1CHAP3 Acc For Merchandize

Principle of Accounting I: - Chapter 3 (Accounting for Merchandising Enterprise) Lecturer Note
CHAPTER THREE
ACCOUNTING FOR A MERCHANDISING ENTERPRISE
Learning Objective
 Describe and illustrate the nature of merchandising enterprise
 Describe and illustrate the accounting for merchandising transaction, including
Purchases of merchandise
Sales of merchandise
Trade discount
Transportation cost
Sales taxes
 Describe and illustrate the periodic inventory systems; describe and illustrate the cost of
goods sold section of an income statement.
 Describe and illustrate the journal entries for merchandise inventory adjustments at year
end
 Describe and illustrate the preparation and completion of a work sheet for a merchandising
enterprises
 Describe and illustrate the alternative formats and terminology for the financial statement.
 Describe and illustrate the preparation of adjusting entries for a merchandising enterprise.
 Describe and illustrate the preparation of closing entries for a merchandising enterprise
 Describe and illustrate the preparation of reversing entries
3.1. Introduction
Nature of merchandising enterprise
Merchandising enterprises are characterized by the basic operations of buying and selling finished
products and include both whole sellers and retailers. Merchandises are goods acquired
(purchase) for resale to customers. The primary differences between a service business and a
merchandising business relate to Revenue activities.
These differences are illustrated by focusing on the revenue and expenses in the following
condensed income statements.
Service Business
Fees earned (Revenue from service) ---------------xxx
Operating expenses --------------------------------- xxx
Net income ---------------------------------------- xxx
1
The revenue activities of a service business involve providing services to customers.

Merchandising Business
Sales (When merchandise to sold) ------------------------------xxx
Cost of good (its cost recognize as expenses) -----------------xxx
Gross profit ------------------------------------------------------- xxx
Operating expenses --------------------------------------------- xxx
Net income ----------------------------------------------------- xxx
Merchandise on hand (not sold) at the end of an accounting period is called merchandising
inventory. It is reported as on current asset on the balance sheet.
Merchandising inventory system
There are two main systems for accounting merchandise held for sales:-
A. periodic system
B. perpetual system
A- Periodic system
It is used by many merchandise enterprises. The revenue from sales are recorded when sales are
made, but no attempt is made on the sales date to record the cost of merchandise sold. It is only by
(a detailed listing of the merchandise on hand called physical inventory at the end of the
accounting period.
B. Perpetual system
Both the sales amount and the cost of merchandise sold amount are recorded when each item of
merchandise sold. The accounting recorded continuously (perpetually) disclose inventory on hand.
3.2. Accounting for purchase
Purchases of merchandise, which may be for cash or on account, are usually identified in the
ledger as purchases. The purchases account is used only for merchandise acquired for resale. The
purchases account does not indicate whether the purchased goods have been sold or still on hand.
At the end of the period, the balance in the purchases account represents the cost of all goods
purchase during the period. This 2amount is added to the beginning inventory to determine the cost
of goods sold.
When the purchases are made for cash, the transaction could be recorded as follow:
DR. Purchase ----------------------------------- xxx
CR. cash ---------------------------------------------- xxx
2
Most purchases of merchandise are made on account and could be recorded as follow:
Illustrations purchased merchandise on account. Terms 2/10, n/30, FOB Shipping point, $ 30.000
August 1 DR. purchases ------------------------- 30.000
CR. Account payable ------------------------ 30,000
3.2.1. Purchase discount
The arrangements agreed up on by the buyer and the sellers as to when payments for merchandise
are to be made are called the credit terms. If payment is required immediately up on delivery, the
terms are said to be "cash" or "net cash" otherwise, the buyer is allowed a certain amount of time,
known as the credit period, in which to pay. It is usual for the credit period to begin with the date
of the sale by the date of the invoice or bill.
Example - if the payment is due a stated number of days after the date of invoice, for example 30
days, the term are said to be "net 30 days" which may be written "n/30" If the payment is due by
the end of the month in which the sale was made, it may expressed as "n/eom"
The selling company regards a cash discount as a sales discount; the buying company calls
the discount a purchase discount. The effect of the discount was to reduce the cost of the
merchandise to the buying company. The credit balance of the purchase discount account should
therefore be deducted in the income statement from the debit balance of the purchase account.
The meaning of the term 2/15, n/30 is that the seller offer to the buyer of 2% discount for sending
the payment 15 days before it is otherwise due.
Thus, the purchase discounts account is contra (or offset) account to purchase.
Example: On August 11, Paid for merchandise purchased on august 1, less discounts.
DR. Account payable ---------------------------------------- 30.000
CR. purchase discount (30.000 x 2%) ------------------ 600
CR Cash -------------------------------------------------- 29,400
Note- Do companies usually take advantage of available cash discounts? The answer is yes. The
term 2/10, n/30 offers the buyer a 2% discount for sending payment 20 days before it is otherwise
due. Saving 2% by paying 20 days early is equivalent to earning an annual return of over 36% (2%
x 365/20 = 36.5%). Thus, taking cash discounts represent an excellent investment opportunity.
Most companies take these discounts even if they must borrow from a bank in order to have
necessary cash available.
3
3.2.2. Purchase return and allowance

When merchandise purchased from suppliers is found to be unsatisfactory, the goods may
be returned, or a request may be made for an allowance on the price. When merchandise is
returned (purchases return) or a price adjustment (purchase allowance) is requested, the buyer
usually communicates with the seller in writing. The details may be stated in a letter, or the buyer
(debtor) may use a debit memorandum form. The debtor may use a copy of the debit
memorandum as the basis for an entry or may wait for confirmation from the creditor, which is
usually in the form of a credit memorandum. The amount of debit memorandum is deducted from
the invoice amount. Thus the purchase return & allowance account is contra (or offset) account to
purchases.
Management is interested in the percentage relationship b/n goods purchased and returned
b/c the returning of merchandise for credit is an expensive, time -consuming process. Excessive
returns suggest inefficiency in the operation of the purchasing department and a need to find more
dependable suppliers.
Illustration -3- August 14 purchases merchandise on account, term 4/15, n/30 FOB shipping point,
$ 20.000. DR. Purchase-----------------------20,000
CR. A/P------------------------------- 20.000
August 16-Returned merchandise purchase on August 14 $ 5,200
DR. Account payable ------------------------ 5,200
CR. purchase return & allowance ------------- 5,200
August 29 paid for merchandise purchased on August 14, less return and discount.
DR. Account payable (20,000- 5,200) ---------14,800
CR. Purchase discount (14,800 x 4%) ----------- 592
CR. Cash ----------------------------------------------14,208
3.3. Accounting for sales
Revenue from merchandise sales is usually identified in the ledger as sales. Sometimes a
business will use a more exact title, such as sales of merchandise. A business may sell merchandise
for cash. Cash sales are normally rung up (entered) on cash register and recorded in the accounts.
Sales to customers who use bank credits cards (such as VISA card, Master card) are generally
treated as cash sales.
Illustration: - ABC Company sold merchandise for 10,000 to PC Company for cash
DR Cash-----------------------------------------------10,000
4
CR Sales---------------------------------------------------10,000
A business may sell merchandise on account. The seller records such sales as a debit to account
receivable and a credit to sales. Sales made by the use of non bank credit cards (such as American
express) generally must be reported periodically
Illustration ABC Company sold merchandise on account to BC co. for $ 14,000
DR. Account Receivable ----------------- 14,000
CR sales -------------------------------------------- 14,000
3.3.1. Sales discounts
The seller refers to the discounts taken by the buyer for early payment of an invoice as
sales discounts. They are recorded by debiting the sales discounts account and are considered to be
reduction in the amount initially recorded in sales. The sales discount account is a contra
(offsetting) account to sales.
Illustration - August 7- sold merchandise on account term 1/10, n/30 FOB destination $ 20,000
DR. Account Receivable ----------------------------- 20,000
CR sales ------------------------------------------------------------ 20,000
August 7- Received cash on account from sales of August 7, less discount
DR, cash------------------------------------ 19,800
DR, Sales discount (20,000 x 1 %) --------- 200
CR, Account Receivable ------------------------ 20,000
3.3.2. Sales return and allowance
Merchandise sold may be returned by the buyer (sales return) or, because of defects or for
other reasons, the buyer may allow a reduction from the original price at which the goods were
sold (sales allowance). If the return or allowance is for a sale on account, the seller usually gives
the buyer a credit memorandum. This memorandum shows the account for which the buyer is to be
credited and the reason therefore. The effect of sales return or allowance is reduction in sales
revenue and a reduction in cash or account receivable. If the sales account is debited, the balance
of the account at the end of the period will represent net sales, & the volume of return &
allowances will not be disclosed. Because of the loss in revenue resulting from allowance and
various expenses (transportation, unpacking, repairing, reselling etc) related to return if it is
advisable that management know the amount of such transaction. Such policy will allow
management to determine the causes of return & allowance and to take corrective action. -Sales
return and allowance is a contra (offsetting) account to sales.
5
Illustration: - Returned merchandise purchase of the credit sales of 6000 because of defective
amounted $ 300
DR. Sales return & Allowance -------------------- 300
CR. Account Receivable -------------------------------- 300
If the sale was on cash basis and cash is refunded for merchandise returned or for an allowance, the
seller debit the sales return & allowance and credit cash.
3.4. Transportation cost
The terms of the agreement between buyer & seller include provisions concerning.
1. When the ownership (title) of the merchandise passes to the buyer and
2. Which party is to bear the cost of delivering the merchandise to the buyer?
There are two shipping terms.
A. FOB shipping point
B. FOB destination
A. FOB shipping point
This means the ownership passes to the buyer when the seller delivers the merchandise to
the shipper; the buyer is to absorb the transportation cost. FOB shipping point means the seller
places the merchandise "free on board" at the shipping point and the buyer is responsible for the
transportation cost beyond that point. When merchandise is purchased on term FOB shipping
point, transportation cost is paid by the buyer and its record as
DR. Transportation in (freight in) -------------- xxx
CR. cash ---------------------------------------------- xxx
The balance of Transportation in should be added to the net purchase to determine the cost of
merchandise sold.
EX. Paid transportation charge on purchased merchandise on account, term 2/10, n/30, FOB
shipping point of $ 1,000
DR. Transportation in ------------------------- 1,000
CR. cash --------------------------------------------- 1,000
B. FOB destination
This means the ownership passes to the buyer when the merchandise is received by the buyer is to
assume the costs of transportation. FOB destination means that the seller places the merchandise
"free on board" to its destination by paying the delivery cost. When the agreement states that the
6
seller is to bear the delivery costs (FOB destination) the amount is paid by the seller and it's
recorded as follow
DR Transportation out /Delivery expense---------------------xxx
CR Cash--------------------------------------------------------------xxx
This costs incurred is reported to the income statement as selling expense
Example: - Paid transportation is charge on sold of merchandise on account, term 1/10, n/30 FOB
destination amounted $ 1,500
DR. Transportation out ----------------------------- 1,500
CR cash ----------------------------------------------------1,500
Note- When the terms provide for a discount for early payment, the discount is based on the
amount of sale return than on the invoice total.
EX. Assume ABC co. sold merchandise to BC co. on account term 2/10, n/30 on Jan 1. $ 1000
with prepaid transportation cost of $ 100 added to invoice.
Required: - Entry by the purchaser at the time of purchase and at the time of payment on Jan 10.
Jan 1 DR purchase ------------------------------- 1000
DR Transportation in------------------------ 100
CR Account payable ------------------------- 1100
Jan 10 DR Account payable ------------------------- 1100
CR cash -------------------------------------------------1,080
CR Purchase discount ----------------------------------- 20
 Invoice from seller (including trans. cost) ---------------1100
 Amount subject to discount ---------------- 1000
 Rate of discount ----------------------------- 2%
 Amount of purchase discount ------------------------------ 20
 Amount payable ------------------------------------------ --1080
EX. What entry wills the seller in the above transaction?
Jan. 1 DR. Account Receivable ------------------- 1,100
CR sales ---------------------------------------1,100
Jan. 10 DR. cash ---------------------------1.080
DR sales discount --------------------20
CR Account Receivable ---------1,100
7
3.5. Periodic Reporting

At yearly intervals throughout the life of a business enterprise, the operating data for the fiscal year
must be summarized & reported for the use of manager, owners, creditors, various governmental
agencies, and other interested persons. Summaries of the various assets of the enterprise on the
last day of the fiscal year, together with the status of the equities of creditors and owners must be
reported.
The sequences of year end producers are the following
1. Prepare a trial balance of the ledger on the worksheet form
2. Review the accounts and gather the data required for the adjustment
3. Insert the adjustments and complete the worksheet
4. Prepare financial statements from the data in the worksheet
5. Journalize the Adjusting entries and post to the ledger
6. Journalize the closing entries post to the ledger
7. Prepare a post- closing trial balance of the ledger.
In a merchandising business, merchandise purchased during the period has been recorded in the
purchases account. Some of this merchandise may have been sold during the period, and some
may be unsold at the end of the period (ending inventory). This ending inventory becomes the
beginning inventory for the next period.
Adjustment is needed:-
To account for the inventory that is in order match revenue and expense.
To account for deferrals and accruals.
3.5.1. Cost of merchandise sold
For merchandising enterprises that uses the periodic system, the cost of merchandise sold
during the period is reported in a separate section in the income statement. When there is no
beginning inventory and with no deduction & additions to purchases cost of merchandise sold:
Purchase ------------------------------------------- xxx
Less, merchandise inventory (Ending) -------- xxx
Cost of merchandise sold ------------------------- xxx
Purchase returns & allowances and purchase discounts are deducted from the total purchases to
yield the net purchases. Transportation costs are added to the net purchases to yield cost of
merchandise purchased. The beginning inventory is added to the cost of merchandise purchase to
8
yield the merchandise available for sale. - Ending inventory is subtracted from merchandise
available for sale to yield cost of merchandise sold.
Answer 1.
Cost of merchandise sold :-
Merchandise inventory, Jan 1 ---------------------------------------------- 113,800
Purchase -------------------------------------- ---------------500,000
Less purchase return & allowance ------ (12,500)
Purchase discount --------------------- (6,500) (19,000)
Net Purchase --------------------------------------------------481.000
Add Transportation In ----------------------------------------2,400
Cost of merchandise purchase ---------------------------------------------- 483,400
Cost of merchandise available for sale ------------------------------------- 597,200
Less merchandise inventory Dec. 31 ---------------------------------------- 107,500
Cost of merchandise sold ----------------------------------------------------- 489.700
3.6. Merchandise inventory adjustment
The best method of making the data available for reporting the cost of merchandise sold is
to maintain a separate account entitled merchandise inventory. - Through out an accounting period,
this account shows the inventory at the beginning of the period. - At the end of the period it is
necessary to remove from merchandise inventory the amount representing the inventory at the
beginning of the period and to replace it with the amount representing the inventory at the end of
the period. - There are two adjusting entries required:-
1. The first adjusting entries transfer the beginning inventory to income summary. Since
the beginning inventory is part of cost of merchandise sold, if is debited to income
summary.
Dec 31 DR income summary ---------------------------- 113,800
CR. merchandise inventory ------------------------------ 113,800
2. The second adjusting entry debits the cost of merchandise inventory at the end of the
period to the asset account, merchandise inventory ending. The credit portion of the
entry effects a deduction of the unsold merchandise from the total cost of the
merchandise available for sale during the period.
Dec. 31 DR. Merchandise inventory --------------- 107,500
CR. Income summary -------------------------------- 107,500
9
You can work the effect of the above transaction in the T-account form.
4. 113,800 -Part of the cost of merchandise available for sale
5. 107,500 - a deduction from cost of merchandise available for sale
Merchandising Inventory
Dec 31, Preceding year 113,800 Dec 31, current year 113, 8000
Dec 31, current year 107,500
Income summary
Dec 31, current year 113,800 Dec 31, current year 107,500
3.7. Completion of the work sheet

Illustration: - the accounts and their balances in the ledger of Miller Company on December 31 of
the current year are as follow.
Cash ------------------------------------------------------------------------------ 38,500
Account Receivable ------------------------------------------------------------ 88,300
Merchandise Inventory --------------------------------------------------------- 113,800
Prepaid Insurance ---------------------------------------------------------------- 9,500
Store supplies -------------------------------------------------------------------- 2,300
Office supplies ------------------------------------------------------------------- 1,500
Store equipment ------------------------------------------------------------------ 86,600
Accumulated Depreciation – store equipment ------------------------------- 28,000
Office equipment ----------------------------------------------------------------- 29,300
Accumulated Depreciation – office equipment-------------------------------- 12,000
Account payable ------------------------------------------------------------------ 89,500
Salaries payable ------------------------------------------------------------------- ----
Unearned rent --------------------------------------------------------------------- 2,400
Note payable (due 1999) -------------------------------------------------------- 100,000
W.A. Miller, capital -------------------------------------------------------------- 79,800
W.A. Miller, drawing ------------------------------------------------------------- 48,000
10
Income summary ----------------------------------------------------------------- ------

Sales ------------------------------------------------------------------------------- 760,000
Sales returned and allowance --------------------------------------------------- 12,000
Sales discount --------------------------------------------------------------------- 7,500
Purchases---------------------------------------------------------------------------500,000
Purchases returned and allowance----------------------------------------------12,500
Purchase discount-----------------------------------------------------------------6,500
Transportation in-----------------------------------------------------------------2,400
Sales salaries expense------------------------------------------------------------64,000
Advertising expense-------------------------------------------------------------- 18,000
Depreciation expense – store equipment--------------------------------------- -----
Store supplies expense----------------------------------------------------------- -----
Miscellaneous selling expense-------------------------------------------------- 1,400
Office salaries expense----------------------------------------------------------- 31,000
Rent expenses--------------------------------------------------------------------- 24,000
Depreciation expense – office equipment------------------------------------- -------
Insurance expenses--------------------------------------------------------------- ------
Office supplies expenses--------------------------------------------------------- ------
Miscellaneous administration expenses---------------------------------------- 1,100
Rent income------------------------------------------------------------------------ ----
Interest expenses------------------------------------------------------------------ 11,500
The data for year-end adjustments on December 31 are as follows:-
Merchandise inventory on December 31 ---------------------------------- 107,500
Insurance expired during the year ------------------------------------------ 6,900
Inventory of supplies on December 31
Store equipment ----------------------------------------------------------- 900
Office supplies ------------------------------------------------------------ 500
Depreciation for the year:
Store equipment ------------------------------------------------ 8,100
Office equipment ----------------------------------------------- 3,000
Salaries payable on December 31:
Sales salaries ---------------------------------------------------- 2,500
11
Office Salaries ------------------------------------------------- 1,200

Rent income earned for the year ---------------------------------- 600
Instruction:
1. Prepare a work sheet for the fiscal year ended December 31. list all accounts in the order
given
2. Prepare the cost of merchandise sold section of the income statement from the data
presented in the income statement columns of the work sheet.
First Journalizing Adjusting entries
Date Description Debit Credit
Dec. 31 income summary 113,800
Merchandise Inv 113,800
Merchandise Inv 107,500
31 income summary 107,500
Insurance expense 6,900
31 prepaid insurance 6,900
Store supplies exp 1,400
Store supplies 1,400
31 Office supplies exp 1,000
office supplies 1,000
31 Depn. Expense –store equ. 8,100
Acc. depn. - Store equ. 8,100
31 Depn. Expense- off-equi. 3000
Acc.Depn-Office Equ 3,000
31 Sales salaries expenses 2,500
Office salaries expenses 1,200
Salary payable 3,700
31 Unearned rent 600
Rent income 600
12
Posting
Account: Income summary Account No.
Date Item P/R Debit Credit Balance
Debit Credit
1996 31 Adjusting 113,800 113,800 - -
Dec.
Account: Merchandise inventory Account No

Debit Credit
1996 31 balance 113,800 113,800
Dec. 31 Adjusting 113,800
Adjusting 107,500 107,500
Account: Insurance expense Account No

Debit Credit
1996 31 Adjusting 6,900 6,900
Dec.
Account: Prepaid insurance Account No

Debit Credit
1996 31 balance 9,500 9,500
Dec. Adjusting 6,900 2,600
Account: Store supplies expense Account No

Debit Credit
1996 1,400 1,400
Dec. 31 Adjusting
13
Account: Store supplies Account No

Debit Credit
1996 balance 2,300 2,300
Dec. 31 Adjusting 1,400 900
Account: Office supplies expense Account No

Debit Credit
1996 Adjusting 1000 1000
Dec. 31
Account: Office supplies Account No

Debit Credit
1996 balance 1,500 1,500
Dec. 31 Adjusting 1000 500
Account: Depreciation exp- store equi. Account No

Debit Credit
1996 8,100 8,100
Dec. 31 Adjusting
Account: Acc.Dep -store-equipment Account No

Debit Credit
14
1996 balance 28,00 28,000

Dec. 31 Adjusting 8,100 36,100
Account: Depreciation expense -office equipment Account No

Debit Credit
1996
Account: Accumulate Depreciation -office equipment Account No

Debit Credit
1996 Balance 12,000 12,000
Account: Sales salaries expenses Account No

Debit Credit
1996 balance 64,000 64,000
Account: salary Payable Account No

Debit Credit
1996 31 Adjusting 3,700 3,700
Dec.
15
Account: office salaries expense Account No

Debit Credit
1996 balance 31,000 31,000
Account: Rent Income Account No

Debit Credit
1996 Adjusting 600 600
Dec. 31
Account: unearned Rent Account No

Debit Credit
1996 balance 2,400 2,400
Dec. 31 Adjusting 600 1,800
16
3.8.1. Completion of the work sheet

Trial Adjustment Balance sheet
Balance Adjustment Trial bal Income statement
Account title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 38,500 38,500 38,500
Account Receivable 88,300 88,300 88,300
Merchandise inventory 113,800 a) 107,500 113,800 107,500 107,500
Prepaid insurance 9,500 b) 6,900 2,600 2,600
Store supplies 2,300 c) 1,400 900 900
Office supplies 1,500 d) 1,000 500 500
Store equipment 86,600 86,600 86,600
Accumulated dep -store equipment 28,000 e) 8,100 36,100 36,100
Office equipment 29,300 29,300 29,300
Accumulated Dep- office
equipment 12,000 f) 3,000 15,000 15,000
Account payable 89,500 89,500 89,500
Salary payable h) 3,700 3,700 3,700
unearned Rent 2,400 i) 600 1,800 1,800
Note payable 100,000 100,000 100,000
W.A. miller capital 79,800 79,800 79,800
W.A. miller drawing 48,000 48,000 48,000
income summary a) 113,800 107,500 113,800 107,500 113,800 107,500
Sales 760,000 760,000 760,000
Sales return & Allowance 12,000 12,000 12,000
Sales discount 7,500 7,500 7,500
17
Pruchase 500,000 500,000 500,000

Purchase return & allowance 12,500 12,500 12,500
Purchase discount 6,500 6,500 6,500
Transportation in 2,400 2,400 2,400
Sales salaries expense 64,000 h) 2,500 66,500 66,500
Advertising expense 18,000 18,000 18,000
Depricaition exp.store equipment e) 8,100 8,100 8,100
Store supplies expense c) 1,400 1,400 1,400
Miscellaneous selling exp. 1,400 1,400 1,400
Office salaries expense 31,000 h) 1,200 32,200 32,200
Rent expense 24,000 24,000 24,000
Depricaition expense -office
equipment e)3,000 3,000 3,000
Insurance expense b) 6,900 6,900 6,900
Miscellaneous administrative 1,100
expense 1,100 1,100
Rent income i) 600 600 600
Interest expense 11,500 11,500 11,500
Office supplies exp. d) 1,000 1,000 1,000
1,090,700 1,090.70 246,000 246,000 1,213,000 1,213,000 810,800 887,100 402,200 325,900
Net income 76,300 76,300
887,100 887,100 402,200 402,200
18
3.9. Preparation of Financial statements

The basic financial statements for a merchandising enterprise, including the income
statement, owner's equity, and balance sheet are similar to those of a service enterprise. The basic
differences between the financial statements of a merchandising enterprises and a service
enterprise includes the cost of merchandise sold section of the income statement and the inclusion
of merchandise inventory on the balance sheet as a current asset.
3.9.1 Income statement
Although merchandising transactions affect the balance sheet in reporting inventory, they
primary affect the income statement.
There are two widely used formats for preparing in comes statement for merchandising enterprise.
1- multiple- step
2-single - step
1. Multiple- step form- has many section, sub sections, and intermediate balance.
Revenue from sales - The total amount section, subsections for merchandise sold, for
cash and on account is reported in this section. Sales returns and allowances and sales
discounts are deducted from this total to yield net sales
Cost of Merchandise Sold/ Cost of Goods Sold or cost of sales are discussed in the
section 3.5.1.
Gross profit - The excess of net sales over the cost of merchandise sold. It is sometimes
called gross profit on sales or gross margin
Operating expenses:- Most merchandising businesses classify operating expenses as
either selling expense or administrative expense. Expenses that are incurred directly in
the selling of merchandising are selling expense. They include such expense as sales
persons, salaries, store supplies used, depreciation of store equipment and advertising.
Experience incurred such expenses incurred in the administration or general operations of
the business are administrative expense or general expenses. Example office salaries,
depreciation of office equipment, and office supplies used. Expenses that are related to
both selling & administration may be divided b/n the two classifications. In small
businesses, such expenses as rent, insurance, taxes are commonly reported as
administrative expenses. Transactions for small, in frequent expenses are often reported
as miscellaneous selling expenses or miscellaneous administrative expense.
19
Income from operations:- The excess of gross profit over total operating expenses. The
relationships of income from operations to total assets and to net sales are important
factors in judging the efficiency & profitability of operations. If operating expenses are
greater than the gross profit the excess is called a loss from operations.
Other income and other expense:- Revenue from sources other than the primary
operating activating of a business is classified as other income. In merchandising of
business, these items include income from interest, rent, and gain resulting from the sale
of fixed assets. Expenses that cannot be traced directly to operations are identified as
other expenses. Interest expense that results from financing activities and losses incurred
in the disposal of fixed assets are examples of these items. Other income and other
expenses are offset again each other on the income statement. If the total of other income
exceeds the total of other expense, the difference is added to income from operation. If
the reverse is happen it subtracted.
Net income / loss-is the net increase/ decrease in owner's equity as a result of profit making
activities.
W.A Company
Income statement
For year ended Dec 31.
Revenue from sales:
Sales------------------------------------------------------------------------------ 760,000
Less sales return & allowance -------------------- 12,000
Sales discount --------------------------------- 7,500 (19,500)
Net sales ---------------------------------------------------------------------------------- 740,500
Cost of good sold
Merchandise inventory Jan 1 --------------------------------------------- 113,800
Purchase -------------------------------------------------500,000
Less purchase returns allowance ------------ 12,500
Purchase discount ----------------------- 6,500 (19,000)
Net purchase ----------------------------------------481,000
Add: Transportation in -------------------------------------- 2,400
Cost of merchandise purchased ----------------------------------------------- 483,400
Merchandise available for sale ------------------------------------------------ 597,200
20
Less merchandise inventory Dec. 31----------------------------------------- 107,500

Cost of goods sold ----------------------------------------------------------------------------- 489,700
Gross profit -------------------------------------------------------------------------------------- 250,800
Operating expenses:
Selling expense:
Sales salaries expense ----------------------------------- 66,500
Advertising expense store ------------------------------ 18,000
Depreciation expense store equipment ----------------- 8,100
Store supplies expense ------------------------------------ 1,400
Miscellaneous selling expense --------------------------- 1,400
Total selling expense ---------------------------------------------- 95,400
Administrative expense:
Office salaries expense --------------------------------------- 32,200
Rent expense --------------------------------------------------- 24,000
Depreciation expenses-office equipment --------------------- 3,000
Insurance expense ----------------------------------------------- 6,900
Office supplies expense ----------------------------------------- 1,000
Miscellaneous administrative expense ------------------------ 1,100
Total administrative expense ------------------------------------------------------ 68,200 163,600
Income from operations -------------------------------------------------------------------------- 87,200
Other income & expense
Rent income -------------------------------------------------------------------- 600
Interest expense ----------------------------------------------------------- (11,500) (10,900)
Net income ------------------------------------------------------------------------------------76,300
2. Single step form
The total of all expense is deducted from the total of all revenues. The Advantage is being simple
and it emphasizes total revenues and total expense as the factors that determine net income The
disadvantage is that such relationship as gross profit to sales and income from operation are act as
readily determinable as they are when the multiple - step form is used
21
W.A. Company
Income statement
For year ended Dec. 31
Revenue:
Net sales ---------------------------------------------------------- 740,500
Rent income ----------------------------------------------------- - 600
Total Revenue ---------------------------------------------------- 741,100
Expenses:
Cost merchandise sold ----------------------- 489,700
Selling expense -------------------------------- 95,400
Administrative expense ----------------------- 68,200
Interest expense -------------------------------- 11,500
Total expenses ----------------------------------------- -------------664,800
Net income ------------------------------------------------ -------------76,300
3.9.2 Statement of owner's equity
Summarize the changes which have occurred in the owner's equity account during the fiscal year.
If server as a connecting link b/n the income statement and the balance sheet.
W.A. Company
Statement of owner's equity
For the year ended Dec. 31
W.A. miller, capital Jan 1 ---------------------------------------------------------- 79,800
Net income for month ------------------------------------------------- 76,300
Less withdrawal -------------------------------------------------------- (48,000)
Increase in owner's equity ---------------------------------------------------------- 28,300
W.A. miller capital Dec 31 --------------------------------------------------------- 108,100
22
3.9.3 Balance sheet

W.A. Company
Balance sheet
December 31
Assets
Current Asset:
Cash -------------------------------------------------------------- 38,500
Account Receivable -------------------------------------------- 88,300
Merchandise inventory -------------------------------------- 107,500
Prepaid insurance ------------------------------------------------ 2,600
Store supplies -------------------------------------------------------- 900
Office supplies ------------------------------------------------------- 500
Total current assets -------------------------------------------------------- 238,300
Plant Asset:
Store equipment ------------------------------------------- 86,600
Less Accumulated depreciation store equipment---- (36,100) ----50,500
Office equipment ------------------------------------ 29,300
Less: Accumulated Dep, office equipment------ (15,000) --------- 14,300
Total plant Asset --------------------------------------------------------- 64,800
Total Assets -------------------------------------------------------------------------------- 303,100
Liabilities
Current liabilities
Account payable 89,500
Salaries payable ------------------------------------------ 3,700
Unearned Rent ------------------------------------------- 1,800
Total current liability ---------------------------------------------- 95,000
Long term liability
Note payable ----------------------------------------------------------- 100,000
Total liability ---------------------------------------------------------------- 195,000
Owner's equity
W.A. miller capital Dec31------------------------------------------------------- 108,100
Total liability and owner's equity ------------------------------------------------ 303,100
23
3.10.3. Closing:
Date Description PR Debit Credit
1996 Closing entries
Dec. 31 Sales 760,00
Purchase return & allowance 12500
Purchase discount 6500
Rent income 600
Income summary 779,600
31 Income summary 697,00
Sales return & allowance 12,000
Sales discount 7,500
Purchase 500,000
Transportation in 2,400
Sales salaries exp 66,500
Advertising exp 18,000
Depn. exp-store equipment 8,100
Store supplies exp 1,400
Miscellaneous exp. 1,400
Office salaries exp. 32,200
Rent expense 24,000
Depn. exp. Office equipment 3,000
Insurance exp. 6,900
Office supplies exp 1,000
Mis. Adm. exp. 1,100
Interest exp. 11,500
31 Income summary 76,300
W.A miller, Capital 76,300
31 W.A Miller capital 48,000
W.A. miller Drilling 48,000
24

1CHAP3 Acc For Merchandize

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1CHAP3 Acc For Merchandize

Uploaded by

Copyright:

Available Formats

Principle of Accounting I: - Chapter 3 (Accounting for Merchandising Enterprise) Lecturer Note

The revenue activities of a service business involve providing services to customers.

3.2.2. Purchase return and allowance

3.5. Periodic Reporting

Dec 31, current year 107,500

3.7. Completion of the work sheet

Income summary ----------------------------------------------------------------- ------

Office Salaries ------------------------------------------------- 1,200

Account: Merchandise inventory Account No

Account: Insurance expense Account No

Account: Prepaid insurance Account No

Account: Store supplies expense Account No

Account: Store supplies Account No

Account: Office supplies expense Account No

Account: Office supplies Account No

Account: Depreciation exp- store equi. Account No

Account: Acc.Dep -store-equipment Account No

1996 balance 28,00 28,000

Account: Depreciation expense -office equipment Account No

Account: Accumulate Depreciation -office equipment Account No

Account: Sales salaries expenses Account No

Account: salary Payable Account No

Account: office salaries expense Account No

Account: Rent Income Account No

Account: unearned Rent Account No

3.8.1. Completion of the work sheet

Pruchase 500,000 500,000 500,000

3.9. Preparation of Financial statements

Less merchandise inventory Dec. 31----------------------------------------- 107,500

3.9.3 Balance sheet

You might also like