Accounting for Merchandising Business

ACG 2021: Chapter 5

Merchandising Business
Revenue activities of a merchandising business involve the buying and selling of merchandise Comparison to service business
Service Business
Fees earned

Merchandising Business
Sales

Less Operating expenses

=Net income

Less Cost of merchandise sold

=Gross Profit Less Operating expenses =Net Income

New Accounts on the Income Statement

SALES revenues collected from the sale of merchandise
COST OF MERCHANDISE SOLD the purchase price plus incidentals of merchandise available for resale GROSS PROFIT Sales Cost of merchandise sold

Income Statement
INCOME STATEMENT Gem City Music Income Statement For the Year Ended December 31, 20 Revenue from sales: Sales Less:: Sales returns and allowances Sales discounts Net sales Cost of merchandise sold XXXX Gross profit Operating expenses: Selling expenses: Sales salaries expense Administrative expenses: Rent expense 7,800 Office salaries expense Depreciation expenseoffice equipment Total operating expenses Income from operations Other expense: Interest expense Net income $189,300 $1,700 500 100,000 $ 87,100

2,200 $187,100

$17,700

22,550 2,800

33,150 50,850 $36,250 2,000 $ 34,250

Computation of Costs
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

Balance Sheet Accounts

Merchandise inventory merchandise on hand at the end of an accounting period.

Merchandising Terms
Sales total amount charged to customers for merchandise sold Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise Sales discount are granted by the seller to customers for early Net sales = Sales returns discount

Merchandising Terms
Cost of goods sold
Cost of merchandise sold to customers

Purchases discounts
Offered by the seller to buyer For early payment

Purchases allowances and returns

Buyer may receive a reduction in the intial price at which the merchandise is purchased.

Merchandising Terms
Merchandise available for sale =
Beginning merchandise inventory + net purchases

Net purchases =
Purchases minus discounts returns and allowances

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.

Accounting for Sales

CASH SALES Example 1: Sold merchandise for cash $5,000. Cost of merchandise sold $3,200
Date Account PR Debit Credit

Cash Sales

$5,000 $5,000

Cost of merchandise sold Merchandise inventory

3,200 3,200

Credit sales
Bank cards
Master card Visa Monies directly deposited in business account Requires a debit to CASH

Service charge must be later recorded as expense

Bank cards
Example 9: Sold merchandise on VISA $10,000. Cost of merchandise sold is $4,000. Credit card expense is 3% of sales.
Date Account PR Debit Credit

Cash
Sales Cost of merchandise sold

$10,000
$10,000 4,000

Merchandise inventory
Credit card expense Cash 300

4,000

300

Bank cards
Example 3: Sold merchandise on VISA $6,000. Cost of merchandise sold is $3,000. Credit card expense is 3% of sales.

Example 10
Cash 6,000 Sales
6,000

Cost of merchandise 3,000 Merchandise inventory 3,000 Credit card expense 180 Cash 180

Credit sales
Two types:
American express On account

Results in debit to ACCOUNTS RECEIVABLE

Sales of Account
Example 4: Sold merchandise on account $6,000. Cost of merchandise sold is $3,000.
Date Account PR Debit Credit

Accounts receivable Sales

$6,000 6,000

Cost of merchandise

3,000

Merchandise inventory

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 on Sales Discount

Example 5: Sold merchandise on account $5,000, terms 2/10, n/30. Cost of merchandise sold is $4,000.
Sales Discount Discount $ Sales Less discount Net amount $5,000 2% $100 $5,000 100 4,900

Sales discount
Date
Cash Sales discount Accounts receivable

Account

PR

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

Sales returns & allowances

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 7,000 Credit

Cost of merchandise Merchandise inventory

3,800 3,800

Sales returns & allowances

Return merchandise with sales price of $2,000 and cost of $1,000.
Date Account Sales returns Accounts receivable PR Debit 2,000 2,000 Credit

Merchandise inventory
Cost of merchandise sold

1,000
1,000

Recap of Sales Example

Example 7: ABC Merchandising had the following transactions: Sold merchandise and received payment by VISA at $6,000, cost of merchandise sold is $4,000. Sold merchandise on account for $7,500 with credit terms 1/10, n/30. Cost of the merchandise is $4,500. Sold merchandise on account for $4,000, cost of merchandise is $2,500. Received a return of the merchandise in (c ) of sales price of $2,000 and cost of $1,750. Received payment within the discount period for merchandise in (b). Received payment for merchandise in (c ).

Accounting for Purchases

Assume a perpetual inventory system
Each purchase and sale of merchandise is recorded as it occurs Example 1: purchase merchandise for resale $4,000 on account
Date Account Accounts payable PR Debit $4,000 $4,000 Credit Mar 1 Merchandise inventory

Purchases Discount
Credit terms 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.

Purchase discount
Example 9: Purchase merchandise for resale $4,000, terms 2/10, n/30 on account. Invoice: $4,000 Discount (2% x $4,000) 80 Net of discount 3,920

Purchase discount
Date Mar 1 Account Merchandise inventory Accounts payable PR Debit $4,000 $4,000 Credit

Mar 10

Accounts payable Cash Merchandise inventory

$4,000 $3,920 80

Purchase Discount
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.

Purchases Returns and Allowances

Purchase returns merchandise is returned to the seller Purchase allowances price adjustment Debit memorandum notification of the return or allowance by seller

Purchases Returns and Allowances

Example 11: Returned merchandise on account $2,500.
Date
Mar 09

Account
Accounts payable Cash

PR

Debit
$2,500

Credit

$2,500

Example
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

Recap of Purchases Example

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.

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

Example 13: Purchased merchandise for $4,000 with shipping costs of $50 FOB shipping point.

FOB shipping point

Date Account
Merchandise inventory Accounts payable

PR

Debit
$4,000

Credit

$4,000

Merchandise Inventory Cash

$50 $50

Transportation Costs
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.

FOB destination point

Date
Sales Cost of merchandise sold Merchandise inventory Delivery expense 50 2000 2000

Account
Accounts receivable

PR

Debit
$4,000

Credit
$4,000

Cash

50

Transportation costs
FREIGHT TERMS
FOB Shipping Point Ownership (title) passes to buyer when merchandise is freight Transportation costs are paid by Delivered to carrier FOB Destination Received by buyer

Buyer

Seller

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.

Sales Taxes
Date
Sales Sales tax payable Cost of merchandise Merchandise inventory 3,800 3,800

Account
Accounts receivable

PR

Debit
$7,350

Credit
7,000 350

Recap of Transactions
Seller Sold merchandise on account: Accounts receivable DR Sales CR Cost of merchandise sold DR Merchandise inventory CR Transportation costs Shipping point Buyer Purchased merchandise on account: Merchandise Inventory DR Accounts Payable CR

Transportation costs Shipping point: Merchandise Inventory DR Cash CR Transportation costs - Destination

Transportation costs Destination: Delivery Expense DR Cash CR

Merchandise returned: Sales Returns & Allowances Accounts receivable Merchandise inventory Cost of merchandise sold
Payment : Cash Accounts receivable Payment with discount: Cash DR Sales discount DR Accounts receivable DR

DR CR DR CR

Merchandise returned: Merchandise inventory DR Accounts payable

CR

CR

Payment: Accounts payable Cash

DR CR

Payment with discount: Merchandise inventory DR Cash CR 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 PR Debit 3,000 Credit

Merchandise inventory

3,000

Closing Entries
Accounts that must be closed
Sales Rent revenue Sales returns and allowances Sales discounts Cost of merchandise sold All expenses and revenues Dividends