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KAL1013 Chapter Five 1
Chapter Five
ACCOUNTING
FOR
MERCHANDISING BUSINESSES
KAL1013 Chapter Five 2
Outline Merchandising Business Environment
Transaction for: Purchases Sales Discounts Returns Transportation Cost
Accounting For Inventory Periodic Inventory System Perpetual Inventory System
Forms of Financial Statements
KAL1013 Chapter Five 3
Merchandising Businesses
A merchandising company is an enterprise that buys and
sells goods to earn a profit.
1) Wholesalers sell to retailers
2) Retailers sell to consumers
A merchandiser’s primary source of revenue is sales.
KAL1013 Chapter Five 4
Merchandising Businesses
Expenses
Cost of Goods Sold Operating Expenses
Total cost of
merchandise sold
during the period.
Expenses incurred inthe process of earning
sales revenue
KAL1013 Chapter Five 5
Merchandising Businesses
SalesRevenue
LessCost of Goods Sold
GrossProfit
LessOperating Expenses
Net Income/ Loss
Equals
Equals
KAL1013 Chapter Five 6
Merchandising Businesses Transactions
Purchases
Sales
Discounts
Returns
Transportation Cost
KAL1013 Chapter Five 7
Purchases
Purchase goods for resale purposes
Cash Purchase Credit Purchase
KAL1013 Chapter Five 8
Sales
Sales of inventories
Cash Sales Credit Sales
KAL1013 Chapter Five 9
Discounts
Incentive offers on purchases / sales
Trade DiscountTrade Discount Cash DiscountCash Discount
Purchase Discount Sales Discount
KAL1013 Chapter Five 10
Trade Discount
Discounts offered for purchase
in bulk
Example
Buy 100-200 unit = 10%
Buy 201-300 unit = 20%
No journal entries recorded.
KAL1013 Chapter Five 11
Cash Discount
Discounts offeredfor a prompt
payment madewithin the discountperiod. It is stated
in credit terms.
Discounts offeredfor a prompt
payment madewithin the discountperiod. It is stated
in credit terms.
Credit Term:
5/10, n/30
n/30
3/15, n/eom
The amount is recorded in related accounts
KAL1013 Chapter Five 12
Purchase Returns & Allowances
PurchaseReturnsPurchaseReturns
PurchaseAllowancesPurchase
Allowances
When merchandiseis returned to
the seller.
When price adjustmentis needed due to the quality / quantity of
the merchandise.
KAL1013 Chapter Five 13
Sales Returns & Allowances
SalesReturns
SalesReturns
SalesAllowance
SalesAllowance
When merchandiseis returned by
customer.
When price adjustmentis needed by customer due
to the quality / quantity of the merchandise.
KAL1013 Chapter Five 14
Transportation Cost
The sales agreementwould indicate
whether the buyeror the seller is
to pay the cost oftransporting the goods
to the buyer’s place.
Freight terms:
FOB Shipping Point
FOB Destination
KAL1013 Chapter Five 15
FOB Shipping Point
SellerTransportCompany Buyer
Transportation cost to be borne / paid by the buyer.
Ownership changed to buyer
KAL1013 Chapter Five 16
FOB Destination
SellerTransportCompany Buyer
Cost to be borne / paidby the seller.
Ownership transferred
KAL1013 Chapter Five 17
Accounting For Inventory
PeriodicInventory
System
PerpetualInventory
System
Detailed records of the cost of each
item are maintained, and the cost
of each item sold is determined
from records when the sale occurs.
Cost of goods sold is determined
only at the end of an accounting
period.
KAL1013 Chapter Five 18
Cost of Goods Sold
The cost of goods sold may be determined each time
a sale occurs or at the end of an accounting period.
To make the determination when the sale occurs,
a company uses a perpetual inventory system.
When the cost of goods sold is determined only at the
end of an accounting period, a company is said to be
using a periodic inventory system.
KAL1013 Chapter Five 19
Determination Cost of Goods Sold Under Periodic Inventory System
Less: cost of goods on hand at the end
of the accounting period (xxxx)
Cost of goods on hand at the beginning
of the accounting period. xxx
Add: cost of goods purchased xxxxx
xxxxx
Cost of Goods Sold xxxxx
KAL1013 Chapter Five 20
Entries Under Perpertual Inventory System
Purchases
Purchase ReturnPurchase Discount
Transportation Cost
Sales
Sales ReturnSales Discount
Transportation Cost
KAL1013 Chapter Five 21
Purchases
Cash Purchase:
Credit Purchase:
Dr. Inventory
Dr. Inventory
Cr. Cash
Cr. Account Payable
KAL1013 Chapter Five 22
Purchase Returns & Allowances
Dr. Account Payable
Cr. Inventory
Cash Purchase:
Credit Purchase:
Dr. Cash
Cr. Inventory
KAL1013 Chapter Five 23
Purchase Discount
Dr. Account Payable
Cr. Cash
Cr. Inventory
KAL1013 Chapter Five 24
Transportation Cost
Dr. Inventory
Cr. Cash / Account Payable
KAL1013 Chapter Five 25
Sales
Cash Sale: Dr. Cash
Dr. Cost of Goods Sold
Cr. Sales
Cr. Inventory
( to record sales at selling price )
( to record cost of goods sold )
KAL1013 Chapter Five 26
Sales
Credit Sale: Dr. Account Receivable
Dr. Cost of Goods Sold
Cr. Sales
Cr. Inventory
( to record sales at selling price )
( to record cost of goods sold )
KAL1013 Chapter Five 27
Sales Returns & Allowances
Cash Sale: Dr. Sales Returns & Allowances
Dr. Inventory
Cr. Cash
Cr. Cost of Goods Sold
( to record sales returns & allowances at selling price )
( to record sales returns & allowances at cost )
KAL1013 Chapter Five 28
Sales Returns & Allowances
Credit Sale: Dr. Sales Returns & Allowances
Dr. Inventory
Cr. Account Receivable
Cr. Cost of Goods Sold
( to record sales returns & allowances at selling price )
( to record sales returns & allowances at cost )
KAL1013 Chapter Five 29
Sales Discounts
Dr. Sales Discount
Dr. Cash
Cr. Account Receivable
KAL1013 Chapter Five 30
Transportation Cost
Dr. Carriage Outwards
Cr. Cash / Accounts Payables
KAL1013 Chapter Five 31
Forms of Financial Statements
Single-Step Income Statement
Multiple-Step Income Statement
KAL1013 Chapter Five 32
Multiple-Step Income Statement
Involves 2 steps in determining net income / loss.
Step 1:Net Sales xxxxx
Less : Cost of Goods Sold (xxx)
Gross Profit xxxx
Step 2:
Less: Operating Expenses
Net Income / Loss xxx
Selling ExpensesAdministrative Expenses xxxx
KAL1013 Chapter Five 33
Multiple-Step Income Statement
It also distinguishes between operating and non-operating activities.
Operatingactivities
Non-operatingactivities
Revenues and expenses fromnormal operations (merchandising)
1. Revenues and expenses fromauxiliary operations.
2. Gains and losses that areunrelated to the company’soperations.
KAL1013 Chapter Five 34
Multiple-Step Income Statement
Sales Revenue xxxxLess: Cost of Goods Sold (xxx)
Gross Profit xxxx
Less: Operating ExpensesSelling Expenses
Administrative Expenses xxxx
Income From Operations xxxx
Other Revenues and gains xxx
Less: Other Expenses and losses (xx)
Net Income xxx
xxx
KAL1013 Chapter Five 35
Single-Step Income Statement
Involves only one step in determining net income / loss.
Total Revenues (operating & non-operating) xxxx
Less: Total Expenses (Operating & non-operating) xxxx
Net Income xxxx
KAL1013 Chapter Five 36