1. Accounting for Merchandising Businesses6
Accounting for Merchandising Businesses

2. After studying this chapter, you should be able to:
Distinguish between the activities and financial statements of service and merchandising businesses.
Describe and illustrate the financial statements of a merchandising business.

3. After studying this chapter, you should be able to:
After studying this chapter, you should be able to:
Describe and illustrate the accounting for merchandise transactions including:
sale of merchandise
purchase of merchandise
transportation costs, sales taxes, trade discounts
dual nature of merchandising transactions.
Describe the adjusting and closing process for a merchandising business.

4. 6-1
Objective 1
Distinguish between the activities and financial statements of service and merchandising businesses.

5. Reporting Financial Performance
Service organizations sell time to earn revenue.
Examples: accounting firms, law firms, and plumbing services
Revenues
Expenses
Minus
Net income
Equals

6. Operating expenses –XXX Net income $XXX
6-1
Service Business
Fees earned $XXX
Operating expenses –XXX
Net income $XXX

7. Reporting Financial Performance
Merchandising companies sell products to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
Cost Mds Sold
Net Sales
Minus
Equals
Gross Profit
Minus
Expenses
Equals
Net Income

8. Merchandising Business
6-1
Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX

9. 6-1
When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold.

10. 6-1
The cost of merchandise sold is subtracted from sales to arrive at gross profit. This amount is called gross profit because it is the profit before deducting the operating expenses.

11. 6-1
Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

12. The gross profit is $490,000 ($250,000 + $975,000 –$735,000).
6-1
1-2
Example Exercise 6-1
On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records?
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 6-1
The gross profit is $490,000 ($250,000 + $975,000 –$735,000).
Follow My Example 1-1
$137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service. 31 10
For Practice: PE 6-1A, PE 6-1B

13. 6-1 11

14. 6-2
Objective 2
Describe and illustrate the financial statements of a merchandising business.

15. Multiple-Step Income Statement
6-2
The multiple-step income statement contains several sections, subsections, and subtotals.

16. 6-2
The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.

17. 6-2
Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.

18. 6-2
Sales discounts are granted by the seller to customers for early payment of amounts owed.

19. 6-2
Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.

20. NetSolutions Income Statement For the Year Ended December 31, 2009
Multiple-Step Income Statement
6-2
NetSolutions Income Statement For the Year Ended December 31, 2009
Revenue from sales:
Sales $720,185
Less: Sales returns and allowances $ 6, Sales discounts 5, ,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
(Continued) 18

21. (Continued) 19 Operating expenses: Selling expenses:
Operating expenses:
Selling expenses:
Sales salaries expense $53,430
Advertising expense 10,860
Depr. Expense–store equipment 3,100
Delivery Expense 2,800
Miscellaneous selling expense
Total selling expenses $ 70,820
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr. expense–office equipment 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. administrative expense
Total admin. expenses ,890
Total operating expenses ,710
Income from operations $ 77,240
(Continued) 19

22. 6-2 (Concluded) 20 Other income and expenses: Rent revenue $ 600
6-2
Other income and expenses:
Rent revenue $ 600
Interest expense (2,440) (1,840)
Net income $75,400 20
(Concluded)

23. 6-2
Cost of merchandise sold was discussed earlier. It is the cost of the merchandise sold to customers.

24. 6-2
As we discussed in Slide 16, sellers may offer customers sales discounts for early payment of their bills. From the buyer’s perspective, such discounts are referred to as purchase discounts.

25. 6-2
The buyer may return merchandise to the seller (a purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (a purchase allowance).

26. Cost of Merchandise Sold
6-2 24

27. Single-Step Income Statement
Single-Step Income Statement
6-2
An 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.

28. NetSolutions Income Statement For the Year Ended December 31, 2009
Exhibit 3: Single-Step Income Statement
6-2
NetSolutions Income Statement For the Year Ended December 31, 2009
Revenues:
Net sales $708,255
Rent revenue
Total revenues $708,855
Expenses:
Cost of merchandise sold $525,305
Selling expenses 70,820
Administrative expenses 34,890
Interest expense ,440
Total expenses ,455
Net income $ 75,400 26

29. 6-2 Exhibit 4: Statement of Owner’s Equity 27
Exhibit 4: Statement of Owner’s Equity
6-2
NetSolutions Statement of Owner’s Equity For the Year Ended December 31, 2009
Chris Clark, capital, 1/1/09 $153,800
Net income for year $75,400
Less withdrawals 18,000
Increase in owner’s equity ,400
Chris Clark, capital, 12/31/09 $211,200 27

30. NetSolutions Balance Sheet December 31, 2009
Exhibit 5: Report Form of Balance Sheet
6-2
NetSolutions Balance Sheet December 31, 2009
Assets
Current assets:
Cash $52,950
Accounts receivable 91,080
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2, Total current assets $209,310 28
(Continued)

31. 6-2 Exhibit 5: Report Form of Balance Sheet
Exhibit 5: Report Form of Balance Sheet
6-2
Property, plant, and equip.:
Land $20,000
Store equipment $27,100
Less accumulated
depreciation 5,700 21,400
Office equipment $15,570
depreciation ,720 10,850 Total property, plant,
and equipment ,250
Total assets $261,560 29
(Continued)

32. 6-2 Exhibit 5: Report Form of Balance Sheet Liabilities
6-2
Exhibit 5: Report Form of Balance Sheet
Liabilities
Current liabilities:
Accounts payable $22,420
Note payable (current portion) 5,000
Salaries payable 1,140
Unearned rent 1,800
Total current liabilities $ 30,360
Long-term liabilities:
Note payable (final pmt. due 2017) ,000
Total liabilities $ 50,360
Owner’s Equity
Chris Clark, capital ,200
Total liabilities and owner’s equity $261,560 30
(Concluded)

33. Merchandise Inventory, May 1 $121,200
6-2
Example Exercise 6-2
Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2.
Merchandise Inventory, May 1 $121,200
Merchandise Inventory, May ,000
Purchases 985,000
Purchases Returns and Allowances 23,500
Purchases Discounts 21,000
Transportation In 11,300 31

34. For Practice: PE 6-2A, PE 6-2B
6-2
Follow My Example 6-2
Merchandise Inventory, May 1 $ 121,200
Purchases $985,000
Less: Purchases returns and allowances $23,500
Purchases discounts 21, ,500
Net purchases $940,500
Add transportation in ,300
Cost of merchandise purchased ,800
Merchandise available for sale $1,073,000
Less merchandise inventory, May ,000
Cost of merchandise sold $ 931,000 32
For Practice: PE 6-2A, PE 6-2B

35. 6-3
Objective 3
Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; transportation costs, sales taxes, trade discounts; dual nature of merchandise transactions.

36. Merchandise available for sale
Exh.
6-5
Inventory Systems
Beginning inventory
Net cost of purchases +
Merchandise available for sale =
Ending Inventory
Cost of Goods Sold +

37. Inventory Systems
Perpetual Method Gives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account.
Periodic Method Requires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account.

38. Inventory Systems
Perpetual Method Gives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account.
Periodic Method Requires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account.
Because of advances in computer
technology, the perpetual method
is widely used in practice and
will be the focus of our discussion.

39. Merchandising and Inventory
Merchandising involves selling inventory
Inventory is usually an important asset
Inventory must be accounted for periodically or perpetually
Traditional periodic method is often being replaced by perpetual inventory accounting

40. Income Statement Comparison Merchandising Business
Service Business
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
20% of revenues
Merchandising Business
Sales revenue $600,000
Cost of mdse. sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
5% of revenues

41. Income Statement Comparison Merchandising Business
Service Business
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
20% of revenues
Merchandising Business
Sales revenue $600,000
Cost of mdse. sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
75% of revenues
5% of revenues

42. Advantages of Using Perpetual Inventory
Continuous determination of inventory value
Continuous determination of gross profit
Affordable with computers, scanners, and bar codes on most products
Perpetual inventory accounting provides management controls
Managers know which items are selling fastest and the profit margin on those items

43. On January 3, NetSolutions sold $1,800 of merchandise for cash.
Cash Sales
6-3
On January 3, NetSolutions sold $1,800 of merchandise for cash. 34

44. Cash Sales (continued)
6-3
Using a perpetual inventory, the $1,200 cost of the inventory must be recorded. 35

45. Credit Card Sales
6-3
At the end of the month, $48 was sent to pay the service charge on credit card sales. 36

46. Sales on Account Using a Perpetual Inventory
6-3
Jan. 12 Accounts Receivable—Sims Co
Sales
Invoice No. 7172
12 Cost of Merchandise Sold
Merchandise Inventory
Cost of merchandise sold on Invoice No
On January 12, NetSolutions sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $280. 37

47. Merchandise Purchases
On June 20, Melton Company purchased $14,000 of Merchandise Inventory paying cash.

48. Sales Discounts
6-3
The terms for when payments for merchandise are to be made, agreed on by the buyer and the seller, are called credit terms. If buyer is allowed an amount of time to pay, it is known as the credit period.

49. Exh.
6-7
Purchase Discounts
A deduction from the invoice price granted to induce early payment of the amount due.
Terms
Time
Due
Discount Period
Credit Period
Full amount
less discount
Full amount due
Purchase or Sale

50. Number of Days Discount Is Available Otherwise, Net (or All) Is Due
Purchase Discounts
2/10,n/30
Discount Percent
Number of Days Discount Is Available
Otherwise, Net (or All) Is Due
Credit Period

51. Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice paid within 10 days of invoice
date?
Full amount is due within 30 days of invoice date. No

52. Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice paid within 10 days of invoice
date?
Full amount is due within 30 days of invoice date. No
Yes
2% of invoice amount is allowed as a cash discount.

53. Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice paid within 10 days of invoice
date?
Full amount is due within 30 days of invoice date. No
Example: Merchandise was purchased for $1,500 with credit terms of 2/10, n/30. Payment within 10 days is calculated as:
Invoice $1,500
Less 2% discount 30
Net cost paid $1,470
Yes
2% of invoice amount is allowed as a cash discount.

54. Managing Discounts
If we fail to take a 2/10, n/30 discount, is it really expensive?
365 days ÷ 20 days × 2% = 36.5% annual rate
Days
in a
year
Number
of additional
days before
payment
Percent
paid to
keep
money

55. Purchase Discounts
On May 7, Martin, Inc. purchased $27,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.

56. On May 15, Martin, Inc. paid the amount due on the purchase of May 7.
Purchase Discounts
On May 15, Martin, Inc. paid the amount due on the purchase of May 7.
$27,000 × 2% = $540 discount

57. Purchase Discounts
After we post these entries, the accounts involved look like this:
Merchandise Inventory
Accounts Payable
5/ ,000 5/
5/ ,000
5/7 27,000
Bal. 26,460
Bal

58. If invoice is paid within 10 days of invoice date
Credit Terms
6-3
Invoice for $1,500
Terms:
2/10, n/30
If invoice is paid within 10 days of invoice date
$1,470 paid ($1,500 less a 2% discount) 39

59. If invoice is NOT paid within 10 days of invoice date
6-3
If invoice is NOT paid within 10 days of invoice date
Invoice for $1,500
Terms:
2/10, n/30
Full amount ($1,500) is due within 30 days of invoice date 40

60. Sales Discounts
6-3
Jan. 22 Cash
Sales Discounts
Accounts Receivable–Omega Tech
Collection of Invoice No , less 2% discount.
On January 22, NetSolutions receives the amount due, less the 2 percent discount. 41

61. 6-3
Jan. 13 Sales Returns and Allowances
Accounts Receivable—Krier Co
Credit Memo No. 32
13 Merchandise Inventory
Cost of Goods Sold
Cost of merchandise returned. Credit Memo No. 32.
On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140. 42

62. Journalize the following merchandise transactions:
1-2
6-3
Example Exercise 6-3
Journalize 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. 43

63. Cost of Merchandise Sold 5,625 Merchandise Inventory 5,625
6-3
Follow My Example 6-3
Accounts Receivable 7,500
Sales 7,500
Cost of Merchandise Sold 5,625
Merchandise Inventory 5,625
Cash 7,350
Sales Discounts 150
Accounts Receivable 7,500 44
For Practice: PE 6-3A, PE 6-3B

64. Purchase Transactions (Perpetual Inventory)
6-3
JOURNAL
PAGE 24
Post. Ref.
Date
Description
Dr Cr.
2009
Jan. 3 Merchandise Inventory
Cash
Purchased inventory from Bowen Co.
On January 3, NetSolutions purchased merchandise for cash from Alden Company, $2,510. 45

65. 6-3
Jan. 4 Merchandise Inventory
Accounts Payable—Thomas Corp
Purchased inventory on account.
On January 4, NetSolutions purchased merchandise on account from Thomas Corporation, $9,250. 46

66. Purchases Discounts
6-3
Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30.

67. Interest for 20 days at the rate of 6% on $2,940 – 9.80
6-3
NetSolutions borrows cash at an annual interest rate of 6%. Should the firm borrow cash to pay the invoice within the discount period?
YES
Discount of 2% on $3,000 $60.00
Interest for 20 days at the rate
of 6% on $2,940 – 9.80
Savings from borrowing $50.20

68. Purchase Transactions (Perpetual Inventory)
6-3
Mar. 12 Merchandise Inventory
Accounts Payable—Alpha Tech
Purchased inventory on account.
On March 12, NetSolutions purchased merchandise on account from Alpha Technologies, $3,000. 49

69. 6-3
Mar Accounts Payable—Alpha Technol
Cash
Merchandise Inventory
Paid Alpha Technologies for March 12 purchase.
If payment is made by March 22, NetSolutions records the discount as a reduction in cost. Notice that Merchandise Inventory is credited because NetSolutions maintains a perpetual inventory. 50

70. 6-3
Apr Accounts Payable—Alpha Technol
Cash
Paid Alpha Technologies for March 12 purchase.
If NetSolutions does not pay the invoice until April 11, it would pay the full amount. 51

71. Purchase Returns and Allowances
Merchandise returned by the purchaser to the supplier.
Purchase Allowance . . .
A reduction in the cost of defective merchandise received by a purchaser from a supplier.

72. Purchase Returns and Allowances
On May 9, Barbee, Inc. purchased $20,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.

73. Purchases Return
6-3
A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.

74. Purchases Allowance
6-3
When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.

75. 6-3
NetSolutions 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.

76. 6-3
Mar. 7 Accounts Payable—Maxim Systems
Merchandise Inventory
Debit Memo No. 18
On March 7, NetSolutions records the return of the merchandise indicated in Debit Memorandum No. 18. 55

77. 6-3
On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30.
May 2 Merchandise Inventory
Accounts Payable—Delta Data
Purchased merchandise. 56

78. On May 4, NetSolutions returns $3,000 of the merchandise.
6-3
On May 4, NetSolutions returns $3,000 of the merchandise.
4 Accounts Payable—Delta Data Link
Merchandise Inventory
Returned portion of the merchandise purchased. 57

79. 6-3
On May 12, NetSolutions pays the amount due, $1,960 [$2,000 – ($5,000 –$3,000) x 2%)].
12 Accounts Payable—Delta Data Links
Cash
Merchandise Inventory
Paid invoice [($5,000 – $3,000) x 2% = $40; $2,000 – $40 = $1,960] 58

80. 6-3
Example Exercise 6-4
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? 59

81. Merchandise Inventory.
6-3
Follow 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) x 2%].
Merchandise Inventory. 60
For Practice: PE 6-4A, PE 6-4B

82. Transportation Costs Seller Buyer Merchandise FOB shipping point
Exh.
6-9
Transportation Costs
Seller
Buyer
FOB shipping point
(buyer pays)
FOB destination
(seller pays)
Merchandise

83. Transportation Costs
6-3
If 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.

84. 6-3
June Merchandise Inventory
Accounts Payable—Magna Data
Purchased merchandise, terms FOB shipping point.
10 Merchandise Inventory
Cash
Paid shipping cost .
On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50. 62

85. Transportation Costs
6-3
If 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.

86. FOB Destination
6-3
On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480.

87. 6-3 June 15 Accounts Receivable—Kranz Co. 700 00 Sales 700 00
6-3
June 15 Accounts Receivable—Kranz Co
Sales
Sold merchandise, terms FOB destination.
15 Cost of Merchandise Sold
Merchandise Inventory
Record cost of merchandise sold to Kranz Company. 65

88. On June 15, NetSolutions pays the transportation cost of $40.
6-3
June 15 Delivery Expense
Cash
Paid shipping cost on merchandise sold.
On June 15, NetSolutions pays the transportation cost of $40. 66

89. FOB Shipping Point
6-3
On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. The cost of the merchandise sold is $360.

90. 6-3 June 20 Accounts Receivable—Planter Co. 800 00 Sales 800 00
6-3
June 20 Accounts Receivable—Planter Co
Sales
Sold merchandise, terms FOB shipping point.
20 Cost of Merchandise Sold
Merchandise Inventory
Record cost of merchandise sold to Planter Company. 68

91. 6-3
June 20 Accounts Receivable—Planter Co
Cash
Prepaid shipping cost on merchandise sold.
NetSolutions pays the transportation cost of $45 and adds it to the invoice. 69

92. 6-3
Example Exercise 6-5
Determine 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.
Transportation Returns and
Merchandise Paid by Seller Transportation Terms Allowances
$4,500 $200 FOB shipping point, $ /10, n/30
$5,000 $60 FOB destination, $2, /10, n/30 70

93. For Practice: PE 6-5A, PE 6-5B
6-3
Follow My Example 6-5
$3,863. Purchase of $4,500 less return of $800 less the discount of $37 [($4,500 – $800) x 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) x 2%]. 71
For Practice: PE 6-5A, PE 6-5B

94. 6-3 72 18

95. Sales Taxes
6-3
Aug. 12 Accounts Receivable—Lemon Co
Sales
Sales Taxes Payable 6 00
Invoice No. 339
On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax. 73 18

96. 6-3
Sept. 15 Sales Tax Payable
Cash
Payment for sales taxes collected during August.
On September 15, the seller sends in a payment of $2,900 to the taxing unit for the August taxes collected. 74 18

97. Trade Discounts
6-3
When wholesalers offer special discounts to certain classes of buyers that order large quantities, these discounts are called trade discounts.

98. Dual Nature of Merchandise Transactions
6-3
Each 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.

99. Scully Company (Seller) Burton Company (Buyer)
6-3
Scully Company (Seller)
Accounts Receivable—Burton Co. 7,500
Sales 7,500
Cost of Merchandise Sold 4,500
Merchandise Inventory 4,500
Burton Company (Buyer)
Merchandise Inventory. 7,500
Accounts Payable—Scully Co. 7,500 77 18

100. 6-3
July 2 Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.

101. Scully Company (Seller) Burton Company (Buyer)
6-3
Scully Company (Seller)
No entry.
Burton Company (Buyer)
Merchandise Inventory 150
Cash 150 79 18

102. 6-3
July 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.

103. Scully Company (Seller) Burton Company (Buyer)
6-3
Scully Company (Seller)
Accounts Receivable—Burton Co. 5,000
Sales 5,000
Cost of Merchandise Sold 3,500
Merchandise Inventory 3,500
Burton Company (Buyer)
Merchandise Inventory. 5,000
Accounts Payable—Scully Co. 5,000 81 18

104. 6-3
July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.

105. Scully Company (Seller) Burton Company (Buyer)
6-3
Scully Company (Seller)
Delivery Expense 250
Cash 250
Burton Company (Buyer)
No entry. 83 18

106. 6-3
July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 purchase on account. The cost of the merchandise was $700.

107. Scully Company (Seller) Burton Company (Buyer)
6-3
Scully Company (Seller)
Sales Returns and Allowances 1,000
Accounts Receivable—Burton Co. 1,000
Merchandise Inventory 700
Cost of Merchandise Sold 700
Burton Company (Buyer)
Accounts Payable—Scully Co. 1,000
Merchandise Inventory 1,000 85 18

108. 6-3
July 15. Scully Company received payment from Burton Company for purchase of July 5.

109. Scully Company (Seller) Burton Company (Buyer)
6-3
Scully Company (Seller)
Cash 4,000
Accounts Receivable—Burton Co. 4,000
Burton Company (Buyer)
Accounts Payable—Scully Co. 4,000
Cash 4,000 87 18

110. 6-3
July 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.

111. Scully Company (Seller) Burton Company (Buyer)
6-3
Scully Company (Seller)
Accounts Receivable—Burton Co. 12,000
Sales 12,000
Accounts Receivable—Burton Co. 500
Cash 500
Cost of Merchandise Sold 7,200
Merchandise Inventory 7,200
Burton Company (Buyer)
Merchandise Inventory 12,500
Accounts Payable—Scully Co. 12,500 89 18

112. 6-3
July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000).

113. Scully Company (Seller) Burton Company (Buyer)
6-3
Scully Company (Seller)
Cash 12,260
Sales Discounts 240
Accounts Receivable—Burton Co. 12,500
Burton Company (Buyer)
Accounts Payable—Scully Co. 12,500
Merchandise Inventory 240
Cash 12,260 91 18

114. 1-2
6-3
Example Exercise 6-6
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 receipt of the check for the amount due from Bray Co. 92

115. 6-3 Follow My Example 6-6 Sievert Company Journal Entries:
6-3
Follow My Example 6-6
Sievert Company Journal Entries:
Cash ($11,500 – $900 – $212) 10,388
Sales Discounts [($11,500 – $900) x 2%] 212
Accounts Receivable—Bray Co.
($11,500 – $900) 10,600
Bray Company Journal Entries:
Accounts Payable—Sievert Co. ($11,500 –
$900) 10,600
Merchandise Inventory [($11,500 – $900)
x 2%] 212
Cash ($11,500 – $900 – $212) 10,388 93
For Practice: PE 6-6A, PE 6-6B

116. 6-4
Objective 4
Describe the adjusting and closing process for a merchandising business.

117. Inventory Shrinkage
6-4
Merchandising 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 merchandise count, the difference is often called inventory shrinkage or inventory shortage.

118. 6-4
NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, The physical count reveals that only $62,150 is actually available.

119. Inventory records $63,950 Inventory count 62,150
6-4
Adjusting Entry
Dec. 31 Cost of Merchandise Sold
Merchandise Inventory
Inventory shrinkage (63,950 – $62,150).
Inventory records $63,950
Inventory count 62,150
Inventory shortage $ 1,800 97 18

120. Close the temporary accounts with credit balances to Income Summary.
Step 1: Closing Entries
6-4
Close the temporary accounts with credit balances to Income Summary.
Date Item PR Debit Credit
Closing Entries
2009
Dec. 31 Sales
Rent Revenue
Income Summary 98

121. Close the temporary accounts with debit balances to Income Summary.
Step 2: Closing Entries
6-4
6-4
Close the temporary accounts with debit balances to Income Summary. 99

122. 6-4 Step 2: Closing Entries 31 Income Summary 312 645 385 00
6-4
Step 2: Closing Entries
100
31 Income Summary
Sales Returns and Allow
Sales Discounts
Cost of Merchandise Sold
Sales Salaries Expense
Advertising Expense
Depr. Exp.—Store Equip
Delivery Expense
Misc. Selling Expense
Office Salaries Expense
Rent Expense
Depr. Exp.—Office Equip
Insurance Expense
Office Supplies Expense
Misc. Administrative Exp
Interest Expense

123. Step 3: Closing Entries
6-4
Close Income Summary (the balance represents a $75,400 profit for NetSolutions in 2009) to Chris Clark, Capital.
31 Income Summary
Chris Clark, Capital
101

124. Close Chris Clark, Drawing to Chris Clark, Capital.
Step 4: Closing Entries
6-4
Close Chris Clark, Drawing to Chris Clark, Capital.
31 Chris Clark, Capital
Chris Clark, Drawing
102

125. 6-4
1-2
Example Exercise 6-7
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, 2008.
Follow My Example 6-7
Mar Cost of Merchandise Sold ($382,800 –
($371,250) 11,550
Merchandise Inventory 11,550
103
For Practice: PE 6-7A, PE 6-7B

126. Ratio of Net Sales to Assets
6-4
Financial Analysis
The ratio of net sales to assets measures how effectively a business is using its assets to generate sales.
Net sales
Average total assets
Ratio of Net Sales to Assets =

127. Ratio of Net Sales to Assets Sears J. C. Penney
6-4
Ratio of Net Sales to Assets
Sears J. C. Penney
Total revenue (net sales) $19,701* $18,424*
Total assets:
Beginning of year $6,074 $18,300
End of year $8,651 $14,127
Average $7,362.5 $16,213.5
Ratio of net sales to assets 2.68 to to 1
*in millions
105

128. 6-4
Interpretation
Based on these ratios, Sears appears better than J. C. Penney in utilizing its assets to generate sales.