1

6
Accounting for
Merchandising
Businesses

1
 2

After studying this chapter, you should

be able to:
1. Distinguish between the activities
and financial statements of service
and merchandising businesses.
2. Describe and illustrate the
financial statements of a
merchandising business.
2
 3

After studying this chapter, you should

be able to:
3. Describe and illustrate the accounting for
merchandise transactions including:
▪ sale of merchandise
▪ purchase of merchandise
▪ transportation costs, sales taxes, trade
discounts
▪ dual nature of merchandising transactions.
4. Describe the adjusting and closing process
for a merchandising business. 3
 4

6
-
1
Objective 1
Distinguish between the
activities and financial
statements of service and
merchandising businesses.

4
 5

6
-
1

Service Business
Fees earned $XXX
Operating expenses –XXX
Net income $XXX

5
 6

6
-
1
Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX
6
 7

6
-
1

When merchandise is sold, the

revenue is reported as sales, and
its cost is recognized as an
expense called cost of
merchandise sold.

7
 8

6-1

The cost of merchandise sold is

subtracted from sales to arrive
at gross profit. This amount is
called gross profit because it is
the profit before deducting the
operating expenses.

8
 9

6
-
1

Merchandise on hand (not

sold) at the end of an
accounting period is called
merchandise inventory.

9
 10

1-2
6
-
1
Example Exercise 6-1
On August 25, Gallatin Repair Service extended an offer of
During
$125,000theforcurrent year,
land that had merchandise
been priced forissale
soldatfor $250,000
$150,000. On
cash and for
September $975,000
3, Gallatin on account.
Repair The cost
Service accepted of the
the seller’s
merchandise
counteroffer ofsold is $735,000.
$137,000. On OctoberWhat is the
20, the landamount of
was assessed
the grossofprofit?
at a value $98,000 for property tax purposes. On December 4,
Gallatin Repair Service was offered $160,000 for the land by a
Follow Myretail
national Example 6-1
chain. At what value should the land be recorded
in Gallatin Repair Service’s records?
The gross profit is $490,000 ($250,000 + $975,000 –
$735,000).
Follow My Example 1-1
$137,000. Under the cost concept, the land should be recorded at
10thePractice:
cost to Gallatin Repair 10
For PE 6-1A, PEService.
6-1B 31
 1
1

6
-
1

1 11
1
 12

6-
2

Objective 2
Describe and illustrate the
financial statements of a
merchandising business.

12
 13

Multiple-Step Income Statement 6-

2

The multiple-step
income statement
contains several sections,
subsections, and
subtotals.

13
 14

6-
2

The Sales account

provides the total amount
charged to customers for
merchandise sold,
including cash sales and
sales on account.
14
 15

6-
2

Sales returns and

allowances are granted by
the seller to customers
for damaged or defective
merchandise.

15
 16

6-
2

Sales discounts are granted

by the seller to customers
for early payment of
amounts owed.

16
 17

6-
2

Net sales is determined by

subtracting sales returns
and allowances and sales
discounts from sales.

17
 1
8

Multiple-Step Income Statement 6-

2
NetSolutions
Income Statement
For the Year Ended December 31, 2009

Revenue from sales:

Sales $720,185
Less: Sales returns and $ 6,140
allowances
Sales discounts 5,790 11,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950

(Continued) 118
8
 1
9

Operating expenses:
Selling expenses:
Sales salaries expense $53,430
Advertising expense
Depr. Expense–store equipment 10,860
Delivery Expense 3,100
Miscellaneous selling expense 2,800
Total selling expenses 630 $ 70,820
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr. expense–office equipment 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. administrative expense 760
Total admin. expenses 34,890
Total operating expenses 105,710
Income from operations (Continued) 1
$ 77,240
19 9
 2
0

6-
2

Other income and expenses:

Rent revenue $
600
Interest expense (2,440) (1,840)
Net income $75,400

220
(Concluded) 0
 21

6-
2

Cost of merchandise sold

was discussed earlier. It is
the cost of the merchandise
sold to customers.

21
 22

6-
2
As we discussed in Slide 16,
sellers may offer customers
sales discounts for early
payment of their bills. From
the buyer’s perspective, such
discounts are referred to as
purchase discounts.
22
 23

6-
2

The buyer may return merchandise

to the seller (a purchase return),
or the buyer may receive a
reduction in the initial price at
which the merchandise was
purchased (a purchase allowance).

23
 2
4

Cost of Merchandise 6-
Sold 2

224
4
 25

Single-Step Income Statement 6-

2
An alternative form of income
statement is the single-step
income statement. As shown
in the next slide, the income
statement for NetSolutions
deducts the total of all
expenses in one step from the
total of all revenues.
25
 2
6

Exhibit 3: Single-Step Income Statement 6-

2
NetSolutions
Income Statement
For the Year Ended
December 31, 2009
Revenues:
Net sales $708,255
Rent revenue 600
Total revenues $708,855
Expenses:
Cost of $525,305
merchandise sold Selling
expenses Administrative 70,820
expenses Interest 34,890
expense 2,440 633,455
Total expenses $ 75,400
Net income 226
6
 2
7

Exhibit 4: Statement of Owner’s Equity 6-

2

NetSolutions
Statement of Owner’s Equity
For the Year Ended
December 31, 2009
Chris Clark, capital, 1/1/09 $153,800
Net income for year $75,400
Less withdrawals 18,000
Increase in owner’s equity 57,400
Chris Clark, capital, 12/31/09 $211,200

227
6
 2
8

Exhibit 5: Report Form of Balance Sheet 6-

2
NetSolutions
Balance Sheet
December 31, 2009
Assets
Current assets:
Cash $52,950
Accounts receivable
Merchandise inventory 91,080
Office supplies 62,150
Prepaid insurance 480
Total current assets 2,650 $209,310

(Continued) 228
8
 2
9

Exhibit 5: Report Form of Balance Sheet 6-

2

Property, plant, and equip.:

Land $20,000
Store equipment $27,100
Less accumulated
depreciation 5,700 21,400
Office equipment $15,570
Less accumulated
depreciation 4,72 10,850
Total property, plant, 0
and equipment 52,250
Total assets $261,560

(Continued) 229
8
 3
0

Exhibit 5: Report Form of Balance Sheet 6-

2
Liabilities
Current liabilities:
Accounts payable $22,420
Note payable (current portion) 5,000
Salaries payable 1,140
Unearned rent 1,800
Total current liabilities $ 30,360
Long-term liabilities:
Note payable (final 20,000
pmt. due 2017) $ 50,360
Total liabilities
Owner’s Equity 211,200
Chris Clark, capital $261,560 330
Total liabilities
(Concluded) 0
and owner’s equity
 3
1
6-
2
Example Exercise 6-2

Based upon the following data, determine the cost of

merchandise sold for May. Use the format seen
in Exhibit 2.
Merchandise Inventory, May 1 $121,200
Merchandise Inventory, May 31 142,000
Purchases 985,000
Purchases Returns and Allowances 23,500
Purchases Discounts 21,000
Transportation In 11,300
331
1
 3
2
6-
2
Follow My Example 6-2

Merchandise Inventory, May 1 $ 121,200

Purchases $985,000
Less: Purchases returns and $23,500
allowances
Purchases discounts 21,000 44,500
Net purchases $940,500
Add transportation in 11,300
Cost of merchandise purchased 951,800
Merchandise available for sale $1,073,000
Less merchandise inventory, May 31 142,000
Cost of merchandise sold $ 931,000

332
For Practice: PE 6-2A, PE 6-2B 2
 33

6-
3
Objective 3
Describe and illustrate the accounting
for merchandise transactions including:
sale of merchandise; purchase of
merchandise; transportation costs, sales
taxes, trade discounts; dual nature of
merchandise transactions.
33
 3
4

Cash Sales 6-
3

On January 3, NetSolutions sold

$1,800 of merchandise for cash.

334
4
 3
5

Cash Sales (continued) 6-

3

Using a perpetual inventory, the $1,200

cost of the inventory must be
recorded.
335
4
 3
6

Credit Card Sales 6-

3

At the end of the month, $48 was

sent to pay the service charge on
credit card sales.
336
4
 3
7

Sales on Account Using a Perpetual 6-

Inventory 3
Jan. 12 Accounts Receivable—Sims Co. 510 00
Sales 510 00
Invoice No. 7172

12 Cost of Merchandise Sold 280 00

Merchandise Inventory 280 00
Cost of merchandise sold on
Invoice No. 7172.

On January 12, NetSolutions sold Sims Company

merchandise on account, $510. The cost of the
337
merchandise to the seller was $280. 7
 38

Sales Discounts 6-
3

The terms for when payments for

merchandise are to be made, agreed
on by the buyer and the seller, are
called credit terms. If buyer is
allowed an amount of time to pay, it
is known as the credit period.

38
 3
9

Credit Terms 6-
3

If invoice is
paid within Invoice for
$1,500
10 days of
Terms:
invoice date 2/10, n/30

$1,470 paid
($1,500 less
a 2% 339
discount) 9
 4
0

6-
3

If invoice is
Invoice for NOT paid
$1,500 within 10
Terms: days of
2/10, n/30 invoice date
Full amount
($1,500) is due
within 30 days of 440
0
invoice date
 4
1

Sales Discounts 6-
3

Jan. 22 Cash 1 470 00

Sales Discounts 30 00
Accounts Receivable–Omega Tech. 1 500 00
Collection of Invoice No.
106-8, less 2% discount.

On January 22, NetSolutions receives the

amount due, less the 2 percent discount.

441
1
 4
2

6-
3
Jan . 13 Sales Returns and Allowances 225 00
Accounts Receivable—Krier Co. 225 00
Credit Memo No. 32

13 Merchandise Inventory 140 00

Cost of Goods Sold 140 00
Cost of merchandise returned.
Credit Memo No. 32.

On January 13, issued Credit Memo 32 to Krier

Company for merchandise returned to
NetSolutions. Selling price, $225; cost to 442
NetSolutions, $140. 2
 43

1-2
6-
3

Example Exercise 6-3

Journalize the following merchandise transactions:
a. Sold merchandise on account, $7,500 with terms of
2/10, n/30. The cost of the merchandise sold
was
$5,625.
b. Received payment less the discount.

443
3
 4
4
6-
3
Follow My Example 6-3

a. Accounts 7,500
Receivable Sales 7,500
Cost of Merchandise Sold 5,625
Merchandise Inventory 5,625
b. Cash 7,350
Sales Discounts 150
Accounts Receivable 7,500

444
For Practice: PE 6-3A, PE 6-3B 4
 4
5

Purchase Transactions (Perpetual 6-

Inventory) 3
JOURNAL PAGE
Post 24
Date Description . Dr Cr.
Ref.
2009
Jan. 3 Merchandise Inventory 2 510 00
Cash 2 510 00

Purchased inventory from

Bowen Co.

On January 3, NetSolutions purchased merchandise

for cash from Alden Company, $2,510.
445
5
 4
6

6-
3

Jan. 4 Merchandise Inventory 9 250 00

Accounts Payable—Thomas Corp. 9 250 00
Purchased inventory on
account.

On January 4, NetSolutions purchased

merchandise on account from
Thomas Corporation, $9,250.
446
5
 47

Purchases Discounts 6-
3

Alpha Technologies issues

an invoice for $3,000 to
NetSolutions dated March
12, with terms 2/10, n/30.

47
 48

6-
3
NetSolutions borrows cash at an annual interest
rate of 6%. Should the firm borrow cash to pay
the invoice within the discount period?
YES
Discount of 2% on $3,000 $60.00
Interest for 20 days at the rate
of 6% on $2,940 – 9.80
Savings from borrowing $50.20
48
 4
9

Purchase Transactions (Perpetual 6-

Inventory) 3

Mar. 12 Merchandise Inventory 3 000 00

Accounts Payable—Alpha Tech. 3 000 00
Purchased inventory on
account.

On March 12, NetSolutions purchased

merchandise on account from Alpha
Technologies, $3,000.
449
9
 5
0

6-
3
Mar. 22 Accounts Payable—Alpha Technol. 3 000 00
Cash 2 940 00
Merchandise Inventory 60 00
Paid Alpha Technologies for
March 12 purchase.

If payment is made by March 22, NetSolutions

records the discount as a reduction in cost.
Notice that Merchandise Inventory is credited
because NetSolutions maintains a perpetual
inventory. 450
9
 5
1

6-
3

Apr. 11 Accounts Payable—Alpha Technol. 3 000 00

Cash 3 000 00
Paid Alpha Technologies for
March 12 purchase.

If NetSolutions does not pay the invoice until

April 11, it would pay the full amount.

451
9
 52

Purchases Return 6-
3

A purchases return involves actually

returning merchandise that is
damaged or does not meet the
specifications of the order.

52
 53

Purchases Allowance 6-
3

When the defective or

incorrect merchandise is kept
by the buyer and the vendor
makes a price adjustment, this
is a purchases allowance.

53
 54

6-3

NetSolutions receives the

delivery from Maxim Systems
and determines that $900 of the
items are not the merchandise
ordered.
Debit memorandum #18 (also
called a debit memo) is issued
to Maxim Systems. 54
 5
5

6-
3

Mar. 7 Accounts Payable—Maxim Systems 900 00

Merchandise Inventory 900 00
Debit Memo No. 18

On March 7, NetSolutions records the

return of the merchandise indicated
in Debit Memorandum No. 18.
555
5
 5
6

6-
3
On May 2, NetSolutions purchased
$5,000 of merchandise from Delta Data
Link, subject to terms 2/10, n/30.

May 2 Merchandise Inventory 5 000 00

Accounts Payable—Delta Data 5 000 00
Purchased merchandise.

556
5
 5
7

6-
3

On May 4, NetSolutions returns

$3,000 of the merchandise.
4 Accounts Payable—Delta Data Link 3 000
00 Merchandise Inventory 3 000 00
Returned portion of the
merchandise purchased.

557
5
 5
8

6-
3

On May 12, NetSolutions pays the amount due,

$1,960 [$2,000 – ($5,000 –$3,000) x 2%)].

12 Accounts Payable—Delta Data Links 2 000 00

Cash 1 960 00
Merchandise Inventory 40 00
Paid invoice [($5,000 –
$3,000) x 2% = $40;
$2,000 – $40 = $1,960]

558
5
 5
9
6-
3

Example Exercise 6-4

Rofles Company purchased merchandise on account from a
supplier for $11,500, terms 2/10, n/30. Rofles Company
returned $3,000 of the merchandise and received full
credit.

a. If Rofles Company pays the invoice within the

discount period, what is the amount of cash
required for the payment?
b. Under a perpetual inventory system, what account is
credited by Rofles Company to record the return? 559
5
 6
0
6-
3
Follow My Example 6-4

a. $8,330. Purchase of $11,500 less the

return of
$3,000 less the discount of $170 [($11,500 –
$3,000) x 2%].
b. Merchandise Inventory.

660
For Practice: PE 6-4A, PE 6-4B 0
 61

Transportation Costs 6-
3

If ownership of the merchandise

passes to the buyer when the
seller delivers the merchandise to
the freight carrier, it is said to be
FOB (free on board) shipping
point.
61
 6
2

6-
3
June 10 Merchandise Inventory 900 00
Accounts Payable—Magna Data 900 00
Purchased merchandise,
terms FOB shipping point.

10 Merchandise Inventory 50 00
Cash 50 00
Paid shipping cost .

On June 10, NetSolutions buys merchandise from

Magna Data on account, $900, terms FOB shipping
point and pays the transportation cost of $50. 662
2
 63

Transportation Costs 6-
3

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)
destination.

63
 64

FOB Destination 6-
3

On June 15, NetSolutions sells

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

64
 6
5

6-
3
June 15 Accounts Receivable—Kranz Co. 700 00
Sales 700 00
Sold merchandise, terms
FOB destination.

15 Cost of Merchandise Sold 480 00

Merchandise Inventory 480 00
Record cost of merchandise
sold to Kranz Company.

665
5
 6
6

6-
3

June 15 Delivery Expense 40 00

Cash 40 00
Paid shipping cost on

merchandise sold.

On June 15, NetSolutions pays the

transportation cost of $40.

666
5
 67

FOB Shipping Point 6-

3

On June 20, NetSolutions sells

merchandise to Planter
Company on account, $800,
terms FOB shipping point. The
cost of the merchandise sold is
$360.

67
 6
8

6-
3
June 20 Accounts Receivable—Planter Co. 800 00
Sales 800 00
Sold merchandise, terms
FOB shipping point.

20 Cost of Merchandise Sold 360 00

Merchandise Inventory 360 00
Record cost of merchandise
sold to Planter Company.

668
8
 6
9

6-
3

June 20 Accounts Receivable—Planter Co. 45 00

Cash 45 00
Prepaid shipping cost on

merchandise sold.

NetSolutions pays the transportation

cost of $45 and adds it to the invoice.

669
8
 7
0
6-
3

Example Exercise 6-5

Determine the amount to be paid in full settlement of each
of invoices (a) and (b), assuming that credit for returns
and allowances was received prior to payment and that all
invoices were paid within the discount period.
Transportation Returns and
Merchandise Paid by Seller Transportation Terms Allowances
a. $200 FOB shipping point, $800
$4,500 1/10, n/30
b. $60 FOB destination, $2,500
$5,000 2/10, n/30
670
8
 7
1
6-
3
Follow My Example 6-5

a. $3,863. Purchase of $4,500 less return of $800

less the discount of $37 [($4,500 – $800) x 1%]
plus $200 of shipping.
b. $2,450. Purchase of $5,000 less return of
$2,500 less the discount of $50 [($5,000 –
$2,500) x 2%].

771
For Practice: PE 6-5A, PE 6-5B 1
 7
2

6-
3

772
1
28
 7
3

Sales Taxes 6-
3

Aug. 12 Accounts Receivable—Lemon Co. 106 00

Sales 100 00
Sales Taxes Payable 6 00
Invoice No. 339

On August 12, merchandise is sold

on account to Lemon Company,
$100. The state has a 6% sales
tax. 773
1
28
 7
4

6-
3

Sept. 15 Sales Tax Payable 2 900 00

Cash 2 900 00
Payment for sales taxes
collected during August.

On September 15, the seller sends in a

payment of $2,900 to the taxing unit for
the August taxes collected.
774
1
28
 75

Trade Discounts 6-
3

When wholesalers offer special

discounts to certain classes of
buyers that order large quantities,
these discounts are called trade
discounts.

75
 76

Dual Nature of Merchandise 6-

Transactions 3

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.
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.
76
 7
7

6-
3
Scully Company (Seller)
Accounts Receivable— 7,500
Sales Burton Co. 7,500

Cost of Merchandise Sold 4,500

Merchandise 4,500
Inventory
Burton Company (Buyer)
Merchandise Inventory. 7,500
Accounts Payable—Scully Co. 7,500

777
1
78
 78

6-
3

July 2 Burton Company paid

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

78
 7
9

6-
3
Scully Company (Seller)
No entry.

Burton Company (Buyer)

Merchandise Inventory 150
Cash 150

779
1
98
 80

6-
3

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.

80
 8
1

6-
3
Scully Company (Seller)
Accounts Receivable— 5,000
Sales Burton Co. 5,000

Cost of Merchandise Sold 3,500

Merchandise Inventory 3,500
Burton Company (Buyer)
Merchandise Inventory. 5,000
Accounts Payable—Scully Co. 5,000

881
1
18
 82

6-
3

July 7. Scully Company paid

transportation costs of $250 for
delivery of merchandise sold
to Burton Company on July 5.

82
 8
3

6-
3
Scully Company (Seller)
Delivery Expense Cash 250
250

Burton Company (Buyer)

No entry.

883
1
38
 84

6-
3

July 13. Scully Company issued Burton

Company a credit memorandum
for $1,000 of merchandise
returned from a July 5 purchase
on account. The cost of the
merchandise was $700.

84
 8
5

6-
3
Scully Company (Seller)
Sales Returns and
Allowances 1,000 1,000
Accounts Receivable—
MerchandiseBurton
Inventory
Co.700 Cost of
Merchandise Sold 700
Burton Company (Buyer)
Accounts Payable—Scully Co. 1,000
Merchandise Inventory 1,000

885
1
58
 86

6-
3

July 15. Scully Company received

payment from Burton Company
for purchase of July 5.

86
 8
7

6-
3
Scully Company (Seller)
Cash 4,000
Accounts Receivable—Burton Co. 4,000

Burton Company (Buyer)

Accounts Payable—Scully Co. 4,000
Cash 4,000

887
1
78
 88

6-3

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.
88
 8
9

6-
3
Scully Company (Seller)
Accounts Receivable—
Sales Burton Co. 12,000 12,000
Accounts Receivable—Burton Co. 500
Cash 500
Cost of Merchandise Sold 7,200
Merchandise 7,200
Inventory
Burton Company (Buyer)
Merchandise Inventory 12,500 Accounts
Payable—Scully Co. 12,500
889
1
98
 90

6-
3

July 28. Scully Company received payment

from Burton Company for purchase
of July 18, less discount (2% x
$12,000).

90
 9
1

6-
3
Scully Company (Seller)
Cash 12,260
Sales Discounts 240
Accounts Receivable—Burton Co. 12,500

Burton Company (Buyer)

Accounts Payable—Scully Co. 12,500
Merchandise Inventory 240
Cash 12,260

991
1
18
 92

1-2
6-
3

Example Exercise 6-6

Sievert Co. sold merchandise to Bray Co. on account,
$11,500, terms 2/15, n/30. The cost of the merchandise
sold is $6,900. Sievert Co. issued a credit
memorandum for
$900 for merchandise returned and later received the
amount due within the discount period. The cost of
the merchandise returned was $540. Journalize
Sievert Co.’s and Bray Co.’s entries for the receipt of the
check for the amount due from Bray Co.

992
2
 9
3
6-
3
Follow My Example 6-6

Sievert Company Journal Entries:

Cash ($11,500 – $900 – $212) 10,388
Sales Discounts [($11,500 – $900) x 2%] 212
Accounts Receivable—Bray Co.
($11,500 – $900) 10,600
Bray Company Journal Entries:
Accounts Payable—Sievert Co. ($11,500 –
$900) 10,600
Merchandise Inventory [($11,500 – $900)
x 2%] 212
Cash ($11,500 – $900 – $212) 10,388

993
For Practice: PE 6-6A, PE 6-6B 3
 94

6-
4

Objective 4
Describe the adjusting and
closing process for a
merchandising business.

94
 95

Inventory Shrinkage 6-
4

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 merchandise count, the
difference is often called inventory shrinkage
or inventory shortage.

95
 96

6-
4

NetSolutions inventory records

indicate that $63,950 of
merchandise should be
available for sale on December
31, 2009. The physical count
reveals that only $62,150 is
actually available.
96
 9
7

6-
4

Adjusting Entry
Dec. 31 Cost of Merchandise Sold 1 800 00
Merchandise Inventory 1 800 00
Inventory shrinkage (63,950
– $62,150).

Inventory records $63,950

Inventory count 62,150
Inventory shortage $ 1,800
997
1
78
 9
8

Step 1: Closing Entries 6-

4
Close the temporary accounts with credit
balances to Income Summary.
Date Item PR Debit Credit
Closing Entries
2009
Dec. 31 Sales 410 720 185 00
Rent Revenue 610 600 00
Income Summary 312 720 785 00

998
8
 9
9

Step 2: Closing Entries 6-

4

Close the temporary accounts

with debit balances to
Income Summary.

999
8
 10
0

Step 2: Closing Entries 6-

31 Income Summary 312 645 385 00 4
Sales Returns and Allow. 411 6 140 00
Sales Discounts 412 5 790 00
Cost of Merchandise Sold 510 525 305 00
Sales Salaries Expense 520 53 430 00
Advertising Expense 521 10 860 00
Depr. Exp.—Store Equip. 522 3 100 00
Delivery Expense 523
2 800 00
Misc. Selling Expense 529 630 00
Office Salaries Expense 530 21 020 00
Rent Expense 531 8 100 00
Depr. Exp.—Office Equip. 532 2 490 00
Insurance Expense 533 1 910 00
Office Supplies Expense 534 610 00
Misc. Administrative Exp. 539 760 00
Interest Expense 710 2 440 00
10
0
100
 10
1

Step 3: Closing Entries 6-

4

Close Income Summary (the balance represents

a $75,400 profit for NetSolutions in 2009) to
Chris Clark, Capital.

31 Income Summary 312 75 400 00

Chris Clark, Capital 310 75 400 00

10
101
1
 10
2

Step 4: Closing Entries 6-

4

Close Chris Clark, Drawing to Chris

Clark, Capital.

31 Chris Clark, Capital 310 18 000 00

Chris Clark, Drawing 311 18 000 00

10
102
1
 10
3
6-
1-2
4
Example Exercise 6-7
Pulmonary Company’s perpetual inventory records indicate
that $382,800 of merchandise should be on hand on March
31, 2008. The physical inventory indicates that
$371,250 of merchandise is actually on hand. Journalize
the adjusting entry for the inventory shrinkage for
Pulmonary Company for the year ended March 31, 2008.
Follow My Example 6-7
Mar. 31 Cost of Merchandise Sold ($382,800
– ($371,250) 11,550
Merchandise Inventory 11,550
103
10
For Practice: PE 6-7A, PE 6-7B 3
 104

Financial Analysis 6-
4

The ratio of net sales to assets

measures how effectively a business
is using its assets to generate sales.

Ratio of Net Net sales

Sales to Assets
Average total assets
=
104
 10
5

6-
4

Ratio
RRaattioooofoff N
Net
Neet Sales
SSaaleessto
ttooAssets
AAsssseettss Sears J. C. Penney
Total revenue (net sales) $19,701* $18,424*
Total assets:
Beginning of year $6,074 $18,300
End of year $8,651 $14,127
Average $7,362.5 $16,213.5
Ratio of net sales to assets 2.68 to 1 1.14 to 1
*in millions 10
105
5
 106

Interpretation 6-
4

Based on these ratios, Sears

appears better than J. C.
Penney in utilizing its assets
to generate sales.

106