Accounting for Merchandising Business

1
Accounting for Merchandising Business

• ACG 2021 Chapter 5

2
Merchandising Business

• Revenue activities of a merchandising business
  involve the buying and selling of merchandise
• Comparison to service business

3
New Accounts on the Income Statement

• SALES revenues collected from the sale of
  merchandise
• COST OF MERCHANDISE SOLD the purchase price
  plus incidentals of merchandise available for
  resale
• GROSS PROFIT Sales Cost of merchandise sold

4
Income Statement
INCOME STATEMENT Gem City Music Income Statement
For the Year Ended December 31, 20 Revenue from
sales Sales
189,300 Less Sales returns and
allowances 1,700 Sales
discounts 500
2,200 Net sales

187,100 Cost of
merchandise sold XXXX 100,000 Gross
profit
87,100 Operating expenses
Selling expenses Sales salaries
expense 17,700 Administrative expenses
Rent expense 7,800 Office salaries
expense 22,550 Depreciation
expenseoffice equipment 2,800
33,150 Total operating expenses 50,850
Income from operations
36,250 Other expense Interest
expense 2,000 Net income
34,250
5
Computation of Costs

• Computation of Cost of Merchandise Sold
• Purchases
• Less merchandise inventory, December 31
• Cost of merchandise sold
• Computation of Cost of Merchandise Purchased
• Purchases
• Less purchases returns and allowances
• Less purchases discount
• Net purchases
• Add transportation in
• Cost of merchandise purchased

6
Balance Sheet Accounts

• Merchandise inventory merchandise on hand at
  the end of an accounting period.

7
Merchandising Terms

• Sales total amount charged to customers for
  merchandise sold
• Sales returns and allowances are granted by the
  seller to customers for damaged or defective
  merchandise
• Sales discount are granted by the seller to
  customers for early
• Net sales Sales returns - discount

8
Merchandising Terms

• Cost of goods sold
• Cost of merchandise sold to customers
• Purchases discounts
• Offered by the seller to buyer
• For early payment
• Purchases allowances and returns
• Buyer may receive a reduction in the intial price
  at which the merchandise is purchased.

9
Merchandising Terms

• Merchandise available for sale
• Beginning merchandise inventory net purchases
• Net purchases
• Purchases minus discounts returns and allowances

10
Accounting for Sales

• Under the perpetual inventory system, all sales
  require the reporting of the removal of inventory
  from the books at the same time.

11
Accounting for Sales

• CASH SALES
• Example 1 Sold merchandise for cash 5,000.
  Cost of merchandise sold 3,200

12
Credit sales

• Bank cards
• Master card
• Visa
• Monies directly deposited in business account
• Requires a debit to CASH
• Service charge must be later recorded as expense

13
Bank cards

• Example 9 Sold merchandise on VISA 10,000.
  Cost of merchandise sold is 4,000. Credit card
  expense is 3 of sales.

14
Bank cards

• Example 3 Sold merchandise on VISA 6,000.
  Cost of merchandise sold is 3,000. Credit card
  expense is 3 of sales.

15
Example 10

• Cash 6,000
• Sales 6,000
• Cost of merchandise 3,000
• Merchandise inventory 3,000
• Credit card expense 180
• Cash
  180

16
Credit sales

• Two types
• American express
• On account
• Results in debit to ACCOUNTS RECEIVABLE

17
Sales of Account

• Example 4 Sold merchandise on account 6,000.
  Cost of merchandise sold is 3,000.

18
Recap

• Under the perpetual inventory system, all sales
  transactions consist of at least two entries.
• The first entry records the sale at the selling
  price with a debit to how it will be paid and
  credit to sales.
• The second entry records the merchandise leaving
  the business with a debit to cost of merchandise
  sold and credit to merchandise inventory for the
  cost of the merchandise.

19
Sales discounts

• A reduction in the price of the good for early
  payment.
• This account is a contra SALES
• Upon payment of the account receivable, if the
  payment is within the discount period, we record
  the discount.
• Credit terms terms of when payments for
  merchandise are to be made.
• Net 30 days full amount due in 30 days
• 2/10 2 discount if paid within 10 days

20
Example on Sales Discount

• Example 5 Sold merchandise on account 5,000,
  terms 2/10, n/30. Cost of merchandise sold is
  4,000.
• Sales 5,000
• Discount 2
• Discount 100
• Sales 5,000
• Less discount 100
• Net amount 4,900

21
Sales discount
22
Sales Returns and Allowances

• Merchandise sold may be returned to the seller
• Merchandise sold may be reduced in price due to
  defects
• This account is CONTRA sales
• Increases with a debit

23
Sales returns allowances
Example 6 Sold merchandise on account 7,000,
terms 1/15, n/30. Cost of merchandise sold is
3,800
24
Sales returns allowances

• Return merchandise with sales price of 2,000 and
  cost of 1,000.

25
Recap of Sales Example

• Example 7 ABC Merchandising had the following
  transactions
• Sold merchandise and received payment by VISA at
  6,000, cost of merchandise sold is 4,000.
• Sold merchandise on account for 7,500 with
  credit terms 1/10, n/30. Cost of the merchandise
  is 4,500.
• Sold merchandise on account for 4,000, cost of
  merchandise is 2,500.
• Received a return of the merchandise in (c ) of
  sales price of 2,000 and cost of 1,750.
• Received payment within the discount period for
  merchandise in (b).
• Received payment for merchandise in (c ).

26
Accounting for Purchases

• Assume a perpetual inventory system
• Each purchase and sale of merchandise is recorded
  as it occurs
• Example 1 purchase merchandise for resale
  4,000 on account

27
Purchases Discount

• Credit terms
• Purchases discounts are discounts taken by the
  buyer for early payment of an invoice.
• These discounts reduce the cost of the
  merchandise purchased.
• Should be taken when offered if not it is a LOSS
  to the business.

28
Purchase discount

• Example 9 Purchase merchandise for resale
  4,000, terms 2/10, n/30 on account.
• Invoice
  4,000
• Discount (2 x 4,000) 80
• Net of discount 3,920

29
Purchase discount
30
Purchase Discount

• Reduction of the cost of the merchandise is
  reflected in the merchandise inventory account.
• Example 10 Purchase merchandise for resale
  6,000, terms 1/15, n/30 on account.

31
Purchases Returns and Allowances

• Purchase returns merchandise is returned to the
  seller
• Purchase allowances price adjustment
• Debit memorandum notification of the return or
  allowance by seller

32
Purchases Returns and Allowances

• Example 11 Returned merchandise on account
  2,500.

33
Example

• Example 12 Purchased merchandise of 8,000 on
  terms 2/10,n/30. Ennis pays the original invoice
  less a return of 2,500 within the discount
  period. Record the above entries

34
Recap of Purchases Example

• Example 7 ABC Merchandising had the following
  transactions
• Purchased merchandise and received payment by
  VISA at 6,000.
• Purchased merchandise on account for 7,500 with
  credit terms 1/10, n/30.
• Purchased merchandise on account for 4,000.
• Return of the merchandise in (c ) of sales price
  of 2,000.
• Paid within the discount period for merchandise
  in (b).
• Paid for merchandise in (c ).

35
Transportation Costs

• The terms of a sale should indicate when the
  ownership of the merchandise passes to the buyer.
• This point determines which party, the buyer or
  the seller must pay the transportation costs.

36
Transportation Costs

• FOB shipping point
• The ownership of the merchandise passes to the
  buyer when the seller delivers the merchandise to
  the transportation company.
• Buyer pays the transportation costs
• Example 13 Purchased merchandise for 4,000
  with shipping costs of 50 FOB shipping point.

37
FOB shipping point
38
Transportation Costs

• FOB destination point
• The ownership of the merchandise passes to the
  buyer when the seller delivers the merchandise to
  the buyer.
• Seller pays the transportation costs
• Example 14 Sold merchandise for 4,000 with
  shipping costs of 50 FOB destination. Cost of
  merchandise sold is 2,000.

39
FOB destination point
40
Transportation costs

• FREIGHT TERMS
• FOB FOB
• Shipping Point Destination
• Ownership (title)
• passes to buyer
• when merchandise Delivered to Received
• is freight carrier by buyer
• Transportation
• costs are paid
• by Buyer Seller
• Risk of loss during
• transportation
• belongs to Buyer Seller

41
Sales Taxes

• Liability to the business
• Create a SALES TAX PAYABLE account
• Example 15 Sold merchandise on account 7,000,
  plus 5 sales tax. Cost of merchandise sold is
  3,800.

42
Sales Taxes
43
Recap of Transactions
44
Adjusting Entries

• Inventory Shrinkage
• Difference between physical count and books
• Example 16 Suppose that physical inventory
  shows balance of 20,000 and books show balance
  of 23,000. Record the shrinkage.

45
Closing Entries

• Accounts that must be closed
• Sales
• Rent revenue
• Sales returns and allowances
• Sales discounts
• Cost of merchandise sold
• All expenses and revenues
• Dividends