Topic 8 - Accounting For Merchandising Operation

Chapter

8

Accounting for Merchandising Operations

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100 Shares

Merchandising? $1 par value

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Learning Learning Objectives Objectives  Describe merchandising activities and identify income components for a merchandising company.  Identify and explain the inventory asset of a merchandising company.  Describe both perpetual and periodic inventory systems.  Analyze and record transactions for merchandise purchases using a

.

perpetual system  Analyze and record transactions for merchandise sales using a perpetual system.

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 Analyze and interpret cost flows and operating activities of a merchandising company.  Prepare adjustments and close accounts for a merchandising company.  Define and prepare multiplestep and single-step income statements.  Record and compare merchandising transactions using both periodic and perpetual inventory systems.

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Merchandising Merchandising Activities Activities Service Service organizations organizations sell sell time time to to earn earn revenue. revenue.

Examples: Examples: accounting accounting firms, firms, law law firms, firms, and and plumbing plumbing services services Revenues

Minus

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Expenses

Equals

Net income

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Merchandising Merchandising Activities Activities Merchandising Companies Manufacturer

Wholesaler

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Retailer

Customer

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Reporting Reporting Income Income for for aa Merchandiser Merchandiser Merchandising companies sell products to earn revenue.

Examples: sporting goods, clothing, and auto parts stores Net Sales

Minus

Cost of Equals Goods Sold

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Gross Profit

Minus

Expenses

Equals

Net Income

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Operating Operating Cycle Cycle for for aa Merchandiser Merchandiser Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. Cash Sale Purchases

Credit Sale Cash collection

Purchases

Merchandise inventory

Account receivable

Cash sales

Merchandise inventory Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Credit sales © The McGraw-Hill Companies, Inc., 2007

Inventory Inventory Systems Systems Beginning inventory

Net cost of purchases

+ Merchandise = available for sale

Ending Inventory Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

+

Cost of Goods Sold © The McGraw-Hill Companies, Inc., 2007

Inventory Inventory Systems Systems Perpetual Inventory System

Detailed records of the cost of each item are maintained, and the cost of each item sold is determined from records when the sale occurs.

Periodic Inventory System

Cost of goods sold is determined only at the end of an accounting period.

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 Main Source, Inc. 614 Tech Avenue Nashville, TN 37651 S o l d



P.O. 167 Item AC417

 Name: Barbee, Inc.

T o

Sales: 25



Invoice

Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501

 Terms 2/10,n/30 Description 250 Backup System

We appreciate your business!

Date 5/4/07

Number 358-BI

 Seller  Invoice date  Purchaser  Order number  Credit terms  Freight terms  Goods  Invoice amount



Ship: FedEx Prepaid Quanity Price 500 $ 54.00

Amount $ 27,000

Sub Total Ship Chg. Tax Total $



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27,000 27,000

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Trade Trade Discounts Discounts Used by manufacturers and wholesalers to offer better prices for greater quantities purchased.

Example Example

Matrix, Matrix, Inc. Inc. offers offers aa 30% 30% trade trade discount discount on on orders orders of of 1,000 1,000 units units or or more more of of their their popular popular product product Racer. Racer. Each Each Racer Racer has has aa list list price price of of $5.25. $5.25.

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Purchase Purchase Discounts 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 Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Purchase Purchase Discounts Discounts

2/10,n/30 Discount Discount Percent Percent

Number Number of of Days Days Discount Discount Is Is Available Available

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Otherwise, Otherwise, Net Net (or (or All) All) Is Is Due Due

Credit Credit Period Period

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

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Transportation Transportation Costs Costs Seller

FOB shipping point (buyer pays)

Buyer

Merchandise

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FOB destination (seller pays)

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Transportation Transportation Costs Costs  If buyer (purchaser) paid the transportation cost (FOB Shipping point): Periodic Inventory System Dr Transportation In/Freight-In Cr Cash Perpetual Inventory System Dr Merchandise Inventory Cr Cash *Freight-In is a part of cost of good purchased

 If the seller paid the transportation cost (FOB Destination): Periodic and Perpetual Dr Delivery Expense/Freight-Out Cr Cash *Delivery expense/freight out is a part of selling expense Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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RECORDING RECORDING MERCHANDISE MERCHANDISE TRANSACTIONS: TRANSACTIONS: PURCHASES PURCHASES  On 2 Nov, Z-Mart purchase the merchandise for RM1,200 on credit with terms of 2/10, n/30, FOB Shipping point. Periodic Dr Purchase 1,200 Cr Accounts Payable 1,200 Perpetual Dr Merchandise Inventory 1,200 Cr Accounts Payable 1,200 Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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RECORDING RECORDING MERCHANDISE MERCHANDISE TRANSACTIONS: TRANSACTIONS: PURCHASES PURCHASES RETURNS RETURNS AND AND ALLOWANCES ALLOWANCES On 5 Nov Z-Mart returned RM300 merchandise purchased on 2 Nov because of defects. Periodic Dr Accounts Payable 300 Cr Purchase Returns & Allowance 300 Perpetual Dr Accounts Payable 300 Cr Merchandise Inventory 300 Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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RECORDING RECORDING MERCHANDISE MERCHANDISE TRANSACTIONS: TRANSACTIONS: PURCHASES PURCHASES DISCOUNTS DISCOUNTS  On 10 Nov Z-Mart pays the supplier for the purchase on 2 Nov. Periodic Dr Accounts Payable 900 Cr Purchase Discounts 18 Cr Cash (900-18) 882 (1,200-300=900 * 2/100 =18) * 1,200-300 (return)=900

@ Perpetual Dr Accounts Payable 900 Cr Merchandise Inventory Cr Cash (1,200-24)

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18 882

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RECORDING RECORDING MERCHANDISE MERCHANDISE TRANSACTION: TRANSACTION: TRANSPORTATION TRANSPORTATION IN IN

Z-Mart paid RM75 freight charge to transport merchandise to its store. Periodic Dr Transportation-In / Freight-In 75 Cr Cash 75 Perpetual Dr Merchandise Inventory 75 Cr Cash 75

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RECORDING RECORDING MERCHANDISE MERCHANDISE TRANSACTION: TRANSACTION: SALE SALE OF OF MERCHANDISE MERCHANDISE  On Nov 16, Z-Mart sold merchandise on credit to ANN Enterprise, terms 1/12, n/30, FOB destination, RM24,000. The merchandise cost RM12,000. Periodic Dr Accounts Receivable 24,000 Cr Sales 24,000 Perpetual Dr Accounts Receivable 24,000 Cr Sales 24,000 Dr Cost of Sales 12,000 Cr Merchandise Inventory 12,000 Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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RECORDING RECORDING MERCHANDISE MERCHANDISE TRANSACTION: TRANSACTION: RETURN RETURN OF OF MERCHANDISE MERCHANDISE SOLD SOLD On Nov 18, Z-Mart accepted for full credit the return of merchandise sold to ANN Enterprise on Nov 16, the cost of which was RM500. Periodic Dr Sales Return & Allowance 1,000 Cr Accounts Receivable 1,000 Perpetual Dr Sales Return & Allowance 1,000 Cr Accounts Receivable 1,000 Dr Merchandise Inventory 500 Cr Cost of Goods Sold 500

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RECORDING RECORDING MERCHANDISE MERCHANDISE TRANSACTION: TRANSACTION: SALES SALES DISCOUNTS DISCOUNTS On Nov 26, Z-Marts received payment in full of the account from ANN Enterprise Periodic Dr Cash 22,770 (23,000-230) Sales Discounts 230 Cr Accounts Receivable 23,000 (24,000-1,000) 24000-1000(return & allowance) = 23,000 * 1/100 = 230

Perpetual Dr Cash 22,770 Sales Discounts 230 Cr Accounts Receivable

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23,000

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Perpetual Inventory System: Let’s complete the accounting cycle by preparing the closing entries for Barton.

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Closing Closing Entries: Entries: Perpetual Perpetual Inventory Inventory System System Dec. 31 Sales . . . . . . . . . . . . . . . . . . . . Income summary . . . . . .

323,800 323,800

To close credit balance in temporary accounts

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Closing Closing Entries: Entries: Perpetual Perpetual Inventory Inventory System System Dec. 31

Income Summary 310,900 Sales Discounts 4,300 Sales Return & Allowance 2,000 Cost of Sales 233,200 Adm. Salaries Expense 18,200 Sales Salaries Expense 29,600 Insurance Expense 1,200 Rent Expense 8,100 Supplies Expense 1,000 Advertising Expense 13,300 To close debit balances in temporary accounts

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Closing Closing Entries: Entries: Perpetual Perpetual Inventory Inventory System System

Dec. 31 Income Summary Barton, Capital

12,900 12,900

To close Income Summary account

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Closing Closing Entries: Entries: Perpetual Perpetual Inventory Inventory System System .. Dec. 31 Barton, Capital Barton, Withdrawals

4,000 4,000

To close the withdrawals account

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Multiple-Step Multiple-Step Income Income Statement Statement (perpetual) (perpetual)

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Single-Step Single-Step Income Income Statement Statement (Perpetual) (Perpetual)

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Classified Classified Balance Balance Sheet Sheet (periodic (periodic & & perpetual perpetual inv. inv. system) system) MERCHANDISING COMPANY BALANCE SHEET 31 DECEMBER 2007 ASSETS Non-current Assets Equipment Current Assets Cash Merchandise Inventory Total Assets EQUITY AND LIABILITIES Equity

$16,000 $ 10,200 1,200 $

11,400 27,400

$

22,200

Long-term Liabilities Notes payable Current Liabilities Accounts payable Total Equity and Liabilities

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$4,000 $

1,200

$ 27,400

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ODIC INVENTORY SYSTEM –TRIAL BALANCE HighPoint Electronic Trial Balance As At 31 December 2007 DEBIT CREDIT Cash Accounts receivable

9,500 16,100

Merchandise Inventory

36,000

Prepaid Insurance Store Equipment

3,800 80,000

Accumulated depreciation – Store Equipment Accounts Payable

16,000

RA Capital

83,000

RA, Drawing

20,400

15,000

Sales Sales Return & Allowance

480,00 0 12,000

Sales Discounts 8,000 Purchases 325,00 Other information: Merchandise Inventory on hand at 0 December RM40,000 Purchase 31, Return & 10,400 © The McGraw-Hill Companies, Inc., 2007 Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana Allowances

CLOSING CLOSING ENTRIES: ENTRIES: PERIODIC PERIODIC INV. INV. SYSTEM SYSTEM Dr

Merchandise Inventory (ending inventory) 40,000 Sales 480,000 Purchase Returns & Allowances 10,400 Purchase Discounts 6,800 Cr Income Summary ( To record ending inventory and close accounts with credit balances) Dr

Income Summary 492,200 Cr Merchandise inventory (beginning inventory) Sales Returns and Allowances Sales Discounts Purchases Freight-in Store Salaries Expense Rent Expense Freight-out/delivery expense Advertising Expense Utilities Expense

537,200

36,000 12,000 8,000 325,000 12,200 40,000 19,000 7,000 16,000 17,000

(To close beginning inventory and other income statement accounts with debit balances)

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CLOSING CLOSING ENTRIES: ENTRIES: PERIODIC PERIODIC INV. INV. SYSTEM SYSTEM

 Dr Income Summary 45,000  Cr RA Capital 45,000  (To transfer net income to capital (537,200492,200)  Dr RA, Capital 15,000  Cr RA Drawing 15,000  (To close drawings to capital)

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MULTIPLE-STEP INCOME STATEMENT – PERIODIC INVENTORY SYSTEM

HighPoint Electronic Income Statement For the Year Ended December 31, 2007

Sales Revenue: Sales Less: Sales returns & allowances Sales discounts Net sales Cost of Goods Sold: Inventory, Dec 1 Purchase Less:Purchase Returns & allowances 10,400 Purchase discounts 6,800 Net Purchase Add: Freight-in Cost of goods purchased Cost of goods available for sale Inventory, December 31 Cost of goods sold Gross Profit Operating expenses: Advertising expense Freight-out/Delivery Expense Rent expense Utility expense Store salaries expense Net Income

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480,000 12,000 8,000

(20,000) 460,000

36,000 325,000 (17,200) 307,800 12,200 320,000 356,000 (40,000) (316,000) 144,000

16,000 7,000 19,000 17,000 40,000

(99,000) 45,000

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Single-Step Single-Stepincome incomeStatementStatement-Periodic PeriodicInventory InventorySystem System HighPoint Electronic Income Statement For the Year Ended December 31, 2007 Revenue: Net sales Expenses: Cost of good sold Advertising expense Freight-in/delivery expense Rent expense Utilities expense Store Salaries expense

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460,000 316,000 16,000 7,000 19,000 17,000 40,000

(415,000) 45,000

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End of Chapter 8

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