Presentation on theme: "MERCHANDISING COMPANY"— Presentation transcript:
1 MERCHANDISING COMPANY A merchandising company is an enterprise that buys and sells goods to earn a profit.1. Wholesalers sell to retailers.2. Retailers sell to consumers.A merchandiser’s primary source of revenue is sales, whereas a service company’s primary source of revenue is service revenue.selling stuffDoing something for you
2 OPERATING CYCLES FOR A SERVICE COMPANY AND A MERCHANDISING COMPANY CashReceive CashPerform ServicesAccountsReceivableCashMerchandising CompanyAccountsReceivableReceive CashBuy InventoryMerchandiseInventorySell Inventory
3 ILLUSTRATION 5-1 INCOME MEASUREMENT PROCESS FOR A MERCHANDISING COMPANY Cost ofGoods SoldLessSalesRevenueGrossProfitEqualsOperatingExpensesLessNetIncome(Loss)Equals
4 INVENTORY SYSTEMSMerchandising entities may use either (or both) of the following inventory systems:1. Perpetual – where detailed records of each inventory purchase and sale are maintained. Cost of goods sold is calculated at the time of each sale.2. Periodic – detailed records are not maintained. Cost of goods sold is calculated only at the end of the accounting period.This chapter covers the perpetual method.old school
5 PURCHASES OF MERCHANDISE Journalize the purchase of $3800 of inventory, bought on creditFor purchases on account, Merchandise Inventory is debited and Accounts Payable is credited. For cash purchases, Merchandise Inventory is debited and Cash is credited.
6 RECORDING COST OF GOODS PURCHASED When merchandise is purchased for resale to customers, the account, Merchandise Inventory, is debited for the cost of the goods.Purchases may be made for cash or on account (credit).The purchase is normally recorded by the purchaser when the goods are received from the seller.
7 FREIGHT COSTSThe sales agreement should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of business.FOB Shipping Point1. Goods delivered to shipping point by seller2. Buyer pays freight costs from shipping point to destinationFOB Destination1. Goods delivered to destination by seller2. Seller pays freight costs
8 ACCOUNTING FOR FREIGHT COSTS Merchandise Inventory is debited by the buyer, if the buyer pays the freight bill (FOB shipping point).Freight Out (or Delivery Expense) is debited by the seller, if the seller pays the freight bill (FOB destination).
9 ACCOUNTING FOR FREIGHT COSTS Journalize: Journalize the purchase of $3800 of inventory, with FOB shipping point - Cost to buyer is 150 for shippingWhen the purchaser directly incurs the freight costs, the account Merchandise Inventory is debited and Cash is credited.Increases cost of goods
10 SALES TRANSACTIONSRevenues are reported when earned in accordance with the revenue recognition principle. In a merchandising company. revenues are earned when the goods are transferred from seller to buyer.
11 SALES TRANSACTIONSJournalize the transaction: $2400 of merchandise inventory sold on account for $38001. The first entry records the sale of goods to a customer at the retail (selling) price.2. The second entry releases the goods from inventory at cost and charges the goods to cost of goods sold.
12 SALES TAXES Now in Ontario! Sales tax is expressed as a percentage of the sales price on selected goods sold to customers by a retailer. They are collected on most revenues, and paid on many costs.Sales taxes may include the federal goods and services tax (GST) 5% and the provincial sales tax (PST) – 8% in Ontario, if any. These two taxes have been combined into one harmonized sales tax (HST) in some Provinces.Now in Ontario!
13 SALES TAXES ON REVENUES The retailer collects the tax from the customer when the sale occurs, and periodically (usually monthly) remits the collections to the Receiver General.Sales taxes are not revenue but are a current liability until remitted.Sales taxes collected are NOT part of revenue!
14 SALES TRANSACTIONSJournalize the transaction: $2400 of merchandise inventory sold on account for $3800 plus 13% HST ($494)1. The first entry records the sale of goods to a customer at the retail (selling) price.2. The second entry releases the goods from inventory at cost and charges the goods to cost of goods sold.
15 PURCHASE RETURNS AND ALLOWANCES A purchaser may be dissatisfied with merchandise received because the goods1. are damaged or defective,2. are of inferior quality, or3. are not in accord with the purchaser’s specifications.
16 PURCHASE RETURNS AND ALLOWANCES return = reversing entry Journalize the return of $300 of merchandise inventory bought on accountreturn = reversing entryFor purchases returns and allowances that were originally made on account, Accounts Receivable is credited and Merchandise Inventory is debited. For cash returns and allowances, Cash is credited and Merchandise Inventory is debited.
17 QUANTITY DISCOUNTSVolume purchase terms may permit the buyer to claim a quantity discount.The merchandise inventory is simply recorded at the discounted cost.
18 PURCHASE DISCOUNTSCredit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due.The buyer calls this discount a purchase discount.A purchase discount is based on the invoice cost less any returns and allowances granted.
19 SALES RETURNS AND ALLOWANCES Sales Returns occur when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for credit or a refund.Sales Allowances occur when customers are dissatisfied, and the seller allows a deduction from the selling price.
20 SALES RETURNS AND ALLOWANCES The normal balance of Sales Returns and Allowances is a debit.Sales Returns and Allowances is a contra revenue account to the Sales account.decreases revenue (&OE)
21 RECORDING SALES RETURNS AND ALLOWANCES return of Goods costing $140, sold for $3001. The first entry reduces the balance owed by the customer and records the goods returned at retail price.2. The second entry records the physical return of goods to inventory at cost and removes the goods from the cost of goods sold account.
22 QUANTITY DISCOUNTSA quantity discount is the offer of a cash discount to a customer in return for a volume sale.Quantity discounts result in a sales price reduction. They are not separately journalized. Instead the sale is recorded at the reduced price.
23 SALES DISCOUNTS like an expense A sales discount is the offer of a cash discount to a customer in exchange for the prompt payment of a balance due.Similar to Sales Returns and Allowances, Sales Discounts is also a contra revenue account with a normal debit balance.like an expense
24 COMPLETING THE ACCOUNTING CYCLE A merchandising company requires the same types of adjusting entries as a service company, with one additional adjustment for inventory to ensure the recorded inventory amount agrees with the actual quantity on hand.A physical count is an important control feature since a perpetual system indicates what should be there but a count will determine what is actually there.Taking Inventory
25 COMPLETING THE ACCOUNTING CYCLE A merchandising company also requires the same types of closing entries as a service company.The additional accounts that need to be closed out in a merchandising account includeSales,Sales Returns and Allowances,Cost of Goods Sold, andFreight Out.Merchandise Inventory is an asset account and is not closed at the end of the period.
26 ILLUSTRATION 5-9 STATEMENT PRESENTATION OF SALES REVENUE SECTION As contra revenue accounts, sales returns and allowances (and sales discounts, if any) are deducted from sales in the income statement to arrive at Net Sales.
27 ILLUSTRATION 5-10 CALCULATION OF GROSS PROFIT Gross profit is calculated by deducting cost of goods sold from net sales as follows:Gross profit is often expressed as a percentage of sales.
28 ILLUSTRATION 5-12 CALCULATION OF NET INCOME Net income is calculated by deducting operating expenses from gross profit as follows:Net income is the “bottom line” of a company’s income statement.
29 USING THE INFORMATION IN THE FINANCIAL STATEMENTS Inventory is particularly important because:It is a large current asset on the balance sheetIt becomes a large expense on the income statementIt is vulnerable to theft or misuse
30 USING THE INFORMATION IN THE FINANCIAL STATEMENTS A balancing act is needed to ensure that a sufficient, but not excessive, quantity of inventory is on hand.Two ratios help evaluate the management of inventory:Inventory turnoverDays sales in inventory
31 INVENTORY TURNOVER Inventory turnover = Cost of goods sold Average inventory