounting for Merchandising Businesses

After studying this chapter, you should be able to: Distinguish between the activities and financial statements of service and merchandising businesses. Describe and illustrate the financial statements of a merchandising business.

After studying this chapter, you should be able to: After studying this chapter, you should be able to: Describe and illustrate the accounting for merchandise transactions including: sale of merchandise purchase of merchandise transportation costs, sales taxes, trade discounts dual nature of merchandising transactions. Describe the adjusting and closing process for a merchandising business.

6-1 Objective 1 Distinguish between the activities and financial statements of service and merchandising businesses.

Reporting Financial Performance Service organizations sell time to earn revenue. Examples: accounting firms, law firms, and plumbing services Revenues Expenses Minus Net income Equals

Operating expenses –XXX Net income $XXX 6-1 Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX

Reporting Financial Performance Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores Cost Mds Sold Net Sales Minus Equals Gross Profit Minus Expenses Equals Net Income

Merchandising Business 6-1 Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX

6-1 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold.

6-1 The cost of merchandise sold is subtracted from sales to arrive at gross profit. This amount is called gross profit because it is the profit before deducting the operating expenses.

6-1 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

The gross profit is $490,000 ($250,000 + $975,000 –$735,000). 6-1 1-2 Example Exercise 6-1 On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records? During the current year, merchandise is sold for $250,000 cash and for $975,000 on account. The cost of the merchandise sold is $735,000. What is the amount of the gross profit? Follow My Example 6-1 The gross profit is $490,000 ($250,000 + $975,000 –$735,000). Follow My Example 1-1 $137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service. 31 10 For Practice: PE 6-1A, PE 6-1B

6-1 11

6-2 Objective 2 Describe and illustrate the financial statements of a merchandising business.

Multiple-Step Income Statement 6-2 The multiple-step income statement contains several sections, subsections, and subtotals.

6-2 The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.

6-2 Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.

6-2 Sales discounts are granted by the seller to customers for early payment of amounts owed.

6-2 Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.

NetSolutions Income Statement For the Year Ended December 31, 2009 Multiple-Step Income Statement 6-2 NetSolutions Income Statement For the Year Ended December 31, 2009 Revenue from sales: Sales $720,185 Less: Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930 Net sales $708,255 Cost of merchandise sold 525,305 Gross profit $182,950 (Continued) 18

(Continued) 19 Operating expenses: Selling expenses: Operating expenses: Selling expenses: Sales salaries expense $53,430 Advertising expense 10,860 Depr. Expense–store equipment 3,100 Delivery Expense 2,800 Miscellaneous selling expense 630 Total selling expenses $ 70,820 Administrative expenses: Office salaries expense $21,020 Rent expense 8,100 Depr. expense–office equipment 2,490 Insurance expense 1,910 Office supplies expense 610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations $ 77,240 (Continued) 19

6-2 (Concluded) 20 Other income and expenses: Rent revenue $ 600 6-2 Other income and expenses: Rent revenue $ 600 Interest expense (2,440) (1,840) Net income $75,400 20 (Concluded)

6-2 Cost of merchandise sold was discussed earlier. It is the cost of the merchandise sold to customers.

6-2 As we discussed in Slide 16, 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.

6-2 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).

Cost of Merchandise Sold 6-2 24

Single-Step Income Statement Single-Step Income Statement 6-2 An alternative form of income statement is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues.

NetSolutions Income Statement For the Year Ended December 31, 2009 Exhibit 3: Single-Step Income Statement 6-2 NetSolutions Income Statement For the Year Ended December 31, 2009 Revenues: Net sales $708,255 Rent revenue 600 Total revenues $708,855 Expenses: Cost of merchandise sold $525,305 Selling expenses 70,820 Administrative expenses 34,890 Interest expense 2,440 Total expenses 633,455 Net income $ 75,400 26

6-2 Exhibit 4: Statement of Owner’s Equity 27 Exhibit 4: Statement of Owner’s Equity 6-2 NetSolutions Statement of Owner’s Equity For the Year Ended December 31, 2009 Chris Clark, capital, 1/1/09 $153,800 Net income for year $75,400 Less withdrawals 18,000 Increase in owner’s equity 57,400 Chris Clark, capital, 12/31/09 $211,200 27

NetSolutions Balance Sheet December 31, 2009 Exhibit 5: Report Form of Balance Sheet 6-2 NetSolutions Balance Sheet December 31, 2009 Assets Current assets: Cash $52,950 Accounts receivable 91,080 Merchandise inventory 62,150 Office supplies 480 Prepaid insurance 2,650 Total current assets $209,310 28 (Continued)

6-2 Exhibit 5: Report Form of Balance Sheet Exhibit 5: Report Form of Balance Sheet 6-2 Property, plant, and equip.: Land $20,000 Store equipment $27,100 Less accumulated depreciation 5,700 21,400 Office equipment $15,570 depreciation 4,720 10,850 Total property, plant, and equipment 52,250 Total assets $261,560 29 (Continued)

6-2 Exhibit 5: Report Form of Balance Sheet Liabilities 6-2 Exhibit 5: Report Form of Balance Sheet Liabilities Current liabilities: Accounts payable $22,420 Note payable (current portion) 5,000 Salaries payable 1,140 Unearned rent 1,800 Total current liabilities $ 30,360 Long-term liabilities: Note payable (final pmt. due 2017) 20,000 Total liabilities $ 50,360 Owner’s Equity Chris Clark, capital 211,200 Total liabilities and owner’s equity $261,560 30 (Concluded)

Merchandise Inventory, May 1 $121,200 6-2 Example Exercise 6-2 Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2. Merchandise Inventory, May 1 $121,200 Merchandise Inventory, May 31 142,000 Purchases 985,000 Purchases Returns and Allowances 23,500 Purchases Discounts 21,000 Transportation In 11,300 31

For Practice: PE 6-2A, PE 6-2B 6-2 Follow My Example 6-2 Merchandise Inventory, May 1 $ 121,200 Purchases $985,000 Less: Purchases returns and allowances $23,500 Purchases discounts 21,000 44,500 Net purchases $940,500 Add transportation in 11,300 Cost of merchandise purchased 951,800 Merchandise available for sale $1,073,000 Less merchandise inventory, May 31 142,000 Cost of merchandise sold $ 931,000 32 For Practice: PE 6-2A, PE 6-2B

6-3 Objective 3 Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; transportation costs, sales taxes, trade discounts; dual nature of merchandise transactions.

Merchandise available for sale Exh. 6-5 Inventory Systems Beginning inventory Net cost of purchases + Merchandise available for sale = Ending Inventory Cost of Goods Sold +

Inventory Systems Perpetual Method Gives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account. Periodic Method Requires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account.

Inventory Systems Perpetual Method Gives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account. Periodic Method Requires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account. Because of advances in computer technology, the perpetual method is widely used in practice and will be the focus of our discussion.

Merchandising and Inventory Merchandising involves selling inventory Inventory is usually an important asset Inventory must be accounted for periodically or perpetually Traditional periodic method is often being replaced by perpetual inventory accounting

Income Statement Comparison Merchandising Business Service Business Fees earned $150,000 Operating expenses 120,000 Net income $ 30,000 20% of revenues Merchandising Business Sales revenue $600,000 Cost of mdse. sold 450,000 Gross profit $150,000 Operating expenses 120,000 Net income $ 30,000 5% of revenues

Income Statement Comparison Merchandising Business Service Business Fees earned $150,000 Operating expenses 120,000 Net income $ 30,000 20% of revenues Merchandising Business Sales revenue $600,000 Cost of mdse. sold 450,000 Gross profit $150,000 Operating expenses 120,000 Net income $ 30,000 75% of revenues 5% of revenues

Advantages of Using Perpetual Inventory Continuous determination of inventory value Continuous determination of gross profit Affordable with computers, scanners, and bar codes on most products Perpetual inventory accounting provides management controls Managers know which items are selling fastest and the profit margin on those items

On January 3, NetSolutions sold $1,800 of merchandise for cash. Cash Sales 6-3 On January 3, NetSolutions sold $1,800 of merchandise for cash. 34

Cash Sales (continued) 6-3 Using a perpetual inventory, the $1,200 cost of the inventory must be recorded. 35

Credit Card Sales 6-3 At the end of the month, $48 was sent to pay the service charge on credit card sales. 36

Sales on Account Using a Perpetual Inventory 6-3 Jan. 12 Accounts Receivable—Sims Co. 510 00 Sales 510 00 Invoice No. 7172 12 Cost of Merchandise Sold 280 00 Merchandise Inventory 280 00 Cost of merchandise sold on Invoice No. 7172. On January 12, NetSolutions sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $280. 37

Merchandise Purchases On June 20, Melton Company purchased $14,000 of Merchandise Inventory paying cash.

Sales Discounts 6-3 The terms for when payments for merchandise are to be made, agreed on by the buyer and the seller, are called credit terms. If buyer is allowed an amount of time to pay, it is known as the credit period.

Exh. 6-7 Purchase Discounts A deduction from the invoice price granted to induce early payment of the amount due. Terms Time Due Discount Period Credit Period Full amount less discount Full amount due Purchase or Sale

Number of Days Discount Is Available Otherwise, Net (or All) Is Due Purchase Discounts 2/10,n/30 Discount Percent Number of Days Discount Is Available Otherwise, Net (or All) Is Due Credit Period

Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? Full amount is due within 30 days of invoice date. No

Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? Full amount is due within 30 days of invoice date. No Yes 2% of invoice amount is allowed as a cash discount.

Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? Full amount is due within 30 days of invoice date. No Example: Merchandise was purchased for $1,500 with credit terms of 2/10, n/30. Payment within 10 days is calculated as: Invoice $1,500 Less 2% discount 30 Net cost paid $1,470 Yes 2% of invoice amount is allowed as a cash discount.

Managing Discounts If we fail to take a 2/10, n/30 discount, is it really expensive? 365 days ÷ 20 days × 2% = 36.5% annual rate Days in a year Number of additional days before payment Percent paid to keep money

Purchase Discounts On May 7, Martin, Inc. purchased $27,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.

On May 15, Martin, Inc. paid the amount due on the purchase of May 7. Purchase Discounts On May 15, Martin, Inc. paid the amount due on the purchase of May 7. $27,000 × 2% = $540 discount

Purchase Discounts After we post these entries, the accounts involved look like this: Merchandise Inventory Accounts Payable 5/7 27,000 5/15 540 5/15 27,000 5/7 27,000 Bal. 26,460 Bal. 0

If invoice is paid within 10 days of invoice date Credit Terms 6-3 Invoice for $1,500 Terms: 2/10, n/30 If invoice is paid within 10 days of invoice date $1,470 paid ($1,500 less a 2% discount) 39

If invoice is NOT paid within 10 days of invoice date 6-3 If invoice is NOT paid within 10 days of invoice date Invoice for $1,500 Terms: 2/10, n/30 Full amount ($1,500) is due within 30 days of invoice date 40

Sales Discounts 6-3 Jan. 22 Cash 1 470 00 Sales Discounts 30 00 Accounts Receivable–Omega Tech. 1 500 00 Collection of Invoice No. 106-8, less 2% discount. On January 22, NetSolutions receives the amount due, less the 2 percent discount. 41

6-3 Jan. 13 Sales Returns and Allowances 225 00 Accounts Receivable—Krier Co. 225 00 Credit Memo No. 32 13 Merchandise Inventory 140 00 Cost of Goods Sold 140 00 Cost of merchandise returned. Credit Memo No. 32. On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140. 42

Journalize the following merchandise transactions: 1-2 6-3 Example Exercise 6-3 Journalize the following merchandise transactions: Sold merchandise on account, $7,500 with terms of 2/10, n/30. The cost of the merchandise sold was $5,625. Received payment less the discount. 43

Cost of Merchandise Sold 5,625 Merchandise Inventory 5,625 6-3 Follow My Example 6-3 Accounts Receivable 7,500 Sales 7,500 Cost of Merchandise Sold 5,625 Merchandise Inventory 5,625 Cash 7,350 Sales Discounts 150 Accounts Receivable 7,500 44 For Practice: PE 6-3A, PE 6-3B

Purchase Transactions (Perpetual Inventory) 6-3 JOURNAL PAGE 24 Post. Ref. Date Description Dr Cr. 2009 Jan. 3 Merchandise Inventory 2 510 00 Cash 2 510 00 Purchased inventory from Bowen Co. On January 3, NetSolutions purchased merchandise for cash from Alden Company, $2,510. 45

6-3 Jan. 4 Merchandise Inventory 9 250 00 Accounts Payable—Thomas Corp. 9 250 00 Purchased inventory on account. On January 4, NetSolutions purchased merchandise on account from Thomas Corporation, $9,250. 46

Purchases Discounts 6-3 Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30.

Interest for 20 days at the rate of 6% on $2,940 – 9.80 6-3 NetSolutions borrows cash at an annual interest rate of 6%. Should the firm borrow cash to pay the invoice within the discount period? YES Discount of 2% on $3,000 $60.00 Interest for 20 days at the rate of 6% on $2,940 – 9.80 Savings from borrowing $50.20

Purchase Transactions (Perpetual Inventory) 6-3 Mar. 12 Merchandise Inventory 3 000 00 Accounts Payable—Alpha Tech. 3 000 00 Purchased inventory on account. On March 12, NetSolutions purchased merchandise on account from Alpha Technologies, $3,000. 49

6-3 Mar. 22 Accounts Payable—Alpha Technol. 3 000 00 Cash 2 940 00 Merchandise Inventory 60 00 Paid Alpha Technologies for March 12 purchase. If payment is made by March 22, NetSolutions records the discount as a reduction in cost. Notice that Merchandise Inventory is credited because NetSolutions maintains a perpetual inventory. 50

6-3 Apr. 11 Accounts Payable—Alpha Technol. 3 000 00 Cash 3 000 00 Paid Alpha Technologies for March 12 purchase. If NetSolutions does not pay the invoice until April 11, it would pay the full amount. 51

Purchase Returns and Allowances Merchandise returned by the purchaser to the supplier. Purchase Allowance . . . A reduction in the cost of defective merchandise received by a purchaser from a supplier.

Purchase Returns and Allowances On May 9, Barbee, Inc. purchased $20,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.

Purchases Return 6-3 A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.

Purchases Allowance 6-3 When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.

6-3 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.

6-3 Mar. 7 Accounts Payable—Maxim Systems 900 00 Merchandise Inventory 900 00 Debit Memo No. 18 On March 7, NetSolutions records the return of the merchandise indicated in Debit Memorandum No. 18. 55

6-3 On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30. May 2 Merchandise Inventory 5 000 00 Accounts Payable—Delta Data 5 000 00 Purchased merchandise. 56

On May 4, NetSolutions returns $3,000 of the merchandise. 6-3 On May 4, NetSolutions returns $3,000 of the merchandise. 4 Accounts Payable—Delta Data Link 3 000 00 Merchandise Inventory 3 000 00 Returned portion of the merchandise purchased. 57

6-3 On May 12, NetSolutions pays the amount due, $1,960 [$2,000 – ($5,000 –$3,000) x 2%)]. 12 Accounts Payable—Delta Data Links 2 000 00 Cash 1 960 00 Merchandise Inventory 40 00 Paid invoice [($5,000 – $3,000) x 2% = $40; $2,000 – $40 = $1,960] 58

6-3 Example Exercise 6-4 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. If Rofles Company pays the invoice within the discount period, what is the amount of cash required for the payment? Under a perpetual inventory system, what account is credited by Rofles Company to record the return? 59

Merchandise Inventory. 6-3 Follow My Example 6-4 $8,330. Purchase of $11,500 less the return of $3,000 less the discount of $170 [($11,500 – $3,000) x 2%]. Merchandise Inventory. 60 For Practice: PE 6-4A, PE 6-4B

Transportation Costs Seller Buyer Merchandise FOB shipping point Exh. 6-9 Transportation Costs Seller Buyer FOB shipping point (buyer pays) FOB destination (seller pays) Merchandise

Transportation Costs 6-3 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.

6-3 June 10 Merchandise Inventory 900 00 Accounts Payable—Magna Data 900 00 Purchased merchandise, terms FOB shipping point. 10 Merchandise Inventory 50 00 Cash 50 00 Paid 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. 62

Transportation Costs 6-3 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.

FOB Destination 6-3 On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480.

6-3 June 15 Accounts Receivable—Kranz Co. 700 00 Sales 700 00 6-3 June 15 Accounts Receivable—Kranz Co. 700 00 Sales 700 00 Sold merchandise, terms FOB destination. 15 Cost of Merchandise Sold 480 00 Merchandise Inventory 480 00 Record cost of merchandise sold to Kranz Company. 65

On June 15, NetSolutions pays the transportation cost of $40. 6-3 June 15 Delivery Expense 40 00 Cash 40 00 Paid shipping cost on merchandise sold. On June 15, NetSolutions pays the transportation cost of $40. 66

FOB Shipping Point 6-3 On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. The cost of the merchandise sold is $360.

6-3 June 20 Accounts Receivable—Planter Co. 800 00 Sales 800 00 6-3 June 20 Accounts Receivable—Planter Co. 800 00 Sales 800 00 Sold merchandise, terms FOB shipping point. 20 Cost of Merchandise Sold 360 00 Merchandise Inventory 360 00 Record cost of merchandise sold to Planter Company. 68

6-3 June 20 Accounts Receivable—Planter Co. 45 00 Cash 45 00 Prepaid shipping cost on merchandise sold. NetSolutions pays the transportation cost of $45 and adds it to the invoice. 69

6-3 Example Exercise 6-5 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. Transportation Returns and Merchandise Paid by Seller Transportation Terms Allowances $4,500 $200 FOB shipping point, $800 1/10, n/30 $5,000 $60 FOB destination, $2,500 2/10, n/30 70

For Practice: PE 6-5A, PE 6-5B 6-3 Follow My Example 6-5 $3,863. Purchase of $4,500 less return of $800 less the discount of $37 [($4,500 – $800) x 1%] plus $200 of shipping. $2,450. Purchase of $5,000 less return of $2,500 less the discount of $50 [($5,000 – $2,500) x 2%]. 71 For Practice: PE 6-5A, PE 6-5B

6-3 72 18

Sales Taxes 6-3 Aug. 12 Accounts Receivable—Lemon Co. 106 00 Sales 100 00 Sales Taxes Payable 6 00 Invoice No. 339 On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax. 73 18

6-3 Sept. 15 Sales Tax Payable 2 900 00 Cash 2 900 00 Payment 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. 74 18

Trade Discounts 6-3 When wholesalers offer special discounts to certain classes of buyers that order large quantities, these discounts are called trade discounts.

Dual Nature of Merchandise Transactions 6-3 Each merchandising transaction affects a buyer and a seller. In the following illustrations, we show how the same transactions would be recorded by both the seller and the buyer. July 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.

Scully Company (Seller) Burton Company (Buyer) 6-3 Scully Company (Seller) Accounts Receivable—Burton Co. 7,500 Sales 7,500 Cost of Merchandise Sold 4,500 Merchandise Inventory 4,500 Burton Company (Buyer) Merchandise Inventory. 7,500 Accounts Payable—Scully Co. 7,500 77 18

6-3 July 2 Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.

Scully Company (Seller) Burton Company (Buyer) 6-3 Scully Company (Seller) No entry. Burton Company (Buyer) Merchandise Inventory 150 Cash 150 79 18

6-3 July 5 Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.

Scully Company (Seller) Burton Company (Buyer) 6-3 Scully Company (Seller) Accounts Receivable—Burton Co. 5,000 Sales 5,000 Cost of Merchandise Sold 3,500 Merchandise Inventory 3,500 Burton Company (Buyer) Merchandise Inventory. 5,000 Accounts Payable—Scully Co. 5,000 81 18

6-3 July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.

Scully Company (Seller) Burton Company (Buyer) 6-3 Scully Company (Seller) Delivery Expense 250 Cash 250 Burton Company (Buyer) No entry. 83 18

6-3 July 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.

Scully Company (Seller) Burton Company (Buyer) 6-3 Scully Company (Seller) Sales Returns and Allowances 1,000 Accounts Receivable—Burton Co. 1,000 Merchandise Inventory 700 Cost of Merchandise Sold 700 Burton Company (Buyer) Accounts Payable—Scully Co. 1,000 Merchandise Inventory 1,000 85 18

6-3 July 15. Scully Company received payment from Burton Company for purchase of July 5.

Scully Company (Seller) Burton Company (Buyer) 6-3 Scully Company (Seller) Cash 4,000 Accounts Receivable—Burton Co. 4,000 Burton Company (Buyer) Accounts Payable—Scully Co. 4,000 Cash 4,000 87 18

6-3 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.

Scully Company (Seller) Burton Company (Buyer) 6-3 Scully Company (Seller) Accounts Receivable—Burton Co. 12,000 Sales 12,000 Accounts Receivable—Burton Co. 500 Cash 500 Cost of Merchandise Sold 7,200 Merchandise Inventory 7,200 Burton Company (Buyer) Merchandise Inventory 12,500 Accounts Payable—Scully Co. 12,500 89 18

6-3 July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000).

Scully Company (Seller) Burton Company (Buyer) 6-3 Scully Company (Seller) Cash 12,260 Sales Discounts 240 Accounts Receivable—Burton Co. 12,500 Burton Company (Buyer) Accounts Payable—Scully Co. 12,500 Merchandise Inventory 240 Cash 12,260 91 18

1-2 6-3 Example Exercise 6-6 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 receipt of the check for the amount due from Bray Co. 92

6-3 Follow My Example 6-6 Sievert Company Journal Entries: 6-3 Follow My Example 6-6 Sievert Company Journal Entries: Cash ($11,500 – $900 – $212) 10,388 Sales Discounts [($11,500 – $900) x 2%] 212 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) x 2%] 212 Cash ($11,500 – $900 – $212) 10,388 93 For Practice: PE 6-6A, PE 6-6B

6-4 Objective 4 Describe the adjusting and closing process for a merchandising business.

Inventory Shrinkage 6-4 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 merchandise count, the difference is often called inventory shrinkage or inventory shortage.

6-4 NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, 2009. The physical count reveals that only $62,150 is actually available.

Inventory records $63,950 Inventory count 62,150 6-4 Adjusting Entry Dec. 31 Cost of Merchandise Sold 1 800 00 Merchandise Inventory 1 800 00 Inventory shrinkage (63,950 – $62,150). Inventory records $63,950 Inventory count 62,150 Inventory shortage $ 1,800 97 18

Close the temporary accounts with credit balances to Income Summary. Step 1: Closing Entries 6-4 Close the temporary accounts with credit balances to Income Summary. Date Item PR Debit Credit Closing Entries 2009 Dec. 31 Sales 410 720 185 00 Rent Revenue 610 600 00 Income Summary 312 720 785 00 98

Close the temporary accounts with debit balances to Income Summary. Step 2: Closing Entries 6-4 6-4 Close the temporary accounts with debit balances to Income Summary. 99

6-4 Step 2: Closing Entries 31 Income Summary 312 645 385 00 6-4 Step 2: Closing Entries 100 31 Income Summary 312 645 385 00 Sales Returns and Allow. 411 6 140 00 Sales Discounts 412 5 790 00 Cost of Merchandise Sold 510 525 305 00 Sales Salaries Expense 520 53 430 00 Advertising Expense 521 10 860 00 Depr. Exp.—Store Equip. 522 3 100 00 Delivery Expense 523 2 800 00 Misc. Selling Expense 529 630 00 Office Salaries Expense 530 21 020 00 Rent Expense 531 8 100 00 Depr. Exp.—Office Equip. 532 2 490 00 Insurance Expense 533 1 910 00 Office Supplies Expense 534 610 00 Misc. Administrative Exp. 539 760 00 Interest Expense 710 2 440 00

Step 3: Closing Entries 6-4 Close Income Summary (the balance represents a $75,400 profit for NetSolutions in 2009) to Chris Clark, Capital. 31 Income Summary 312 75 400 00 Chris Clark, Capital 310 75 400 00 101

Close Chris Clark, Drawing to Chris Clark, Capital. Step 4: Closing Entries 6-4 Close Chris Clark, Drawing to Chris Clark, Capital. 31 Chris Clark, Capital 310 18 000 00 Chris Clark, Drawing 311 18 000 00 102

6-4 1-2 Example Exercise 6-7 Pulmonary Company’s perpetual inventory records indicate that $382,800 of merchandise should be on hand on March 31, 2008. The physical inventory indicates that $371,250 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Pulmonary Company for the year ended March 31, 2008. Follow My Example 6-7 Mar. 31 Cost of Merchandise Sold ($382,800 – ($371,250) 11,550 Merchandise Inventory 11,550 103 For Practice: PE 6-7A, PE 6-7B

Ratio of Net Sales to Assets 6-4 Financial Analysis The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. Net sales Average total assets Ratio of Net Sales to Assets =

Ratio of Net Sales to Assets Sears J. C. Penney 6-4 Ratio of Net Sales to Assets Sears J. C. Penney Total revenue (net sales) $19,701* $18,424* Total assets: Beginning of year $6,074 $18,300 End of year $8,651 $14,127 Average $7,362.5 $16,213.5 Ratio of net sales to assets 2.68 to 1 1.14 to 1 *in millions 105

6-4 Interpretation Based on these ratios, Sears appears better than J. C. Penney in utilizing its assets to generate sales.