Accounting For Merchandising Businesses

Chapter 6 Accounting for Merchandising Businesses Accounting, 21st Edition Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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Objectives Objectives 1. Distinguish the activities of a service business from those of a merchandising business. After studying this After studying this 2. Describe and illustrate the financial statements of a chapter, you should should merchandisingchapter, business. you be to: 3. Describe the accounting for the be able able to:sale of merchandise. 4. Describe the accounting for the purchase of merchandise.

Objectives Objectives 5. Describe the accounting for transportation costs, sales taxes, and trade discounts. 6. Illustrate the dual nature of merchandising transactions. 7. Prepare a chart of accounts for a merchandising business. 8. Describe the accounting cycle for a merchandising business. 9. Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets.

Nature Nature of of Businesses Businesses Service Business Fees earned Operating expenses Net income

$XXX –XXX $XXX

Nature Nature of of Businesses Businesses Merchandising Business Sales Cost of Merchandise Sold Gross Profit Operating Expenses Net Income

$XXX –XXX $XXX –XXX $XXX

Multiple-Step Income Statement

NetSolutions Income Statement For the Year Ended December 31, 2007 Revenue from sales: Sales $720,185 Less:Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930 Net sales $708,255 Cost of merchandise sold 525,305 Gross profit $182,950

Continued

Operating expenses: Selling expenses: Sales salaries expense Advertising expense Depr. Expense–store equipment Miscellaneous selling expense Total selling expenses Administrative expenses: Office salaries expense Rent expense Depr. expense–office equipment Insurance expense Office supplies expense Misc. administrative expense Total admin. expenses Total operating expenses Income from operations

$56,230 10,860 3,100 630 $ 70,820 $21,020 8,100 2,490 1,910 610 760

Continued

34,890 105,710 $ 77,240

Other income and expenses: Rent revenue Interest expense Net income

Concluded

$ 600 (2,440)

(1,840) $75,400

Periodic Periodic vs. vs. Perpetual Perpetual Methods Methods of of Accounting Accounting Periodic Method • A method of determining the cost of merchandise sold and the amount of merchandise on hand • Under this method, the inventory records do not show the amount available for sale or the amount sold during the period

Periodic Periodic vs. vs. Perpetual Perpetual Methods Methods of of Accounting Accounting Perpetual Method • Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. • The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records.

Cost Cost of of Merchandise Merchandise Purchased Purchased Purchases Less: Purchase returns and allowances $9,100 Purchase discounts 2,525 Net purchases Add transportation-in Cost of merchandise purchased

$521,980

11,625 $510,355 17,400 $527,755

Cost Cost of of Merchandise Merchandise Sold Sold Merchandise inventory, 1/1/07 $ 59,700 Purchases $521,980 Less: Purchase returns and allowances $9,100 Purchase discounts 2,525 11,625 Net purchases $510,355 Add transportation-in 17,400 Cost of merchandise purchased 527,755 Merchandise available for sale $587,455 Less merchandise inventory, 12/31/07 62,150 Cost of merchandise sold $525,305

Single-Step Income Statement for a Merchandising Business

NetSolutions Income Statement For the Year Ended December 31, 2007 Revenues: Net sales Rent revenue Total revenues Expenses: Cost of merchandise sold Selling expenses Administrative expenses Interest expense Total expenses Net income

$708,255 600 $708,855 $525,305 70,820 34,890 2,440 633,455 $ 75,400

Statement of Owner’s Equity for a Merchandising Business

NetSolutions Statement of Owner’s Equity For the Year Ended December 31, 2007

Chris Clark, capital, 1/1/07 Net income for year Less withdrawals Increase in owner’s equity Chris Clark, capital, 12/31/07

$153,800 $75,400 18,000 57,400 $211,200

Balance Sheet

NetSolutions Balance Sheet December 31, 2007 Assets Current assets: Cash Accounts receivable Merchandise inventory Office supplies Prepaid insurance assets

$52,950 91,080 62,150 480 2,650 $209,310

Continued

Total current

Property, plant, and equipment: Land $20,000 Store equipment $27,100 Less accumulated depreciation 5,70021,400 Office equipment $15,570 Less accumulated depreciation 4,72010,850 Total property, plant, and equipment 52,250 Total assets $261,560

Continued

Liabilities Liabilities Current Current liabilities: liabilities: Accounts $22,420 Accounts payable payable $22,420 Note 5,000 Note payable payable (current (current portion) portion) 5,000 Salaries 1,140 Salariespayable payable 1,140 Unearned 1,800 Unearned rent rent 1,800 Total Totalcurrent current liabilities liabilities Long-term Long-term liabilities: liabilities: Note Note payable payable (due (due 2017) 2017) Total Totalliabilities liabilities Owner’s Owner’sEquity Equity Chris ChrisClark, Clark,capital capital Total Totalliabilities liabilitiesand andowner’s owner’sequity equity Concluded

$$ 30,360 30,360 20,000 20,000 $$ 50,360 50,360 211,200 211,200 $261,560 $261,560

Sales Sales Transactions Transactions

Cash Cash Sales Sales JOURNAL Description

Date 2007

1 Jan. 3 Cash 2 3 4

PAGE 26 Post. Ref.

Dr Cr.

1 800 00

Sales

To record cash sales.

5

On On January January 3, 3, aa firm firm sold sold $1,800 $1,800 of of merchandise merchandise for for cash. cash.

1 800 00

Cash Cash Sales Sales 6

3 Cost of Merchandise Sold

7

Merchandise Inventory

8 9

1 200 00 1 200 00

To record the cost of merchandise sold.

10

Using Using aa perpetual perpetual inventory, inventory, the the inventory inventory cost cost of of $1,200 $1,200 must must be be recorded. recorded.

Cash Cash Sales Sales JOURNAL Description

Date 2007

1 Jan. 31 Credit Card Expense 2 3 4 5

PAGE 28 Post. Ref.

Dr Cr.

48 00

Cash

To record service charges on credit card sales for the month.

At Credit the card sales the (MasterCard $48 or At Credit the end end cardof of sales the month, month, (MasterCard $48 was was or sent Visa) to cover recorded this as charge. sales. sent Visa) toare are cover recorded this service service as cash cash charge. sales.

48 00

Sales Sales on on Account Account Jan. 12 Accounts Receivable—Sims Co.

510 00

Sales

510 00

Invoice No. 7172. 12 Cost of Merchandise Sold Merchandise Inventory

280 00 280 00

Cost of merchandise sold on Invoice No. 7172.

On On January January 12, 12, aa firm firm sold sold Sims Sims Company Company merchandise merchandise on on account, account, $510. $510. The The cost cost of of the the merchandise merchandise to to the the seller seller was was $280. $280.

Sales Sales Discounts Discounts The The terms terms for for when when payments payments for for merchandise merchandise are are to to be be made made are are called called credit credit terms. terms. IfIf buyer buyer isis allowed allowed an an amount amount of of time time to to pay, pay, itit isis known known as as the the credit credit period. period.

Sales Sales Discounts Discounts Credit Terms If invoice is paid within 10 days of invoice date $1,470 paid (less 2% as a cash discount)

Invoice for $1,500 Terms: 2/10, n/30

Sales Sales Discounts Discounts Credit Terms

Invoice for $1,500 Terms: 2/10, n/30

If invoice is NOT paid within 10 days of invoice date $1,500 PAID

Sales Sales Discounts Discounts Jan. 21 Cash

499 80

Sales Discounts

10 20

Accounts Receivable—Sims Co.

Collection of Invoice No. 7172, less discount.

On On January January 21, 21, the the firm firm receives receives the the amount amount due due from from Sims Sims (refer (refer to to Slide Slide 25), 25), less less the the 22 percent percent discount. discount.

510 00

Sales Sales Returns Returns and and Allowances Allowances Merchandise Merchandise that that isis returned returned to to the the vendor vendor isis referred referred to to as as aa sales sales return. return. IfIf there there isis aa defect defect in in the the product product or or the the wrong wrong item item was was shipped, shipped, the the seller seller may may reduce reduce the the initial initial price price at at which which the the goods goods were were sold. sold. This This isis known known as as aa sales sales allowance. allowance.

Sales Sales Returns Returns and and Allowances Allowances Jan. 13 Sales Returns and Allowances

225 00

Accounts Receivable—Krier Co.

225 00

Credit Memo No. 32. 13 Merchandise Inventory Cost of Merchandise Sold Cost of merchandise returned—Credit Memo 32.

140 00 140 00

On On January January 13, 13, issued issued Credit Credit Memo Memo 32 32 to to Krier Krier Company Company for for merchandise merchandise returned returned to to NetSolutions. NetSolutions. Selling Selling price, price, $225; $225; cost cost to to NetSolutions, NetSolutions, $140. $140.

Purchase Purchase Transactions Transactions

Purchase Purchase Transactions Transactions Description

Date 2007

1 Jan. 3 Merchandise Inventory 2 3 4

Cash

Post. Ref.

Dr Cr.

2 510 00 2 510 00

Purchased inventory from Bowen Co.

5

On On January January 13, 13, Purchased Purchased merchandise merchandise for for cash cash from from Alden Alden Company, Company, $2,510. $2,510.

Purchase Purchase Discounts Discounts What’s What’s the the last last day day the the invoice invoice can can be be paid? paid? Alpha Alpha Technologies Technologies issues issues an an invoice invoice for for $3,000 $3,000 to to NetSolutions NetSolutions dated dated March March 12, 12, with with terms terms 2/10, 2/10, n/30. n/30.

Purchase Purchase Discounts Discounts The The full full amount amount isis Let’s do due on 11. Let’s do aa simple simple due on April April 11. calculation. calculation.

Invoice period Days in March 31 Date of invoice 12 Remaining days April

30 19 11

Purchase Purchase Discounts Discounts We We can can borrow borrow at at an an annual annual interest interest rate rate of of 6%. 6%. Should Should we we borrow borrow the the to to pay pay the the invoice invoice within within the the discount discount period? period? $60 $60 discount discount (2% (2% xx $3,000)? $3,000)?

Purchase Purchase Discounts Discounts Let’s Let’s see… see… Interest Interest on on the the amount amount due due of of $3,000 $3,000 less less the the 22 percent… percent…

Discount $60.00 Interest for 20 days at the rate of 6% on $2,940 –9.80 Savings from borrowing $50.20

Purchase Purchase Discounts Discounts Looks Looks like like we we should should take take advantage advantage of of the the discount discount even even ifif we we have have to to borrow borrow the the money. money. Discount $60.00 Interest for 20 days at the rate of 6% on $2,940 –9.80 Savings from borrowing $50.20

Purchase Purchase Discounts Discounts JOURNAL Date

Description

2007

1 Mar. 12 Merchandise Inventory 2 3 4

PAGE 27 Post. Ref.

Dr Cr.

3 000 00

Accounts Payable—Alpha Technologies

5

On On March March 12, 12, NetSolutions NetSolutions purchased purchased merchandise merchandise on on account account from from Alpha Alpha Technologies, Technologies, $3,000. $3,000.

3 000 00

Purchase Purchase Discounts Discounts JOURNAL Description

Date 2007

1 Mar. 22 Accounts Payable—Alpha Technol. 2

Cash

3 4

Merchandise Inventory

PAGE 27 Post. Ref.

Dr Cr.

3 000 00 2 940 00 60 00

5

IfIf payment payment isis made made by by March March 22 22 NetSolutions NetSolutions records records the the discount discount as as aa reduction reduction in in cost. cost.

Purchase Purchase Discounts Discounts JOURNAL Description

Date 2007

1 Apr. 11 Accounts Payable—Alpha Technol. 2

Cash

PAGE 27 Post. Ref.

Dr Cr.

3 000 00 3 000 00

3 4 5

IfIf NetSolutions NetSolutions does does not not pay pay the the invoice invoice until until April April 11, 11, itit would would pay pay the the full full amount. amount.

Purchases Purchases Returns Returns and and Allowances Allowances A A purchases purchases return return involves involves actually actually returning returning merchandise merchandise that that isis damaged damaged or or does does not not meet meet the the specifications specifications of of the the order. order. When When the the defective defective or or incorrect incorrect merchandise merchandise isis kept kept by by the the buyer buyer and and the the vendor vendor makes makes aa price price adjustment, adjustment, this this isis aa purchases purchases allowance. allowance.

Purchases Purchases Returns Returns and and Allowances Allowances You You sent sent me me the the wrong wrong interface interface cards. cards. We’ll We’ll send send aa debit debit memorandum memorandum with with the the returned returned items. items. NetSolutions NetSolutions received received the the delivery delivery from from Maxim Maxim Systems Systems and and determined determined that that $900 $900 of of the the items items were were not not the the merchandise merchandise ordered. ordered. Debit Debit memorandum memorandum #18 #18 isis issued issued to to Maxim Maxim Systems. Systems.

Purchases Purchases Returns Returns and and Allowances Allowances Mar. 7 Accounts Payable—Maxim Systems Merchandise Inventory Debit Memo No. 18

900 00 900 00

Purchases Purchases Returns Returns and and Allowances Allowances On On May May 2, 2, NetSolutions NetSolutions purchased purchased $5,000 $5,000 of of merchandise merchandise from from Delta Delta Data Data Link, Link, subject subject to to terms terms 2/10, 2/10, n/30. n/30. May 2 Merchandise Inventory Accounts Payable—Delta Data Purchased merchandise.

5 000 00 5 000 00

Purchases Purchases Returns Returns and and Allowances Allowances On On May May 4, 4, NetSolutions NetSolutions returns returns $3,000 $3,000 of of the the merchandise. merchandise. May 4 Accounts Payable—Delta Data Links Merchandise Inventory Returned portion of merchandise purchased.

3 000 00 3 000 00

Purchases Purchases Returns Returns and and Allowances Allowances On On May May 12, 12, NetSolutions NetSolutions pays pays the the amount amount due. due. May 12 Accounts Payable—Delta Data Links Cash Merchandise Inventory Paid invoice.

2 000 00

($5,000 ($5,000 –– $3,000) $3,000) xx 2% 2%

1 960 00 40 00

Transportation Costs

FOB FOB Shipping Shipping Point Point Buyer pays freight costs and debits Merchandise Inventory

Fruit Express

Title Title passes passes to to buyer buyer as as shipment shipment leaves leaves shipping shipping point. point.

FOB FOB Shipping Shipping Point Point June 10 Merchandise Inventory Accounts Payable—Magna Data

900 00 900 00

Purchased merchandise, terms FOB shipping point. 10 Merchandise Inventory Cash Paid shipping cost .

50 00 50 00

On On June June 10, 10, NetSolutions NetSolutions buys buys merchandise merchandise from from Magna Magna Data Data on on account, account, $900, $900, terms terms FOB FOB shipping shipping point point and and pays pays the the transportation transportation cost cost of of $50. $50.

FOB FOB Destination Destination Seller pays freight costs and debits Transportation Out

Fruit Express

Title Title passes passes to to buyer buyer upon upon arrival arrival at at destination. destination.

FOB FOB Destination Destination June 15 Accounts Receivable—Kranz Co. Sales Sold merchandise, terms FOB destination. 15 Cost of Merchandise Sold Merchandise Inventory

700 00 700 00

480 00 480 00

Cost of sale of Kranz Co .

On On June June 15, 15, NetSolutions NetSolutions sells sells merchandise merchandise to to Kranz Kranz Company Company on on account, account, $700, $700, terms terms FOB FOBdestination. destination. The The cost cost of of the the merchandise merchandise sold sold isis $480. $480. NetSolutions NetSolutions pays pays the the transportation transportation cost cost of of $40. $40.

FOB FOB Destination Destination June 15 Transportation Out Cash

40 00 40 00

Paid shipping cost on merchandise sold.

On On June June 15, 15, NetSolutions NetSolutions sells sells merchandise merchandise to to Kranz Kranz Company Company on on account, account, $700, $700, terms terms FOB FOBdestination. destination. The The cost cost of of the the merchandise merchandise sold sold isis $480. $480. NetSolutions NetSolutions pays pays the the transportation transportation cost cost of of $40. $40.

Sales Sales Taxes Taxes Aug. 12 Accounts Receivable—Lemon Co.

106 00

Sales Sales Taxes Payable Invoice No. 339

On On August August 12, 12, merchandise merchandise isis sold sold on on account account to to Lemon Lemon Company, Company, $100. $100. The The state state has has aa 6% 6% sales sales tax. tax.

100 00 6 00

Sales Sales Taxes Taxes Sept.15 Sales Tax Payable Cash Payment for sales taxes collected during August.

2 900 00 2 900 00

On On September September 15, 15, the the seller seller sends sends in in aa payment payment of of $2,900 $2,900 to to the the taxing taxing unit unit for for the the August August taxes taxes collected. collected.

Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller)

Accounts Receivable—Burton Co. Sales

7,500

Cost of Merchandise Sold Merchandise Inventory

4,500

7,500 4,500

Burton Company (Buyer)

Merchandise Inventory. Accounts Payable—Scully Co.

7,500

7,500

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.

Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller)

No entry.

Burton Company (Buyer)

Merchandise Inventory Cash

150

150

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

Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller)

Accounts Receivable—Burton Co. Sales

5,000

Cost of Merchandise Sold Merchandise Inventory

3,500

5,000 3,500

Burton Company (Buyer)

Merchandise Inventory. Accounts Payable—Scully Co.

5,000

5,000

July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB shipping point, n/30. The cost of the merchandise sold was $3,500.

Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller)

Transportation Out Cash

250

250

Burton Company (Buyer)

No entry. July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.

Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller)

Sales Returns and Allowances Accounts Receivable—Burton Co. Merchandise Inventory Cost of Merchandise Sold

1,000 700

1,000 700

Burton Company (Buyer)

Accounts Payable—Scully Co. Merchandise Inventory

1,000

1,000

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.

Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller)

Cash Accounts Receivable—Burton Co.

4,000

4,000

Burton Company (Buyer)

Accounts Payable—Scully Co. Cash

4,000

4,000

July 15. Scully Company received payment from Burton Company for purchase of July 5.

Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller)

Accounts Receivable—Burton Co. Sales

12,000

Accounts Receivable—Burton Co. Cash

500

12,000 500

Burton Company (Buyer)

Merchandise Inventory Accounts Payable—Scully Co.

12,500

12,500

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.

Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Continued (Seller)

Cost of Merchandise Sold Merchandise Inventory

7,200

7,200

Burton Company (Buyer)

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.

Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller)

Cash Sales Discounts Accounts Receivable—Burton Co.

12,260 240

12,500

Burton Company (Buyer)

Accounts Payable—Scully Co. Merchandise Inventory Cash

12,500

240 12,260

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

NetSolutions Chart of Accounts Balance Sheet Accounts 110 112 115 116 117 120 123 124 125 126

100 Assets Cash Accounts Receivable Merchandise Inventory Office Supplies Prepaid Insurance Land Store Equipment Accumulated Depreciation— Store Equipment Office Equipment Accumulated Depreciation— Office Equipment

210 211 212 215

200 Liabilities Accounts Payable Salaries Payable Unearned Rent Notes Payable

300 Owner’s Equity 310 Chris Clark, Capital 311 Chris Clark, Drawing 312 Income Summary

NetSolutions Chart of Accounts Income Statement Accounts 400 Revenues 410 Sales 411 Sales Returns and Allowances 412 Sales Discounts 600 Other Income 610 Rent Revenue 700 Other Expense 710 Interest Expense

500 Costs and Expenses 510 Cost of Merchandise Sold 520 Sales Salaries Expense 521 Advertising Expense 522 Depreciation Expense— Store Equipment 523 Transportation Out 529 Miscellaneous Selling Expense 530 Office Salaries Expense 531 Rent Expense 532 Depreciation Expense— Office Equipment 533 Insurance Expense 534 Office Supplies Expense 539 Miscellaneous Admin. Expense

Merchandise Merchandise Inventory Inventory Shrinkage Shrinkage NetSolutions NetSolutions inventory inventory records records indicate indicate that that $63,950 $63,950 of of merchandise merchandise should should be be available available for for sale sale on on December December 31, 31, 2007. 2007. The The physical physical count count reveals reveals that that only only $62,150 $62,150 isis actually actually available. available.

Merchandise Merchandise Inventory Inventory Shrinkage Shrinkage Adjusting Entry Dec. 31 Cost of Merchandise Sold

1 800 00

Merchandise Inventory

Inventory records $63,950 Inventory count 62,150 Inventory shortage $ 1,800

1 800 00

Profitability Measures -- Effective Use of Assets Ratio Ratio of of Net Net Sales Sales to to Assets Assets Net sales Total assets: Beginning of year End of year Average Ratio of net sales to assets

Sears Penney $41,366,000 $31,846,000

$50,409,000 $19,742,000 $44,317,000 $20,908,000 $47,363,000 $20,325,000 .87 to 1

1.57 to 1

Ratio Ratio Use: Use: To To assess assess the the effectiveness effectiveness in in the the use useof of assets assets to to generate generate sales. sales.

Chapter 6 The The End End