Accounting for Merchandising Operations

1. Accounting for Merchandising Operations Chapter 5

2. Learning objective • Describe merchandising activities and identify income components for a merchandising company. • Identify and explain the inventory asset of a merchandising company. • Prepare adjustments and close accounts for a merchandising company. • Define and prepare multiple-step and single-step income statements.

3. Learning objective • Describe merchandising activities and identify income components for a merchandising company.

4. Service organizations sell time to earn revenue. Examples: accounting firms, law firms, and plumbing services Expenses Equals Netincome Minus Merchandising Activities Revenues

5. Merchandising companies sell goods to earn revenue. Example: supermarket Expenses Equals Netincome Minus Merchandising Activities Revenues

6. Merchandising Activities Merchandising Companies Manufacturer Wholesaler Retailer Customer

7. Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores Minus Equals Minus Equals NetSales Reporting Income for a Merchandiser Cost ofGoods Sold Expenses NetIncome GrossProfit

8. Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. Operating Cycle for a Merchandiser Credit Sale Cash Sale Cashcollection Purchases Purchases Merchandiseinventory Accountreceivable Cashsales Merchandiseinventory Credit sales

9. Learning objective • Identify and explain the inventory asset of a merchandising company.

10. Inventory Systems Beginninginventory Net cost ofpurchases + Merchandiseavailable for sale = Ending Inventory Cost of GoodsSold +

11. Inventory Systems • Perpetual inventory system continuously updates accounting records for merchandising transactions — specifically, for those records of inventory available for sale and inventory sold. • Periodic inventory system updates the accounting records for merchandise transactions only at the end of a period.

12. Learning objective • Analyze and record transactions for merchandising purchases and sales using a perpetual system.

13. Accounting for Merchandise Purchases • Trade discounts vs. purchase discounts • Purchase returns and allowances • Transportation costs

14. Accounting for Merchandise Purchases On June 20, Jason, Inc. purchased $14,000 of Merchandise Inventory paying cash.

15.    SellerInvoice datePurchaser Order numberCredit termsFreight termsGoodsInvoice amount     

16. Used by manufacturers and wholesalers to offer better prices for greater quantities purchased. Trade Discounts Example Matrix, Inc. offers a 30% trade discount on orders of 1,000 units or more of their popular product Racer. Each Racer has a list price of $5.25.

17. A deduction from the invoice price granted to induce early payment of the amount due. Purchase Discounts Terms Time Due Discount Period Credit Period Full amount less discount Full amount due Purchase or Sale

18. Number of Days Discount Is Available Otherwise, Net (or All) Is Due Discount Percent CreditPeriod Purchase Discounts 2/10,n/30

19. On May 7, Jason, Inc. purchased $27,000 of Merchandise Inventory on account, credit terms are 2/10, n/30. Purchase Discounts

20. On May 15, Jason, Inc. paid the amount due on the purchase of May 7. Purchase Discounts $27,000 × 2% = $540 discount

21. After we post these entries, the accounts involved look like this: Merchandise Inventory Accounts Payable 5/15 27,000 5/7 27,000 5/7 27,000 5/15 540 Bal. 26,460 Bal. 0 Purchase Discounts

22. If we fail to take a 2/10, n/30 discount, is it really expensive? Days in a year Number of additional days before payment Percent paid to keep money Failure to Pay Within the Discount Period 365 days ÷ 20 days × 2% =36.5% annual rate

23. Purchase Return . . . Merchandise returned by the purchaser to the supplier. Purchase Allowance . . . A reduction in the cost of defective merchandise received by a purchaser from a supplier. Purchase Returns and Allowances

24. On May 9, Matrix, Inc. purchased $20,000 of Merchandise Inventory on account, credit terms are 2/10, n/30. Purchase Returns and Allowances

25. On May 10, Matrix, Inc. returned $500 of defective merchandise to the supplier. Purchase Returns and Allowances

26. On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9. Purchase Returns and Allowances

27. Transportation Costs Buyer Seller Merchandise FOB shipping point (buyer pays) FOB destination (seller pays)

28. On May 12, Jason, Inc. purchased $8,000 of Merchandise Inventory for cash and also paid $100 transportation costs. Transportation Costs

29. Quick Check  On July 6, 2005 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will be part of Buyer’s July 6 journal entry? a. Credit Sales $7,500 b. Credit Purchase Discounts $150 c. Debit Merchandise Inventory $100 d. Debit Accounts Payable $7,450 FOB shipping point indicates the buyer ultimately pays the freight. This is recorded witha debit to Merchandise Inventory.

30. Itemized Cost of Merchandise Purchased

31. Accounting for Merchandise Sales • Sales of merchandise • Sales discounts • Sales returns and allowances

32. Sales discounts and returns and allowances are Contra Revenueaccounts. Accounting for Merchandise Sales

33. On March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was carried in inventory at a cost of $18,000. Sales of Merchandise

34. On June 8, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. Let’s prepare the journal entries. Sales Discounts

35. On June 17, Barton Co. received a check for $5,880 in full payment of the June 8 sale. Sales Discounts Contra Revenue Account

36. On June 12, Barton Co. sold merchandise costing $4,000 for $7,500 on account The credit terms were 2/10, n/30. Sales Returns and Allowances

37. On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Barton. The return is related to the June 12 sale. Sales Returns and Allowances

38. On June 20, Barton received the amount owed to it from the sale of June 12. Sales Returns and Allowances

39. Learning objective • Prepare adjustments and close accounts for a merchandising company.

40. Let’s complete the accounting cycle by preparing the closing entries for Barton.

41. Step 1: Close Credit Balances in Temporary Accounts to Income Summary.

42. Step 2: Close Debit Balances in Temporary Accounts to Income Summary.

43. Step 3: Close Income Summary to Owner’s Capital

44. Step 4: Close Withdrawals Account to Owner’s Capital.

45. Learning objective • Define and prepare multiple-step and single-step income statements.

46. Multiple-Step Single-Step Income Statement Formats

47. Multiple-Step Income Statement

48. Operating expenses • Selling expenses include the expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers. • General and administrative expenses support a company’s overall operations and include expenses related to accounting, HR management, and financial management.

49. Single-Step Income Statement

50. Single-Step Income Statement