Accounting for

Merchandising Businesses

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 Chapter 6
Accounting for
Merchandising Businesses
Accounting, 21st Edition
Warren Reeve Fess

© Copyright 2004 South-Western, a division

PowerPoint Presentation by Douglas Cloud of Thomson Learning. All rights reserved.
Professor Emeritus of Accounting
Pepperdine University Task Force Image Gallery clip art included in this electronic
presentation is used with the permission of NVTech Inc.
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 Objectives
1. Distinguish the activities of a service
Afterthose
business from studying
of athis
merchandising
business. chapter, you should
be able to:the financial
2. Describe and illustrate
statements of a merchandising business.
3. Describe the accounting for the sale of
merchandise.
4. Describe the accounting for the
purchase of merchandise.
 Objectives
5. Describe the accounting for
transportation costs, sales taxes, and trade
discounts.
6. Illustrate the dual nature of
merchandising transactions.
7. Prepare a chart of accounts for a
merchandising business.
8. Describe the accounting cycle for a
merchandising business.
9. Compute the ratio of net sales to assets as
a measure of how effectively a business is
using its assets.
 Nature of Businesses
Service Business
Fees earned $XXX
Operating expenses –XXX
Net income $XXX
 Nature of Businesses
Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX
Multiple-Step
Income
Statement
 NetSolutions
Income Statement For the Year Ended
December 31, 2007

Revenue from sales:

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

Continued
Operating expenses:
Selling expenses:
Sales salaries expense $56,230
Advertising expense 10,860
Depr. Expense–store equipment 3,100
Miscellaneous selling expense 630
Total selling expenses $ 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 $ 77,240

Continued
Other income and expenses:
Rent revenue $ 600
Interest expense(2,440) (1,840)
Net income $75,400

Concluded
Periodic vs. Perpetual Methods of
Accounting
Periodic Method
• A method of determining the cost of merchandise
sold and the amount of merchandise on hand
• Under this method, the inventory records do not
show the amount available for sale or the amount
sold during the period
Periodic vs. Perpetual Methods of
Accounting
Perpetual Method
• Under this method, each purchase and sale of
merchandise is recorded in the inventory and the
cost of merchandise sold accounts.
• The amount of merchandise available for sale
and the amount sold are continuously disclosed in
the inventory records.
 Cost of Merchandise Purchased
Purchases $521,980
Less: Purchase returns and
allowances $9,100
Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased $527,755
 Cost of Merchandise Sold
Merchandise inventory, 1/1/07 $ 59,700
Purchases $521,980
Less: Purchase returns and
allowances $9,100
Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased 527,755
Merchandise available for sale $587,455
Less merchandise inventory, 12/31/07 62,150
Cost of merchandise sold $525,305
Single-Step Income
Statement for a
Merchandising
Business
 NetSolutions
Income Statement
For the Year Ended December 31, 2007

Revenues:
Net sales $708,255
Rent revenue 600
Total revenues $708,855
Expenses:
Cost of merchandise sold $525,305
Selling expenses 70,820
Administrative expenses 34,890
Interest expense 2,440
Total expenses 633,455
Net income $ 75,400
 Statement of
Owner’s Equity for
a Merchandising
Business
 NetSolutions
Statement of Owner’s Equity
For the Year Ended December 31, 2007

Chris Clark, capital, 1/1/07 $153,800

Net income for year $75,400
Less withdrawals 18,000
Increase in owner’s equity 57,400
Chris Clark, capital, 12/31/07 $211,200
Balance Sheet
 NetSolutions
Balance Sheet
December 31, 2007

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

Continued
Property, plant, and equipment:
Land $20,000
Store equipment $27,100
Less accumulated
depreciation 5,700 21,400
Office equipment $15,570
Less accumulated
depreciation 4,720 10,850 Total property, plant, and
equipment 52,250
Total assets $261,560

Continued
 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 (due 2017) 20,000
Total liabilities $ 50,360
Owner’s Equity
Chris Clark, capital 211,200
Total liabilities and owner’s equity $261,560

Concluded
Sales Transactions
 Cash Sales
JOURNAL PAGE 26
Post.
Date Description Ref. Dr Cr.
2007
1 Jan. 3 Cash 1 800 00
2 Sales 1 800 00
3 To record cash sales.
4
5

On January 3, a firm sold $1,800

of merchandise for cash.
 Cash Sales

6 3 Cost of Merchandise Sold 1 280 00

7 Merchandise Inventory 1 280 00
8 To record the cost of
9 merchandise sold.
10

Using a perpetual inventory, the inventory

cost of $1,200 must be recorded.
 Cash Sales
JOURNAL PAGE 28
Post.
Date Description Ref. Dr Cr.
2007
1 Jan. 31 Credit Card Expense 48 00
2 Cash 48 00
3 To record service charges
4 on credit card sales for the
5 month.

At
Credit
the end
cardofsales
the month,
(MasterCard
$48 was
or
sent
Visa)toare
cover
recorded
this service
as cashcharge.
sales.
 Sales on Account
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, a firm sold Sims Company

merchandise on account, $510. The cost of
the merchandise to the seller was $280.
 Sales Discounts
The terms for when payments for
merchandise are to be made are
called credit terms.

If buyer is allowed an
amount of time to pay, it is
known as the credit period.
Sales Discounts
Credit Terms

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

$1,470 paid (less

2% as a cash
discount)
 Sales Discounts
Credit Terms

If invoice is
Invoice for NOT paid
$1,500 within 10
Terms: days of
2/10, n/30 invoice date
$1,500 PAID
 Sales Discounts

Jan. 21 Cash 499 80

Sales Discounts 10 20
Accounts Receivable—Sims Co. 510 00
Collection of Invoice
No. 7172, less discount.

On January 21, the firm receives the

amount due from Sims (refer to Slide
25), less the 2 percent discount.
Sales Returns and Allowances
Merchandise that is returned to the
vendor is referred to as a sales return.

If there is a defect in the product or the

wrong item was shipped, the seller
may reduce the initial price at which
the goods were sold. This is known as
a sales allowance.
Sales Returns and Allowances
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 Merchandise Sold 140 00
Cost of merchandise
returned—Credit Memo 32.

On January 13, issued Credit Memo 32 to Krier

Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.
 Purchase
Transactions
 Purchase Transactions
Post.
Date Description Ref. Dr Cr.
2007
1 Jan. 3 Merchandise Inventory 2 510 00
2 Cash 2 510 00
3 Purchased inventory from
4
Bowen Co.
5

On January 3, Purchased merchandise

for cash from Bowen Company, $2,510.
 Purchase Discounts
What’s the last
day the invoice
can be paid?
Alpha Technologies
issues an invoice for
$3,000 to
NetSolutions dated
March 12, with terms
2/10, n/30.
Purchase Discounts

The full amount is

Let’s
due do a simple
on April 11.
calculation.
Invoice period 30
Days in March 31
Date of invoice 12
Remaining days 19
April 11
 Purchase Discounts
We can borrow at an annual interest rate of
6%. Should we borrow to pay the invoice
within the discount period?

$60 discount
(2% x
$3,000)?
Purchase Discounts

Let’s see… Interest on the

amount due of $3,000 less
the 2 percent…
Discount $60.00
Interest for 20 days
at the rate of 6%
on $2,940 –9.80
Savings from
borrowing $50.20
Purchase Discounts
Looks like we should take
advantage of the discount even if we
have to borrow the money.

Discount $60.00
Interest for 20 days
at the rate of 6%
on $2,940 –9.80
Savings from
borrowing $50.20
 Purchase Discounts
JOURNAL PAGE 27
Post.
Date Description Ref. Dr Cr.
2007
1 Mar. 12 Merchandise Inventory 3 000 00
2 Accounts Payable—Alpha
3 Technologies 3 000 00
4
5

On March 12, NetSolutions purchased

merchandise on account from Alpha
Technologies, $3,000.
 Purchase Discounts
JOURNAL PAGE 27
Post.
Date Description Ref. Dr Cr.
2007
1 Mar. 22 Accounts Payable—Alpha Technol. 3 000 00
2 Cash 2 940 00
3 Merchandise Inventory 60 00
4
5

If payment is made by March 22 NetSolutions

records the discount as a reduction in cost.
 Purchase Discounts
JOURNAL PAGE 27
Post.
Date Description Ref. Dr Cr.
2007
1 Apr. 11 Accounts Payable—Alpha Technol. 3 000 00
2 Cash 3 000 00
3
4
5

If NetSolutions does not pay the invoice until

April 11, it would pay the full amount.
Purchases Returns and Allowances

A purchases return involves actually

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

When the defective or incorrect

merchandise is kept by the buyer and
the vendor makes a price adjustment,
this is a purchases allowance.
 Purchases Returns and Allowances
You sent me the wrong interface cards.
We’ll send a debit memorandum with the
returned items.
NetSolutions received the
delivery from Maxim
Systems and determined that
$900 of the items were not
the merchandise ordered.
Debit memorandum #18 is
issued to Maxim Systems.
 Purchases Returns and Allowances

Mar. 7 Accounts Payable—Maxim Systems 900 00

Merchandise Inventory 900 00
Debit Memo No. 18
 Purchases Returns and Allowances

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.
 Purchases Returns and Allowances

On May 4, NetSolutions returns

$3,000 of the merchandise.

May 4 Accounts Payable—Delta Data Links 3 000 00

Merchandise Inventory 3 000 00
Returned portion of
merchandise purchased.
 Purchases Returns and Allowances
On May 12, NetSolutions pays the amount due.

May 12 Accounts Payable—Delta Data Links 2 000 00

Cash ($5,000 – 1 960 00
Merchandise Inventory $3,000) x 40 00
Paid invoice. 2%
Transportation
Costs
 FOB Shipping Point

Buyer pays freight costs and debits

Merchandise Inventory

Fruit Express

Title passes to buyer as

shipment leaves
shipping point.
 FOB Shipping Point
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.
 FOB Destination

Seller pays freight costs and debits

Transportation Out

Fruit Express

Title passes to buyer

upon arrival at
destination.
 FOB Destination
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
Cost of sale of Kranz Co .

On June 15, NetSolutions sells merchandise to Kranz

Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480.
NetSolutions pays the transportation cost of $40.
 FOB Destination

June 15 Transportation Out 40 00

Cash 40 00
Paid shipping cost on
merchandise sold.

On June 15, NetSolutions sells merchandise to Kranz

Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480.
NetSolutions pays the transportation cost of $40.
 Sales Taxes

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.
 Sales Taxes

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.
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co. 7,500
Sales 7,500

Cost of Merchandise Sold 4,500

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

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.
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
No entry.

Burton Company (Buyer)

Merchandise Inventory 150
Cash 150

July 2. Burton Company paid transportation charges of

$150 on July 1 purchase from Scully Company.
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co. 5,000
Sales 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

July 5. Scully Company sold merchandise on account

to Burton Co., $5,000, terms FOB shipping point,
n/30. The cost of the merchandise sold was $3,500.
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Transportation Out 250
Cash 250

Burton Company (Buyer)

No entry.

July 7. Scully Company paid transportation costs

of $250 for delivery of merchandise sold to
Burton Company on July 5.
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Sales Returns and Allowances 1,000
Accounts Receivable—Burton Co. 1,000

Merchandise Inventory 700

Cost of Merchandise Sold 700
Burton Company (Buyer)
Accounts Payable—Scully Co. 1,000
Merchandise Inventory 1,000
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.
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Cash 4,000
Accounts Receivable—Burton Co. 4,000

Burton Company (Buyer)

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

July 15. Scully Company received payment

from Burton Company for purchase of July 5.
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co. 12,000
Sales 12,000

Accounts Receivable—Burton Co. 500

Cash 500
Burton Company (Buyer)
Merchandise Inventory 12,500
Accounts Payable—Scully Co. 12,500
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.
 Illustration of Accounting for
Merchandise Transactions
Continued (Seller)
Cost of Merchandise Sold 7,200
Merchandise Inventory 7,200

Burton Company (Buyer)

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.
 Illustration of Accounting for
Merchandise Transactions
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

July 28. Scully Company received payment

from Burton Company for purchase of July
18, less discount (2% x $12,000).
 NetSolutions
Chart of Accounts
Balance Sheet Accounts
100 Assets 200 Liabilities
110 Cash 210 Accounts Payable
112 Accounts Receivable 211 Salaries Payable
115 Merchandise Inventory 212 Unearned Rent
116 Office Supplies 215 Notes Payable
117 Prepaid Insurance
120 Land 300 Owner’s Equity
123 Store Equipment 310 Chris Clark, Capital
124 Accumulated Depreciation— 311 Chris Clark, Drawing
Store Equipment 312 Income Summary
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
 NetSolutions
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 Revenue 529 Miscellaneous Selling Expense
530 Office Salaries Expense
700 Other Expense 531 Rent Expense
710 Interest Expense 532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Miscellaneous Admin. Expense
 Merchandise Inventory
Shrinkage
NetSolutions inventory
records indicate that
$63,950 of merchandise
should be available for sale
on December 31, 2007.
The physical count reveals
that only $62,150 is
actually available.
 Merchandise Inventory
Shrinkage
Adjusting Entry
Dec. 31 Cost of Merchandise Sold 1 800 00
Merchandise Inventory 1 800 00

Inventory records $63,950

Inventory count 62,150
Inventory shortage $ 1,800
 Profitability Measures -- Effective Use of Assets
Ratio of Net Sales to Assets
Sears Penney
Net sales $41,366,000 $31,846,000
Total assets:
Beginning of year $50,409,000 $19,742,000
End of year $44,317,000 $20,908,000
Average $47,363,000 $20,325,000
Ratio of net sales to assets .87 to 1 1.57 to 1

Ratio Use: To assess the effectiveness in the

use of assets to generate sales.
Chapter 6

The End