Understanding Merchandising Operations in Accounting

1. Chapter 5 Merchandising Operations

2. What’s Different • Service Company has labor and they do something for someone • Merchandising Company buys goods from someone else to sell to customers.

3. New Revenue Account • Our Revenue Account is now “Sales” • Net Income is computed Sales-Cost of Goods=Gross Profit Gross Profit – Operating Expenses = New Income

4. Merchandise Inventory • We now have inventory of the things we sell to customers • Merchandise Inventory is an Asset • So when we buy inventory we debit Merchandise Inventory and credit cash or accounts payable.

5. Example • ATA Warehouse bought 100, 50” TV’s for $450 each. We will pay the bill in 30 days. Merchandise Inventory Accounts Payable- Sony Company Let’s Do BE5-1, Page 228

6. Freight • Like anything delivered, there is a freight expense. There are two ways to pay freight • The seller pays (sony) called FOB Destination • The buyer pays (ATA Warehouse) called FOB Shipping Point

7. First Freight FOB • Seller (Sony is paying the freight on the TV’s) • This is an expense to Sony Delivery Expense Cash (Or AP)

8. Buyer Pays Freight • ATA Warehouse is paying for the freight on the TV’s which is added to the merchandise cost Merchandise Inventory Cash or AP

9. Purchase Returns • Two of the TV’s were damaged and were returned to Sony Accounts Payable 900 Merchandise Inventory 900

10. Discounts • Many times if you pay your bill before the month is up, the company will give you a discount. • Sony has terms of 2/10, net 30 • This means we can take a 2% discount off our bill if we pay in 10 days, but the whole amount is due in 30 days.

11. Now we will pay Sony for our TV’s • Remember, we bought 100 TV’s for $450 each but we returned two so we owe this is what our entries look like so far. • Purchased 100, 50” tv’s for $450 each Merchandise Inventory 45,000 Accounts Payable 45,000

12. Freight was FOB Shipping • So we had to pay the freight of $500 Merchandise Inventory $500 Accounts Payable $500 • We returned 2 of the TV’s Accounts Payable $900 Merchandise Inventory $900

13. Pay the Bill • We have a balance of $44,600 to pay, Sony give 2/10, net 30, so we can take 2% of the total. Accounts Payable $44,600 Cash (44,600-2%) $43,708 Merchandise Inventory $892 Do E5-2 and E5-3 Page 231

14. Sales Side • Now we want to sell our TV’s We sold three TV’s to the WTU Company on account. We want a 20% profit (we have to make a profit). Sales tax is 6% • Record the sale Accounts Receivable ? Sales ? Sales Tax Payable ? • Take it out of inventory Cost of Goods Sold ? Merchandise Inventory ?

15. “I don’t like this TV” • One of the TV’s was returned but is still in working order. • We want to make sure we know how many things were returned so we use a contra-sales account, “Sales Returns and Allowance”. We also want to reduce his bill. • Sales Returns and Allowances ? Sales Tax Payable ? A/R-WTU Co. ?

16. Put it Back in Inventory • Merchandise Inventory $450 Cost of Goods Sold $450 (This amount is at our original cost)*****

17. Sales Discounts • We also give discounts to companies to pay early. We have 1/10, net 30. WTU pays their bill within the 10 Days. Cash Sales Discounts Accts Receivable Do Problem 5-1A Page 235, 236

18. Closing Entries • All accounts that record transactions for a fiscal year must be closed using the temporary account, Income Summary • Look at all the accounts on Page 212

19. Financial Statements • Multi-Step Income Statement • Look at Page 216 • Look at the Sales Section Sales -Sales Returns and Allowances =Net Sales -Cost of Goods Sold =Net Profit

20. Assignments for Chapter • BE 5-1, E 5-1, E-53 • P5-1A • P5-2A • ***Read Instructions and Transactions Carefully**** • Test is like 5-1A and Terms

21. Terms to Know