Accounting for Merchandising Operations

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CHAPTER 6 ACCOUNTING FOR MERCHANDISING OPERATIONS
STUDY OBJECTIVES After studying this chapter, you
should understand
The differences between a service company and a merchandiser Single multiple step income statements
Purchase entriesperpetual inventory How to compute gross profit
Revenue entries--perpetual inventory COGS -- periodic inventory
Completing the accounting cycle
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STUDY OBJECTIVE 1 MERCHANDISER VS. SERVICE COMPANY
A service company provides a service to earn a
profit. No COGS
A merchandiser buys and sells goods to earn a
profit. Wholesalers/Retailers COGS
-
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INCOME MEASUREMENT MERCHANDISER
Less
Sales Revenue
Equals
Cost of Goods Sold
Less
Gross Profit
Equals
Net Income (Loss)
Operating Expenses
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OPERATING CYCLE COMPARISON
Service Company
Receive Cash
Perform Services
Cash
Accounts Receivable
Merchandising Company
Receive Cash
Buy Inventory
Sell Inventory
Accounts Receivable
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INVENTORY SYSTEMS
PERPETUAL INVENTORY
End of period No entry
Inventory purchased
Item sold
SOLD
Record purchase
Record revenue COGS
PERIODIC INVENTORY
Inventory purchased
Item sold
End of period Compute and record COGS
SOLD
Record purchase
Record revenue only
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STUDY OBJECTIVE 2 PURCHASE ENTRIES PERPETUAL
INVENTORY
MERCHANDISE INVENTORY
CASH
Cash purchase
COST
COST
A/P
Credit purchase
MERCHANDISE INVENTORY
COST
COST
The purchase is normally recorded when the goods
are received
Credit purchases are normally supported by a
purchase invoice
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STUDY OBJECTIVE 2 PURCHASE ENTRIES PERPETUAL
INVENTORY
Cash purchase
Credit purchase
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SHIPPING TERMS FREE ON BOARD
FOB SHIPPING POINT FOB DESTINATION
Title transfers to buyer at sellers shipping dock Buyer pays freight costs Title transfers to buyer at buyers receiving dock Seller pays freight costs
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ACCOUNTING FOR FREIGHT COSTS PAID BY BUYER
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
150 150
May 6
Merchandise Inventory

Cash
(To record payment of freight,
terms FOB shipping point)
Freight costs are part of the cost of inventory
purchased.
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ACCOUNTING FOR FREIGHT COSTS PAID BY SELLER
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
150 150
May 4
Freight-out (Delivery Expense)

Cash
(To record payment of freight on
goods sold FOB destination)
Freight costs incurred by the seller are selling
expenses called Freight-out.
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PURCHASE RETURNS AND ALLOWANCES
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
300 300
May 8
Accounts Payable

Merchandise Inventory
(To record return of inoperable
goods received from Highpoint
Electronic, DM No. 126)
For purchases returns and allowances, Accounts
Payable is debited and Merchandise Inventory is
credited.
Buyer
Seller
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PURCHASE DISCOUNTS PAYMENT WITHIN DISCOUNT PERIOD
Credit terms may permit the buyer to claim a cash
discount for the prompt payment of a balance
due.
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
3,500 3,430 70
May 14
Accounts Payable
Cash

Merchandise Inventory
(To record payment within
discount period)
If payment is made within the discount period,
Merchandise inventory is credited for the
discount taken.
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PURCHASE DISCOUNTS PAYMENT AFTER DISCOUNT PERIOD
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
3,500 3,500
June 3
Accounts Payable
Cash
(To record payment with no
discount taken)
If payment is made after the discount period,
Accounts Payable is debited and Cash is credited
for the full amount.
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STUDY OBJECTIVE 3 REVENUE ENTRIES PERPETUAL
INVENTORY
Revenues are reported when earned in accordance
with the revenue recognition principle.
In a merchandising company, revenues are
earned when the goods are transferred from
seller to buyer.
All sales should be supported by a cash register
tape (cash sales) or sales invoice (credit
sales).
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REVENUE ENTRIES PERPETUAL INVENTORY
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
May 4
Accounts Receivable
3,800 3,800 2,400 2,400

Sales
(To record credit sales to Chelsea
Video per invoice 731)
4
Cost of Goods Sold
Merchandise Inventory
(To record cost of merchandise
sold on invoice 731 to Chelsea
Video)
For cash sales, simply replace the debit to
accounts receivable with a debit to cash.
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SALES RETURNS ALLOWANCES
SALES RETURN Customer returns goods to the
seller for credit or a refund.
SALES ALLOWANCE Seller allows a reduction in
selling price. Goods are not returned.
Seller prepares a CREDIT MEMORANDUM.
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RECORDING SALES RETURNS ALLOWANCES
300 300 140 140


(To record cost of goods returned
)


















Sales Returns and Allowances is a CONTRA-REVENUE
account. Its normal balance is a DEBIT.
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SALES DISCOUNTS
Seller offers customer a cash discount for prompt
payment of balance due.
Credit terms indicate the discount percent,
Discount period, and final due date.
2/10, n/30 A 2 discount may be taken if
payment is made within 10 days of the
invoice date. 1/10 EOM A 1 discount is
available if payment is made by the 10th of
the next month.
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RECORDING SALES DISCOUNTS
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
3,430 70 3,500
May 14
Cash
Sales Discounts
Accounts Receivable
(To record collection within 2/10,
n/30 discount period from Beyer
Video)

• Sales discounts is a CONTRA-REVENUE ACCOUNT.
• Its normal balance is a DEBIT.

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COMPLETING THE ACCOUNTING CYCLE Study Objective 4
After all adjustments have been posted, closing
entries are prepared from the Income Statement
section of the worksheet.
All accounts that affect the determination of
net income are closed to Income Summary.
480,000 480,000

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CLOSING ENTRIES
Cost of Goods Sold is closed to Income Summary.
450,000 12,000 8,000
316,000 45,000 19,000 7,000 16,000 17,000
8,000 2,000


Freight
-
out






Advertising Expense






Utilities Expense






Depreciation Expense






Insurance Expense






(To close income statement



accounts

with debit balances)















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CLOSING ENTRIES
30,000 30,000 15,000 15,000






Dividends






(To close dividends to retained



earnings
)








After the closing entries are posted, all
temporary accounts have zero balances.
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STUDY OBJECTIVE 5 MULTIPLE - STEP INCOME STATEMENT
Illustration 5-6 Computation of Net Sales
Sales revenues
Sales 480,000
Less Sales returns allowances 12,000
Sales Discounts 8,000 20,000
Net Sales 460,000
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STUDY OBJECTIVES 5 6 MULTIPLE - STEP INCOME
STATEMENT
The multiple step income statement arrives at net
income in stages.
Sellers Electronix Income Statement
Net Sales 460,000
Less Cost of Goods Sold 316,000
Gross Profit 144,000
Operating Expenses 114,000
Net Income 30,000
The multiple step income statement also
distinguished between operating and
non-operating activities.
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MULTIPLE - STEP INCOME STATEMENT NON-OPERATING
ACTIVITIES
NON-OPERATING ACTIVITIES
OTHER REVENUES GAINS OTHER LOSSES EXPENSES
Interest revenue Interest expense
Dividend revenue Casualty losses
Rent revenue Loss from employee strikes
Gains on sale of assets Loss on sale of assets
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SINGLE-STEP INCOME STATEMENT

• All data are classified under two categories
  1 Revenues
  
• 2 Expenses
• Only one step is required in determining net
  income or net loss.

200





Total expenses



432,000



Net income



31,600









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STUDY OBJECTIVES 7 COST OF GOODS SOLDPERIODIC
INVENTORY
Sellers Electronix Cost of Goods Sold For the
year ended December 31, 2006
Cost of Goods Sold
Inventory, January 1 36,000
Purchases 325,000
Less Purchase returns allowances 10,400
Purchase discounts 6,800 17,200
Net purchases 307,800
Add Freight-in 12,200
Cost of Goods Purchased 320,000
Cost of Goods Available for Sale 356,000
Inventory, December 31 (physical count required) 40,000
Cost of Goods Sold 316,000