Ch06 accounting for merchandising businesses

 Sales is the total amount charged customers for merchandise sold, including cash sales and sales on account..  The buyer may return merchandise to the seller purchase return , or th

Student Version

Businesses

Chapter 6

 Distinguish between the activities and financial statements of service and merchandising businesses.

Nature of Merchandising Businesses

 Most service businesses , such as

plumbing repair and accounting

services, have no merchandise

 Merchandising businesses , such as a

department store or sandwich shop,

generate revenue by selling a

product.

 Merchandise on hand (not sold) at the

 Distinguish between the activities and financial statements of service and merchandising businesses.

 Describe and illustrate the financial statements of a merchandising

business.

Multiple-Step Income Statement

 The multiple-step income statement

contains several sections,

subsections, and subtotals The first

segment reports revenue from sales.

 Sales is the total amount charged

customers for merchandise sold, including

cash sales and sales on account.

 Sales returns and allowances are granted

by the seller to customers for damaged or

defective merchandise.

 Sales discounts are granted by the seller to

customers for early payment of amounts

owed.

Statement

 The second segment of the

multiple-step income statement is the cost of

merchandise sold section.

 The cost of merchandise sold is the

cost of the merchandise sold to

customers Merchandise costs consist

of all the costs of acquiring the

merchandise and readying it for sale,

Statement

 The buyer may return merchandise to the seller ( purchase return ), or the

buyer may receive a reduction in the

initial price at which the merchandise was purchased ( purchase

allowance ).

 Sellers may offer customers sales

discounts for early payment of their

bills From the buyer’s perspective,

such discounts are referred to as

Statement

 If merchandise inventory at the end

of the period is determined by taking

a physical count of inventory on hand,

a periodic inventory system is being

used.

 Under the perpetual inventory

system , the amounts of inventory

purchased, available for sale, and

sold are continuously (perpetually)

Statement

Gross Profit

 Gross profit is computed by

subtracting the cost of merchandise

sold from net sales.

Gross Profit

 Selling expenses are incurred directly

in the selling of merchandise

Statement

 Administrative expenses , sometimes

called general expenses , are

incurred in the administration or

general operations of the business.

 Income from operations , sometimes

called operating income, is

 Other income is revenue from sources other than the primary operating

activity of a business.

 Other expense is an expense that

cannot be traced directly to the

normal operations of the business.

 Subtracting other income and

expenses from “income from

operations” provides the net income

Statement

Balance Sheet

 The form of balance sheet with the

assets on the left-hand side and the

liabilities and owner’s equity on the

right-hand side is called the account

form

 When the balance sheet is presented

in a downward sequence in three

sections, it has been prepared using

the report form

 Distinguish between the activities and

financial statements of service and

merchandising businesses.

 Describe and illustrate the financial

statements of a merchandising business.

 Describe and illustrate the accounting

for merchandising transactions

including: sale of merchandise; purchase

of merchandise; freight; sales taxes and trade discounts; dual nature of

On January 3, NetSolutions sold $1,800 of

merchandise for cash.

Cash Sales

Using the perpetual inventory system, the cost

of merchandise sold and the decrease in

merchandise inventory are also recorded The

cost of merchandise sold on January 3 is

$1,200.

Cash Sales

Sales made to customers using credit cards are

recorded as cash sales Assume that NetSolutions

paid credit card processing fees of $48 on

January 31.

Cash Sales

On January 12, NetSolutions sold merchandise

on account for $510 The cost of merchandise

sold was $280.

Sales on Account

 The terms for when payments for

merchandise are to be made are

called credit terms

 If payment is required on delivery,

the terms are cash or net cash

Otherwise, the buyer is allowed an

amount of time, known as the credit

period , in which to pay.

Sales Discounts

Credit Terms

 To encourage the buyer to pay before the end of the credit period, the

seller may offer a discount, such as

2/10, n/30 These terms indicate that

a two percent discount can be taken

if the invoice is paid within ten days

After ten days the full amount is due

by the thirtieth day from the invoice

date.

On January 17, NetSolutions receives the amount

due within ten days, so the buyer deducted $30

($1,500 x 2%) from the invoice amount.

Receipts on Account

Credit Memo

 A credit memorandum , often called a

credit memo , authorizes a credit to

(decreases) the buyer’s account

receivable

On January 13, issued Credit Memo No 32 to Krier

Company for merchandise returned to NetSolutions Selling price, $225; cost to NetSolutions, $140.

Credit Memo

Purchase Transactions

On January 3, NetSolutions purchased merchandise

for cash.

Purchase Transactions

On January 4, NetSolutions purchased merchandise

on account from Thomas Corporation.

Purchases Discounts

 A buyer may receive a discount from

the seller (sales discount) for early

payment of the amount owed From

the buyer’s perspective, such

discounts are called purchases

discounts

Alpha Technologies issues an invoice for $3,000 to

NetSolutions dated March 12, with terms 2/10,

n/30 NetSolutions is trying to determine if it

should pay the invoice within the discount period

Purchase Transactions

Purchase Transactions

Alpha Technologies issued an invoice for $3,000 to

NetSolutions dated March 12, with terms 2/10, n/30 Based on the calculation in the previous slide,

NetSolutions pays the amount due, less the discount,

on March 22

Assume that, instead of paying the invoice within

the discount period, NetSolutions pays the invoice

on April 11.

Discount Not Taken

Purchases Returns and Allowances

 A purchases return involves actually

returning merchandise that is

damaged or does not meet the

specifications of the order From a

buyer’s perspective, such returns are called purchases returns and

allowances

 A debit memorandum , often called a

debit memo , informs the seller of the

Debit Memo

NetSolutions receives a delivery from Maxim

Systems and determines that $900 of the items are

not the merchandise ordered Debit memorandum

#18 is issued to Maxim Systems NetSolutions

records the return of the merchandise as follows:

On May 2, NetSolutions purchased $5,000 of

merchandise on account from Delta Data Link,

terms 2/10, n/30.

Merchandise Purchased

On May 4 , NetSolutions returned $3,000 of the

merchandise purchased from Delta Data Link.

On May 12, NetSolutions paid for the purchase of

May 2 less the return and discount.

Invoice Paid

 If ownership of the merchandise

passes to the buyer when the seller

delivers the merchandise to the

freight carrier, the terms are said to

be FOB (free on board) shipping

point

 If ownership of the merchandise

passes to the buyer when the buyer

receives the merchandise, the terms

are said to be FOB (free on board)

On June 10, NetSolutions buys merchandise from

Magna Data on account, $900, terms FOB shipping point and pays the shipping cost of $50.

Freight

On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination The cost of the merchandise sold is $480.

Sale Plus Freight Cost

On June 15, NetSolutions pays freight of $40 on the

sale of June 15.

Sale Plus Freight Cost

On June 20, NetSolutions sells merchandise to

Planter Company on account, $800, terms FOB

shipping point NetSolutions paid freight of $45,

which was added to the invoice The cost of the

merchandise sold is $360

Seller Prepays Freight

Seller Prepays Freight

On August 12, merchandise is sold on account to Lemon

Company, $100 The state has a 6% sales tax.

Sales Taxes

On a regular basis, the seller pays to the taxing authority

(state) the amount of the sales taxes collected.

Trade Discounts

 When wholesalers offer special

discounts to certain classes of buyers who order large quantities, these

discounts are called trade discounts

 Each merchandising transaction

affects a buyer and a seller In the

following illustrations, we show how

the same transactions would be

recorded by both the seller and the

buyer.

Dual Nature of Merchandise Transactions

Transactions

July 1 Scully Company sold merchandise on

account to Burton Co., $7,500, terms FOB shipping point, n/45 The cost of the merchandise sold was $4,500.

Scully Company (Seller)

Accounts Receivable—Burton Co 7,500

Accounts Payable—Scully Co 7,500

Dual Nature of Merchandise Transactions

July 2 Burton Company paid

transportation charges of $150 on the July 1 purchase from Scully Company.

Dual Nature of Merchandise Transactions

No entry.

Burton Company (Buyer )

Scully Company (Seller )

Dual Nature of Merchandise Transactions

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.

Dual Nature of Merchandise Transactions

Accounts Receivable—Burton Co 5,000

Cost of Merchandise Sold 3,500

Scully Company (Seller)

Burton Company (Buyer)

Accounts Payable—Scully Co 5,000

Dual Nature of Merchandise Transactions

July 7 Scully Company paid transportation

costs of $250 for delivery of merchandise sold to Burton Company

on July 5.

Dual Nature of Merchandise Transactions

Scully Company (Seller)

July 13 Scully Company issued Burton

Company a credit memorandum for merchandise returned, $1,000 The cost of the merchandise returned was

$700.

Dual Nature of Merchandise Transactions

Scully Company (Seller)

Sales Returns and Allowances 1,000

Accounts Receivable—Burton Co 1,000

Burton Company (Buyer)

Accounts Payable—Scully Co 1,000

Dual Nature of Merchandise Transactions

July 15 Scully Company received payment

from Burton Company for purchase

of July 5.

Dual Nature of Merchandise Transactions

Scully Company (Seller)

Accounts Receivable—Burton Co 4,000

Burton Company (Buyer)

Accounts Payable—Scully Co 4,000

Dual Nature of Merchandise Transactions

July 18 Scully Company sold merchandise

on account to Burton Company,

$12,000, terms FOB shipping point, 2/10, n/eom Scully prepaid

transportation costs of $500, which were added to the invoice The cost

of the merchandise sold was $7,200.

Dual Nature of Merchandise Transactions

Scully Company (Seller)

Accounts Receivable—Burton Co 12,000

July 28 Scully Company received payment

from Burton Company for purchase

of July 18, less discount (2% ×

$12,000).

Dual Nature of Merchandise Transactions

Scully Company (Seller)

Accounts Receivable—Burton Co 12,500

Burton Company (Buyer)

Accounts Payable—Scully Co 12,500

Dual Nature of Merchandise Transactions

 Distinguish between the activities and

financial statements of service and

merchandising businesses.

 Describe and illustrate the financial

statements of a merchandising business.

 Describe and illustrate the accounting

for merchandising transactions

including: sale of merchandise, purchase

of merchandise; freight, sales taxes, and trade discounts; dual nature of

Adjusting Entry for Inventory Shrinkage

 Merchandising businesses may

experience some loss of inventory

due to shoplifting, employee theft, or errors in recording or counting

inventory

 If the balance of the Merchandise

Inventory account is larger than the

total amount of the merchandise

count, the difference is often called

inventory shrinkage or inventory

At the end of the accounting period, Merchandise

Inventory has a balance of $63,950 A physical

count indicates that only $62,150 in inventory is

on hand This inventory shrinkage of $1,800 is

recorded by the following adjusting entry:

Inventory Shrinkage

1 Debit each temporary account with a credit

balance, such as Sales, for its balance and credit

Income Summary.

Step 1: Closing Entries

2 Credit each temporary account with a debit

balance, such as an expense, for its balance and

debit Income Summary.

Step 2: Closing Entries

3. Debit Income Summary for the amount of its

balance (net income) and credit the owner’s

capital account

Steps 3 and 4: Closing Entries

4 Debit the owner’s capital account for the balance

of the drawing account and credit the drawing

account.

5 Describe and illustrate the use of

the ratio of net sales to assets in evaluating a company’s operating performance.

Ratio of Net Sales to Assets

 The ratio of net sales to assets

measures how effectively a business

is using its assets to generate sales.

Ratio of Net

Sales to Assets

Net Sales Average Total Assets

=

Ratio of Net Sales to Assets

 The ratio of net sales to assets (in

millions) for Dollar Tree, Inc for each year are as follows:

Student Version

Businesses

The End