Chapter 5 Merchandising Operations

What’s Different Service Company has labor and they do something for someone Merchandising Company buys goods from someone else to sell to customers.

New Revenue Account Our Revenue Account is now “Sales” Net Income is computed Sales-Cost of Goods=Gross Profit Gross Profit – Operating Expenses = New Income

Merchandise Inventory We now have inventory of the things we sell to customers Merchandise Inventory is an Asset So when we buy inventory we debit Merchandise Inventory and credit cash or accounts payable.

Example ATA Warehouse bought 100, 50” TV’s for $450 each. We will pay the bill in 30 days. Merchandise Inventory Accounts Payable- Sony Company Let’s Do BE5-1, Page 228

Freight Like anything delivered, there is a freight expense. There are two ways to pay freight The seller pays (sony) called FOB Destination The buyer pays (ATA Warehouse) called FOB Shipping Point

First Freight FOB Seller (Sony is paying the freight on the TV’s) This is an expense to Sony Delivery Expense Cash (Or AP)

Buyer Pays Freight ATA Warehouse is paying for the freight on the TV’s which is added to the merchandise cost Merchandise Inventory Cash or AP

Purchase Returns Two of the TV’s were damaged and were returned to Sony Accounts Payable 900 Merchandise Inventory 900

Discounts Many times if you pay your bill before the month is up, the company will give you a discount. Sony has terms of 2/10, net 30 – This means we can take a 2% discount off our bill if we pay in 10 days, but the whole amount is due in 30 days.

Now we will pay Sony for our TV’s Remember, we bought 100 TV’s for $450 each but we returned two so we owe this is what our entries look like so far. Purchased 100, 50” tv’s for $450 each Merchandise Inventory 45,000 Accounts Payable 45,000

Freight was FOB Shipping So we had to pay the freight of $500 Merchandise Inventory $500 Accounts Payable $500 We returned 2 of the TV’s Accounts Payable $900 Merchandise Inventory $900

Pay the Bill We have a balance of $44,600 to pay, Sony give 2/10, net 30, so we can take 2% of the total. Accounts Payable $44,600 Cash (44,500-2%) $43,708 Merchandise Inventory $892 Do E5-2 and E5-3 Page 231

Sales Side Now we want to sell our TV’s We sold three TV’s to the WTU Company on account. We want a 20% profit (we have to make a profit). Sales tax is 6% 1.Record the sale Accounts Receivable ? Sales ? Sales Tax Payable ? 2.Take it out of inventory Cost of Goods Sold ? Merchandise Inventory ?

“I don’t like this TV” One of the TV’s was returned but is still in working order. We want to make sure we know how many things were returned so we use a contra-sales account, “Sales Returns and Allowance”. We also want to reduce his bill. Sales Returns and Allowances ? Sales Tax Payable ? A/R-WTU Co. ?

Put it Back in Inventory Merchandise Inventory $450 Cost of Goods Sold $450 (This amount is at our original cost)*****

Sales Discounts We also give discounts to companies to pay early. We have 1/10, net 30. WTU pays their bill within the 10 Days. Cash Sales Discounts Accts Receivable Do Problem 5-1A Page 235, 236

Closing Entries All accounts that record transactions for a fiscal year must be closed using the temporary account, Income Summary Look at all the accounts on Page 212

Financial Statements Multi-Step Income Statement Look at Page 216 – Look at the Sales Section Sales -Sales Returns and Allowances =Net Sales -Cost of Goods Sold =Net Profit

Assignments for Chapter P5-1A P5-2A ***Read Instructions and Transactions Carefully****

Terms to Know Merchandising CompanySells goods to customers Cost of Goods SoldYour cost of the goods sold to customers Perpetual InventoryInventory down continuously (scanned) Periodic InventoryInventory taken time to time Merchandise InventoryAll the goods available for sale, is an asset Freight CostDelivery Cost FOB DestinationFreight charges paid by seller FOB Shipping PointFreight charges paid by buyer Purchase DiscountsAmount deducted from bill when paid early Sales DiscountsAmount deducted from bill when paid early Purchase/Sales ReturnsMerchandise returned for credit 2/10 Net 302% deducted if paid in 10 days, entire amount due in 30 days.