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

0. 6 – Accounting for Merchandising Businesses. After studying this chapter, you should be able to:. Distinguish between the activities and financial statements of service and merchandising businesses. Describe and illustrate the financial statements of a merchandising business.

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

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  1. 0 6 – Accounting for Merchandising Businesses After studying this chapter, you should be able to: • Distinguish between the activities and financial statements of service and merchandising businesses. • Describe and illustrate the financial statements of a merchandising business. • Describe and illustrate the accounting for merchandise transactions including: • purchase of merchandise • sale of merchandise • freight costs, sales taxes, trade discounts • dual nature of merchandising transactions. • Describe the adjusting and closing process for a merchandising business

  2. 0 Objective 1 Distinguish between the activities and financial statements of service and merchandising businesses. 6-1 Service Business • 0 Fees earned $XXX Operating expenses –XXX Net income $XXX Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX

  3. 0 6-1 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost ofmerchandise sold. (this appears on the Income Statement) Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.(this appears on the balance sheet as a current asset)

  4. Objective 2 Describe and illustrate the financial statements of a merchandising business. • 0 6-2 • 0 The multiple-step incomestatement contains several sections, subsections, and subtotals. NetSolutionsIncome Statement For the Year Ended December 31, 2009 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)

  5. 0 Other income and expenses: Rent revenue $ 600 Interest expense (2,440) (1,840) Net income $75,400 Operating expenses: Selling expenses: Sales salaries expense $53,430 Advertising expense 10,860 Depr. Expense–store equipment 3,100 Delivery Expense 2,800 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

  6. The Salesaccount provides the total amount charged to customers for merchandise sold, including cash sales and sales on account. Sales returns andallowancesare granted by the seller to customers for damaged or defective merchandise. Sales discountsare granted by the seller to customers for early payment of amounts owed. Net salesis determined by subtracting sales returns and allowances and sales discounts from sales.

  7. As we discussed earlier, 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. 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).

  8. Cost of merchandise soldwas discussed earlier. It is the cost of the merchandise sold to customers. • 0 6-2 In a PERPETUAL ACCOUNTING SYSTEM, there will be an account called Cost of merchandise sold, which is continuously updated whenever inventory is bought or sold. Note – there is another type of accounting system – The Periodic Accounting System. In this system the accounting records for inventory are not updated continuously with each purchase and sale. (We will not be focusing on his type in this course)

  9. 0 An alternative form of income statement is the single-stepincome statement. • 0 6-2 NetSolutionsIncome Statement For the Year Ended December 31, 2009 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 NetSolutions deducts the total of all expenses in one step from the total of all revenues.

  10. 0 Objective 3 6-3 Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; freight costs, sales taxes, trade discounts; dual nature of merchandise transactions. Recall that we are using the PERPETUAL SYSTEM

  11. 0 Purchase Transactions (Perpetual Inventory) 6-3 On January 3, NetSolutions purchased merchandise for cash from Alden Company, $2,510. Post. Ref. Description Dr Cr. Date 2009 Jan. 3 Merchandise Inventory 2 510 00 Cash 2 510 00 Purchased inventory from Bowen Co. • 0 On January 4, NetSolutions purchased merchandise on account from Thomas Corporation, $9,250. Jan. 4 Merchandise Inventory 9 250 00 45 Accounts Payable—Thomas Corp. 9 250 00 Purchased inventory on account.

  12. 0 Purchases Discounts 6-3 Mar. 12 Merchandise Inventory 3 000 00 Accounts Payable—Alpha Tech. 3 000 00 Purchased inventory on account. On March 12, NetSolutions purchased merchandise on account from Alpha Technologies, $3,000, with terms 2/10, n/30.

  13. 0 If payment is made by March 22, NetSolutions records the discount as a reduction in cost. Notice that Merchandise Inventory is credited because NetSolutions maintains a perpetual inventory. Mar. 22 Accounts Payable—Alpha Technol. 3 000 00 Cash 2 940 00 Merchandise Inventory 60 00 Paid Alpha Technologies for March 12 purchase. • 0 If NetSolutions does not pay the invoice until April 11, it would pay the full amount. Apr. 11 Accounts Payable—Alpha Technol. 3 000 00 Cash 3 000 00 Paid Alpha Technologies for March 12 purchase.

  14. Purchases Returns • 0 6-3 A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. Purchases Allowances When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.

  15. Purchases Returns and Allowances • 0 6-3 NetSolutions receives the delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debitmemorandum #18 (also called a debit memo) is issued to Maxim Systems. • 0 On March 7, NetSolutions records the return of the merchandise indicated in Debit Memorandum No. 18. Mar. 7 Accounts Payable—Maxim Systems 900 00 Merchandise Inventory 900 00 Debit Memo No. 18

  16. 0 6-3 Sales (Purchases) Discounts 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.

  17. Credit Terms Invoice for $1,500 Terms: 2/10, n/30 • 0 6-3 If invoice is paid within 10 days ofinvoice date $1,470 paid ($1,500 less a 2% discount) If invoice is NOT paid within 10 days ofinvoice date Full amount ($1,500) is due within 30 days of invoice date

  18. 0 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 • 0 Accounts Payable—Delta Data 5 000 00 Purchased merchandise. On May 4, NetSolutions returns $3,000 of the merchandise. 4 Accounts Payable—Delta Data Link 3 000 00 Merchandise Inventory 3 000 00 Returned portion of the merchandise purchased.

  19. 0 6-3 On May 12, NetSolutions pays the amount due, $1,960 [$2,000 – (($5,000 –$3,000) x 2%)]. 12 Accounts Payable—Delta Data Links 2 000 00 Cash 1 960 00 Merchandise Inventory 40 00 Paid invoice [($5,000 – $3,000) x 2% = $40; $2,000 – $40 = $1,960]

  20. Cash Sales • 0 On January 3, NetSolutions sold $1,800 of merchandise for cash. 6-3 The $1,200 cost of the inventory must be recorded.

  21. Credit Card Sales • 0 6-3 Assume that at the end of the month, $48 was sent to pay the service charge on credit card sales.

  22. Sales on Account 6-3 On January 12, NetSolutions sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $280. • 0 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.

  23. Sales Discount (1) On January 12, NetSolutions sold Omega Tech merchandise on account for $1,500. The cost of the merchandise to the NetSolutions was $1,200. The terms were: 2/10 n/30 • 0 First, we record the sale on Jan 12…… Jan. 12 Accounts Receivable— Omega Tech 1,500 00 Sales 1,500 00 Invoice No. 106-8 12 Cost of Merchandise Sold 1, 200 00 Merchandise Inventory 1, 200 00 Cost of merchandise sold on Invoice No. 106-8

  24. SalesDiscount (2) On January 22, NetSolutions receives the amount due, less the 2 percent discount. 6-3 Jan. 22 Cash 1 470 00 Sales Discounts 30 00 Accounts Receivable–Omega Tech. 1 500 00 Collection of Invoice No. 106-8, less 2% discount.

  25. Sales Returns and Allowances On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140. • 0 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 Goods Sold 140 00 Cost of merchandise returned. Credit Memo No. 32.

  26. FOB(free on board) shipping point(1) – Buyer side On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the freight cost of $50. • 0 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 .

  27. 0 6-3 FOB(free on board) destination point – Seller side On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. On June 15, NetSolutions also pays the freight cost of $40.

  28. 0 June 15 Accounts Receivable—Kranz Co. 700 00 Sales 700 00 Sold merchandise, terms FOB destination. • 0 15 Cost of Merchandise Sold 480 00 Merchandise Inventory 480 00 Record cost of merchandise sold to Kranz Company. June 15 Delivery Expense 40 00 Cash 40 00 Paid shipping cost on merchandise sold.

  29. Sales Taxes • 0 On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax. Aug. 12 Accounts Receivable—Lemon Co. 106 00 Sales 100 00 Sales Taxes Payable 6 00 Invoice No. 339 • 0 On September 15, the seller sends in a payment of $2,900 to the taxing unit for the August taxes collected. Sept. 15 Sales Tax Payable 2 900 00 Cash 2 900 00 Payment for sales taxes collected during August.

  30. Dual Nature of Merchandise Transactions • 0 Each merchandising transaction affects a buyer and a seller. In the following illustrations, we show how the same transactions would be recorded by both the seller and the buyer. See page 272

  31. Objective 4 • 0 6-4 Describe the adjusting and closing process for a merchandising business. Adjusting Entries Inventory Shrinkage Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory. If the balance of the Merchandise Inventory account is larger than the total amount of merchandise count, the difference is often called inventory shrinkage or inventory shortage.

  32. Inventory Shrinkage e.g. NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, 2009. The physical count reveals that only $62,150 is actually available. • 0 6-4 Adjusting Entry Dec. 31 Cost of Merchandise Sold 1 800 00 Merchandise Inventory 1 800 00 Inventory shrinkage (63,950 – $62,150). Inventory records $63,950 Inventory count 62,150 Inventory shortage $ 1,800

  33. Closing Entries • 0 6-4 Step 1: Close the temporary accounts with credit balances to Income Summary. Date Item PR Debit Credit Closing Entries 2009 Dec. 31 Sales 410 720 185 00 Rent Revenue 610 600 00 Income Summary 312 720 785 00

  34. 6-4 6-4 31 Income Summary 312 645 385 00 Sales Returns and Allow. 411 6 140 00 Sales Discounts 412 5 790 00 Cost of Merchandise Sold 510 525 305 00 Sales Salaries Expense 520 53 430 00 Advertising Expense 521 10 860 00 Depr. Exp.—Store Equip. 522 3 100 00 Delivery Expense 523 2 800 00 Misc. Selling Expense 529 630 00 Office Salaries Expense 530 21 020 00 Rent Expense 531 8 100 00 Depr. Exp.—Office Equip. 532 2 490 00 Insurance Expense 533 1 910 00 Office Supplies Expense 534 610 00 Misc. Administrative Exp. 539 760 00 Interest Expense 710 2 440 00 Step 2:Close the temporary accounts with debit balances to Income Summary. • 0

  35. 0 31 Income Summary 312 75 400 00 Chris Clark, Capital 310 75 400 00 31 Chris Clark, Capital 310 18 000 00 Chris Clark, Drawing 311 18 000 00 Step 3: Closing Entries Close Income Summary(the balance represents a $75,400 profit for NetSolutions in 2009) to Chris Clark, Capital. • 0 Step 4: Closing Entries Close Chris Clark, Drawing to Chris Clark,Capital.

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