You are on page 1of 12

Chapter 5: Accounting for Merchandising Business

Nature of Merchandising Business Revenue activities of a merchandising business involve the buying and selling of merchandise. They purchase merchandise which is resold to customers. Comparison to Service Business Service Business Merchandising Business Fees earned Sales Less Operating expenses Less Cost of merchandise sold =Net income =Gross Profit Less Operating expenses =Net Income New Accounts on the Income Statement o SALES revenues collected from the sale of merchandise o COST OF MERCHANDISE SOLD the purchase price plus incidentals of merchandise available for resale o GROSS PROFIT Sales COMS
INCOME STATEMENT Gem City Music Income Statement For the Year Ended December 31, 20 Revenue from sales:........................................ Sales ..................................................... $189,300 Less: Sales returns and allowances $ 1,700 Sales discounts........................ 500 2,200 Net sales................................... $187,100 Cost of merchandise sold XXXX..................... 100,000 Gross profit ..................................................... $ 87,100 Operating expenses: Selling expenses: Sales salaries expense....................... $17,700 Administrative expenses: Rent expense $ 7,800 Office salaries expense...................... 22,550 Depreciation expenseoffice equipment 2,800 33,150 Total operating expenses........................ 50,850 Income from operations.................................. $ 36,250 Other expense: Interest expense....................................... 2,000 Net income ................................................. $ 34,250 Fall 2007 Prof. M. Mari Page 1

Chapter 5: Accounting for Merchandising Business XXXX Computation of Cost of Merchandise Sold Purchases Less merchandise inventory, December 31 =Cost of merchandise sold Computation of Cost of Merchandise Purchased Purchases Less: purchases returns and allowances Less: purchases discount =Net purchases Add: transportation in =Cost of merchandise purchased

New Accounts on the Balance Sheet o Merchandise inventory merchandise on hand at the end of an accounting period.

Merchandising Transactions Chart of Accounts for Merchandising Business


Assets Cash Accounts receivable Merchandise inventory Office Supplies Prepaid Insurance Store Equipment Acc. Depreciation Office Equipment Acc. Depreciation Liabilities Accounts payable Salaries payable Unearned rent Notes payable Fall 2007 Prof. M. Mari Page 2

Chapter 5: Accounting for Merchandising Business Stockholders Equity Capital stock Retained earnings Dividends Income Summary Revenues Sales Sales returns and allowances Sales discounts Costs and Expenses Sales salaries expense Advertising expense Depreciation expense Misc. selling expense Office salaries expense Rent expense Insurance expense Office supplies expense Other income Rent revenue Other expense Interest expense

Accounting for Sales Under the perpetual inventory system, all sales require the reporting of the removal of inventory from the books at the same time. 1. CASH SALES Example 1: Sold merchandise for cash $5,000. Cost of merchandise sold $3,200 Date Account PR Debit Credit Cash $5,000 Sales $5,000 Cost of merchandise sold
Fall 2007 Prof. M. Mari Page 3

3,200

Chapter 5: Accounting for Merchandising Business

Merchandise inventory

3,200

Note: that sales are credited for the sales price and merchandise inventory is credited for the COST. 2. MASTERCARD OR VISA The transaction requires a debit to CASH since the money is deposited in the vendors account overnight. But a reduction of the cash account must be made for the service charge from the credit card company, which is directly taken out of the account. Example 2: Sold merchandise on VISA $10,000. Cost of merchandise sold is $4,000. Credit card expense is 3% of sales. Date Cash Sales Cost of merchandise sold Merchandise inventory Credit card expense Cash Account PR Debit $10,000 4,000 4,000 300 300 Credit $10,000

Example 3: Sold merchandise on VISA $6,000. Cost of merchandise sold is $3,000. Credit card expense is 3% of sales. Date Account PR Debit Credit

Fall 2007 Prof. M. Mari Page 4

Chapter 5: Accounting for Merchandising Business

3. SALES ON ACCOUNT Includes sales to nonblank credit cards such as AMERICAN EXPRESS Example 4: Sold merchandise on account $6,000. Cost of merchandise sold is $3,000. Date Account Accounts receivable Sales Cost of merchandise Merchandise inventory PR Debit $6,000 3,000 3,000 Credit 6,000

Recap: Under the perpetual inventory system, all sales transactions consist of at least two entries. The first entry records the sale at the selling price with a debit to how it will be paid and credit to sales. The second entry records the merchandise leaving the business with a debit to cost of merchandise sold and credit to merchandise inventory for the cost of the merchandise.

Sales Discounts
A reduction in the price of the good for early payment. This account is a contra SALES Upon payment of the account receivable, if the payment is within the discount period, we record the discount. Credit terms terms of when payments for merchandise are to be made.

Net 30 days full amount due in 30 days 2/10 2% discount if paid within 10 days Example 5: Sold merchandise on account $5,000, terms 2/10, n/30. Cost of merchandise sold is $4,000. Sales Discount Discount $
Fall 2007 Prof. M. Mari Page 5

$5,000 2% $100

Chapter 5: Accounting for Merchandising Business Sales Less discount Net amount $5,000 100 4,900

Date

Account Cash Sales discount Accounts receivable

PR

Debit 4900 100

Credit 5000

Sales Returns and Allowances


Merchandise sold may be returned to the seller Merchandise sold may be reduced in price due to defects This account is CONTRA sales Increases with a debit

Example 6: Sold merchandise on account $7,000, terms 1/15, n/30. Cost of merchandise sold is $3,800. Date Account Accounts receivable Sales Cost of merchandise Merchandise inventory PR Debit $7,000 3,800 3,800 Credit 7,000

Return merchandise with sales price of $2,000 and cost of $1,000. Date Account Sales returns Accounts receivable Merchandise inventory Cost of merchandise sold
Fall 2007 Prof. M. Mari Page 6

PR

Debit 2,000 1,000

Credit 2,000 1,000

Chapter 5: Accounting for Merchandising Business

Example 7: ABC Merchandising had the following transactions: a> Sold merchandise and received payment by VISA at $6,000, cost of merchandise sold is $4,000. b> Sold merchandise on account for $7,500 with credit terms 1/10, n/30. Cost of the merchandise is $4,500. c> Sold merchandise on account for $4,000, cost of merchandise is $2,500. d> Received a return of the merchandise in (c ) of sales price of $2,000 and cost of $1,750. e> Received payment within the discount period for merchandise in (b). f> Received payment for merchandise in (c ). Record the Transactions.

Accounting for Purchases: Under perpetual inventory system.


Example 8: Purchase merchandise for resale $4,000 on account. Date Mar 1 Account Merchandise inventory Accounts payable PR Debit $4,000 Credit $4,000

Purchases Discounts

Purchases discounts are discounts taken by the buyer for early payment of an invoice.

These discounts reduce the cost of the merchandise purchased.

Should be taken when offered if not it is a LOSS to the business.

Example 9: Purchase merchandise for resale $4,000, terms 2/10, n/30 on account. Invoice: Discount (2% x $4,000) Net of discount
Fall 2007 Prof. M. Mari Page 7

$4,000 80 3,920

Chapter 5: Accounting for Merchandising Business

Account Dat e Mar 1 Merchandise inventory Accounts payable Mar 10 Accounts payable Cash Merchandise inventory

PR

Debit

Credit

$4,000 $4,000 $4,000 $3,920 80

Reduction of the cost of the merchandise is reflected in the merchandise inventory account. Example 10: Purchase merchandise for resale $6,000, terms 1/15, n/30 on account. Date Account PR Debit Credit

Purchases Returns and Allowances


o Purchase returns merchandise is returned to the seller o Purchase allowances price adjustment o Debit memorandum notification of the return or allowance by seller Example 11: Returned merchandise on account $2,500. Date Mar 09 Account Accounts payable Cash PR Debit $2,500 Credit $2,500

Fall 2007 Prof. M. Mari Page 8

Chapter 5: Accounting for Merchandising Business

Example 12: Purchased merchandise of $8,000 on terms 2/10,n/30. Ennis pays the original invoice less a return of $2,500 within the discount period. Record the above entries. Date Account PR Debit Credit

Recap of Purchasing Transactions


Example 7: ABC Merchandising had the following transactions: Purchased merchandise and received payment by VISA at $6,000. Purchased merchandise on account for $7,500 with credit terms 1/10, n/30. Purchased merchandise on account for $4,000. Return of the merchandise in (c ) of sales price of $2,000. Paid within the discount period for merchandise in (b). Paid for merchandise in (c ).

Transportation Costs
The terms of a sale should indicate when the ownership of the merchandise passes to the buyer. This point determines which party, the buyer or the seller must pay the transportation costs. o FOB shipping point The ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the transportation company. Buyer pays the transportation costs Example 13: Purchased merchandise for $4,000 with shipping costs of $50 FOB shipping point.
Fall 2007 Prof. M. Mari Page 9

Chapter 5: Accounting for Merchandising Business

Date

Account Merchandise inventory Accounts payable Merchandise Inventory Cash

PR

Debit $4,000 $50

Credit $4,000 $50

o FOB destination point

The ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the buyer. Seller pays the transportation costs Example 14: Sold merchandise for $4,000 with shipping costs of $50 FOB destination. Cost of merchandise sold is $2,000. Date Account Accounts receivable Sales Cost of merchandise sold Merchandise inventory Delivery expense Cash PR Debit $4,000 2000 2000 50 50 Credit $4,000

Review for Test!

RECAP
FREIGHT TERMS
FOB Shipping Point Ownership (title) passes to buyer when merchandise is................................................... Transportation costs are paid by.................................................. Fall 2007 Prof. M. Mari Page 10 FOB Destination

Delivered to freight carrier

Received by buyer

Buyer

Seller

Chapter 5: Accounting for Merchandising Business Risk of loss during transportation belongs to....................................

Buyer

Seller

Sales Taxes
Liability to the business Create a SALES TAX PAYABLE account

Example 15: Sold merchandise on account $7,000, plus 5% sales tax. Cost of merchandise sold is $3,800. Date Account Accounts receivable Sales Sales tax payable Cost of merchandise Merchandise inventory PR Debit $7,350 Credit 7,000 350 3,800 3,800

RECAP of Sales and Purchases Transactions


Seller Sold merchandise on account: Accounts receivable DR Sales CR Cost of merchandise sold DR Merchandise inventory CR Transportation costs Shipping point Transportation costs Destination: Delivery Expense DR Cash CR Merchandise returned: Sales Returns & Allowances DR Accounts receivable CR Fall 2007 Prof. M. Mari Page 11 Buyer Purchased merchandise on account: Merchandise Inventory DR Accounts Payable CR

Transportation costs Shipping point: Merchandise Inventory DR Cash CR Transportation costs - Destination Merchandise returned: Merchandise inventory DR Accounts payable

CR

Chapter 5: Accounting for Merchandising Business Merchandise inventory DR Cost of merchandise sold CR Payment : Cash DR Accounts receivable CR Payment with discount: Cash DR Sales discount DR Accounts receivable CR

Payment: Accounts payable DR Cash CR Payment with discount: Merchandise inventory DR Cash CR

Adjusting Entries:
Inventory Shrinkage Difference between physical count and books
Example 16: Suppose that physical inventory shows balance of $20,000 and books show balance of $23,000. Record the shrinkage.

Date

Account Cost of merchandise sold Merchandise inventory

PR

Debit 3,000

Credit 3,000

Closing Entries:
o Accounts that must be closed Sales Rent revenue Sales returns and allowances Sales discounts Cost of merchandise sold All expenses and revenues Dividends

Fall 2007 Prof. M. Mari Page 12

You might also like