Presentation on theme: "Accounting for Merchandising Business"— Presentation transcript:
1 Accounting for Merchandising Business ACG 2021: Chapter 5
2 Merchandising Business Revenue activities of a merchandising business involve the buying and selling of merchandiseComparison to service businessService BusinessMerchandising BusinessFees earnedSalesLess Operating expensesLess Cost of merchandise sold=Net income=Gross Profit=Net Income
3 New Accounts on the Income Statement SALES – revenues collected from the sale of merchandiseCOST OF MERCHANDISE SOLD – the purchase price plus incidentals of merchandise available for resaleGROSS PROFIT – Sales – Cost of merchandise sold
4 For the Year Ended December 31, 20— Income StatementINCOME STATEMENTGem City MusicIncome StatementFor the Year Ended December 31, 20—Revenue from sales:Sales $189,300Less:: Sales returns and allowances $ 1,700Sales discounts ,200Net sales $187,100Cost of merchandise sold XXXX ,000Gross profit $ 87,100Operating expenses:Selling expenses:Sales salaries expense $17,700Administrative expenses:Rent expense ,800Office salaries expense ,550Depreciation expense—office equipment 2, ,150Total operating expenses ,850Income from operations $ 36,250Other expense:Interest expense ,000Net income $ 34,250
5 Computation of Costs Computation of Cost of Merchandise Sold Purchases Less merchandise inventory, December 31=Cost of merchandise soldComputation of Cost of Merchandise PurchasedLess: purchases returns and allowancesLess: purchases discount=Net purchasesAdd: transportation in=Cost of merchandise purchased
6 Balance Sheet Accounts Merchandise inventory – merchandise on hand at the end of an accounting period.
7 Merchandising TermsSales – total amount charged to customers for merchandise soldSales returns and allowances – are granted by the seller to customers for damaged or defective merchandiseSales discount – are granted by the seller to customers for earlyNet sales = Sales –returns - discount
8 Merchandising Terms Cost of goods sold Purchases discounts Cost of merchandise sold to customersPurchases discountsOffered by the seller to buyerFor early paymentPurchases allowances and returnsBuyer may receive a reduction in the intial price at which the merchandise is purchased.
9 Merchandising Terms Merchandise available for sale = Net purchases = Beginning merchandise inventory + net purchasesNet purchases =Purchases minus discounts – returns and allowances
10 Accounting for SalesUnder the perpetual inventory system, all sales require the reporting of the removal of inventory from the books at the same time.
11 Accounting for Sales CASH SALES Example 1: Sold merchandise for cash $5,000. Cost of merchandise sold $3,200DateAccountPRDebitCreditCash$5,000SalesCost of merchandise sold3,200Merchandise inventory
12 Credit sales Bank cards Master cardVisaMonies directly deposited in business accountRequires a debit to CASHService charge must be later recorded as expense
13 Bank cardsExample 9: Sold merchandise on VISA $10,000. Cost of merchandise sold is $4,000. Credit card expense is 3% of sales.DateAccountPRDebitCreditCash$10,000SalesCost of merchandise sold4,000Merchandise inventoryCredit card expense300
14 Bank cardsExample 3: Sold merchandise on VISA $6,000. Cost of merchandise sold is $3,000. Credit card expense is 3% of sales.
15 Example 10 Cash 6,000 Sales 6,000 Cost of merchandise 3,000 Merchandise inventory 3,000Credit card expenseCash
16 Credit sales Two types: Results in debit to ACCOUNTS RECEIVABLE American expressOn accountResults in debit to ACCOUNTS RECEIVABLE
17 Sales of AccountExample 4: Sold merchandise on account $6,000. Cost of merchandise sold is $3,000.DateAccountPRDebitCreditAccounts receivable$6,000Sales6,000Cost of merchandise3,000Merchandise inventory
18 RecapUnder the perpetual inventory system, all sales transactions consist of at least two entries.The first entry records the sale at the selling price with a debit to how it will be paid and credit to sales.The second entry records the merchandise leaving the business with a debit to cost of merchandise sold and credit to merchandise inventory for the cost of the merchandise.
19 Sales discountsA reduction in the price of the good for early payment.This account is a contra – SALESUpon payment of the account receivable, if the payment is within the discount period, we record the discount.Credit terms – terms of when payments for merchandise are to be made.Net 30 days – full amount due in 30 days2/10 – 2% discount if paid within 10 days
20 Example on Sales Discount Example 5: Sold merchandise on account $5,000, terms 2/10, n/30. Cost of merchandise sold is $4,000.Sales $5,000Discount %Discount $ $100Sales $5,000Less discountNet amount ,900
22 Sales Returns and Allowances Merchandise sold may be returned to the sellerMerchandise sold may be reduced in price due to defectsThis account is CONTRA – salesIncreases with a debit
23 Sales returns & allowances Example 6: Sold merchandise on account $7,000, terms 1/15, n/30. Cost of merchandise sold is $3,800DateAccountPRDebitCreditAccounts receivable$7,000Sales7,000Cost of merchandise3,800Merchandise inventory
24 Sales returns & allowances Return merchandise with sales price of $2,000 and cost of $1,000.DateAccountPRDebitCreditSales returns2,000Accounts receivableMerchandise inventory1,000Cost of merchandise sold
25 Recap of Sales ExampleExample 7: ABC Merchandising had the following transactions:Sold merchandise and received payment by VISA at $6,000, cost of merchandise sold is $4,000.Sold merchandise on account for $7,500 with credit terms 1/10, n/30. Cost of the merchandise is $4,500.Sold merchandise on account for $4,000, cost of merchandise is $2,500.Received a return of the merchandise in (c ) of sales price of $2,000 and cost of $1,750.Received payment within the discount period for merchandise in (b).Received payment for merchandise in (c ).
26 Accounting for Purchases Assume a perpetual inventory systemEach purchase and sale of merchandise is recorded as it occursExample 1: purchase merchandise for resale $4,000 on accountDateAccountPRDebitCreditMar 1Merchandise inventory$4,000Accounts payable
27 Purchases Discount Credit terms Purchases discounts are discounts taken by the buyer for early payment of an invoice.These discounts reduce the cost of the merchandise purchased.Should be taken when offered if not it is a LOSS to the business.
28 Purchase discountExample 9: Purchase merchandise for resale $4,000, terms 2/10, n/30 on account.Invoice: $4,000Discount (2% x $4,000)Net of discount 3,920
29 Purchase discount Date Account PR Debit Credit Mar 1 Merchandise inventory$4,000Accounts payableMar 10Cash$3,92080
30 Purchase DiscountReduction of the cost of the merchandise is reflected in the merchandise inventory account.Example 10: Purchase merchandise for resale $6,000, terms 1/15, n/30 on account.
31 Purchases Returns and Allowances Purchase returns – merchandise is returned to the sellerPurchase allowances – price adjustmentDebit memorandum – notification of the return or allowance by seller
32 Purchases Returns and Allowances Example 11: Returned merchandise on account $2,500.DateAccountPRDebitCreditMar 09Accounts payable$2,500Cash
33 ExampleExample 12: Purchased merchandise of $8,000 on terms 2/10,n/30. Ennis pays the original invoice less a return of $2,500 within the discount period. Record the above entries
34 Recap of Purchases Example Example 7: ABC Merchandising had the following transactions:Purchased merchandise and received payment by VISA at $6,000.Purchased merchandise on account for $7,500 with credit terms 1/10, n/30.Purchased merchandise on account for $4,000.Return of the merchandise in (c ) of sales price of $2,000.Paid within the discount period for merchandise in (b).Paid for merchandise in (c ).
35 Transportation CostsThe terms of a sale should indicate when the ownership of the merchandise passes to the buyer.This point determines which party, the buyer or the seller must pay the transportation costs.
36 Transportation CostsFOB – shipping pointThe ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the transportation company.Buyer pays the transportation costsExample 13: Purchased merchandise for $4,000 with shipping costs of $50 FOB shipping point.
37 FOB – shipping point Date Account PR Debit Credit Merchandise inventory$4,000Accounts payableMerchandise Inventory$50Cash
38 Transportation CostsFOB – destination pointThe ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the buyer.Seller pays the transportation costsExample 14: Sold merchandise for $4,000 with shipping costs of $50 FOB destination. Cost of merchandise sold is $2,000.
39 FOB – destination point DateAccountPRDebitCreditAccounts receivable$4,000SalesCost of merchandise sold2000Merchandise inventoryDelivery expense50Cash
40 Transportation costs FREIGHT TERMS FOB FOB Shipping Point Destination Ownership (title)passes to buyerwhen merchandise Delivered to Receivedis freight carrier by buyerTransportationcosts are paidby Buyer SellerRisk of loss duringtransportationbelongs to Buyer Seller
41 Sales Taxes Liability to the business Create a SALES TAX PAYABLE accountExample 15: Sold merchandise on account $7,000, plus 5% sales tax. Cost of merchandise sold is $3,800.
42 Sales Taxes Date Account PR Debit Credit Accounts receivable $7,350 7,000Sales tax payable350Cost of merchandise3,800Merchandise inventory
43 Recap of Transactions Seller Buyer Sold merchandise on account: Accounts receivable DRSales CRCost of merchandise sold DRMerchandise inventory CRPurchased merchandise on account:Merchandise Inventory DRAccounts Payable CRTransportation costs Shipping pointTransportation costs Shipping point:Merchandise Inventory DRCash CRTransportation costs – Destination:Delivery Expense DRCash CRTransportation costs - DestinationMerchandise returned:Sales Returns & Allowances DRAccounts receivable CRMerchandise inventory DRCost of merchandise sold CRMerchandise inventory DRAccounts payable CRPayment :Cash DRPayment:Accounts payable DRCash CRPayment with discount:Cash DRSales discount DRAccounts receivable CRCash CR
44 Adjusting Entries Inventory Shrinkage Difference between physical count and booksExample 16: Suppose that physical inventory shows balance of $20,000 and books show balance of $23,000. Record the shrinkage.DateAccountPRDebitCreditCost of merchandise sold3,000Merchandise inventory
45 Closing Entries Accounts that must be closed Sales Rent revenue Sales returns and allowancesSales discountsCost of merchandise soldAll expenses and revenuesDividends