Chapter 5: Accounting for Merchandising Business
Nature of Merchandising Business Revenue activities of a merchandising business involve the buying and selling of merchandise. merchandise. They purchase merchandise merchandise which is resold to customers. • Comparison to Service Business Service Business Merchandising Business Fees earned Sales Less Operating expenses Less Cost of merchandise sold =Net income =Gross Profit Less Operating expenses =Net Income •
•
New Accounts on the Income Statement o SALES – revenues collected from the sale of merchandise o COST OF MERCHANDISE SOLD – the purchase price plus incidentals of merchandise available for resale o GROSS PROFIT – Sales – COMS
INCOME STATEMENT Gem City Music Income Statement For the Year Ended December 31, 20— Revenue Revenue from sales:.......... sales:........................................ .............................. Sales ..................................................... $189,300 Less: Sales returns and allowances $ 1,700 Sales discounts........................ 500 2,200 Net sales.................................. sales.................. .................. $187,100 Cost of merchandise sold XXXX..................... 100,000 Gross profit ..................................................... $ 87,100 Operating expenses: Selling expenses: Sales salaries expense....................... $17,700 Administrative expenses: Rent expense $ 7,800 Office salaries expense...................... 22,550 Depr Deprec ecia iati tion on expe expens nse— e—of offi fice ce equi equipm pmen entt 2,80 2,800 0 33,1 33,150 50 Total operating expenses........................ 50,850 Income from operations.................................. $ 36,250 Other expense: Interest expense....................................... 2,000 Net income ................................................. $ 34,250 Fall 2007 Prof. M. Mari Page 1
Chapter 5: Accounting for Merchandising Business
XXXX Computation of Cost of Merchandise Sold Purchases Less merchandise inventory, December 31 =Cost of merchandise sold Computation of Cost of Merchandise Purchased Purchases Less: purchases returns and allowances Less: purchases discount =Net purchases Add: transportation in =Cost of merchandise purchased •
New Accounts on the Balance Sheet o Merchandise inventory – merchandise on hand at the end of an accounting period.
Merchandising Transactions Chart of Accounts for Merchandising Business Assets Cash Accounts receivable Merchandise inventory Office Supplies Prepaid Insurance Store Equipment Acc. Depreciation Office Equipment Acc. Depreciation Liabilities Accounts payable Salaries payable Unearned rent Notes payable Fall 2007 Prof. M. Mari Page 2
Chapter 5: Accounting for Merchandising Business Stockholder’s Equity Capital stock Retained earnings Dividends Income Summary Revenues Sales Sales returns and allowances Sales discounts Costs and Expenses Sales salaries expense Advertising expense Depreciation expense Misc. selling expense Office salaries expense Rent expense Insurance expense Office supplies expense Other income Rent revenue Other expense Interest expense
Accounting for Sales Under the perpetual inventory system, all sales require the reporting of the removal of inventory from the books at the same time. 1. CASH SALES
Example 1: Sold merchandise for cash $5,000. Cost of merchandise sold $3,200 Date Account PR Debit Credit Cash $5,000 Sales $5,000 Cost of merchandise sold Fall 2007 Prof. M. Mari Page 3
3,200
Chapter 5: Accounting for Merchandising Business
Merchandise inventory
3,200
Note: that sales are credited for the sales price and merchandise inventory is credited for the COST. 2. MASTERCARD OR VISA The transaction requires a debit to CASH since the money is deposited in the vendor’s account overnight.
But a reduction of the cash account must be made for the service charge from the credit card company, which is directly taken out of the account. Example 2: Sold merchandise on VISA $10,000. Cost of merchandise sold is $4,000. Credit card expense is 3% of sales.
Date
Account
PR
Cash Sales
Debit $10,000
Credit
$10,000
Cost of merchandise sold Merchandise inventory
4,000
Credit card expense Cash
300
4,000
300
Example 3: Sold merchandise on VISA $6,000. Cost of merchandise sold is $3,000. Credit card expense is 3% of sales.
Date
Fall 2007 Prof. M. Mari Page 4
Account
PR
Debit
Credit
Chapter 5: Accounting for Merchandising Business
3. SALES ON ACCOUNT Includes sales to nonblank credit cards such as AMERICAN EXPRESS
Example 4: Sold merchandise on account $6,000. Cost of merchandise sold is $3,000. Date
Account Accounts receivable Sales
PR
Cost of merchandise Merchandise inventory
Debit $6,000
Credit
6,000 3,000 3,000
Recap: Under the perpetual inventory system, all sales transactions consist of at least two entries. The first entry records the sale at the selling price with a debit to how it will be paid and credit to sales. The second entry records the merchandise leaving the business with a debit to cost of merchandise sold and credit to merchandise inventory for the cost of the merchandise.
Sales Discounts – A reduction in the price of the good for early payment.
– This account is a contra – SALES – Upon payment of the account receivable, if the payment is within the discount period, we record the discount. – Credit terms – terms of when payments for merchandise are to be made. Net 30 days – full amount due in 30 days 2/10 – 2% discount if paid within 10 days Example 5: Sold merchandise on account $5,000, terms 2/10, n/30. Cost of merchandise sold is $4,000.
Sales Discount Discount $ Fall 2007 Prof. M. Mari Page 5
$5,000 2% $100
Chapter 5: Accounting for Merchandising Business Sales Less discount Net amount
Date
Account
PR
Cash Sales discount Accounts receivable
$5,000 100 4,900
Debit 4900 100
Credit
5000
Sales Returns and Allowances – – – –
Merchandise sold may be returned to the seller Merchandise sold may be reduced in price due to defects This account is CONTRA – sales Increases with a debit
Example 6: Sold merchandise on account $7,000, terms 1/15, n/30. Cost of merchandise sold is $3,800. Date
Account Accounts receivable Sales
PR
Debit $7,000
Credit
7,000
Cost of merchandise Merchandise inventory
3,800 3,800
Return merchandise with sales price of $2,000 and cost of $1,000. Date
Account Sales returns Accounts receivable
Merchandise inventory Cost of merchandise sold
Fall 2007 Prof. M. Mari Page 6
PR
Debit 2,000
Credit
2,000 1,000 1,000
Chapter 5: Accounting for Merchandising Business
Example 7: ABC Merchandising had the following transactions: a> Sold merchandise and received payment by VISA at $6,000, cost of merchandise sold is $4,000. b> Sold merchandise on account for $7,500 with credit terms 1/10, n/30. Cost of the merchandise is $4,500. c> Sold merchandise on account for $4,000, cost of merchandise is $2,500. d> Received a return of the merchandise in (c ) of sales price of $2,000 and cost of $1,750. e> Received payment within the discount period for merchandise in (b). f> Received payment for merchandise in (c ). Record the Transactions.
Accounting for Purchases: – Under perpetual inventory system. Example 8: Purchase merchandise for resale $4,000 on account. Date Mar 1
Account Merchandise inventory Accounts payable
PR
Debit $4,000
Credit
$4,000
Purchases Discounts – Purchases discounts are discounts taken by the buyer for early payment
of an invoice. – These discounts reduce the cost of the merchandise purchased. – Should be taken when offered if not it is a LOSS to the business.
Example 9: Purchase merchandise for resale $4,000, terms 2/10, n/30 on account.
Invoice: Discount (2% x $4,000) Net of discount Fall 2007 Prof. M. Mari Page 7
$4,000 80 3,920
Chapter 5: Accounting for Merchandising Business
Account
PR
Dat e Mar 1 Merchandise inventory Accounts payable
Mar 10
Debit
Credit
$4,000 $4,000
Accounts payable Cash Merchandise inventory
$4,000 $3,920 80
Reduction of the cost of the merchandise is reflected in the merchandise inventory account.
Example 10: Purchase merchandise for resale $6,000, terms 1/15, n/30 on account. Date
Account
PR
Debit
Credit
Purchases Returns and Allowances o o o
Purchase returns – merchandise is returned to the seller Purchase allowances – price adjustment Debit memorandum – notification of the return or allowance by seller
Example 11: Returned merchandise on account $2,500. Date Mar 09
Fall 2007 Prof. M. Mari Page 8
Account Accounts payable Cash
PR
Debit $2,500
Credit
$2,500
Chapter 5: Accounting for Merchandising Business
Example 12: Purchased merchandise of $8,000 on terms 2/10,n/30. Ennis pays the original invoice less a return of $2,500 within the discount period. Record the above entries. Date
Account
PR
Debit
Credit
Recap of Purchasing Transactions Example 7: ABC Merchandising had the following transactions: Purchased merchandise and received payment by VISA at $6,000. • Purchased merchandise on account for $7,500 with credit terms 1/10, n/30. • Purchased merchandise on account for $4,000. Return of the merchandise in (c ) of sales price of $2,000. • Paid within the discount period for merchandise in (b). • Paid for merchandise in (c ). • •
Transportation Costs – The terms of a sale should indicate when the ownership of the merchandise passes to the buyer. This point determines which party, the buyer or the seller must pay the transportation costs. FOB – shipping point The ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the transportation company. Buyer pays the transportation costs
o
Example 13: Purchased merchandise for $4,000 with shipping costs of $50 FOB shipping point. Fall 2007 Prof. M. Mari Page 9
Chapter 5: Accounting for Merchandising Business
Date
Account Merchandise inventory Accounts payable
PR
Credit
$4,000
Merchandise Inventory Cash
o
Debit $4,000
$50 $50
FOB – destination point The ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the buyer. Seller pays the transportation costs
Example 14: Sold merchandise for $4,000 with shipping costs of $50 FOB destination. Cost of merchandise sold is $2,000. Date
Revi ew for Test!
Account Accounts receivable Sales
PR
Debit $4,000
Credit
$4,000
Cost of merchandise sold Merchandise inventory Delivery expense Cash
2000 2000 50 50
RECAP FREIGHT TERMS FOB Shipping Point
FOB Destination
Ownership (title) passes to buyer when merchandise is...................................................
Delivered to freight carrier
Received by buyer
Transportation costs are paid by..................................................
Buyer
Seller
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Chapter 5: Accounting for Merchandising Business
Risk of loss during transportation belongs to....................................
Buyer
Seller
Sales Taxes – Liability to the business – Create a SALES TAX PAYABLE account
Example 15: Sold merchandise on account $7,000, plus 5% sales tax. Cost of merchandise sold is $3,800. Date
Account Accounts receivable Sales Sales tax payable
PR
Debit $7,350
Credit
7,000 350
Cost of merchandise Merchandise inventory
3,800 3,800
RECAP of Sales and Purchases Transactions Seller Sold merchandise on account :
Buyer Purchased merchandise on account :
Accounts receivable Sales
Merchandise Inventory DR Accounts Payable CR
DR CR
Cost of merchandise sold DR Merchandise inventory CR Transportation costs Shipping point
Transportation costs – Destination: Delivery Expense DR Cash CR Merchandise returned: Sales Returns & Allowances DR Accounts receivable CR
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Transportation costs Shipping point: Merchandise Inventory DR Cash CR Transportation costs - Destination
Merchandise returned: Merchandise inventory DR Accounts payable
CR
Chapter 5: Accounting for Merchandising Business Merchandise inventory DR Cost of merchandise sold CR Payment : Cash DR Accounts receivable CR Payment with discount: Cash DR Sales discount DR Accounts receivable CR
Payment: Accounts payable DR Cash CR Payment with discount: Merchandise inventory DR Cash CR
Adjusting Entries: – Inventory Shrinkage Difference between physical count and books •
Example 16: Suppose that physical inventory shows balance of $20,000 and books show balance of $23,000. Record the shrinkage.
Date
Account Cost of merchandise sold Merchandise inventory
Closing Entries: o
Accounts that must be closed Sales Rent revenue Sales returns and allowances Sales discounts Cost of merchandise sold All expenses and revenues Dividends
Fall 2007 Prof. M. Mari Page 12
PR
Debit 3,000
Credit
3,000