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Accounting for Merchandising Businesses

6. Accounting for Merchandising Businesses. Principles of Financial Accounting, 11e Reeve • Warren • Duchac. 1. Distinguish between the activities and financial statements of service and merchandising businesses. 6-4. 1. Nature of Merchandising Businesses. Service Business.

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Accounting for Merchandising Businesses

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  1. 6 Accounting for Merchandising Businesses Principles of Financial Accounting, 11e Reeve • Warren • Duchac

  2. 1 Distinguish between the activities and financial statements of service and merchandising businesses. 6-4

  3. 1 Nature of Merchandising Businesses Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX

  4. 1 Nature of Merchandising Businesses Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX

  5. 1 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold.

  6. 1 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

  7. Follow My Example 6-1 The gross profit is $490,000 ($250,000 + $975,000 –$735,000). Follow My Example 6-1 For Practice: PE 6-1A, PE 6-1B 1 Example Exercise 6-1 Gross Profit During the current year, merchandise is sold for $250,000 cash and for $975,000 on account. The cost of the merchandise sold is $735,000. What is the amount of the gross profit? 6-9

  8. 1

  9. 2 Describe and illustrate the financial statements of a merchandising business. 6-11

  10. 2 Multiple-Step Income Statement The multiple-step income statement contains several sections, subsections, and subtotals.

  11. Exhibit 1 2 Multiple-Step Income Statement (continued on Slide 19)

  12. 2 The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.

  13. 2 Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.

  14. 2 Sales discountsare granted by the seller to customers for early payment of amounts owed.

  15. 2 Net salesis determined by subtracting sales returns and allowances and sales discounts from sales.

  16. 2 The cost of merchandise sold is the cost of the merchandise sold to customers.

  17. Exhibit 1 2 Multiple-Step Income Statement (continued) (continued on Slide 28)

  18. 2 The buyer may return merchandise to the seller (apurchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (apurchase allowance).

  19. 2 You have seen how 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.

  20. 2 If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand, a periodic inventory system is being used.

  21. 2 Under the perpetual inventory system of accounting, the amounts of inventory available for sale and sold are continuously (perpetually) updated in the inventory records.

  22. Exhibit 2 2 Cost of Merchandise Sold

  23. 2 Selling expenses are incurred directly in the selling of merchandise. • Sales salaries • Store supplies used • Depreciation of store equipment • Delivery expense • Advertising

  24. 2 Administrative expenses sometimes called general expenses, are incurred in the administration or general operation of the business. • Office salaries • Depreciation of office equipment • Office supplies used

  25. 2 • Other income is revenue from sources other than the primary operating activity of a business. • Other expenseis an expense that cannot be traced directly to the normal operations of the business.

  26. Exhibit 1 2 Multiple-Step Income Statement (concluded)

  27. 2 Example Exercise 6-2 Cost of Merchandise Sold Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2. Merchandise Inventory, May 1 $121,200 Merchandise Inventory, May 31 142,000 Purchases 985,000 Purchases Returns and Allowances 23,500 Purchases Discounts 21,000 Transportation In 11,300 6-29

  28. Follow My Example 6-2 For Practice: PE 6-2A, PE 6-2B 2 Example Exercise 6-2 (continued) Merchandise Inventory, May 1 $ 121,200 Purchases $985,000 Less: Purchases ret. and allow. $23,500 Purchases discounts 21,000 44,500 Net purchases $940,500 Add transportation in 11,300 Cost of merchandise purchased 951,800 Merchandise available for sale $1,073,000 Less merchandise inventory, May 31 142,000 Cost of merchandise sold $ 931,000 6-30

  29. 2 An alternative form of income statement is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues.

  30. Exhibit 3 2 Single-Step Income Statement

  31. Exhibit 4 2 Statement of Owner’s Equity for Merchandising Business

  32. Exhibit 5 2 Report Form of Balance Sheet (Continued)

  33. Exhibit 5 2 Report Form of Balance Sheet (continued)

  34. 3 Describe and illustrate the accounting for merchandise transactions including: 6-36

  35. 3 • Sale of merchandise • Purchase of merchandise • Freight, sales taxes, and trade discounts • Dual nature of merchandise transactions 6-37

  36. Exhibit 6 3 Chart of Accounts for NetSolutions Merchandising Business

  37. 3 Cash Sales On January 3, NetSolutions sold $1,800 of merchandise for cash.

  38. 3 Cash Sales Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are recorded. The cost of merchandise sold on January 3 is $1,200.

  39. 3 Credit Card Sales Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 1.

  40. 3 Sales on Account On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.

  41. 3 Sales Discounts The terms for when payments for merchandise are to be made, are called credit terms. If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay.

  42. 3 Receipts on Account On January 22, NetSolutions receives the amount due, less the 2 percent discount. $1,500 x .02

  43. 3 Credit Memorandum A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable.

  44. Exhibit 9 3 Credit Memo

  45. 3 On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.

  46. 3 Example Exercise 6-3 Sales Transactions Journalize the following merchandise transactions: • Sold merchandise on account, $7,500 with terms of 2/10, n/30. The cost of the merchandise sold was $5,625. • Received payment less the discount. 6-50

  47. Follow My Example 6-3 For Practice: PE 6-3A, PE 6-3B 3 Example Exercise 6-3 (continued) Accounts Receivable……………. 7,500 Sales…………………………….. 7,500 Cost of Merchandise Sold………. 5,625 Merchandise Inventory………. 5,625 Cash…………………………………. 7,350 Sales Discounts…………………… 150 Accounts Receivable…………. 7,500 6-51

  48. 3 Purchase Merchandise for Cash * *Assumes a perpetual inventory system is used.

  49. 3 Purchase Merchandise on Account * *Assumes a perpetual inventory system is used. We will assume a perpetual inventory system is used throughout the chapter. The periodic inventory system is discussed in Appendix 2.

  50. 3 Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions pays the amount due, less the discount, on March 22.

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