1&2p Accounting For Merchandising Business

Chapter 5
Accounting for Merchandising Businesses
Learning Objectives
1. Nature of Merchandising Business
2a. Accounting for Purchases
2b. Accounting for Sales
2c. Transportation Costs
2d. Merchandise Transactions
3. Merchandising Chart of Accounts
4. Merchandising Income Statement
5. Merchandising Accounting Cycle
Merchandising and Inventory
 Merchandising involves selling inventory

 Inventory is usually an important asset
 Inventory must be accounted for periodically
or perpetually
 Traditional periodic method is often being
replaced by perpetual inventory accounting
Income Statement Comparison
Service Business
Fees earned RM150,000
Operating expenses (120,000)
Net income RM 30,000 20% of revenues
Merchandising Business
Sales revenue RM600,000
Cost of mdse. sold (450,000)
Gross profit RM150,000
Income Statement Comparison
Service Business
Fees earned RM150,000
Merchandising Business
Sales revenue RM600,000
Cost of mdse. sold (450,000) 75% of revenues
Inventory Costs and Relationships
LIABILITIES
Merchandise ASSETS OWNER’S
Inventory EQUITY
Net Income
Cost of COSTS & REVENUES

Mdse. Sold EXPENSES
If merchandise inventory is . . . . . . . overstated

Cost of merchandise sold is . . . . . . understated
Gross profit and net income are . . . overstated
Ending owner’s equity is . . . . . . . . . overstated
Inventory Costs and Relationships
LIABILITIES
Merchandise ASSETS OWNER’S
Inventory EQUITY
Net Income
Cost of COSTS & REVENUES

Mdse. Sold EXPENSES
If merchandise inventory is . . . . . . . understated

Cost of merchandise sold is . . . . . . overstated
Gross profit and net income are . . . understated
Ending owner’s equity is . . . . . . . . . understated
Inventory Systems for Merchandise
• Perpetual inventory system

• Records all purchases in the Merchandise Inventory
account; it uses no Purchases account.
• Records returns of purchased merchandise by directly
reducing the Merchandise Inventory account.
• Increases the Merchandise Inventory account for additional
costs of purchases like freight-in and decreases
Merchandise Inventory account directly for reductions in
purchases discounts.
• Increases Cost of Goods Sold and decreases Merchandise
Inventory when merchandise is sold.
• Records customer return and allowances by decreasing
Cost of Goods Sold and increasing the Merchandise
Inventory.
• Merchandise inventory account balance changes with
every change in amount or cost of the inventory.
• Periodic inventory system
• Records all purchases in a Purchases account.
• Records returns of purchased merchandise in
a Purchase Returns and Allowances account.
• Uses Freight-in and Purchase Discounts
accounts for additional costs of purchases.
• Computes cost of Goods Sold based on the
inventory count at the end of the period.
• No entry for the cost of a sales return.
• Merchandise inventory account balances does
not change until the closing entries are made.
Advantages of Using Perpetual Inventory
 Continuous determination of inventory value

 Continuous determination of gross profit
 Affordable with computers, scanners, and bar codes on most products
 Perpetual inventory accounting provides management controls
 Managers know which items are selling fastest and the profit margin on those
items
Perpetual Inventory System
General Journal General Ledger
Description Debit Credit Mdse. Inventory
Mdse. Inventory 5,000
A Accts. Payable 5,000
A 5,000
Cost of Mdse. Sold
In a perpetual system,
A Purchase on account Mdse. Inventory is an
active asset account.
B Return of merchandise All changes are recorded
as they occur.
A 5,000 1,000 B
Bal 4,000
B Accts. Payable 1,000
Cost of Mdse. Sold
C Sale of merchandise as they occur.
A 5,000 1,000 B
2,500 C

Bal 1,500
Accts. Receivable 3,250 Cost of Mdse. Sold

C Sales 3,250
C 2,500
Cost of Mdse. Sold 2,500
A 5,000 1,000 B
2,500 C

Bal 1,500
Accts. Receivable 3,250 Cost of Mdse. Sold

C Sales 3,250
C 2,500
Purchases Discounts
• Credit terms – the terms for when payments

for merchandise are to be made, agreed on by
the buyer and the seller (payment method).
• Cash/net cash- payment is required on
delivery.
• Credit period- buyer is allowed an amount of
time to pay.
• Purchase discounts- discount taken by the
buyer for early payment of an invoice.
Credit Terms, Cash Discounts
Read as:
2% discount if
Credit Terms: 2/10, n/30
paid within 10 days,
net amount due within 30 day.
Is invoice
paid within 10 Full amount is due
days of No within 30 days of
invoice invoice date.
date?
Yes
Example: Merchandise was
purchased for $1,500 with credit
2% of invoice terms of 2/10, n/30. Payment
amount is within 10 days is calculated as:
allowed as a Invoice $1,500
cash discount. Less 2% discount 30
Net cost paid $1,470
Selling and Buying Merchandise Inventory
Seller Buyer
Description Debit Credit Description Debit Credit
Accts. Receivable 1,500 Mdse. Inventory 1,470

Sales 1,500 Accts. Payable 1,470
Cost of Mdse. Sold 900 Recorded at net cost
Mdse. Inventory 900 RM1,500 - RM30 (discount)
Jan 12. Merchandise was sold with credit terms of 2/10, n/30.
Jan 22. Payment was made within the discount period.

Seller Buyer

Cost of Mdse. Sold 900 Recorded at net cost
Mdse. Inventory 900 RM1,500 - RM30 (discount)
Cash 1,470 Accts. Payable 1,470

Sales Discounts 30 Cash 1,470
Accts. Receivable 1,500

Seller Buyer

Cost of Mdse. Sold 900 Recorded at full cost
Mdse. Inventory 900

Sales Discounts 30 Mdse. Inventory 30
Accts. Receivable 1,500 Cash 1,470

• Transportation Costs
The terms of a sale should indicate when the owner

ship of the merchandise passes to the buyer.
a) FOB (free on board) shipping point
It means that seller is responsible for the
transportation chargers to the shipping point and the
buyer then pays the transportation costs to the final
destination.
b) FOB (free on board destination)
Seller delivers the merchandise to the buyer’s
final destination, free of transportation charges to
the buyer. Thus, seller pays the transportation costs
to the final destination.
Accounting for Merchandise Transactions
Syarikat Sali (Seller) Syarikat Bali (Buyer)

July 5. Syarikat Sali sold merchandise on account to
Syarikat Bali, RM5,000, terms FOB destination, n/30. The
cost of the merchandise sold was RM3,500.
Transportation Out 250 No entry.

Cash 250
July 7. Syarikat Sali paid transportation costs of RM250 for

delivery of merchandise sold to Syarikat Bali on July 5.
Purchases Returns and Allowances
• Purchase return
• When merchandise is returned.
• Purchase allowance
• Price adjustment is requested.
• Used a debit memorandum (buyer sent to seller)
• inform the seller (creditor) the amount the buyer
processes to debit to the account payable due to
the seller.
• It state the reasons for the return or request for a
price reduction.
• Sales Returns and Allowances
•Used credit memorandum-
•Seller send to buyer
•Seller confirm the return of allowance
•Trade discounts
•Special discount that offer for a purchase in a
large quantities.
•Sellers and buyers normally do not record the
list prices of merchandise and the related trade
discounts in their accounts.

Transportation Out 250 No entry.

Cash 250
Sales Ret. & Allow. 1,000 Accts. Payable 1,000

Accts Receivable 1,000 Mdse. Inventory 1,000
Mdse. Inventory 700
Cost of Mdse. Sold 700
July 13. Syarikat Sali issued Syarikat Bali a credit memo for
merchandise returned, RM1,000. The merchandise cost was RM700.

July 15. Syarikat Sali received payment from

Syarikat Bali for purchase of July 5.


Cash 500
July 18. Syarikat Sali sold merchandise on

account to Syarikat Bali, RM12,000, terms FOB
shipping point, 2/10, n/eom. Syarikat Sali prepaid
transportation costs of RM500. Cost of
merchandise sold was RM7,200.


Cash 500

Sales Discounts 240 Mdse. Inventory 240
July 28. Syarikat Sali received payment from

Syarikat Bali less discount (2% x RM12,000).
NetSolutions
Merchandising Chart of Accounts
Balance Sheet Accounts
100 Assets 200 Liabilities
110 Cash 210 Accounts Payable
111 Notes Receivable 211 Salaries Payable
112 Accounts Receivable 212 Unearned Rent
113 Interest Receivable 215 Notes Payable
115 Merchandise Inventory
116 Office Supplies 300 Owner’s Equity
117 Prepaid Insurance 310 Idris Ismail, Capital
120 Land 311 Idris Ismail, Drawing
123 Store Equipment 312 Income Summary
124 Accumulated Depreciation—
Store Equipment
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
NetSolutions
Merchandising Chart of Accounts
Income Statement Accounts
400 Revenues 500 Costs and Expenses

410 Sales 510 Cost of Merchandise Sold
411 Sales Returns and 520 Sales Salaries Expense
Allowances 521 Advertising Expense
412 Sales Discounts 522 Depreciation Expense—
Store Equipment
600 Other Income 523 Transportation Out
610 Rent Income 529 Misc. Selling Expense
611 Interest Income 530 Office Salaries Expense
531 Rent Expense
700 Other Expense 532 Depreciation Expense—
710 Interest Expense Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Misc. Admin. Expense
NetSolutions
Income Statement (Multiple-Step)
For the Year Ended December 31, 2002
Revenue from sales:

Sales RM720,185
Less:Sales returns and allow. RM 6,140
Sales discounts 5,790 (11,930)
Net sales RM708,255
Cost of merchandise sold (525,305)
Continued
Operating expenses
Selling expenses:
Sales salaries expense RM60,030
Advertising expense 10,860
Depr. expense–store equip. 3,100
Miscellaneous selling expense 630
Total selling expenses RM74,620
Administrative expenses:
Office salaries expense RM21,020
Rent expense 8,100
Depr. expense–office equip. 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. admin. expenses 760
Total admin. expenses 34,890
Total operating expenses (109,510)
Income from operations RM73,440
Continued
Other income:
Interest revenue RM3,800
Rent revenue 600
Total other income RM4,400
Other expense:
Interest expense (2,440) 1,960
Net income RM75,400
NetSolutions
Income Statement (Single-Step)
For the Year Ended December 31, 2002
Revenues:
Net sales RM708,255
Interest revenue 3,800
Rent revenue 600
Total revenues RM712,655
Expenses:
Cost of merchandise sold RM525,305
Selling expenses 74,620
Administrative expenses 34,890
Interest expense 2,440
Total expenses (637,255)
Net income RM75,400
NetSolutions
Balance Sheet
December 31, 2002
Assets
Current assets:
Cash RM52,950
Notes receivable 40,000
Accounts receivable 60,880
Interest receivable 200
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650
Total current assets RM219,310
Continued
NetSolutions
Balance Sheet
December 31, 2002
Property, plant, and

equipment:
Land RM10,000
Store equipment RM27,100
Less accum. depreciation(5,700) 21,400
Office equipment RM15,570

Less accum. depreciation(4,720) 10,850 Total property, plant,
and
equipment 42,250
Total assets RM261,560
Continued
NetSolutions
Balance Sheet
December 31, 2002
Liabilities
Current liabilities:
Accounts payable RM22,420
Note payable (current portion) 5,000
Salaries payable 1,140
Unearned rent 1,800
Total current liabilities RM30,360
Long-term liabilities:
Note payable (due 2004) 20,000
Total liabilities RM50,360
Owner’s Equity
Idris Ismail, capital 211,200
Total liabilities and owner’s equity RM261,560

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Chapter 5

Accounting for Merchandising Businesses

 Merchandising involves selling inventory

Cost of COSTS & REVENUES

If merchandise inventory is . . . . . . . overstated

Cost of COSTS & REVENUES

If merchandise inventory is . . . . . . . understated

• Perpetual inventory system

 Continuous determination of inventory value

Cost of Mdse. Sold

Cost of Mdse. Sold

B Accts. Payable 1,000

Accts. Receivable 3,250 Cost of Mdse. Sold

B Accts. Payable 1,000

Accts. Receivable 3,250 Cost of Mdse. Sold

• Credit terms – the terms for when payments

Accts. Receivable 1,500 Mdse. Inventory 1,470

Jan 22. Payment was made within the discount period.

Accts. Receivable 1,500 Mdse. Inventory 1,470

Cash 1,470 Accts. Payable 1,470

Jan 22. Payment was made within the discount period.

Accts. Receivable 1,500 Mdse. Inventory 1,500

Cash 1,470 Accts. Payable 1,500

Jan 22. Payment was made within the discount period.

The terms of a sale should indicate when the owner

Accts. Receivable 5,000 Mdse. Inventory 5,000

Transportation Out 250 No entry.

July 7. Syarikat Sali paid transportation costs of RM250 for

Accts. Receivable 5,000 Mdse. Inventory 5,000

Transportation Out 250 No entry.

Sales Ret. & Allow. 1,000 Accts. Payable 1,000

Cash 4,000 Accts. Payable 4,000

July 15. Syarikat Sali received payment from

Cash 4,000 Accts. Payable 4,000

Accts. Receivable 12,500 Mdse. Inventory 12,500

July 18. Syarikat Sali sold merchandise on

Cash 4,000 Accts. Payable 4,000

Accts. Receivable 12,500 Mdse. Inventory 12,500

Cash 12,260 Accts. Payable 12,500

July 28. Syarikat Sali received payment from

400 Revenues 500 Costs and Expenses

Revenue from sales:

Property, plant, and

Office equipment RM15,570

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