1. Accounting for Merchandising Businesses
Chapter 6
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2. Learning Objective 1
Distinguish between the activities and financial statements of service and merchandising businesses.

3. Nature of Merchandising Businesses
LO 1
Nature of Merchandising Businesses
Most service businesses, such as plumbing repair and accounting services, have no merchandise.
Merchandising businesses, such as a department store or sandwich shop, generate revenue by selling a product.
Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

4. Learning Objective 2
Distinguish between the activities and financial statements of service and merchandising businesses.
Describe and illustrate the financial statements of a merchandising business.

5. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement
The multiple-step income statement contains several sections, subsections, and subtotals. The first segment reports revenue from sales.

6. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement
Sales is the total amount charged customers for merchandise sold, including cash sales and sales on account.
Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.
Sales discounts are granted by the seller to customers for early payment of amounts owed.
Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.

7. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement
The second segment of the multiple-step income statement is the cost of merchandise sold section.
The cost of merchandise sold is the cost of the merchandise sold to customers. Merchandise costs consist of all the costs of acquiring the merchandise and readying it for sale, such as purchase and freight costs.

8. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement
The buyer may return merchandise to the seller (purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (purchase allowance).
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.

9. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement
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.
Under the perpetual inventory system, the amounts of inventory purchased, available for sale, and sold are continuously (perpetually) updated in the inventory records.

10. LO 2
Gross Profit
Gross profit is computed by subtracting the cost of merchandise sold from net sales.
GrossProfit

11. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement
Selling expenses are incurred directly in the selling of merchandise.
Administrative expenses, sometimes called general expenses, are incurred in the administration or general operations of the business.
Income from operations, sometimes called operating income, is determined by subtracting operating expenses from gross profit.

12. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement
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.
Subtracting other income and expenses from “income from operations” provides the net income or loss.

13. LO 2
Balance Sheet
The form of balance sheet with the assets on the left-hand side and the liabilities and owner’s equity on the right-hand side is called the account form.
When the balance sheet is presented in a downward sequence in three sections, it has been prepared using the report form.

14. Learning Objective 3
Distinguish between the activities and financial statements of service and merchandising businesses.
Describe and illustrate the financial statements of a merchandising business.
Describe and illustrate the accounting for merchandising transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; dual nature of merchandising transactions.

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

16. LO 3
Cash Sales
Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are also recorded. The cost of merchandise sold on January 3 is $1,200.

17. LO 3
Cash Sales
Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 31.

18. LO 3
Sales on Account
On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.

19. LO 3
Sales Discounts
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.

20. LO 3
Credit Terms
To encourage the buyer to pay before the end of the credit period, the seller may offer a discount, such as 2/10, n/30. These terms indicate that a two percent discount can be taken if the invoice is paid within ten days. After ten days the full amount is due by the thirtieth day from the invoice date.

21. LO 3
Receipts on Account
On January 17, NetSolutions receives the amount due within ten days, so the buyer deducted $30 ($1,500 x 2%) from the invoice amount.

22. LO 3
Credit Memo
A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable.

23. LO 3
Credit Memo
On January 13, issued Credit Memo No. 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.

24. Purchase Transactions
LO 3
Purchase Transactions
On January 3, NetSolutions purchased merchandise for cash. *
NOTE: Assume a perpetual inventory system is used.

25. Purchase Transactions
LO 3
Purchase Transactions
On January 4, NetSolutions purchased merchandise on account from Thomas Corporation. *

26. LO 3
Purchases Discounts
A buyer may receive a discount from the seller (sales discount) for early payment of the amount owed. From the buyer’s perspective, such discounts are called purchases discounts.

27. Purchase Transactions
LO 3
LO 3
Purchase Transactions
Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions is trying to determine if it should pay the invoice within the discount period.

28. Purchase Transactions
LO 3
Purchase Transactions
Alpha Technologies issued an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. Based on the calculation in the previous slide, NetSolutions pays the amount due, less the discount, on March 22.

29. LO 3
Discount Not Taken
Assume that, instead of paying the invoice within the discount period, NetSolutions pays the invoice on April 11.

30. Purchases Returns and Allowances
A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. From a buyer’s perspective, such returns are called purchases returns and allowances.
A debit memorandum, often called a debit memo, informs the seller of the amount the buyer proposes to debit to the account payable due the seller.

31. LO 3
Debit Memo
NetSolutions receives a delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems. NetSolutions records the return of the merchandise as follows:

32. Merchandise Purchased
LO 3
Merchandise Purchased
On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.
On May 4 , NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link.

33. LO 3
Invoice Paid
On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.

34. LO 3
Freight
If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, the terms are said to be FOB (free on board) shipping point.
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.

35. LO 3
Freight
On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the shipping cost of $50.

36. LO 3
Sale Plus Freight Cost
On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480.

37. LO 3
Sale Plus Freight Cost
On June 15, NetSolutions pays freight of $40 on the sale of June 15.

38. Seller Prepays Freight
LO 3
Seller Prepays Freight
On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost of the merchandise sold is $360.

39. Seller Prepays Freight
LO 3
Seller Prepays Freight

40. LO 3
Sales Taxes
On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.
On a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected.

41. LO 3
Trade Discounts
When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts.

42. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
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.

43. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
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.

44. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
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

45. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 2. Burton Company paid transportation charges of $150 on the July 1 purchase from Scully Company.

46. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
No entry.
Burton Company (Buyer)
Merchandise Inventory 150
Cash 150

47. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
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.

48. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
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

49. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.

50. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
Delivery Expense 250
Cash 250
Burton Company (Buyer)
No entry.

51. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 13. Scully Company issued Burton Company a credit memorandum for merchandise returned, $1,000. The cost of the merchandise returned was $700.

52. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
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

53. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 15. Scully Company received payment from Burton Company for purchase of July 5.

54. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
Cash 4,000
Accounts Receivable—Burton Co. 4,000
Burton Company (Buyer)
Accounts Payable—Scully Co. 4,000
Cash 4,000

55. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
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.

56. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
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

57. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July Scully Company received payment from Burton Company for purchase of July 18, less discount (2% × $12,000).

58. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
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

59. Learning Objective 4
Distinguish between the activities and financial statements of service and merchandising businesses.
Describe and illustrate the financial statements of a merchandising business.
Describe and illustrate the accounting for merchandising transactions including: sale of merchandise, purchase of merchandise; freight, sales taxes, and trade discounts; dual nature of merchandising transactions.
Describe the adjusting and closing process for a merchandising business.

60. Adjusting Entry for Inventory Shrinkage
LO 4
Adjusting Entry for Inventory Shrinkage
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.

61. LO 4
Inventory Shrinkage
At the end of the accounting period, Merchandise Inventory has a balance of $63,950. A physical count indicates that only $62,150 in inventory is on hand. This inventory shrinkage of $1,800 is recorded by the following adjusting entry:

62. LO 4
Step 1: Closing Entries
1. Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary.

63. LO 4
Step 2: Closing Entries
2. Credit each temporary account with a debit balance, such as an expense, for its balance and debit Income Summary.

64. Steps 3 and 4: Closing Entries
3. Debit Income Summary for the amount of its balance (net income) and credit the owner’s capital account.
4. Debit the owner’s capital account for the balance of the drawing account and credit the drawing account.

65. Learning Objective 5
Describe and illustrate the use of the ratio of net sales to assets in evaluating a company’s operating performance.

66. Ratio of Net Sales to Assets
LO 5
Ratio of Net Sales to Assets
The ratio of net sales to assets measures how effectively a business is using its assets to generate sales.
Ratio of Net Sales to Assets
Net Sales
Average Total Assets =

67. Ratio of Net Sales to Assets
LO 4
Ratio of Net Sales to Assets
The ratio of net sales to assets (in millions) for Dollar Tree, Inc. for each year are as follows:

68. Accounting for Merchandising Businesses
The End