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Chapter 6 Accounting for Merchandising Businesses

Chapter 6 Accounting for Merchandising Businesses

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Chapter 6 Accounting for Merchandising Businesses

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  1. Chapter 6 Accounting for Merchandising Businesses • Nature of Merchandising Business • Accounting for Purchases • Accounting for Sales • Transportation Costs • Merchandise Transactions • Merchandising Chart of Accounts • Merchandising Income Statement • Merchandising Accounting Cycle • Financial Analysis and Interpretation Learning Objectives

  2. Nature of merchandise business Service business • Provide service • Usually it is a small business Merchandise business • Purchase and sell merchandise inventory • Bigger than service business

  3. Comparison of Income Statements: Service Co. And Merchandising Co. Service Co. Income Statement Year ended June 30, 20xx Service revenue $xxx Expenses: Salary expense x Depreciation expense x Income tax expense x Net income $ xx Merchandising Co. Income Statement Year ended June 30, 20xx Sales revenue $xxx Cost of goodssold x Gross profit xx Operating expenses: Salary expense x Depreciation expense x Income tax expense x Net income $ xx

  4. Special terms • sales revenue or sales • the amount that a business earns from selling merchandise inventory is called sales revenue, or sales. • cost of merchandise sold • the major expense of a merchandiser is cost of goods sold. • Gross margin or Gross profit • The excess of sales over cost of sales is called gross margin. • Merchandise inventory • Merchandise on hand at the end of an account period

  5. Compute the net income • Service business: • Fees earned – operating expenses = net income • Merchandise business: • Sales – cost of merchandise sold = gross profit • Gross profit – operating expenses = net income The cost of merchandise sold is the largest expense for the merchandise business, say 70% or more

  6. Income Statement Comparison Service Business Fees earned $150,000 Operating expenses 120,000 Net income $ 30,000 20% of revenues Merchandising Business Sales revenue $600,000 Cost of mdse. sold 450,000 Gross profit $150,000 Operating expenses 120,000 Net income $ 30,000 75% of revenues 5% of revenues

  7. Merchandise Inventory • Merchandising involves selling inventory • Inventory is usually an important asset • Inventory must be accounted for periodically or perpetually • Inventory system • Perpetual inventory system • Periodic inventory system

  8. Perpetual inventory system • In a perpetual inventory system, each purchase and the cost of each sale are recorded in Merchandise Inventory. • Most companies using the perpetual inventory system.

  9. Periodic inventory system • In a periodic inventory system, the inventory records do not show the amount available for sale or sold during the period. Instead, a detailed listing of merchandise for sale at the end of the accounting period is prepared by the physical count. • This physical inventory is used to determine the cost of the merchandise inventory on hand and the cost of merchandise sold.

  10. Advantages of Using Perpetual Inventory • Continuous determination of inventory value • Continuous determination of gross profit • Affordable with computers, scanners, and bar codes on most products • Perpetual inventory accounting provides managementcontrols • Managers know which items are selling fastest and the profit margin on those items

  11. Accounting for purchase • Purchase order • Receive the inventory • Invoice and payment • Exhibit 1 invoice • Netsolutions purchase $1,500 merchandise inventor • Credit term: 2/10; n/30

  12. Purchase and payment Payment without discount

  13. Purchase and payment Payment with the discount: 1500 *2% = $30

  14. Discount rate • Purchase amount: $1500 • Discount rate: 2% for 20 days 1500* 2% =30 • Interest rate: 12% per year 1470*12%*20/360= 9.80 • Savings from borrowing: 30 –9.80 =20.20

  15. What is the due date of the invoice? • Question 1: • An invoice dated august 13, has terms n/30. • Question 2: • An invoice dated November 22

  16. What is the due date of the invoice? • Question 1: • An invoice dated august 13, credit terms n/30. Solution: • Sep. 12 • Question 2: • An invoice dated November 22, credit terms:2/10,n/30 Solution: • Dec. 2 • Dec. 22

  17. Purchases returns and allowances • Purchase returns • Purchase business return the merchandise inventory to selling business • get a debit memorandum from the sales business • Purchase allowances • Purchase business do not return the merchandise inventory to selling business • get a debit memorandum from the sales business

  18. Purchases returns and allowances Example : p.231 • May 2, purchases $5,000 of inventory. • May 4, returns $3,000 of inventory • Credit term: 2/10; n/30 • Discount: (5000-3000) * 2% = $40 Recording in the journal

  19. Accounting for sales • To record: • Sales revenue • Cost of sales • Sales expenses • Example: p. 233 • Sales :$ 1000 • Cost of sales: $550 • Credit card charges: $50

  20. Sales discount To set up a separate account: sales discounts • It is a contra account to Sales. • Balance on usually on the debit side. • Example : p. 233 • Sales: $1500 • Discount: $30 • Net sales: $1470

  21. Sales returns and allowances To set up a separate account: • Sales returns and allowances • It is a contra account to Sales. • Balance on usually on the debit side. • Example : p. 234 • Sales returns: $225, cost $140 • Record the deduction of sales • Record the deduction of cost of sales

  22. Sales taxes Example p.235 • Sales price $100 • Sales tax rate 6% • Total amount $106 of accounts receivable

  23. Sales taxes Example p.235 • Sales price $100 • Sales tax rate 6% • Total amount $106 of accounts receivable

  24. Trade discount • Wholesalers give the purchaser the discount for large amount of purchase. • P. 235 • 30% of discount for $2400 sales • The sales revenue: 2400 * 70%=1680

  25. Transportation cost • FOB shipping point • FOB destination • If FOB shipping point, the buyer pays the transportation costs. • If FOB destination, the seller pays the transportation costs. Shipping point buyer seller

  26. Example: FOB shipping point • Buyer’s record: • Buy merchandise inventory $ 900 • Transportation cost $ 50

  27. Example: FOB shipping point • Buyer’s record:

  28. More example • Under the term of FOB shipping point, sometimes the seller prepaid the transportation cost, then to get the refund from the buyer. • Selling merchandise inventory $800 • Term: FOB shipping point • Transportation cost $45

  29. More example The seller’s record:

  30. Example : FOB destination • seller’s record • selling merchandise inventory $700 • Cost of sales $480 • Transportation cost 40

  31. Example : FOB destination • seller’s record

  32. Illustration of Accounting formerchandise inventory Seller: Scully company Buyer: Burton company

  33. Selling and Buying Merchandise Inventory Seller Buyer Description Debit Credit Description Debit Credit Mdse. Inventory 7,500 Accts. Payable 7,500 Mdse. Inventory 150 Cash 150 Accts. Receivable 7,500 Sales 7,500 Cost of Mdse. Sold 4,500 Mdse. Inventory 4,500 No entry Recorded at full cost July1. Merchandise was sold with credit terms of n/45. July 2. Paid transportation cost.

  34. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Mdse. Inventory 5,000 Accts. Payable 5,000 Accts. Receivable 5,000 Sales 5,000 Cost of Mdse. Sold 3,500 Mdse. Inventory 3,500 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.

  35. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Accts. Receivable 5,000 Sales 5,000 Cost of Mdse. Sold 3,500 Mdse. Inventory 3,500 Mdse. Inventory 5,000 Accts. Payable 5,000 No entry. Transportation Out 250 Cash 250 July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Co. on July 5.

  36. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Accts. Receivable 5,000 Sales 5,000 Cost of Mdse. Sold 3,500 Mdse. Inventory 3,500 Transportation Out 250 Cash 250 Mdse. Inventory 5,000 Accts. Payable 5,000 No entry. Accts. Payable 1,000 Mdse. Inventory 1,000 Sales Ret. & Allow. 1,000 Accts Receivable 1,000 Mdse. Inventory 700 Cost of Mdse. Sold 700 July 13. Scully Company issued Burton Co. a credit memo for merchandise returned, $1,000. The merchandise cost was $700.

  37. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Accts. Payable 4,000 Cash 4,000 Cash 4,000 Accts. Receivable 4,000 July 15. Scully Company received payment from Burton Co. for purchase of July 5.

  38. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Cash 4,000 Accts. Receivable 4,000 Accts. Payable 4,000 Cash 4,000 Mdse. Inventory 12,500 Accts. Payable 12,500 Accts. Receivable 12,500 Sales 12,000 Cash 500 Cost of Mdse. Sold 7,200 Mdse. Inventory 7,200 July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7,200.

  39. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Cash 4,000 Accts. Receivable 4,000 Accts. Receivable 12,500 Sales 12,000 Cash 500 Cost of Mdse. Sold 7,200 Mdse. Inventory 7,200 Accts. Payable 4,000 Cash 4,000 Mdse. Inventory 12,500 Accts. Payable 12,500 Accts. Payable 12,500 Mdse. Inventory 240 Cash 12,260 Cash 12,260 Sales Discounts 240 Accts. Receivable 12,500 July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

  40. Chart of accounts for a merchandise business • What are new accounts in the chart of accounts? • Assets • Liabilities • Owner’s equity • Revenue • Costs and expense • Other income • Other expense

  41. NetSolutions Merchandising Chart of Accounts Balance Sheet Accounts 200 Liabilities 210 Accounts Payable 211 Salaries Payable 212 Unearned Rent 215 Notes Payable 300 Owner’s Equity 310 Chris Clark, Capital 311 Chris Clark, Drawing 312 Income Summary 100 Assets 110 Cash 111 Notes Receivable 112 Accounts Receivable 113 Interest Receivable 115 Merchandise Inventory 116 Office Supplies 117 Prepaid Insurance 120 Land 123 Store Equipment 124 Accumulated Depreciation— Store Equipment 125 Office Equipment 126 Accumulated Depreciation— Office Equipment

  42. NetSolutions Merchandising Chart of Accounts Income Statement Accounts 500 Costs and Expenses 510 Cost of Merchandise Sold 520 Sales Salaries Expense 521 Advertising Expense 522 Depreciation Expense— Store Equipment 523 Transportation Out 529 Misc. Selling Expense 530 Office Salaries Expense 531 Rent Expense 532 Depreciation Expense— Office Equipment 533 Insurance Expense 534 Office Supplies Expense 539 Misc. Admin. Expense 400 Revenues 410 Sales 411 Sales Returns and Allowances 412 Sales Discounts 600 Other Income 610 Rent Income 611 Interest Income 700 Other Expense 710 Interest Expense

  43. Income statement for a merchandise business • A service business • Single-step form] • A merchandise business • Multiple-step form • Exhibit 7

  44. NetSolutionsIncome Statement (Multiple-Step)For the Year Ended December 31, 2004 Revenue from sales: Sales $720,185 Less:Sales returns and allow. $ 6,140 Sales discounts 5,790 11,930 Net sales $708,255 Cost of merchandise sold 525,305 Gross profit $182,950 Continued

  45. Operating expenses: Selling expenses: Sales salaries expense $60,030 Advertising expense 10,860 Depr. expense–store equip. 3,100 Miscellaneous selling expense 630 Total selling expenses $ 74,620 Administrative expenses: Office salaries expense $21,020 Rent expense 8,100 Depr. expense–office equip. 2,490 Insurance expense 1,910 Office supplies expense 610 Misc. admin. expenses 760 Total admin. expenses 34,890 Total operating expenses 109,510 Income from operations $ 73,440 Continued

  46. Other income: Interest revenue $ 3,800 Rent revenue 600 Total other income $ 4,400 Other expense: Interest expense 2,440 1,960 Net income $75,400

  47. NetSolutionsIncome Statement (Single-Step)For the Year Ended December 31, 2004 Revenues: Net sales $708,255 Interest revenue 3,800 Rent revenue 600 Total revenues $712,655 Expenses: Cost of merchandise sold $525,305 Selling expenses 74,620 Administrative expenses 34,890 Interest expense 2,440 Total expenses 637,255 Net income $ 75,400

  48. NetSolutionsBalance SheetDecember 31, 2002 Assets Current assets: Cash $ 52,950 Notes receivable 40,000 Accounts receivable 60,880 Interest receivable 200 Merchandise inventory 62,150 Office supplies 480 Prepaid insurance 2,650 Total current assets $219,310 Continued

  49. NetSolutionsBalance SheetDecember 31, 2002 Property, plant, and equipment: Land $ 10,000 Store equipment $ 27,100 Less accum. depreciation 5,700 21,400 Office equipment $ 15,570 Less accum. depreciation 4,720 10,850 Total property, plant, and equipment 42,250 Total assets $261,560 Continued

  50. NetSolutionsBalance SheetDecember 31, 2002 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 (due 2004) 20,000 Total liabilities $ 50,360 Owner’s Equity Chris Clark, capital 211,200 Total liabilities and owner’s equity $261,560