1. 5 Accounting for Merchandising Activities CHAPTER
PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
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Learning Objectives
Describe merchandising and identify and explain the important income statement and balance sheet components for a merchandising company. (LO1)
Describe both periodic and perpetual merchandise inventory systems. (LO2)
Analyze and record transactions for merchandise purchases and sales using a perpetual system. (LO3)
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Learning Objectives
Prepare adjustments for a merchandising company. (LO4)
Define, prepare, and use merchandising income statements. (LO5)
Prepare closing entries for a merchandising company. (LO6)
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Learning Objectives
Record and compare merchandising transactions using both periodic and perpetual inventory systems. (Appendix 5A) (LO7)
Explain and record Provincial Sales Tax (PST) and Goods and Services Tax (GST). (Appendix 5B) (LO8)
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5. Merchandising Activities
Merchandiser: A company that earns net income by buying and selling merchandise. Wholesaler: A company that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers.
LO 1
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Computing Net Income
Merchandiser
Service Company
Net Sales
Revenues
Cost of Goods
Sold
Gross Profit
Operating
Expenses
Operating
Expenses
Net Income
Net Income
LO 1
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Inventory
Products a company owns for the purpose of selling to customers.
It is often referred to as Merchandise Inventory.
Is classified as a current asset.
LO 1
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8. Merchandise Inventory
Cost of merchandise inventory includes:
Costs incurred to purchase the goods.
Shipping costs.
Other costs required to make goods ready for sale.
LO 1
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9. Merchandising Cost Flow
Beginning
Merchandise
Inventory
Net cost of
Purchases
Merchandise
available for
sale
Ending
Merchandise
inventory
Cost of goods
sold
LO 1
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10. Merchandise Inventory Systems
Perpetual
Provides a continuous record of:
The amount of merchandise inventory on hand.
Cost of goods sold to date.
Periodic
Requires a physical count of goods to determine:
Cost of goods sold.
LO 2
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11. Perpetual System-Example
Purchases
Nov Merchandise Inventory 1,200
Accounts Payable ,200
Purchased merchandise inv. on account
Purchase Returns and Allowances
Nov Accounts Payable
Merchandise Inventory
Purchase allowance re: debit memo
LO 3
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12. Purchase/Sales Discounts
A deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30
Terms
Time
Due
Credit Period = 30 days
Discount Period = 10 days
Nov.2
Nov.12
Dec.2
(Full amount minus 2% discount) due between Nov.2 and Nov.12
Full amount due anytime between Nov.13 and Dec.2
Purchase or Sale
LO 3
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13. Perpetual System — Example
Purchase Discounts- Assume the purchase of merchandise inventory on November 2 was on the terms 2/10,n30. Case 1-Discount taken
Nov Accounts Payable
Merchandise Inventory
Cash
2% x (1, ) = 18
Case 2-Discount not taken
Nov Accounts Payable
Cash
LO 3
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Mini-Quiz
Prepare journal entries for each of the following transactions. Assume a perpetual merchandise inventory system. October 6: Purchased 650 units of merchandise inventory at $5 per unit. The seller offered a cash discount of 2/10, n/30. October 8: Returned 25 defective units and received full credit. October 10:Paid the amount in full, less the returned items.
LO 3
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Mini-Quiz
Oct.6 Merchandise Inventory 3,250
A/P ,250
(650 x 5)
8 A/P
Merchandise Inventory
(25 x 5)
11 A/P ,125
Merchandise Inventory
Cash , (3, ) x 2%
LO 3
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16. (Buyer pays shipping charges) (Seller pays for shipping charges)
Transportation Charges – Perpetual System
Seller
Buyer
Goods
FOB Shipping Point
(Buyer pays shipping charges)
Carrier
FOB Destination
(Seller pays for shipping charges)
LO 3
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17. Perpetual System — Example
Transportation Costs
Nov.24 Merchandise Inventory
Cash
Paid freight charges on purchased merchandise.
LO 3
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18. Perpetual System — Example
Sales of Merchandise
Nov Accounts Receivable ,000
Sales ,000
Sold merchandise on terms 2/10,n60
Cost of goods sold
Merchandise Inventory
To record cost of merchandise sold
LO 3
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19. Perpetual System — Example
Customer Payment
Case 1-Customer pays in 60 days
Case 2-Customer pays in 10 days
Jan Cash ,000
Accounts receivable ,000
Received payment for Nov. 12 sale
Nov Cash
Sales discounts
Accounts receivable ,000
Received payment less the discount
LO 3
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20. Perpetual System — Example
Sales Returns and Allowances
Nov.6 Sales Returns & Allowance
Accounts Receivable
Customer returned merchandise
Merchandise Inventory
Cost of Goods Sold
Returned goods to merchandise inventory
LO 3
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21. Perpetual Merchandise Inventory
Adjustments-
Perpetual Merchandise Inventory
Perpetual merchandise inventory systems keep a running total of inventory levels by recording sales and purchase transactions.
Periodic adjustments must be made to account for shrinkage (loss due to theft or deterioration of merchandise inventory).
LO 4
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22. Perpetual System — Example
Inventory per accounting records: $21,250 Inventory per physical count: -$21,000 Difference (shrinkage) $250 Adjustment required:
Dec Cost of Goods Sold
Merchandise Inventory
To record inventory shrinkage revealed by physical count.
LO 4
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23. Income Statement Formats
Income statements may be formatted in a variety of ways.
Typical formats are:
Classified, Multiple-Step
Multiple-Step
Single-Step
LO 5
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24. Classified Multi-step Format (for internal reporting)
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LO 5

25. (for external reporting)
Multi-step Format
(for external reporting)
LO 5
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26. (for external reporting)
Single- step Format
(for external reporting)
LO 5
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27. Gross profit from sales
Gross Profit Ratio
The amount of gross profit expressed as a percentage of net sales.
May be tracked over time and/or compared to similar businesses.
May be calculated for whole business, departments, products.
Gross profit from sales
Net sales
Gross profit ratio =
X 100%
LO 5
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28. Closing Entries-Perpetual System
The closing process is similar for merchandising and service companies.
Merchandising companies have additional temporary accounts that must be closed.
These include:
Sales
Sales Returns & Allowances
Sales Discounts
Cost of Goods Sold
LO 6
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Review
Identify and explain the components of income for a merchandising company.
The basic components of income start with net sales. From net sales is subtracted the cost of goods sold. The resulting amount is called gross profit or gross margin. Selling and general and administrative expenses are subtracted from gross profit to determine income from operations.
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Review
Explain the difference between single-step and multiple-step income statements.
A A single-step income statement format includes cost of goods sold as an operating expense, and shows only one subtotal for total expenses. Operating expenses are highly summarized.
A multiple-step income statement shows intermediate totals between sales and net income. It also includes detailed computations of net sales and cost of goods sold.
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Appendix 5A- Periodic and Perpetual Merchandise Inventory Systems Compared
Periodic systems Merchandise Inventory is updated at the end of the period based on a physical count. Perpetual systems Merchandise Inventory is updated after each sale or purchase.
LO 7
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Appendix 5A - Example
Periodic System
Perpetual System
Purchase of Merchandise
Purchases Merchandise Inventory
Accounts Payable Accounts Payable
Return of Merchandise
Accounts Payable Accounts Payable
Purchase Returns Merchandise Inventory
LO 7
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Appendix 5A - Example
Periodic System
Perpetual System
Purchase Discount Taken (2/10, n30)
Accounts Payable Accounts Payable
Purchase Discounts Merchandise Inventory
Cash Cash
Transportation Charges
Transportation-in Merchandise Inventory
Cash Cash
LO 7
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Appendix 5A - Example
Periodic System
Perpetual System
Sale of merchandise
Accounts Receivable Accounts Receivable
Sales Sales
Cost of Goods Sold
Merchandise Inventory
LO 7
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Appendix 5A - Example
Periodic System
Perpetual System
Sales Return
Sales Returns & Allow Sales Returns & Allow
Accounts Receivable Accounts Receivable
Merchandise Inventory
Cost of Goods Sold
LO 7
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Appendix 5B – Sales Tax
Provincial Sales Tax (PST)
A consumption tax applied on sales to the final consumers of products or services.
Is not applicable to all sales.
Varies from province to province.
Amount collected is a liability.
LO 8
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Appendix 5B - Sales Tax
Goods and Services Tax (GST)
A 5% tax on almost all goods and services provided in Canada.
Is ultimately paid by the final consumer.
Is uniform from province to province.
Amount collected by a business is a liability.
Amount paid by a business offsets the GST owing.
LO 8
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Appendix 5B - Sales Tax
Harmonized Sales Tax (HST)
Is a combined GST and PST rate applied to taxable supplies.
LO 8
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Appendix 5B - Example
Purchase of Merchandise
Assume: Perpetual system and 5% GST.
Merchandise Inventory
GST Receivable
Accounts Payable
LO 8
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Appendix 5B - Example
Sale of Merchandise
Assume: Perpetual system, 7% PST and 5% GST.
Accounts Receivable ,008
Sales
PST Payable
GST Payable
To record sale of merchandise
Cost of goods sold
Merchandise Inventory
To record cost of merchandise sold
LO 8
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End of Chapter
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