Section 1Accounting for a Merchandising Business

1
Chapter 14

Section 1 Accounting for a Merchandising Business

• What Youll Learn
• The purpose of a merchandising business.
• The difference between a retailer and a
  wholesaler.
• Uses of the Merchandise Inventory account, and
  its rules of debit and credit.
• Uses of the Sales account, and its rules of debit
  and credit.

2
Section 1 Accounting for a Merchandising Business
(cont'd.)
Chapter 14

Why Its Important As consumers, we buy goods
from merchandising businesses daily. You need to
understand the nature of these transactions to
maintain accounting records for a merchandising
business.

• Key Terms
• retailer
• wholesaler
• merchandise

• inventory
• sales

3
Section 1 Accounting for a Merchandising Business
(cont'd.)
Chapter 14

The Operating Cycle of a Merchandising Business



4
Section 1 Accounting for a Merchandising Business
(cont'd.)
Chapter 14

Merchandise Inventory Account
Goods bought for resale are called merchandise.
The items of merchandise the business has in
stock are referred to as inventory. The
inventory is represented in the general ledger by
the asset account, Merchandise Inventory.



5
Section 1 Accounting for a Merchandising Business
(cont'd.)
Chapter 14

Sales Account
When a retail merchandising business sells goods
to a customer, the amount of the merchandise sold
is recorded in the Sales account.


Sales

6
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

• The Sales Slip
• A sales slip lists the details of a sale

• The date of the sale.
• The name of the customer.
• The description, quantity, and price of the
  item(s) sold.

7
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

Sales Tax

• Most states and some cities tax the retail sale
  of goods and services. This tax is called a
  sales tax.
• The sales tax rate is usually stated as a
  percentage of the sale, such as 6.
• The business keeps a record of the sales tax owed
  to the state in a liability account called Sales
  Tax Payable.

Sales Tax Payable
Credit Increase Side Normal Balance
Debit Decrease Side
8
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

Credit Terms

• Credit terms state the time allowed for payment.
• The credit terms for the sale to Casey Klein are
  n/30.
• The n stands for the net, or total, amount of
  the sale.
• The 30 stands for the number of days the
  customer has to pay for the merchandise.

9
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

The Accounts Receivable Ledger
The accounts receivable subsidiary ledger
contains an account for each charge customer.



10
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

The Accounts Receivable Subsidiary Ledger Form

• The subsidiary ledger account form has lines at
  the top for the name and address of the customer.

11
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

Recording Sales on Account

Business Transaction
On December 1, On Your Mark sold merchandise on
account to Casey Klein for 200 plus sales tax of
12, Sales Slip 50.

ANALYSIS Identify 1. The accounts affected are
Accounts Receivable (controlling), Accounts
ReceivableCasey Klein (subsidiary), Sales, and
Sales Tax Payable.

12
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

Recording Sales on Account (cont'd.)
Business Transaction (cont'd.)

On December 1, On Your Mark sold merchandise on
account to Casey Klein for 200 plus sales tax of
12, Sales Slip 50.

ANALYSIS Classify 2. Accounts Receivable
(controlling) and Accounts ReceivableCasey Klein
(subsidiary) are asset accounts. Sales is a
revenue account. Sales Tax Payable is a liability
account.

13
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

Recording Sales on Account (cont'd.)
Business Transaction (cont'd.)

On December 1, On Your Mark sold merchandise on
account to Casey Klein for 200 plus sales tax of
12, Sales Slip 50.
ANALYSIS / 3. Accounts Receivable
(controlling) and Accounts ReceivableCasey Klein
(subsidiary) are increased by the total amount,
212 (dollar amount of merchandise sold plus
sales tax). Sales is increased by the dollar
amount of merchandise sold, 200. Sales Tax
Payable is increased by the amount of sales tax
charged, 12.


14
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

Recording Sales on Account (cont'd.)
Business Transaction (cont'd.)

On December 1, On Your Mark sold merchandise on
account to Casey Klein for 200 plus sales tax of
12, Sales Slip 50.

DEBIT-CREDIT RULE 4. Increases to asset accounts
are recorded as debits. Debit Accounts Receivable
(controlling) for 212. Also debit Accounts
ReceivableCasey Klein (subsidiary) for 212.
5. Increases to revenue and liability accounts
are recorded as credits. Credit Sales for 200
and Sales Tax Payable for 12.

15
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

Recording Sales on Account (cont'd.)
Business Transaction (cont'd.)
On December 1, On Your Mark sold merchandise on
account to Casey Klein for 200 plus sales tax of
12, Sales Slip 50.

T ACCOUNTS 6.
Accounts Receivable Sales

Debit 212
Credit 200
Credit
Debit

Accounts Receivable Subsidiary Ledger Sales
Tax Casey Klein Payable
Credit
Debit
Debit 212
Credit 12
16
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

Recording Sales on Account (cont'd.)
Business Transaction (cont'd.)

On December 1, On Your Mark sold merchandise on
account to Casey Klein for 200 plus sales tax of
12, Sales Slip 50.

JOURNAL ENTRY 7.

17
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

Sales Returns and Allowances

• Any merchandise returned for credit or a cash
  refund is called a sales return.
• A price reduction granted for damaged goods kept
  by the customer is called a sales allowance.

18
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

Sales Returns and Allowances (cont'd.)

• A credit memorandum lists the details of a sales
  return or allowance.

19
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

The Sales Returns and Allowances Account

• decreases the total revenue earned by a business
• summarizes the total returns and allowances for
  damaged, defective, or other otherwise
  unsatisfactory merchandise
• is a contra account.

Sales Returns and Allowances
Credit Decrease Side
Debit Increase Side Normal Balance
20
Section 2 Analyzing Sales Transactions (cont'd.)
Chapter 14

The Sales Returns and Allowances Account
Business Transaction

On December 4, On Your Mark issued Credit
Memorandum 124 to Gabriel Ramos for the return
of merchandise purchased on account, 150 plus
9 sales tax.

JOURNAL ENTRY 7.

21
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Kinds of Cash Receipts

• payments from charge customers
• cash sales
• bankcard sales

22
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Cash Sales

• The business receives full payment for
  merchandise sold at the time of the sale.
• Most retailers use a cash register to record cash
  sales.

23
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Cash from Charge Customers

• Businesses record cash received on account from
  charge customers by preparing receipts.
• Receipts are pre-numbered and may be prepared in
  multiple copies.
• The receipt is a source document for the journal
  entry.

24
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Bankcard Sales

• A bankcard is issued by a bank and honored by
  many businesses.
• Bankcard sales are recorded as though they are
  cash sales.

25
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Cash Discounts

• A cash discount, or sales discount, is the amount
  a customer can deduct from the amount owed for
  purchased merchandise if payment is made within a
  certain time.
• Terms 2/10, n/30 means that the customer can
  deduct 2 of the cost of merchandise if payment
  is made within 10 days of the sale date.
  Otherwise, the full (net) amount is due within 30
  days.

26
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Cash Discount Transactions
On December 3, On Your Mark sold 1,500 worth of
merchandise on account to South Branch High
School Athletics. If South Branch pays within 10
days (by December 13), On Your Mark will receive
1,470, or the original price less the cash
discount of 30.



27
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Cash Discount Transactions (cont'd.)
1. Merchandise Discount Sold X Rate Discount

1,500 X .02 30

2. Amount Paid Within Sales
Slip Discount Discount Amount Amount
Period

1,500 30 1,470
28
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Cash Discount Transactions (cont'd.)

• Journal Entry for Cash Received on Account with a
  Cash Discount
• On December 12 On Your Mark received 1470 from
  South Branch High School Athletics in payment of
  Sales Slip 51 for 1,500 less the discount of
  30, Receipt 302.
• Cash in Bank 1470
• Sales Discounts 30
• Accts. Rec./South Br. H.S. 1500

29
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Recording Cash Received from Charge Customers
Business Transaction

On December 5, On Your Mark received 212
from Casey Klein to apply to her account,
Receipt 301.


ANALYSIS Identify 1. The accounts affected are
Cash in Bank, Accounts Receivable (controlling),
and Accounts ReceivableCasey Klein (subsidiary).
30
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Recording Cash Received from Charge Customers
(cont'd.)

Business Transaction (cont'd.)
On December 5, On Your Mark received 212 from
Casey Klein to apply to her account, Receipt 301.

ANALYSIS Classify 2. Cash in Bank, Accounts
Receivable (controlling), and Accounts
ReceivableCasey Klein (subsidiary) are asset
accounts.

31
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Recording Cash Received from Charge Customers
(cont'd.)

Business Transaction (cont'd.)
On December 5, On Your Mark received 212 from
Casey Klein to apply to her account, Receipt 301.

ANALYSIS / 3. Cash in Bank is increased by
212. Accounts Receivable (controlling) and
Accounts ReceivableCasey Klein (subsidiary) are
decreased by 212.

32
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Recording Cash Received from Charge Customers
(cont'd.)

Business Transaction (cont'd.)
On December 5, On Your Mark received 212 from
Casey Klein to apply to her account, Receipt 301.

DEBIT-CREDIT RULE 4. Increases to asset accounts
are recorded as debits. Debit Cash in Bank for
212. 5. Decreases to asset accounts are
recorded as credits. Credit Accounts Receivable
(controlling) for 212. Also credit Accounts
ReceivableCasey Klein (subsidiary) for 212.

33
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Recording Cash Received from Charge Customers
(cont'd.)
Business Transaction (cont'd.)

On December 5, On Your Mark received 212 from
Casey Klein to apply to her account, Receipt 301.
T ACCOUNTS 6.
Cash in Accounts Bank Receivable

Debit 212
Credit
Debit
Credit 212

Accounts Receivable Subsidiary Ledger Casey
Klein
Debit
Credit 212
34
Section 3 Analyzing Cash Receipt Transactions
(cont'd.)
Chapter 14

Recording Cash Received from Charge Customers
(cont'd.)

Business Transaction (cont'd.)
On December 5, On Your Mark received 212 from
Casey Klein to apply to her account, Receipt 301.

JOURNAL ENTRY 7.