Chapter Accounting for

Merchandising

8
Operations
100 Shares

Merchandising?
$1 par value

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Learning
Learning Objectives
Objectives
 Describe merchandising activities and
identify income components for a
merchandising company.
 Identify and explain the inventory asset
of a merchandising company.
 Describe both perpetual and periodic
inventory systems.
 Analyze and record transactions for
merchandise purchases using a
perpetual system . statements.
 Analyze and record transactions for
merchandise sales using a perpetual
system.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
 Analyze and interpret cost flows
and operating activities of a
merchandising company.
 Prepare adjustments and close
accounts for a merchandising
company.
 Define and prepare multiple-
step and single-step income
 Record and compare
merchandising transactions
using both periodic and
perpetual inventory systems.
© The McGraw-Hill Companies, Inc., 2007
 Merchandising
Merchandising Activities
Activities
Service
Service organizations
organizations sell
sell time
time to
to earn
earn revenue.
revenue.

Examples:
Examples: accounting
accounting firms,
firms, law
law firms,
firms, and
and
plumbing
plumbing services
services

Minus Equals Net

Revenues Expenses
income

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Merchandising
Merchandising Activities
Activities
Merchandising Companies

Manufacturer Wholesaler Retailer Customer

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Reporting
Reporting Income
Income for
for aa Merchandiser
Merchandiser
Merchandising companies sell products to earn revenue.
Examples: sporting goods, clothing, and auto
parts stores
Net Minus Cost of Equals Gross Minus Equals Net
Expenses
Sales Goods Sold Profit Income

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Operating
Operating Cycle
Cycle for
for aa Merchandiser
Merchandiser
Begins with the purchase of merchandise and ends
with the collection of cash from the sale of
merchandise.
Cash Sale Credit Sale
Cash
Purchases collection Purchases

Merchandise
Cash Account
inventory
sales receivable

Merchandise
inventory Credit sales
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Inventory
Inventory Systems
Systems

Beginning Net cost of

inventory + purchases

= Merchandise
available for sale

Cost of Goods
Ending Inventory
+ Sold

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Inventory
Inventory Systems
Systems
Detailed records of the cost of each
Perpetual item are maintained, and the cost
Inventory of each item sold is determined
System
from records when the sale occurs.

Periodic Cost of goods sold is determined

Inventory only at the end of an accounting
System period.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 
Main Source, Inc. Invoice
614 Tech Avenue Date Number
Nashville, TN 37651  5/4/07 358-BI

S
o Name: Barbee, Inc.  Seller  Invoice date
l  Purchaser  Order number
d Attn: Tom Bell
Address: One Willow Plaza  Credit terms  Freight terms
T Cookeville, Tennessee  Goods  Invoice amount
o 38501
  
P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx Prepaid
Item Description Quanity Price Amount
AC417  250 Backup System 500 $ 54.00 $ 27,000

Sub Total 27,000

We appreciate your business! Ship Chg. -
Tax -
Total $  27,000

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Trade
Trade Discounts
Discounts
Used by manufacturers and wholesalers to offer
better prices for greater quantities purchased.

Example
Example
Matrix,
Matrix, Inc.
Inc. offers
offers aa 30%
30% trade
trade
discount
discount onon orders
orders ofof 1,000
1,000
units
units or
or more
more of of their
their popular
popular
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price ofof $5.25.
$5.25.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Purchase
Purchase Discounts
Discounts
A deduction from the invoice price granted to
induce early payment of the amount due.

Terms
Discount Period Credit Period
Time
Full amount Full amount due
Due less discount

Purchase or Sale

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Purchase
Purchase Discounts
Discounts

2/10,n/30
Number
Number ofof
Days
Days Otherwise,
Otherwise,
Discount
Discount Discount
Discount Is
Is Net
Net (or
(or All)
All) Credit
Credit
Percent
Percent Available
Available Is
Is Due
Due Period
Period

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Purchase
Purchase Returns
Returns and
and Allowances
Allowances
Purchase
Purchase Return
Return .. .. ..
Merchandise
Merchandise returned
returned by by the
the purchaser
purchaser toto the
the supplier.
supplier.
Purchase
Purchase Allowance
Allowance .. .. ..
A
A reduction
reduction in
in the
the cost
cost of
of defective
defective merchandise
merchandise
received
received by
by aa purchaser
purchaser from
from aa supplier
supplier

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Transportation
Transportation Costs
Costs
Seller Buyer

FOB shipping point Merchandise FOB destination

(buyer pays) (seller pays)

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Transportation
Transportation Costs
Costs
 If buyer (purchaser) paid the transportation cost (FOB Shipping point):
Periodic Inventory System
Dr Transportation In/Freight-In
Cr Cash
Perpetual Inventory System
Dr Merchandise Inventory
Cr Cash
*Freight-In is a part of cost of good purchased

 If the seller paid the transportation cost (FOB Destination):

Periodic and Perpetual
Dr Delivery Expense/Freight-Out
Cr Cash
*Delivery expense/freight out is a part of selling expense

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 RECORDING
RECORDING MERCHANDISE
MERCHANDISE TRANSACTIONS:
TRANSACTIONS:
PURCHASES
PURCHASES

 On 2 Nov, Z-Mart purchase the merchandise for

RM1,200 on credit with terms of 2/10, n/30, FOB
Shipping point.
Periodic
Dr Purchase 1,200
Cr Accounts Payable 1,200
Perpetual
Dr Merchandise Inventory 1,200
Cr Accounts Payable 1,200

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 RECORDING
RECORDING MERCHANDISE
MERCHANDISE TRANSACTIONS:
TRANSACTIONS:
PURCHASES
PURCHASES RETURNS
RETURNS AND
AND ALLOWANCES
ALLOWANCES

On 5 Nov Z-Mart returned RM300 merchandise

purchased on 2 Nov because of defects.
Periodic
Dr Accounts Payable 300
Cr Purchase Returns & Allowance 300

Perpetual
Dr Accounts Payable 300
Cr Merchandise Inventory 300

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 RECORDING
RECORDING MERCHANDISE
MERCHANDISE TRANSACTIONS:
TRANSACTIONS:
PURCHASES
PURCHASES DISCOUNTS
DISCOUNTS
 On 10 Nov Z-Mart pays the supplier for the purchase on 2 Nov.
Periodic
Dr Accounts Payable 900
Cr Purchase Discounts 18
Cr Cash (900-18) 882
(1,200-300=900 * 2/100 =18)
* 1,200-300 (return)=900
@
Perpetual
Dr Accounts Payable 900
Cr Merchandise Inventory 18
Cr Cash (1,200-24) 882

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 RECORDING
RECORDING MERCHANDISE
MERCHANDISE TRANSACTION:
TRANSACTION:
TRANSPORTATION
TRANSPORTATION IN
IN
Z-Mart paid RM75 freight charge to transport
merchandise to its store.
Periodic
Dr Transportation-In / Freight-In 75
Cr Cash 75
Perpetual
Dr Merchandise Inventory 75
Cr Cash 75

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 RECORDING
RECORDING MERCHANDISE
MERCHANDISE TRANSACTION:
TRANSACTION:
SALE
SALE OF
OF MERCHANDISE
MERCHANDISE
 On Nov 16, Z-Mart sold merchandise on credit to ANN
Enterprise, terms 1/12, n/30, FOB destination, RM24,000.
The merchandise cost RM12,000.
Periodic
Dr Accounts Receivable 24,000
Cr Sales 24,000
Perpetual
Dr Accounts Receivable 24,000
Cr Sales 24,000
Dr Cost of Sales 12,000
Cr Merchandise Inventory 12,000
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 RECORDING
RECORDING MERCHANDISE
MERCHANDISE TRANSACTION:
TRANSACTION:
RETURN
RETURN OF
OF MERCHANDISE
MERCHANDISE SOLD
SOLD
On Nov 18, Z-Mart accepted for full credit the return of merchandise
sold to ANN Enterprise on Nov 16, the cost of which was RM500.
Periodic
Dr Sales Return & Allowance 1,000
Cr Accounts Receivable 1,000
Perpetual
Dr Sales Return & Allowance 1,000
Cr Accounts Receivable 1,000
Dr Merchandise Inventory 500
Cr Cost of Goods Sold 500

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 RECORDING
RECORDING MERCHANDISE
MERCHANDISE TRANSACTION:
TRANSACTION:
SALES
SALES DISCOUNTS
DISCOUNTS
On Nov 26, Z-Marts received payment in full of the account from ANN
Enterprise
Periodic
Dr Cash 22,770 (23,000-230)
Sales Discounts 230
Cr Accounts Receivable 23,000 (24,000-1,000)
24000-1000(return & allowance) = 23,000 * 1/100 = 230
Perpetual
Dr Cash 22,770
Sales Discounts 230
Cr Accounts Receivable 23,000

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Perpetual
Inventory System:
Let’s complete the
accounting cycle
by preparing the
closing entries for
Barton.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Closing
Closing Entries:
Entries: Perpetual
Perpetual Inventory
Inventory System
System

Dec. 31 Sales . . . . . . . . . . . . . . . . . . . . 323,800

Income summary . . . . . . 323,800
To close credit balance in temporary accounts

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Closing
Closing Entries:
Entries: Perpetual
Perpetual Inventory
Inventory System
System

Dec. 31 Income Summary 310,900

Sales Discounts 4,300
Sales Return & Allowance 2,000
Cost of Sales 233,200
Adm. Salaries Expense 18,200
Sales Salaries Expense 29,600
Insurance Expense 1,200
Rent Expense 8,100
Supplies Expense 1,000
Advertising Expense 13,300
To close debit balances in temporary accounts

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Closing
Closing Entries:
Entries: Perpetual
Perpetual Inventory
Inventory System
System

Dec. 31 Income Summary 12,900

Barton, Capital 12,900
To close Income Summary account

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Closing
Closing Entries:
Entries: Perpetual
Perpetual Inventory
Inventory System
System
..

Dec. 31 Barton, Capital 4,000

Barton, Withdrawals 4,000
To close the withdrawals account

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Multiple-Step
Multiple-Step Income
Income Statement
Statement
(perpetual)
(perpetual)

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Single-Step
Single-Step Income
Income Statement
Statement
(Perpetual)
(Perpetual)

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Classified
Classified Balance
Balance Sheet
Sheet
(periodic
(periodic &
& perpetual
perpetual inv.
inv. system)
system)
MERCHANDISING COMPANY
BALANCE SHEET
31 DECEMBER 2007
ASSETS
Non-current Assets
Equipment $16,000
Current Assets
Cash $ 10,200
Merchandise Inventory 1,200 11,400
Total Assets $ 27,400

EQUITY AND LIABILITIES

Equity $ 22,200
Long-term Liabilities
Notes payable $4,000

Current Liabilities
Accounts payable $ 1,200
Total Equity and Liabilities $ 27,400

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
ODIC INVENTORY SYSTEM –TRIAL BALANCE
HighPoint Electronic
Trial Balance
As At 31 December 2007
DEBIT CREDIT

Cash 9,500
Accounts receivable 16,100

Merchandise Inventory 36,000

Prepaid Insurance 3,800

Store Equipment 80,000

Accumulated depreciation – 16,000

Store Equipment
Accounts Payable 20,400

RA Capital 83,000

RA, Drawing 15,000

Sales 480,00
0
Sales Return & Allowance 12,000

Sales Discounts 8,000

Purchases 325,00
Other information: Merchandise Inventory
0 on hand at
December
Purchase 31, RM40,000
Return & 10,400
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati,
Allowances Liana © The McGraw-Hill Companies, Inc., 2007
 CLOSING
CLOSING ENTRIES:
ENTRIES: PERIODIC
PERIODIC INV.
INV. SYSTEM
SYSTEM
Dr Merchandise Inventory (ending inventory) 40,000
Sales 480,000
Purchase Returns & Allowances 10,400
Purchase Discounts 6,800
Cr Income Summary 537,200
( To record ending inventory and close accounts with credit balances)

Dr Income Summary 492,200

Cr Merchandise inventory (beginning inventory) 36,000
Sales Returns and Allowances 12,000
Sales Discounts 8,000
Purchases 325,000
Freight-in 12,200
Store Salaries Expense 40,000
Rent Expense 19,000
Freight-out/delivery expense 7,000
Advertising Expense 16,000
Utilities Expense 17,000

(To close beginning inventory and other income statement accounts with debit balances)

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 CLOSING
CLOSING ENTRIES:
ENTRIES: PERIODIC
PERIODIC INV.
INV. SYSTEM
SYSTEM
 Dr Income Summary 45,000
 Cr RA Capital 45,000
 (To transfer net income to capital (537,200-
492,200)

 Dr RA, Capital 15,000

 Cr RA Drawing 15,000
 (To close drawings to capital)

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
MULTIPLE-STEP INCOME STATEMENT – PERIODIC INVENTORY SYSTEM
HighPoint Electronic
Income Statement
For the Year Ended December 31, 2007
Sales Revenue:
Sales 480,000
Less: Sales returns & allowances 12,000
Sales discounts 8,000 (20,000)
Net sales 460,000
Cost of Goods Sold:
Inventory, Dec 1 36,000
Purchase 325,000
Less:Purchase Returns & allowances
10,400 (17,200)
Purchase discounts 307,800
6,800 12,200
Net Purchase 320,000
Add: Freight-in 356,000
Cost of goods purchased (40,000)
Cost of goods available for sale (316,000)
Inventory, December 31 144,000
Cost of goods sold
Gross Profit
Operating expenses:
Advertising expense 16,000
Freight-out/Delivery Expense 7,000
Rent expense 19,000
Utility expense 17,000
Store salaries expense 40,000 (99,000)
Net Income 45,000

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Single-Step
Single-Stepincome
incomeStatement-
Statement-Periodic
PeriodicInventory
InventorySystem
System

HighPoint Electronic
Income Statement
For the Year Ended December 31, 2007
Revenue:
Net sales 460,000

Expenses:
Cost of good sold 316,000
Advertising expense 16,000
Freight-in/delivery expense 7,000
Rent expense 19,000
Utilities expense 17,000
Store Salaries expense 40,000 (415,000)
45,000

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 End of Chapter 8

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007