Accounting for Merchandising Businesses

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5
Accounting for Merchandising Businesses
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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.

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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.

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5-1
Objective 1
Distinguish between the activities and financial
statements of service and merchandising
businesses.
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5-1
Service Business
Fees earned XXX Operating expenses XXX Net
income XXX
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5-1
Merchandising Business
Sales XXX Cost of Merchandise Sold XXX Gross
Profit XXX Operating Expenses XXX Net
Income XXX
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5-1
When merchandise is sold, the revenue is reported
as sales, and its cost is recognized as an
expense called cost of merchandise sold.
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5-1
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.
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5-1
Merchandise on hand (not sold) at the end of an
accounting period is called merchandise inventory.
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1-2
5-1
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 sellers 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 Services 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?
The gross profit is 490,000 (250,000 975,000
735,000).
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For Practice PE 5-1A, PE 5-1B
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5-1
11
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5-2
Objective 2
Describe and illustrate the financial statements
of a merchandising business.
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5-2
Multiple-Step Income Statement
The multiple-step income statement contains
several sections, subsections, and subtotals.
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5-2
The Sales account provides the total amount
charged to customers for merchandise sold,
including cash sales and sales on account.
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5-2
Sales returns and allowances are granted by the
seller to customers for damaged or defective
merchandise.
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5-2
Sales discounts are granted by the seller to
customers for early payment of amounts owed.
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5-2
Net sales is determined by subtracting sales
returns and allowances and sales discounts from
sales.
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5-2
Multiple-Step Income Statement
NetSolutionsIncome Statement For the Year Ended
December 31, 2009
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
18
(Continued)
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Operating expenses Selling expenses Sales
salaries expense 53,430 Advertising
expense 10,860 Depr. Expensestore
equipment 3,100 Delivery Expense 2,800 Miscell
aneous selling expense 630 Total
selling expenses 70,820 Administrative
expenses Office salaries expense 21,020 Rent
expense 8,100 Depr. expenseoffice
equipment 2,490 Insurance expense 1,910 Office
supplies expense 610 Misc. administrative
expense 760 Total admin. expenses
34,890 Total operating expenses
105,710 Income from operations 77,240
(Continued)
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5-2
Multiple-Step Income Statement
20
(Concluded)
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5-2
Cost of merchandise sold was discussed earlier.
It is the cost of the merchandise sold to
customers.
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5-2
As we discussed in Slide 16, sellers may offer
customers sales discounts for early payment of
their bills. From the buyers perspective, such
discounts are referred to as purchase discounts.
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5-2
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).
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5-2
Cost of Merchandise Sold
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5-2
Single-Step Income Statement
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.
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5-2
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 31 142,000 Purchases 985,000 Purcha
ses Returns and Allowances 23,500 Purchases
Discounts 21,000 Transportation In 11,300
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5-2
27
For Practice PE 5-2A, PE 5-2B
28
NetSolutionsIncome Statement For the Year Ended
December 31, 2009

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5-2
Single-Step Income Statement

• Revenues
• Net sales 708,255
• Rent revenue 600
• Total revenues 708,855
• Expenses
• Cost of merchandise sold 525,305
• Selling expenses 70,820
• Administrative expenses 34,890
• Interest expense 2,440
• Total expenses 633,455
• Net income 75,400

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Retained Earnings Statement
for Merchandising Business
5-2
4
NetSolutionsRetained Earnings Statement
For the Year
Ended December 31, 2009
Retained earnings, 1/1/09 128,800 Net income
for year 75,400 Less dividends 18,000 Increase
in retained earnings 57,400 Retained
earnings, 12/31/09 186,200
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30
NetSolutionsBalance SheetDecember 31, 2009

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5-2
5
Report Form of Balance Sheet

• Assets
• Current assets
• Cash 52,950
• Accounts receivable 91,080
• Merchandise inventory 62,150
• Office supplies 480
• Prepaid insurance 2,650
• Total current assets 209,310

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(Continued)
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5-2
5
Report Form of Balance Sheet

• Property, plant, and equip.
• Land 20,000
• Store equipment 27,100
• Less accumulated
• depreciation 5,700 21,400
• Office equipment 15,570
• Less accumulated
• depreciation 4,720 10,850 Total
  property, plant,
• and equipment 52,250
• Total assets 261,560

31
(Continued)
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5-2
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) 20,000
• Total liabilities 50,360

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(Continued)
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5-2
5
Report Form of Balance Sheet
Stockholders Equity Capital
stock 25,000 Retained earnings 186,200 Total
stockholders equity 211,200 Total liabilities
and stockholders equity 261,560
(Concluded)
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5-3
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.
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5-3
Cash Sales
On January 3, NetSolutions sold 1,800 of
merchandise for cash.
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5-3
Cash Sales (continued)
Using a perpetual inventory, the 1,200 cost of
the inventory must be recorded.
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5-3
Credit Card Sales
At the end of the month, 48 was sent to pay the
service charge on credit card sales.
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5-3
Sales on Account Using a Perpetual Inventory
Jan. 12 Accounts ReceivableSims Co.
510 00
Sales 510 00
Invoice No. 7172
12 Cost of Merchandise Sold 280 00
Merchandise Inventory 280 00
Cost of merchandise sold on Invoice No. 7172.
On January 12, NetSolutions sold Sims Company
merchandise on account, 510. The cost of the
merchandise to the seller was 280.
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5-3
Sales Discounts
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.
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5-3
Credit Terms
If invoice is paid within 10 days of invoice date
1,470 paid (1,500 less a 2 discount)
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5-3
If invoice is NOT paid within 10 days of invoice
date
Full amount (1,500) is due within 30 days of
invoice date
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5-3
Sales Discounts
Jan. 22 Cash 1 470 00
Sales Discounts 30 00
Accounts ReceivableOmega Tech. 1 500 00
Collection of Invoice No. 106-8, less 2 discount.
On January 22, NetSolutions receives the amount
due, less the 2 percent discount.
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5-3
Jan. 13 Sales Returns and Allowances
225 00
Accounts ReceivableKrier Co. 225 00
Credit Memo No. 32
13 Merchandise Inventory 140 00
Cost of Goods Sold 140 00
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.
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1-2
5-3

• 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.

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5-3

• 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

45
For Practice PE 5-3A, PE 5-3B
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5-3
Purchase Transactions (Perpetual Inventory)
JOURNAL
PAGE 24
Post. Ref.
Description
Dr Cr.
Date
2009
Jan. 3 Merchandise Inventory 2 510 00
Cash 2 510 00
Purchased inventory from Bowen Co.
On January 3, NetSolutions purchased merchandise
for cash from Alden Company, 2,510.
46
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5-3
Jan. 4 Merchandise Inventory 9 250 00
Accounts PayableThomas Corp. 9 250 00
Purchased inventory on account.
On January 4, NetSolutions purchased merchandise
on account from Thomas Corporation, 9,250.
47
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5-3
Purchase Transactions (Perpetual Inventory)
Mar. 12 Merchandise Inventory 3 000 00
Accounts PayableAlpha Tech. 3 000 00
Purchased inventory on account.
Alpha Technologies issues an invoice for 3,000
to NetSolutions dated March 12, with terms 2/10,
n/30.
48
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5-3
Purchases Discount
NetSolutions borrows cash at an annual interest
rate of 6. Should the firm borrow cash to pay
the invoice within the discount period?
YES
49
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5-3
Mar. 22 Accounts PayableAlpha Technol. 3
000 00
Cash 2 940 00 Merchandise Inventory 60 00
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
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5-3
Apr. 11 Accounts PayableAlpha Technol. 3
000 00
Cash 3 000 00
Paid Alpha Technologies for March 12 purchase.
If NetSolutions does not pay the invoice until
April 11, it would pay the full amount.
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5-3
Purchases Return
A purchases return involves actually returning
merchandise that is damaged or does not meet the
specifications of the order.
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5-3
Purchases Allowance
When the defective or incorrect merchandise is
kept by the buyer and the vendor makes a price
adjustment, this is a purchases allowance.
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5-3
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.
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5-3
Mar. 7 Accounts PayableMaxim Systems 900
00
Merchandise Inventory 900 00
Debit Memo No. 18
On March 7, NetSolutions records the return of
the merchandise indicated in Debit Memorandum No.
18.
55
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5-3
On May 2, NetSolutions purchased 5,000 of
merchandise from Delta Data Link, subject to
terms 2/10, n/30.
May 2 Merchandise Inventory 5 000 00
Accounts PayableDelta Data 5 000 00
Purchased merchandise.
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5-3
On May 4, NetSolutions returns 3,000 of the
merchandise.
4 Accounts PayableDelta Data Link 3 000
00
Merchandise Inventory 3 000 00
Returned portion of the merchandise purchased.
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5-3
On May 12, NetSolutions pays the amount due,
1,960 2,000 (5,000 3,000) x 2).
12 Accounts PayableDelta Data Links 2 000
00
Cash 1 960 00 Merchandise Inventory
40 00
Paid invoice (5,000 3,000) x 2 40
2,000 40 1,960
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5-3
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?

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5-3

• 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.

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For Practice PE 5-4A, PE 5-4B
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5-3
Transportation Costs
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.
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5-3
June 10 Merchandise Inventory 900 00
Accounts PayableMagna Data 900 00
Purchased merchandise, terms FOB shipping point.
10 Merchandise Inventory 50 00
Cash 50 00
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.
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5-3
Transportation Costs
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.
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5-3
FOB Destination
On June 15, NetSolutions sells merchandise to
Kranz Company on account, 700, terms FOB
destination. The cost of the merchandise sold is
480.
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5-3
June 15 Accounts ReceivableKranz Co. 700
00
Sales 700 00
Sold merchandise, terms FOB destination.
15 Cost of Merchandise Sold 480 00
Merchandise Inventory 480 00
Record cost of merchandise sold to Kranz Company.
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5-3
June 15 Delivery Expense 40 00
Cash 40 00
Paid shipping cost on merchandise sold.
On June 15, NetSolutions pays the transportation
cost of 40.
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5-3
FOB Shipping Point
On June 20, NetSolutions sells merchandise to
Planter Company on account, 800, terms FOB
shipping point. The cost of the merchandise sold
is 360.
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5-3
June 20 Accounts ReceivablePlanter Co.
800 00
Sales 800 00
Sold merchandise, terms FOB shipping point.
20 Cost of Merchandise Sold 360 00
Merchandise Inventory 360 00
Record cost of merchandise sold to Planter
Company.
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5-3
June 20 Accounts ReceivablePlanter Co. 45 00
Cash 45 00
Prepaid shipping cost on merchandise sold.
NetSolutions pays the transportation cost of 45
and adds it to the invoice.
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5-3
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, 800 1/10,
  n/30

• 5,000 60 FOB destination, 2,500 2/10, n/30

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5-3

• 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.

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For Practice PE 5-5A, PE 5-5B
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5-3
Transportation Terms
18
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5-3
Sales Taxes
Aug. 12 Accounts ReceivableLemon Co. 106 00
Sales 100 00 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.
18
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5-3
Sept. 15 Sales Tax Payable 2 900 00
Cash 2 900 00
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.
18
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5-3
Trade Discounts
When wholesalers offer special discounts to
certain classes of buyers that order large
quantities, these discounts are called trade
discounts.
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Dual Nature of Merchandise Transactions
5-3
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.
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5-3
Scully Company (Seller)
Accounts ReceivableBurton Co. 7,500 Sales 7,500
Cost of Merchandise Sold 4,500 Merchandise
Inventory 4,500
Burton Company (Buyer)
Merchandise Inventory. 7,500 Accounts
PayableScully Co. 7,500
18
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5-3
July 2 Burton Company paid transportation
charges of 150 on July 1 purchase from Scully
Company.
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5-3
Scully Company (Seller)
No entry.
Burton Company (Buyer)
Merchandise Inventory 150 Cash 150
18
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5-3
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.
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5-3
Scully Company (Seller)
Accounts ReceivableBurton Co. 5,000 Sales 5,000
Cost of Merchandise Sold 3,500 Merchandise
Inventory 3,500
Burton Company (Buyer)
Merchandise Inventory. 5,000 Accounts
PayableScully Co. 5,000
18
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5-3
July 7. Scully Company paid transportation costs
of 250 for delivery of merchandise sold to
Burton Company on July 5.
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5-3
Scully Company (Seller)
Delivery Expense 250 Cash 250
Burton Company (Buyer)
No entry.
18
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5-3
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.
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5-3
Scully Company (Seller)
Sales Returns and Allowances 1,000 Accounts
ReceivableBurton Co. 1,000 Merchandise
Inventory 700 Cost of Merchandise Sold 700
Burton Company (Buyer)
Accounts PayableScully Co. 1,000 Merchandise
Inventory 1,000
18
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5-3
July 15. Scully Company received payment from
Burton Company for purchase of July 5.
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5-3
Scully Company (Seller)
Cash 4,000 Accounts ReceivableBurton Co. 4,000
Burton Company (Buyer)
Accounts PayableScully Co. 4,000 Cash 4,000
18
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88
5-3
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.
89
5-3
Scully Company (Seller)
Accounts ReceivableBurton Co. 12,000 Sales 12,0
00 Accounts ReceivableBurton Co. 500 Cash 500
Cost of Merchandise Sold 7,200 Merchandise
Inventory 7,200
Burton Company (Buyer)
Merchandise Inventory 12,500 Accounts
PayableScully Co. 12,500
18
89
90
5-3
July 28. Scully Company received payment from
Burton Company for purchase of July 18, less
discount (2 x 12,000).
91
5-3
Scully Company (Seller)
Cash 12,260 Sales Discounts 240 Accounts
ReceivableBurton Co. 12,500
Burton Company (Buyer)
Accounts PayableScully Co. 12,500 Merchandise
Inventory 240 Cash 12,260
18
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1-2
5-3
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.
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5-3
Sievert Company Journal Entries
Cash (11,500 900 212) 10,388 Sales
Discounts (11,500 900) x 2 212 Accounts
ReceivableBray Co. (11,500 900) 10,600
Bray Company Journal Entries
Accounts PayableSievert Co. (11,500
900) 10,600 Merchandise Inventory (11,500
900) x 2 212 Cash (11,500 900
212) 10,388
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For Practice PE 5-6A, PE 5-6B
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5-4
Objective 4
Describe the adjusting and closing process for a
merchandising business.
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5-4
Inventory Shrinkage
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.
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5-4
NetSolutions inventory records indicate that
63,950 of merchandise should be available for
sale on December 31, 2009. The physical count
reveals that only 62,150 is actually available.
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5-4
Adjusting Entry
Dec. 31 Cost of Merchandise Sold 1 800 00
Merchandise Inventory 1 800 00
Inventory shrinkage (63,950 62,150).
Inventory records 63,950 Inventory count
62,150 Inventory shortage 1,800
18
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5-4
Closing Entries

• Close the temporary accounts with credit balances
  to Income Summary.
• Close the temporary accounts with debit balances
  to Income Summary.
• Close Income Summary to Retained Earnings.
• Close Dividends to Retained Earnings.

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5-4
Step 1 Closing Entries
Close the temporary accounts with credit balances
to Income Summary.
Date Item PR Debit Credit
Closing Entries
2009
Dec. 31 Sales 410 720 185 00 Rent
Revenue 610 600 00 Income Summary 313 720 785
00
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5-4
Step 2 Closing Entries
Close the temporary accounts with debit balances
to Income Summary.
100
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5-4
Step 2 Closing Entries
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5-4
Step 3 Closing Entries
Close Income Summary (the balance represents a
75,400 profit for NetSolutions in 2009) to
Retained Earnings.
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5-4
Step 4 Closing Entries
Close Dividends to Retained Earnings.
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1-2
5-4
Pulmonary Companys perpetual inventory records
indicate that 382,800 of merchandise should be
on hand on March 31, 2008. 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.
Mar. 31 Cost of Merchandise Sold 11,550
Merchandise Inventory 11,550 Inve
ntory shrinkage (382,800 371,250)
104
For Practice PE 5-7A, PE 5-7B
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5-4
Financial Analysis
The ratio of net sales to assets measures how
effectively a business is using its assets to
generate sales.
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5-4
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 1 1.14 to 1
106
in millions
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5-4
Interpretation
Based on these ratios, Sears appears better than
J. C. Penney in utilizing its assets to generate
sales.