Accounting For Merchandising

By Rachelle Agatha, CPA, MBA

Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

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

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

After studying this chapter, you should be able to:

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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.

After studying this chapter, you should be able to:

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

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Objective 1Objective 15-2

Distinguish between the activities and

financial statements of

service and merchandising

businesses.

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Service Business

Fees earned

$XXXOperating expenses

–XXXNet income

$XXX

6-1

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Merchandising Business

Sales $XXXCost of Merchandise Sold –XXXGross Profit $XXXOperating Expenses –XXXNet Income $XXX

6-1

Sales -Cost

Merch Sold

=Gross Profit

Gross Profit

-Operating Expenses

=Net

Income

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When merchandise is sold, the revenue is reported as

sales, and its cost is recognized as an expense

called cost of merchandise sold or Cost of Goods Sold.

6-1

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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.

6-1

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Merchandise on hand (not sold) at the end of an accounting period is called merchandise

inventory.

6-1

12

Describe and illustrate the

financial statements of a merchandising

business.

Objective 2Objective 2

6-2

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The multiple-step income

statement contains several

sections, subsections, and

subtotals.

6-2Multiple-Step Income Statement

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The Sales account provides the total

amount charged to customers for

merchandise sold, including cash sales

and sales on account.

6-2

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Sales returns and allowances are

granted by the seller to customers for

damaged or defective

merchandise.

6-2

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Sales discounts are granted by the seller to customers for early payment of amounts

owed.

6-2

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Net sales is determined by

subtracting sales returns and allowances

and sales discounts from sales.

6-2

Revenue from sales:Sales 750,000$ Less: Sales returns and

allowances 15,000$ Sales discounts 6,000 21,000 Net sales 729,000$

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Cost of merchandise sold

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

customers.

6-2

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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.

6-2

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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).

6-2

Purchases 481,400$

Less:Purchases returns and allowances

8,500$

Purchases discounts 1,500 (10,000) Net purchases 471,400

Cost of merchandise sold:Merchandise inventory, March 1 88,370$ Purchases 481,400$

Less:Purchases returns and allowances

8,500$

Purchases discounts 1,500 (10,000) Net purchases 471,400 Add transportation in 3,180

Cost of merchandise purchased 474,580 Merchandise available for sale 562,950 Less merchandise inventory, March 31 (125,550) Cost of merchandise sold 437,400$

Revenue from sales:Sales 750,000$ Less: Sales returns and

allowances 15,000$ Sales discounts 6,000 21,000 Net sales 729,000$

Cost of merchandise sold 437,400 Gross profit 291,600$

GROSS PROFIT

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Understand the accounting for merchandise transactions including: sale, purchase, transportation costs, sales taxes, and trade discounts.

Objective 3Objective 36-3

Sale Transaction

DR CR

Accounts Receivable 12,250Sales 12,250

Cost of Merchandise Sold 7,400Merchandise Inventory 7,400

(record sale of inventory)

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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.

6-3Sales Discounts

Payment Transaction

Cash 12,005Sales Discounts 245

Accounts Receivable 12,250(record receipt of payment on account)

Sales Returns & Allowance 225Accounts Receivable 225

(Record Credit Memo)

Merchandise Inventory 140Cost of Merch Sold 140

(Return of Merch)

MERCHANDISE IS RETURNED: SOLD FOR $225, COST WAS $140)

Purchase Inventory (Perpetual System)

DR CR

Merchandise Inventory 2,510Cash 2,510

(Purchased Inventory for cash)

Merchandise Inventory 2,510Accounts Payable 2,510

(Purchased Inventory on account)

DR CR

Accounts Payable 300Merchandise Inventory 300

(Returned inventory - debit memo)

Accounts Payable 2,210Cash 2,210

(Paid on account - $2,510 - 300))

Return & Payment on Account

DR CR

June 1 Merchandise Inventory 4,500Acounts Payable 4,500

(Purchased Inventory on account, terms 2/10 n 30)

June 4 Accounts Payable 2,000Merchandise Inventory 2,000

(Returned inventory - debit memo)

June 9 Accounts Payable 2,500Cash 2,450Merchandise Inventory 50

(Paid Invoice ([$4,500 - $2,000]*2%) = $50)$2,500 - $50 = $2,450)

Payment with Discount

The buyer bears the transportation cost

Add cost to inventory

FOB (Free On Board) Shipping Point

DR CR

Merchandise Inventory 900Accounts Payable 900

(Purchased Inventory FOB Shipping Point)

Merchandise Inventory 45Cash 45

(Paid shipping cost on inventory purchased)

FOB (Free On Board) Shipping Point

The seller bears the transportation cost

Cost is delivery expense

FOB (Free On Board) Destination

FOB (Free On Board) DestinationDR CR

Accounts Receivable 700Sales 700

(record sale of inventory)

Cost of Merchandise Sold 480Merchandise Inventory 480

(Record cost of merch sold)

Delivery expense 40Cash 40

(Paid shipping - FOB Destination)

DR CRSeller. journal entries:

Cash ($5,250 - $650 - $92) 4,508Sales Discounts [($5,250 - $650) × 2%] 92

Accounts Receivable-Buyer ($5,250 - $650) 4,600

Buyer. journal entries:

Accounts Payable-Seller ($5,250 - $650) 4,600Merchandise Inventory [($5,250 - $650) × 2%] 92Cash ($5,250 - $650 - $92) 4,508

Buyer vs. Seller

Record Shrinkage

DR CR

Cost of Merch Inv Sold 150Merchandise Inventory 150

(Inventory shrinkage - physical inventory performed)

Perform physical inventory and

difference is shrinkage

Periodic vs. Perpetual System

Periodic system:

Revenues are recorded when sales occur

No inventory is recorded or cost of sales

Physical inventory taken and inventory is adjusted

Summary Merchandising business

Operating Cycle

Sales Transactions

Purchase Transactions

Financial Statements

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