1. Chapter 6 Accounting for Merchandising Businesses
Learning Objectives
Nature of Merchandising Business
Accounting for Purchases
Accounting for Sales
Transportation Costs
Merchandise Transactions
Merchandising Chart of Accounts
Merchandising Income Statement
Merchandising Accounting Cycle
Financial Analysis and Interpretation

2. Nature of merchandise business
Service business
Provide service
Usually it is a small business
Merchandise business
Purchase and sell merchandise inventory
Bigger than service business

3. Comparison of Income Statements: Service Co. And Merchandising Co.
Year ended June 30, 20xx
Service revenue $xxx
Expenses:
Salary expense x
Depreciation expense x
Income tax expense x
Net income $ xx
Merchandising Co.
Income Statement
Year ended June 30, 20xx
Sales revenue $xxx
Cost of goods sold x
Gross profit xx
Operating expenses:
Salary expense x
Depreciation expense x
Income tax expense x
Net income $ xx

4. Special terms sales revenue or sales cost of merchandise sold
the amount that a business earns from selling merchandise inventory is called sales revenue, or sales.
cost of merchandise sold
the major expense of a merchandiser is cost of goods sold.
Gross margin or Gross profit
The excess of sales over cost of sales is called gross margin.
Merchandise inventory
Merchandise on hand at the end of an account period

5. Compute the net income Service business: Merchandise business:
Fees earned – operating expenses = net income
Merchandise business:
Sales – cost of merchandise sold = gross profit
Gross profit – operating expenses = net income
The cost of merchandise sold is the largest expense for the merchandise business, say 70% or more

6. 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

7. Merchandise Inventory
Merchandising involves selling inventory
Inventory is usually an important asset
Inventory must be accounted for periodically or perpetually
Inventory system
Perpetual inventory system
Periodic inventory system

8. Perpetual inventory system
In a perpetual inventory system, each purchase and the cost of each sale are recorded in Merchandise Inventory.
Most companies using the perpetual inventory system.

9. Periodic inventory system
In a periodic inventory system, the inventory records do not show the amount available for sale or sold during the period. Instead, a detailed listing of merchandise for sale at the end of the accounting period is prepared by the physical count.
This physical inventory is used to determine the cost of the merchandise inventory on hand and the cost of merchandise sold.

10. 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

11. Accounting for purchase
Purchase order
Receive the inventory
Invoice and payment
Exhibit 1 invoice
Netsolutions purchase $1,500 merchandise inventor
Credit term: 2/10; n/30

12. Purchase and payment Merchandise inventory 1500 Accounts payable Cash
Payment without discount
Jan. 12
Merchandise inventory
1500
Accounts payable
Jan. 22
Cash

13. Purchase and payment Merchandise inventory 1500 Accounts payable Cash
Payment with the discount: 1500 *2% = $30
Jan. 12
Merchandise inventory
1500
Accounts payable
Jan. 22
Cash
1470 30

14. Discount rate Purchase amount: $1500 Discount rate: 2% for 20 days
1500* 2% =30
Interest rate: 12% per year
1470*12%*20/360= 9.80
Savings from borrowing:
30 –9.80 =20.20

15. What is the due date of the invoice?
Question 1:
An invoice dated august 13, has terms n/30.
Question 2:
An invoice dated November 22

16. What is the due date of the invoice?
Question 1:
An invoice dated august 13, credit terms n/30.
Solution:
Sep. 12
Question 2:
An invoice dated November 22, credit terms:2/10,n/30
Dec. 2
Dec. 22

17. Purchases returns and allowances
Purchase returns
Purchase business return the merchandise inventory to selling business
get a debit memorandum from the sales business
Purchase allowances
Purchase business do not return the merchandise inventory to selling business

18. Purchases returns and allowances
Example : p.231
May 2, purchases $5,000 of inventory.
May 4, returns $3,000 of inventory
Credit term: 2/10; n/30
Discount: ( ) * 2% = $40
Recording in the journal

19. Accounting for sales To record: Example: p. 233 Sales revenue
Cost of sales
Sales expenses
Example: p. 233
Sales :$ 1000
Cost of sales: $550
Credit card charges: $50

20. Sales discount To set up a separate account: sales discounts
It is a contra account to Sales.
Balance on usually on the debit side.
Example : p. 233
Sales: $1500
Discount: $30
Net sales: $1470

21. Sales returns and allowances
To set up a separate account:
Sales returns and allowances
It is a contra account to Sales.
Balance on usually on the debit side.
Example : p. 234
Sales returns: $225, cost $140
Record the deduction of sales
Record the deduction of cost of sales

22. Sales taxes Example p.235 Sales price $100 Sales tax rate 6%
Total amount $106 of accounts receivable

23. Sales taxes Example p.235 Sales price $100 Sales tax rate 6%
Total amount $106 of accounts receivable
Accounts receivable
106
Sales
100
sales tax payable 6
Sales tax payable
Cash

24. Trade discount
Wholesalers give the purchaser the discount for large amount of purchase.
P. 235
30% of discount for $2400 sales
The sales revenue: 2400 * 70%=1680

25. Transportation cost FOB shipping point FOB destination
If FOB shipping point, the buyer pays the transportation costs.
If FOB destination, the seller pays the transportation costs.
Shipping
point
seller
buyer

26. Example: FOB shipping point
Buyer’s record:
Buy merchandise inventory $ 900
Transportation cost $ 50

27. Example: FOB shipping point
Buyer’s record:
Merchandise inventory
900
Accounts payable 50
Cash

28. More example
Under the term of FOB shipping point, sometimes the seller prepaid the transportation cost, then to get the refund from the buyer.
Selling merchandise inventory $800
Term: FOB shipping point
Transportation cost $45

29. More example The seller’s record: Accounts receivable 800 Sales
Cost of merchandise sold
360
Merchandise inventory
Transportation out 45
Cash

30. Example : FOB destination
seller’s record
selling merchandise inventory $700
Cost of sales $480
Transportation cost 40

31. Example : FOB destination
seller’s record
Accounts receivable
700
Sales
Cost of merchandise sold 48
Merchandise inventory
Transportation out 40
Cash

32. Illustration of Accounting for merchandise inventory
Seller: Scully company
Buyer: Burton company

33. Selling and Buying Merchandise Inventory
Seller
Buyer
Description Debit Credit
Description Debit Credit
Accts. Receivable 7,500
Sales 7,500
Cost of Mdse. Sold 4,500
Mdse. Inventory 4,500
No entry
Mdse. Inventory 7,500
Accts. Payable 7,500
Mdse. Inventory Cash 150
Recorded at full cost
July1. Merchandise was sold with credit terms of n/45.
July 2. Paid transportation cost.

34. Accounting for Merchandise Transactions Scully Company (Seller)
Burton Co. (Buyer)
Description Debit Credit
Description Debit Credit
Accts. Receivable 5,000
Sales 5,000
Cost of Mdse. Sold 3,500
Mdse. Inventory 3,500
Mdse. Inventory 5,000
Accts. Payable 5,000
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.

35. Accounting for Merchandise Transactions Scully Company (Seller)
Burton Co. (Buyer)
Description Debit Credit
Description Debit Credit
Accts. Receivable 5,000
Sales 5,000
Cost of Mdse. Sold 3,500
Mdse. Inventory 3,500
Mdse. Inventory 5,000
Accts. Payable 5,000
No entry.
Transportation Out 250
Cash 250
July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Co. on July 5.

36. Accounting for Merchandise Transactions Scully Company (Seller)
Burton Co. (Buyer)
Description Debit Credit
Description Debit Credit
Accts. Receivable 5,000
Sales 5,000
Cost of Mdse. Sold 3,500
Mdse. Inventory 3,500
Transportation Out 250
Cash 250
Mdse. Inventory 5,000
Accts. Payable 5,000
No entry.
Accts. Payable 1,000
Mdse. Inventory 1,000
Sales Ret. & Allow. 1,000
Accts Receivable 1,000
Mdse. Inventory 700
Cost of Mdse. Sold 700
July 13. Scully Company issued Burton Co. a credit memo for merchandise returned, $1,000. The merchandise cost was $700.

37. Accounting for Merchandise Transactions Scully Company (Seller)
Burton Co. (Buyer)
Description Debit Credit
Description Debit Credit
Cash 4,000
Accts. Receivable 4,000
Accts. Payable 4,000
Cash 4,000
July 15. Scully Company received payment from Burton Co. for purchase of July 5.

38. Accounting for Merchandise Transactions Scully Company (Seller)
Burton Co. (Buyer)
Description Debit Credit
Description Debit Credit
Cash 4,000
Accts. Receivable 4,000
Accts. Payable 4,000
Cash 4,000
Mdse. Inventory 12,500
Accts. Payable 12,500
Accts. Receivable 12,500
Sales 12,000
Cash 500
Cost of Mdse. Sold 7,200
Mdse. Inventory 7,200
July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7,200.

39. Accounting for Merchandise Transactions Scully Company (Seller)
Burton Co. (Buyer)
Description Debit Credit
Description Debit Credit
Cash 4,000
Accts. Receivable 4,000
Accts. Receivable 12,500
Sales 12,000
Cash 500
Cost of Mdse. Sold 7,200
Mdse. Inventory 7,200
Accts. Payable 4,000
Cash 4,000
Mdse. Inventory 12,500
Accts. Payable 12,500
Accts. Payable 12,500
Mdse. Inventory 240
Cash 12,260
Cash 12,260
Sales Discounts 240
Accts. Receivable 12,500
July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

40. Chart of accounts for a merchandise business
What are new accounts in the chart of accounts?
Assets
Liabilities
Owner’s equity
Revenue
Costs and expense
Other income
Other expense

41. Merchandising Chart of Accounts Balance Sheet Accounts
NetSolutions
Merchandising Chart of Accounts
Balance Sheet Accounts
200 Liabilities
210 Accounts Payable
211 Salaries Payable
212 Unearned Rent
215 Notes Payable
300 Owner’s Equity
310 Chris Clark, Capital
311 Chris Clark, Drawing
312 Income Summary
100 Assets
110 Cash
111 Notes Receivable
112 Accounts Receivable
113 Interest Receivable
115 Merchandise Inventory
116 Office Supplies
117 Prepaid Insurance
120 Land
123 Store Equipment
124 Accumulated Depreciation—
Store Equipment
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment

42. Merchandising Chart of Accounts Income Statement Accounts
NetSolutions
Merchandising Chart of Accounts
Income Statement Accounts
500 Costs and Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense—
Store Equipment
523 Transportation Out
529 Misc. Selling Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Misc. Admin. Expense
400 Revenues
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
600 Other Income
610 Rent Income
611 Interest Income
700 Other Expense
710 Interest Expense

43. Income statement for a merchandise business
A service business
Single-step form]
A merchandise business
Multiple-step form
Exhibit 7

44. NetSolutions Income Statement (Multiple-Step) For the Year Ended December 31, 2004
Revenue from sales:
Sales $720,185
Less:Sales returns and allow. $ 6, Sales discounts 5,790 11,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
Continued

45. Operating expenses:
Selling expenses:
Sales salaries expense $60,030
Advertising expense 10,860
Depr. expense–store equip. 3,100
Miscellaneous selling expense 630
Total selling expenses $ 74,620
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr. expense–office equip. 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. admin. expenses 760
Total admin. expenses 34,890
Total operating expenses 109,510
Income from operations $ 73,440
Continued

46. Other income:
Interest revenue $ 3,800
Rent revenue 600
Total other income $ 4,400
Other expense:
Interest expense 2,440 1,960
Net income $75,400

47. NetSolutions Income Statement (Single-Step) For the Year Ended December 31, 2004
Revenues:
Net sales $708,255
Interest revenue 3,800
Rent revenue 600
Total revenues $712,655
Expenses:
Cost of merchandise sold $525,305
Selling expenses 74,620
Administrative expenses 34,890
Interest expense 2,440
Total expenses 637,255
Net income $ 75,400

48. NetSolutions Balance Sheet December 31, 2002
Assets
Current assets:
Cash $ 52,950
Notes receivable 40,000
Accounts receivable 60,880
Interest receivable 200
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650
Total current assets $219,310
Continued

49. NetSolutions Balance Sheet December 31, 2002
Property, plant, and
equipment:
Land $ 10,000
Store equipment $ 27,100
Less accum. depreciation 5,700 21,400
Office equipment $ 15,570
Less accum. depreciation 4,720 10,850 Total property, plant, and
equipment 42,250
Total assets $261,560
Continued

50. NetSolutions Balance Sheet December 31, 2002
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 (due 2004) 20,000
Total liabilities $ 50,360
Owner’s Equity
Chris Clark, capital 211,200
Total liabilities and owner’s equity $261,560

51. Merchandise inventory shrinkage
Book records: $63,950
Physical inventory : $ 62,150
Inventory shortage: $ 1,800
Adjusting:
Cost of merchandise sold
Merchandise inventory

52. Profitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available.
Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.

53. Profitability Measures — Effective Use of Assets
Ratio of Net Sales to Assets
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500

54. Profitability Measures — Effective use of Assets
Ratio of Net Sales to Assets
Net sales on account $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
Ratio of net sales to assets 1.4 to to 1
Use: To assess the effectiveness in the use of assets

55. HOME WORK READING: Writing: Discussion: Illustrative problem
Self- examination questions
Multiple choice
Writing:
Exercise: 6-25;6-26;6-27
Problem : 6-5B
Discussion:

56. This is the end of Chapter 6.