Journal entries

May-01 Prepaid rent (A) 18,000

IVA Receivable (A) 2,880

May-03 Temporary investment (A) 14,000

May-09 Office supplies inventory (A) 1,000

IVA Receivable (A) 160

May-18 Cash (A) 19,140

May-26 Cash (A) 15,000

May-31 Utilities [E) 800

IVA Receivable (a) 128

Adjusting entries

May 1 --> 1 month rent used rent cost for 6 mnths --> 18,000 /6

A1) Rent (E] 3,000

Prepaid rent (a)

Uneraned fees --> 28,000 received for 4 months services --> started MAY 1

A2) Unerarned fees (l) 7,000

Fees earned (r]
 CETES --> interst 150. WLL BE Collected in June

A3) Interest receivable (a) 150

Interest on investment (r]

Off. Supplies inv. Start--> 5,000 now--> 2,000

A4) Use Office supplies (e] 3,000

Office supplies inventory (a)

Off furniture usefull life--> 20 years

rescue value--> 20,000 6,000 / year --> 500 monthly

A5) Depreciation of equipment (e] 500

Accu depreciation on office
supplies (-A)
Cash (A) 20,880

Cash (A) 14,000

Cash (A) 200

Creditors (L) 960

Earned fees (r] 16,500

IVA Payable (l) 2,640

Capital stock (oe) 10,000

Premium on stock (oe) 5,000

Acc. Payable (l) 928

3,000 / month

3,000

28,000/4->
7,000 per
month

7,000
 150

3,000

500
CHAPTER 5: Accounting for Merchandising Businesses
     I.        Nature of Merchandising Businesses

Service BusinMerchandising Business

1. Revenue ac1. Revenue activitiesà buying and selling of merchandise. (purchases to sell to its customers).
- Salesà Merchandise is sold
2. Operating - Cost of merchandise mmmsoldàexpense

3. Net income2. Gross profitàsales – cost of M. sold = profit before deducting operating expenses.

3. Operating expensesà incurred in providing the services.

4. Net incomeà fees earned - o.expenses

·        
Merchandise inventory à Merchandise on hand (not sold) at the end of an accounting period. Reported as a current asset on t
·         The operating cycle beginsà spending cash, ends à with receiving cash from customers.
·         It is the process.
   II.        Financial Statements for a Merchandising Business
a)    Multiple-Step Income Statement
·         contains several sections, subsections, and subtotals
1. Revenue from Salesà consists of sales, sales returns and allowances, sales discounts, and net sales.
Ø  Sales à Total amount charged customers for merchandise sold, including cash sales and sales on account.

Ø  Sales returns and allowances à Granted by the seller to customers for damaged or defective merchandise. Customer may re

Ø  Sales discountsà Granted by the seller to customers for early payment of amounts owed.

Ø  Net salesà subtracting sales returns and allowances and sales discounts from sales = SALES – (RETURNS + ALLOWANCE +DIS

2. Cost of Merchandise Sol- All the costs of acquiring the merchandise and readying it for sale: purchase and freight costs.
·         Two systems of accounting for recording and reporting the cost of merchandise sold are:
1. Periodic inventory systemà don´t show amount available for sale or amount sold during the period. à Cost of merchandise s
2. Perpetual inventory systemà Each purchase and sale of merchandise is recorded in the inventory and the cost of merchandi

3. Gross Profità Net sale – Cost of merchandise sold.

4. Income from Operations/Operating incomeà Gross profit - operating expenses.
Operating expenses à * selling expenses or * administrative expenses.
Selling expensesà incurred directly in selling of merchandise.
Administrative expensesà(general expenses) incurred in administration or general operations of the business.

5. Other Income and Expenseà items are not related to the primary operations of the business.
*Revenueà sources other than the primary operating activity of a business. - income from interest, rent, and gains resulting f
*Expenseà expense not traced to normal operations of business. : -interest expense and losses from disposing of fixed assets.

b)    Single-Step Income Statementà Deducts the total of all expenses in one step from the total of all revenues.
à Emphasizes total revenues and total expenses in determining
net income.
è Gross profit and income from operations are not reported.

c)    Retained Earnings Statementà Prepared in the same manner as for a service business.

d)    Balance Sheet ->may be presented:

*account formà with assets on the left-hand side and the liabilities& stockholders’ equity on the right-hand side.
*Report formà Downward sequence in three sections.

  III.        Merchandising Transactions

1.    Chart of Accounts for a Merchandising BusinessàReflect the elements of the financial statements.
àChart of accounts consists of three-digit account numbers: The first digit indicates the major financial statement classification
àUsing a three-digit numbering system makes it easier to add new accounts as they are needed.
2.    Sales Transactionsà recorded using the rules of debit and credit

·         Subsidiary ledgeràlarge number of individual accounts with a common characteristic

·         General ledgerà Contains all of the balance sheet and income statement accounts.
·         Controlling accountà Summarizing account which represents in the general ledger each subsidiary ledger.
·         Subsidiary ledger balance = balance of the controlling account.
-Common subsidiary ledgers are:

1. Accounts receivable subsidiary ledger(customers ledger)à lists individual customer accounts in alphabetical order. (controlli

2. Accounts payable subsidiary ledger(creditors ledger)àlists individual creditor accounts in alphabetical order. (controlling acc

3. Inventory subsidiary ledger (inventory ledger)à lists individual inventory by item (bar code) number.(controlling account in t
An inventory subsidiary ledger is used in a perpetual inventory system.

a)   
Cash Salesà Cash sales are normally entered (rung up) on a cash register and recorded in the accounts.

·        
Customers using credit cards such as MasterCard or VISA. Such sales are recorded as cash sales.

b)    Sales on Accountà A business may sell merchandise on account. The seller records such sales as a debit to Accounts Recei

c)    Sales Discounts àThe terms of a sale are normally indicated on the invoice or bill that the seller sends to the buyer.
·         Credit termsà The terms for when payments for merchandise are to be made. If payment is required on delivery, the ter
·         Credit period à the buyer is allowed an amount of time in which to pay. Usually beginsàdate of the sale as shown on the
If payment is due within a stated number of days after the invoice date, such as 30 days, the terms are net 30 days. These term
-          If you pay before you´ll get 2% disc= These terms are expressed as 2/10, n/30 and are read as 2% discount if paid within
d)    Sales Returns and Allowancesà Merchandise sold may be returned to the seller (sales return). In other cases, the seller ma
-          credit memorandum àIf the return or allowance is for a sale on account, the seller usually issues the buyer a, often calle
-          A credit memo authorizes a credit to (decreases) the buyer’s account receivable. A credit memo indicates the amount a
-          Sales returns and allowances reduce sales revenue. Also, returns often result in additional shipping and handling expens
-          Sales returns and allowances are recorded in a separate sales returns and allowances account, which is a contra (or offs

3.    Purchase Transactions

a)    Purchases Discountsà Discount from the seller (sales discount) for early payment of the amount owed.
-          Reduce the cost of the merchandise purchased. Even if the buyer has to borrow to pay within a discount period.
b)    Purchases Returns and Allowances à returned (purchases return) or a price allowance (purchases allowance) for damaged
-          The buyer sends the seller a debit memorandum.
-          Debit memorándumà( debit memo)à Informs the seller of the amount the buyer proposes to debit to the account payab
-          Buyer debits Accounts Payable and credits merchandise Inventory

4.    Freight
-          (free on board) shipping pointà The ownership of the merchandise may pass to the buyer when the seller delivers the m
o   Buyer pays the freight costs from the shipping point to the final destination.
o   Such costs are part of the buyer’s total cost of purchasing inventory and are added to the cost of the inventory by debiting
-          FOB (free on board) destinationà The ownership of the merchandise may pass to the buyer when the buyer receives the
o   seller pays the freight costs from shipping point TO buyer’s final destination.
o   Seller debits Delivery Expense or Freight Out. Reported on the income statement as a selling expense.
-          The seller may prepay the freight even though the terms are FOB shipping point. The seller will then add the freight to
amount of the invoice, including the freight. Any discount terms would not apply to the prepaid freight.

5.    Sales Taxes and Trade Discounts

a)    Sales Taxes àAlmost all states levy a tax on sales of merchandise. The liability for the sales tax is incurred when the sale is
-          Receivable - Payable
-          Trade Discounts àWholesalers (companies that sell merchandise to other businesses rather than to the public). Offer sp

6.    Dual Nature of Merchandise Transactions

-          Each merchandising transaction affects a buyer and a seller.
àsee pag 231 book

IV.        The Adjusting and Closing Process

1. Adjusting Entry for Inventory Shrinkage
- The balance of the merchandise inventory account à Amount of merchandise available for sale at that point in time.
- inventory shrinkage or inventory shortageà loss of inventory due to shoplifting, employee theft, or errors. Thus, the physical
2. Closing Entries
The four closing entries:
1. Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary.
2. Credit each temporary account with a debit balance, such as the various expenses, and credit Income Summary. Since Sales
3. Debit Income Summary for the amount of its balance (net income) and credit the retained earnings account. The accounts d
4. Debit the retained earnings account for the balance of the dividends account and credit the dividends account.
* After the closing entries are posted to the accounts, a post-closing trial balance is prepared. The only accounts : asset, contra

   V.        Financial Analysis and Interpretation:

1.    Ratio of Net Sales to Assets
-          ratio of net sales to assetsà measures how effectively a business is using its assets to generate sales.
§  High ratioà effective use of assets.
o   The assets used may beà total assets at the end of the year, the average of the total assets at the beginning and end of the
o   The ratio is computedà
customers).

Reported as a current asset on the balance sheet.

s on account.

merchandise. Customer may return merchandise or accept an allowance from the seller.

– (RETURNS + ALLOWANCE +DISC)

purchase and freight costs.

period. à Cost of merchandise sold and the merchandise on hand are determined at the end of the period by physically counting the inven
ntory and the cost of merchandise sold accounts. As a result. à amounts of merchandise available for sale and sold are continuously updat

of the business.

erest, rent, and gains resulting from the sale of fixed assets.
 from disposing of fixed assets.

l of all revenues.

he right-hand side.

financial statement classification (1 for assets, 2 for liabilities, and so on). The second digit indicates the subclassification (e.g., 11 for curre

ubsidiary ledger.

in alphabetical order. (controlling account in the general ledger= Accounts Receivable)

habetical order. (controlling account in the general ledgerà Accounts Payable)

number.(controlling account in the general ledgerà Inventory)

les as a debit to Accounts Receivable and a credit to Sales

eller sends to the buyer.

t is required on delivery, the terms are cash or net cash.
date of the sale as shown on the invoice.
erms are net 30 days. These terms may be written as n/30. If payment is due by the end of the month in which the sale was made, the term
ad as 2% discount if paid within 10 days, net amount due within 30 days.
rn). In other cases, the seller may reduce the initial selling price (sales allowance).
ly issues the buyer a, often called a credit memo.
t memo indicates the amount and reason for the credit.
al shipping and handling expenses
count, which is a contra (or offsetting) account to Sales.

mount owed.
within a discount period.
chases allowance) for damaged or defective merchandise.

es to debit to the account payable due the seller. It also states the reasons for the return or the request for the price allowance.

er when the seller delivers the merchandise to the freight carrier.

ost of the inventory by debiting Merchandise Inventory.

yer when the buyer receives the merchandise.

ller will then add the freight to the invoice. The buyer debits Merchandise Inventory for the total

tax is incurred when the sale is made.

her than to the public). Offer special discounts to government agencies or businesses that order large quantities.

le at that point in time.

eft, or errors. Thus, the physical inventory on hand at the end of the accounting period is usually less than the balance of Merchandise Inve

Income Summary.
it Income Summary. Since Sales Returns and Allowances, Sales Discounts, and Cost of Merchandise Sold are temporary accounts with deb
arnings account. The accounts debited and credited are reversed if there is a net loss.
dividends account.
The only accounts : asset, contra asset, liability, and stockholders’ accounts with balances.

nerate sales.

at the beginning and end of the year, or the average of the monthly assets.
 by physically counting the inventory
and sold are continuously updated in the inventory records. àwidely used.
bclassification (e.g., 11 for current assets, 12 for noncurrent assets). The third digit identifies the specific account (e.g., 110 for Cash, 123 fo
hich the sale was made, the terms are written as n/eom.

r the price allowance.

he balance of Merchandise Inventory. This difference.

e temporary accounts with debit balances, they are credited for their balances.
count (e.g., 110 for Cash, 123 for Store Equipment).