Merchandise Inventory Account  A merchandising business  buys goods and then sells them to customers (retailers and/or wholesalers) for a profit  Retailer  a business that sells to the final user; the consumer  Wholesaler  a business that sells to retailers  Goods purchased for resale  merchandise  The items of merchandise the business has in stock  inventory  A merchandising business  buys goods and then sells them to customers (retailers and/or wholesalers) for a profit  Retailer  a business that sells to the final user; the consumer  Wholesaler  a business that sells to retailers  Goods purchased for resale  merchandise  The items of merchandise the business has in stock  inventory

The Sales Slip/Invoice  A sales slip or invoice is a source document for a sale on account.  Accounts Receivable is debited for the total sales slip (sales amount plus sales tax).  Sales is credited for the amount of the merchandise sale.  Sales Tax Payable is credited for the amount of sales tax being collected.  A sales slip or invoice is a source document for a sale on account.  Accounts Receivable is debited for the total sales slip (sales amount plus sales tax).  Sales is credited for the amount of the merchandise sale.  Sales Tax Payable is credited for the amount of sales tax being collected.

Sales Account  The account used by a merchandising business to record the sale of goods to a customer  Sales account  Increase the profits of a business  Revenue account  The rules  The account used by a merchandising business to record the sale of goods to a customer  Sales account  Increase the profits of a business  Revenue account  The rules Sales Debit – Decrease Side Credit + Increase Side Normal Balance

Sales Tax  A tax paid by the customer and collected by a business based on the total selling price of the goods.  Sales taxes are assessed by cities, states and special districts.  The sales tax is calculated as a percentage of the sale.  Sales Tax has no impact on profits.  The business keeps a record of the sales tax collected and paid in an account called Sales Tax Payable.  The Sales Tax Payable account is a liability account.  The rules  A tax paid by the customer and collected by a business based on the total selling price of the goods.  Sales taxes are assessed by cities, states and special districts.  The sales tax is calculated as a percentage of the sale.  Sales Tax has no impact on profits.  The business keeps a record of the sales tax collected and paid in an account called Sales Tax Payable.  The Sales Tax Payable account is a liability account.  The rules Sales Tax Payable Debit – Decrease Side Credit + Increase Side Normal Balance

Cash Sales  When the business receives full payment in cash for merchandise sold and any applicable sales tax at the time of the sale.  Source document - cash register tape  Debit Cash for full amount of cash received including sales tax (CA + ST)  Credit Sales for amount of merchandise sales (CA)  Credit Sales Tax Payable for the amount of sales tax collected (ST)  When the business receives full payment in cash for merchandise sold and any applicable sales tax at the time of the sale.  Source document - cash register tape  Debit Cash for full amount of cash received including sales tax (CA + ST)  Credit Sales for amount of merchandise sales (CA)  Credit Sales Tax Payable for the amount of sales tax collected (ST) Cash Sales Sales Tax

Bankcard Sales  When the business receives full payment with a bankcard (Discover, American Express, etc) for merchandise sold and any applicable sales tax at the time of the sale.  Treated like cash sales  Source Document: cash register tape  Debit Cash for full amount of cash received including sales tax (BCS + ST)  Credit Sales for amount of merchandise sales (BCS)  Credit Sales Tax Payable for the amount of sales tax collected (ST)  When the business receives full payment with a bankcard (Discover, American Express, etc) for merchandise sold and any applicable sales tax at the time of the sale.  Treated like cash sales  Source Document: cash register tape  Debit Cash for full amount of cash received including sales tax (BCS + ST)  Credit Sales for amount of merchandise sales (BCS)  Credit Sales Tax Payable for the amount of sales tax collected (ST) Bankcard Sales Sales Tax

Sales Returns and Allowances  Any merchandise returned for credit or a cash refund is called a sales return.  A price reduction granted for damaged goods kept by the customer is called a sales allowance.  Source document = Credit memorandum  Any merchandise returned for credit or a cash refund is called a sales return.  A price reduction granted for damaged goods kept by the customer is called a sales allowance.  Source document = Credit memorandum  Debit Sales Returns and Allowances (SR&A)  Debit Sales Tax Payable  Credit Accounts Receivable  Debit Sales Returns and Allowances (SR&A)  Debit Sales Tax Payable  Credit Accounts Receivable

The Sales Returns and Allowances Account  Decrease the total revenue earned by a business; reduces the overall sales of the business  A contra revenue account  The balance of a contra account is a decrease to the balance of another account  In this example - the Sales account  The rules  Decrease the total revenue earned by a business; reduces the overall sales of the business  A contra revenue account  The balance of a contra account is a decrease to the balance of another account  In this example - the Sales account  The rules Debit + Increase Side Normal Balance Credit – Decrease Side Sales Returns and Allowances

Credit Terms  A sales discount, is the amount a customer can deduct from the amount owed if payment is made within a certain time.  Credit terms state the time allowed for net payment, applicable discount and discount time  n/30  n/60  2/10, n/30  3/15, n/60  N = Net due  30 = Number of days to pay  2/10 = % discount if paid in number of days  A sales discount, is the amount a customer can deduct from the amount owed if payment is made within a certain time.  Credit terms state the time allowed for net payment, applicable discount and discount time  n/30  n/60  2/10, n/30  3/15, n/60  N = Net due  30 = Number of days to pay  2/10 = % discount if paid in number of days

The Sales Discount Account  Decreases the total revenue earned by a business; reduces the overall sales of the business  A contra revenue account  The rules  Decreases the total revenue earned by a business; reduces the overall sales of the business  A contra revenue account  The rules Sales Discounts Debit + Increase Side Normal Balance Credit – Decrease Side

Calculating Net Sales  The amount of sales for the period less any sales discounts, returns and allowances. Sales (credit balance) -Sales Discounts (contra debit balance) -Sales Returns & Allowances (contra debit balance) = Net Sales  The amount of sales for the period less any sales discounts, returns and allowances. Sales (credit balance) -Sales Discounts (contra debit balance) -Sales Returns & Allowances (contra debit balance) = Net Sales

Merchandise Inventory Account  The account used to track the dollar amount of merchandise in stock at the beginning of each period  Merchandise Inventory  Asset account  The rules  The account used to track the dollar amount of merchandise in stock at the beginning of each period  Merchandise Inventory  Asset account  The rules Merchandise Inventory Credit – Decrease Side Debit + Increase Side Normal Balance

The Purchasing Process The purchase of supplies, equipment, and merchandise is divided into four stages: The Purchasing Process The purchase of supplies, equipment, and merchandise is divided into four stages: PROCESS SOURCE DOCUMENT  requesting needed items Purchase requisition  ordering from a supplier Purchasing order  verifying items received Packing slip  recording purchase Invoice PROCESS SOURCE DOCUMENT  requesting needed items Purchase requisition  ordering from a supplier Purchasing order  verifying items received Packing slip  recording purchase Invoice

The Supplier’s invoice  Lists the details of a purchase  Lists credit terms The Supplier’s invoice  Lists the details of a purchase  Lists credit terms Processing stamp Completed by the accounting department to determine the

The Purchases Account The account used to track the cost of the merchandise bought during a period Purchases account Purchases decrease the profits of a business Classified as a Cost of Merchandise account In chart of accounts between Revenue and Expense accounts A temporary account The rules The account used to track the cost of the merchandise bought during a period Purchases account Purchases decrease the profits of a business Classified as a Cost of Merchandise account In chart of accounts between Revenue and Expense accounts A temporary account The rules Debit + Increase Side Normal Balance Credit – Decrease Side Purchases

Cash Purchases of Merchandise  Cash purchase of merchandise involves paying for the merchandise at the time of the purchase; getting the merchandise at the time you pay for it.  Source document = Check Stub  Debit Purchases for amount purchased  Credit Cash for amount paid  Cash purchase of merchandise involves paying for the merchandise at the time of the purchase; getting the merchandise at the time you pay for it.  Source document = Check Stub  Debit Purchases for amount purchased  Credit Cash for amount paid

Purchases Returns and Allowances  When a business returns merchandise to the supplier to request full credit a purchase return is recorded.  When a business agrees to keep less than satisfactory merchandise and requests to pay a reduced price a purchase allowance is recorded.  Source document = Debit memorandum  When a business returns merchandise to the supplier to request full credit a purchase return is recorded.  When a business agrees to keep less than satisfactory merchandise and requests to pay a reduced price a purchase allowance is recorded.  Source document = Debit memorandum

Purchases Returns and Allowances Account  Increase the profits of a business; reduces the overall cost of the purchases  A contra cost of merchandise account  The rules  Increase the profits of a business; reduces the overall cost of the purchases  A contra cost of merchandise account  The rules Credit + Increase Side Normal Balance Debit – Decrease Side Purchases Returns and Allowances

 A purchase discount, is the amount a business can deduct from the amount owed if payment is made within a certain time.  Credit terms state the time allowed for net payment, applicable discount and discount time  n/30  n/60  2/10, n/30  3/15, n/60  N = Net due  30 = Number of days to pay  2/10 = % discount if paid in number of days  A purchase discount, is the amount a business can deduct from the amount owed if payment is made within a certain time.  Credit terms state the time allowed for net payment, applicable discount and discount time  n/30  n/60  2/10, n/30  3/15, n/60  N = Net due  30 = Number of days to pay  2/10 = % discount if paid in number of days Credit Terms

The Purchase Discount Account  Increases the total profits of a business; reduces the overall cost of the purchases  A contra cost of merchandise account  The rules  Increases the total profits of a business; reduces the overall cost of the purchases  A contra cost of merchandise account  The rules Purchase Discounts Debit - Decrease Side Credit + Increase Side Normal Balance

Transportation In  A shipping charge is a charge to ship merchandise.  Shipping terms determine who will pay the shipping charges  FOB – Free on Board  FOB destination –supplier pays the shipping charges  FOB shipping point – buyer pays the shipping charges  Cost of Merchandise account – the rules  Decrease the profits of a business; increases the overall cost of the purchases  Source document = Check Stub  A shipping charge is a charge to ship merchandise.  Shipping terms determine who will pay the shipping charges  FOB – Free on Board  FOB destination –supplier pays the shipping charges  FOB shipping point – buyer pays the shipping charges  Cost of Merchandise account – the rules  Decrease the profits of a business; increases the overall cost of the purchases  Source document = Check Stub Debit + Increase Side Normal Balance Credit - Decrease side Transportation In

Calculating Net Purchases Purchases + Transportation = Cost of Delivered Merchandise -Purchases Returns & Allowances -Purchase Discounts =Net Purchases

Prepaid Insurance  The cost of insurance protection for a business (fire, theft, etc) is called premiums.  Premiums are paid in advance at the beginning of a covered period.  When the insurance protection expires, the premiums become an expense.  Asset account – the rules  Source document = Check Stub  The cost of insurance protection for a business (fire, theft, etc) is called premiums.  Premiums are paid in advance at the beginning of a covered period.  When the insurance protection expires, the premiums become an expense.  Asset account – the rules  Source document = Check Stub Debit + Increase Side Normal Balance Credit – Decrease Side Prepaid Insurance

Bankcard Fees  Fees charged by the bank for processing bankcard sales  Fees are calculated as a percentage of the bankcard sales slips processed  Expense account  Decrease the profits of a business  Source document = Check stub  The bankcard fees are recorded on the check stub at the time of bank reconciliation; when the bank statement is received.  The rules  Fees charged by the bank for processing bankcard sales  Fees are calculated as a percentage of the bankcard sales slips processed  Expense account  Decrease the profits of a business  Source document = Check stub  The bankcard fees are recorded on the check stub at the time of bank reconciliation; when the bank statement is received.  The rules Debit Credit - Decrease side Bankcard Fees + Increase Side Normal Balance