Presentation on theme: "Chapter 6 Accounting for Merchandising Businesses"— Presentation transcript:
1 Chapter 6 Accounting for Merchandising Businesses Learning ObjectivesNature of Merchandising BusinessAccounting for PurchasesAccounting for SalesTransportation CostsMerchandise TransactionsMerchandising Chart of AccountsMerchandising Income StatementMerchandising Accounting CycleFinancial Analysis and Interpretation
2 Nature of merchandise business Service businessProvide serviceUsually it is a small businessMerchandise businessPurchase and sell merchandise inventoryBigger than service business
3 Comparison of Income Statements: Service Co. And Merchandising Co. Year ended June 30, 20xxService revenue $xxxExpenses:Salary expense xDepreciation expense xIncome tax expense xNet income $ xxMerchandising Co.Income StatementYear ended June 30, 20xxSales revenue $xxxCost of goods sold xGross profit xxOperating expenses:Salary expense xDepreciation expense xIncome tax expense xNet 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 soldthe major expense of a merchandiser is cost of goods sold.Gross margin or Gross profitThe excess of sales over cost of sales is called gross margin.Merchandise inventoryMerchandise on hand at the end of an account period
5 Compute the net income Service business: Merchandise business: Fees earned – operating expenses = net incomeMerchandise business:Sales – cost of merchandise sold = gross profitGross profit – operating expenses = net incomeThe cost of merchandise sold is the largest expense for the merchandise business, say 70% or more
6 Income Statement Comparison Merchandising Business Service BusinessFees earned $150,000Operating expenses 120,000Net income $ 30,00020% of revenuesMerchandising BusinessSales revenue $600,000Cost of mdse. sold 450,000Gross profit $150,000Operating expenses 120,000Net income $ 30,00075% of revenues5% of revenues
7 Merchandise Inventory Merchandising involves selling inventoryInventory is usually an important assetInventory must be accounted for periodically or perpetuallyInventory systemPerpetual inventory systemPeriodic 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 valueContinuous determination of gross profitAffordable with computers, scanners, and bar codes on most productsPerpetual inventory accounting provides management controlsManagers know which items are selling fastest and the profit margin on those items
11 Accounting for purchase Purchase orderReceive the inventoryInvoice and paymentExhibit 1 invoiceNetsolutions purchase $1,500 merchandise inventorCredit term: 2/10; n/30
12 Purchase and payment Merchandise inventory 1500 Accounts payable Cash Payment without discountJan. 12Merchandise inventory1500Accounts payableJan. 22Cash
13 Purchase and payment Merchandise inventory 1500 Accounts payable Cash Payment with the discount: 1500 *2% = $30Jan. 12Merchandise inventory1500Accounts payableJan. 22Cash147030
14 Discount rate Purchase amount: $1500 Discount rate: 2% for 20 days 1500* 2% =30Interest rate: 12% per year1470*12%*20/360= 9.80Savings 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. 12Question 2:An invoice dated November 22, credit terms:2/10,n/30Dec. 2Dec. 22
17 Purchases returns and allowances Purchase returnsPurchase business return the merchandise inventory to selling businessget a debit memorandum from the sales businessPurchase allowancesPurchase business do not return the merchandise inventory to selling business
18 Purchases returns and allowances Example : p.231May 2, purchases $5,000 of inventory.May 4, returns $3,000 of inventoryCredit term: 2/10; n/30Discount: ( ) * 2% = $40Recording in the journal
19 Accounting for sales To record: Example: p. 233 Sales revenue Cost of salesSales expensesExample: p. 233Sales :$ 1000Cost of sales: $550Credit 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. 233Sales: $1500Discount: $30Net sales: $1470
21 Sales returns and allowances To set up a separate account:Sales returns and allowancesIt is a contra account to Sales.Balance on usually on the debit side.Example : p. 234Sales returns: $225, cost $140Record the deduction of salesRecord 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 receivableAccounts receivable106Sales100sales tax payable6Sales tax payableCash
24 Trade discountWholesalers give the purchaser the discount for large amount of purchase.P. 23530% of discount for $2400 salesThe 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.Shippingpointsellerbuyer
27 Example: FOB shipping point Buyer’s record:Merchandise inventory900Accounts payable50Cash
28 More exampleUnder the term of FOB shipping point, sometimes the seller prepaid the transportation cost, then to get the refund from the buyer.Selling merchandise inventory $800Term: FOB shipping pointTransportation cost $45
29 More example The seller’s record: Accounts receivable 800 Sales Cost of merchandise sold360Merchandise inventoryTransportation out45Cash
30 Example : FOB destination seller’s recordselling merchandise inventory $700Cost of sales $480Transportation cost 40
31 Example : FOB destination seller’s recordAccounts receivable700SalesCost of merchandise sold48Merchandise inventoryTransportation out40Cash
32 Illustration of Accounting for merchandise inventory Seller: Scully companyBuyer: Burton company
33 Selling and Buying Merchandise Inventory SellerBuyerDescription Debit CreditDescription Debit CreditAccts. Receivable 7,500Sales 7,500Cost of Mdse. Sold 4,500Mdse. Inventory 4,500No entryMdse. Inventory 7,500Accts. Payable 7,500Mdse. Inventory Cash 150Recorded at full costJuly1. 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 CreditDescription Debit CreditAccts. Receivable 5,000Sales 5,000Cost of Mdse. Sold 3,500Mdse. Inventory 3,500Mdse. Inventory 5,000Accts. Payable 5,000July 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 CreditDescription Debit CreditAccts. Receivable 5,000Sales 5,000Cost of Mdse. Sold 3,500Mdse. Inventory 3,500Mdse. Inventory 5,000Accts. Payable 5,000No entry.Transportation Out 250Cash 250July 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 CreditDescription Debit CreditAccts. Receivable 5,000Sales 5,000Cost of Mdse. Sold 3,500Mdse. Inventory 3,500Transportation Out 250Cash 250Mdse. Inventory 5,000Accts. Payable 5,000No entry.Accts. Payable 1,000Mdse. Inventory 1,000Sales Ret. & Allow. 1,000Accts Receivable 1,000Mdse. Inventory 700Cost of Mdse. Sold 700July 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 CreditDescription Debit CreditCash 4,000Accts. Receivable 4,000Accts. Payable 4,000Cash 4,000July 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 CreditDescription Debit CreditCash 4,000Accts. Receivable 4,000Accts. Payable 4,000Cash 4,000Mdse. Inventory 12,500Accts. Payable 12,500Accts. Receivable 12,500Sales 12,000Cash 500Cost of Mdse. Sold 7,200Mdse. Inventory 7,200July 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 CreditDescription Debit CreditCash 4,000Accts. Receivable 4,000Accts. Receivable 12,500Sales 12,000Cash 500Cost of Mdse. Sold 7,200Mdse. Inventory 7,200Accts. Payable 4,000Cash 4,000Mdse. Inventory 12,500Accts. Payable 12,500Accts. Payable 12,500Mdse. Inventory 240Cash 12,260Cash 12,260Sales Discounts 240Accts. Receivable 12,500July 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?AssetsLiabilitiesOwner’s equityRevenueCosts and expenseOther incomeOther expense
41 Merchandising Chart of Accounts Balance Sheet Accounts NetSolutionsMerchandising Chart of AccountsBalance Sheet Accounts200 Liabilities210 Accounts Payable211 Salaries Payable212 Unearned Rent215 Notes Payable300 Owner’s Equity310 Chris Clark, Capital311 Chris Clark, Drawing312 Income Summary100 Assets110 Cash111 Notes Receivable112 Accounts Receivable113 Interest Receivable115 Merchandise Inventory116 Office Supplies117 Prepaid Insurance120 Land123 Store Equipment124 Accumulated Depreciation—Store Equipment125 Office Equipment126 Accumulated Depreciation—Office Equipment
42 Merchandising Chart of Accounts Income Statement Accounts NetSolutionsMerchandising Chart of AccountsIncome Statement Accounts500 Costs and Expenses510 Cost of Merchandise Sold520 Sales Salaries Expense521 Advertising Expense522 Depreciation Expense—Store Equipment523 Transportation Out529 Misc. Selling Expense530 Office Salaries Expense531 Rent Expense532 Depreciation Expense—Office Equipment533 Insurance Expense534 Office Supplies Expense539 Misc. Admin. Expense400 Revenues410 Sales411 Sales Returns andAllowances412 Sales Discounts600 Other Income610 Rent Income611 Interest Income700 Other Expense710 Interest Expense
43 Income statement for a merchandise business A service businessSingle-step form]A merchandise businessMultiple-step formExhibit 7
44 NetSolutions Income Statement (Multiple-Step) For the Year Ended December 31, 2004 Revenue from sales:Sales $720,185Less:Sales returns and allow. $ 6, Sales discounts 5,790 11,930Net sales $708,255Cost of merchandise sold 525,305Gross profit $182,950Continued
46 Other income:Interest revenue $ 3,800Rent revenue 600Total other income $ 4,400Other expense:Interest expense 2,440 1,960Net income $75,400
47 NetSolutions Income Statement (Single-Step) For the Year Ended December 31, 2004 Revenues:Net sales $708,255Interest revenue 3,800Rent revenue 600Total revenues $712,655Expenses:Cost of merchandise sold $525,305Selling expenses 74,620Administrative expenses 34,890Interest expense 2,440Total expenses 637,255Net income $ 75,400
50 NetSolutions Balance Sheet December 31, 2002 LiabilitiesCurrent liabilities:Accounts payable $ 22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800Total current liabilities $30,360Long-term liabilities:Note payable (due 2004) 20,000Total liabilities $ 50,360Owner’s EquityChris Clark, capital 211,200Total liabilities and owner’s equity $261,560
51 Merchandise inventory shrinkage Book records: $63,950Physical inventory : $ 62,150Inventory shortage: $ 1,800Adjusting:Cost of merchandise soldMerchandise 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 AssetsNet sales $1,498,000 $1,200,000Total assets:Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000Average $1,048,750 $1,031,500
54 Profitability Measures — Effective use of Assets Ratio of Net Sales to AssetsNet sales on account $1,498,000 $1,200,000Total assets:Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000Average $1,048,750 $1,031,500Ratio of net sales to assets 1.4 to to 1Use: To assess the effectiveness in the use of assets
55 HOME WORK READING: Writing: Discussion: Illustrative problem Self- examination questionsMultiple choiceWriting:Exercise: 6-25;6-26;6-27Problem : 6-5BDiscussion: