Presentation on theme: "Principles of Financial Accounting, 11e"— Presentation transcript:
1 Principles of Financial Accounting, 11e 6Accounting for Merchandising BusinessesPrinciples of Financial Accounting, 11eReeve • Warren • Duchac
2 1Distinguish between the activities and financial statements of service and merchandising businesses.6-4
3 Nature of Merchandising Businesses 1Nature of Merchandising BusinessesService BusinessFees earned $XXXOperating expenses –XXXNet income $XXX
4 Nature of Merchandising Businesses Merchandising Business 1Nature of Merchandising BusinessesMerchandising BusinessSales $XXXCost of Merchandise Sold –XXXGross Profit $XXXOperating Expenses –XXXNet Income $XXX
5 1When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold.
6 1Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.
7 1 Example Exercise 6-1 Gross Profit During the current year, merchandise is sold for $250,000 cash and for $975,000 on account. The cost of the merchandise sold is $735,000. What is the amount of the gross profit?Follow My Example 6-1The gross profit is $490,000 ($250,000 + $975,000 –$735,000).Follow My Example 6-1For Practice: PE 6-1A, PE 6-1B6-9
23 Selling expenses are incurred directly in the selling of merchandise. 2Selling expenses are incurred directly in the selling of merchandise.Sales salariesStore supplies usedDepreciation of store equipmentDelivery expenseAdvertising
24 Depreciation of office equipment Office supplies used 2Administrative expenses sometimes called general expenses, are incurred in the administration or general operation of the business.Office salariesDepreciation of office equipmentOffice supplies used
25 2Other 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.
26 2Exhibit 1Multiple-Step Income Statement (concluded)
27 2 Example Exercise 6-2 Cost of Merchandise Sold Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2.Merchandise Inventory, May 1 $121,200Merchandise Inventory, May ,000Purchases 985,000Purchases Returns and Allowances 23,500Purchases Discounts 21,000Transportation In 11,3006-29
28 2 Follow My Example 6-2 Merchandise Inventory, May 1 $ 121,200 Example Exercise 6-2 (continued)2Follow My Example 6-2Merchandise Inventory, May 1 $ 121,200Purchases $985,000Less: Purchases ret. and allow. $23,500Purchases discounts 21, ,500Net purchases $940,500Add transportation in ,300Cost of merchandise purchased ,800Merchandise available for sale $1,073,000Less merchandise inventory, May ,000Cost of merchandise sold $ 931,000For Practice: PE 6-2A, PE 6-2B6-30
29 2An alternative form of income statement is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues.
31 2Statement of Owner’s Equity for Merchandising BusinessExhibit 4
32 2Exhibit 5Report Form of Balance Sheet(Continued)
33 2Exhibit 5Report Form of Balance Sheet (continued)
34 3Describe and illustrate the accounting for merchandise transactions including:6-36
35 3 Sale of merchandise Purchase of merchandise Freight, sales taxes, and trade discountsDual nature of merchandise transactions6-37
36 3Chart of Accounts for NetSolutions Merchandising BusinessExhibit 6
37 3Cash SalesOn January 3, NetSolutions sold $1,800 of merchandise for cash.
38 3Cash SalesUsing the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are recorded. The cost of merchandise sold on January 3 is $1,200.
39 3Credit Card SalesSales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 1.
40 3Sales on AccountOn January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.
41 3Sales DiscountsThe 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.
42 3Receipts on AccountOn January 22, NetSolutions receives the amount due, less the 2 percent discount.$1,500 x .02
43 3Credit MemorandumA credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable.
45 3On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.
46 3Example Exercise 6-3Sales TransactionsJournalize the following merchandise transactions:Sold merchandise on account, $7,500 with terms of 2/10, n/30. The cost of the merchandise sold was $5,625.Received payment less the discount.6-50
47 3 Follow My Example 6-3 Accounts Receivable……………. 7,500 Example Exercise 6-3 (continued)3Follow My Example 6-3Accounts Receivable……………. 7,500Sales…………………………….. 7,500Cost of Merchandise Sold………. 5,625Merchandise Inventory………. 5,625Cash…………………………………. 7,350Sales Discounts…………………… 150Accounts Receivable…………. 7,500For Practice: PE 6-3A, PE 6-3B6-51
48 Purchase Merchandise for Cash 3Purchase Merchandise for Cash**Assumes a perpetual inventory system is used.
49 Purchase Merchandise on Account 3Purchase Merchandise on Account**Assumes a perpetual inventory system is used.We will assume a perpetual inventory system is used throughout the chapter. The periodic inventory system is discussed in Appendix 2.
50 3Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions pays the amount due, less the discount, on March 22.
51 3NetSolutions borrows cash at an annual interest rate of 6%. Should the firm borrow cash to pay the invoice within the discount period?Discount of 2% on $3,000 $60.00Interest for 20 days at the rateof 6% on $2,940 – 9.80Savings from borrowing $50.20YES
57 3NetSolutions receives the delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 (also called a debit memo) is issued to Maxim Systems.
58 3NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 10 as follows:
59 3Price AllowanceOn May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.
60 3NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link on May 4.
61 3On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.
62 3 Example Exercise 6-4 Purchase Transactions Rofles Company purchased merchandise on account from a supplier for $11,500, terms 2/10, n/30. Rofles Company returned $3,000 of the merchandise and received full credit.If Rofles Company pays the invoice within the discount period, what is the amount of cash required for the payment?Under a perpetual inventory system, what account is credited by Rofles Company to record the return?6-66
63 Example Exercise 6-4 (continued) 3Follow My Example 6-4$8,330. Purchase of $11,500 less the return of $3,000 less the discount of $170 [($11,500 – $3,000) × 2%].Merchandise inventoryFor Practice: PE 6-4A, PE 6-4B6-67
64 3FreightIf ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, it is said to be FOB (free on board) shipping point.
65 3On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50.
66 3If 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.
67 3On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. NetSolutions pays freight of $40.
69 3On 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.
72 Returns and Allowances 3Example Exercise 6-5Freight TermsDetermine the amount to be paid in full settlement of each of invoices (a) and (b), assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period.Freight Paid by SellerReturns and AllowancesMerchandiseFreight Termsa. $4,500 $200 FOB shipping point, $ /10, n/30$5, FOB destination, 2, /10, n/306-76
73 Example Exercise 6-5 (continued) 3Follow My Example 6-5$3,863. Purchase of $4,500 less return of $800 less the discount of $37 [($4,500 – $800) × 1%] plus $200 of shipping.$2,450. Purchase of $5,000 less return of $2,500 less the discount of $50 [($5,000 – $2,500) × 2%].For Practice: PE 6-5A, PE 6-5B6-77
74 3Sales TaxesOn August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.
75 3Sales TaxesOn a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected.
76 3Trade DiscountsWhen wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts.
77 Dual Nature of Merchandise Transactions 3Dual Nature of Merchandise TransactionsEach 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.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.
78 Scully Company (Seller) Burton Company (Buyer) 3Scully Company (Seller)Accounts Receivable—Burton Co. 7,500Sales 7,500Cost of Merchandise Sold 4,500Merchandise Inventory 4,500Burton Company (Buyer)Merchandise Inventory. 7,500Accounts Payable—Scully Co. 7,500
79 3July 2. Burton Company paid transportation charges of $150 on the July 1 purchase from Scully Company.
80 Scully Company (Seller) Burton Company (Buyer) 3Scully Company (Seller)No entry.Burton Company (Buyer)Merchandise Inventory 150Cash 150
81 3July 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.
82 Scully Company (Seller) Burton Company (Buyer) 3Scully Company (Seller)Accounts Receivable—Burton Co. 5,000Sales 5,000Cost of Merchandise Sold 3,500Merchandise Inventory 3,500Burton Company (Buyer)Merchandise Inventory. 5,000Accounts Payable—Scully Co. 5,000
83 3July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.
84 Scully Company (Seller) Burton Company (Buyer) 3Scully Company (Seller)Delivery Expense 250Cash 250Burton Company (Buyer)No entry.
85 3July Scully Company issued Burton Company a credit memorandum for merchandise returned, $1,000. The cost of the merchandise returned was $700.
86 Scully Company (Seller) Burton Company (Buyer) 3Scully Company (Seller)Sales Returns and Allowances 1,000Accounts Receivable—Burton Co. 1,000Merchandise Inventory 700Cost of Merchandise Sold 700Burton Company (Buyer)Accounts Payable—Scully Co. 1,000Merchandise Inventory 1,000
87 3July 15. Scully Company received payment from Burton Company for purchase of July 5.
88 Scully Company (Seller) Burton Company (Buyer) 3Scully Company (Seller)Cash 4,000Accounts Receivable—Burton Co. 4,000Burton Company (Buyer)Accounts Payable—Scully Co. 4,000Cash 4,000
89 3July 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.
90 Scully Company (Seller) Burton Company (Buyer) 3Scully Company (Seller)Accounts Receivable—Burton Co. 12,000Sales 12,000Accounts Receivable—Burton Co. 500Cash 500Cost of Merchandise Sold 7,200Merchandise Inventory 7,200Burton Company (Buyer)Merchandise Inventory 12,500Accounts Payable—Scully Co. 12,500
91 3July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% × $12,000).
92 Scully Company (Seller) Burton Company (Buyer) 3Scully Company (Seller)Cash 12,260Sales Discounts 240Accounts Receivable—Burton Co. 12,500Burton Company (Buyer)Accounts Payable—Scully Co. 12,500Merchandise Inventory 240Cash 12,260
93 3 Example Exercise 6-6 Transactions for Buyer and Seller Sievert Co. sold merchandise to Bray Co. on account, $11,500, terms 2/15, n/30. The cost of the merchandise sold is $6,900. Sievert Co. issued a credit memorandum for $900 for merchandise returned and later received the amount due within the discount period. The cost of the merchandise returned was $540. Journalize Sievert Co.’s and Bray Co.’s entries for the payment of the amount due.6-97
94 Example Exercise 6-6 (continued) 3Follow My Example 6-6Cash ($11,500 – $900 – $212)…………………………….. 10,388Sales Discounts [($11,500 – $900) × 2%]…Accounts Receivable—Bray Co ($11,500 – $900)… 10,600Bray Company Journal Entries:Accounts Payable—Sievert Co. ($11,500 – $900)……... 10,600Merchandise Inventory [($11,500 – $900) × 2%]…… 212Cash ($11,500 – $900 – $212)…………… ,388For Practice: PE 6-6A, PE 6-6B6-98
95 4Describe the adjusting and closing process for a merchandising business.6-99
96 4Merchandising 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.
97 4NetSolutions’ inventory records indicate the following on December 31, 2011:Dec. 31, 2011Account balance of Merchandise Inventory $63,950Physical merchandise inventory on hand 62,150Inventory shrinkage $ 1,800
98 4At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry:
99 4Step 1: Closing EntriesDebit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary.
100 4Step 2: Closing EntriesCredit each temporary account with a debit balance, such as an expense, for the balance and credit Income Summary.
101 4Step 3: Closing EntriesDebit Income Summary for the amount of its balance (net income) and credit the owner’s equity account.
102 4Step 4: Closing EntriesDebit the owner’s capital account for the balance of the drawing account and credit the drawing account.
103 4NetSolutions’ Income Summary account after the closing entries have been posted is as follows:
104 4 Example Exercise 6-7 Inventory Shrinkage Pulmonary Company’s perpetual inventory records indicate that $382,800 of merchandise should be on hand on March 31, The physical inventory indicates that $371,250 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Pulmonary Company for the year ended March 31, 2010.6-108
105 4 Follow My Example 6-7 Mar. 31 Cost of Merchandise Sold………. 11,550 Example Exercise 6-7 (continued)4Follow My Example 6-7Mar. 31 Cost of Merchandise Sold………. 11,550Merchandise Inventory………. 11,550Inventory shrinkage ($382,800 – $371,250).For Practice: PE 6-7A, PE 6-7B6-109
106 The Periodic Inventory System Appendix 2:The Periodic Inventory System6-118
107 Determining Cost of Merchandise Sold Using the Periodic System Exhibit 18
108 Chart of Accounts Under the Periodic Inventory System Exhibit 19
109 Transactions Using the Periodic and Perpetual Inventory Systems Exhibit 20
110 Transactions Using the Periodic and Perpetual Inventory Systems (continued) Exhibit 20