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Accounting for Merchandising Businesses

These slides should be viewed using the presentation mode (click the icon to start presentation). Accounting for Merchandising Businesses. Chapter 6. Learning Objective 1. Distinguish between the activities and financial statements of service and merchandising businesses.

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Accounting for Merchandising Businesses

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  1. These slides should be viewed using the presentation mode (click the icon to start presentation). Accounting for Merchandising Businesses Chapter 6

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

  3. Nature of Merchandising Businesses Most service businesses, such as plumbing repair and accounting services, have no merchandise. Merchandising businesses, such as a department store or sandwich shop, generate revenue by selling a product. Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory. LO 1

  4. Learning Objective 2 Distinguish between the activities and financial statements of service and merchandising businesses. Describe and illustrate the financial statements of a merchandising business.

  5. Multiple-Step Income Statement The multiple-step income statement contains several sections, subsections, and subtotals. The first segment reports revenue from sales. LO 2

  6. Sales is the total amount charged customers for merchandise sold, including cash sales and sales on account. LO 2 Multiple-Step Income Statement • Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. • Sales discounts are granted by the seller to customers for early payment of amounts owed. • Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.

  7. The second segment of the multiple-step income statement is the cost of merchandise sold section. The cost of merchandise sold is the cost of the merchandise sold to customers. Merchandise costs consist of all the costs of acquiring the merchandise and readying it for sale, such as purchase and freight costs. LO 2 Multiple-Step Income Statement

  8. The buyer may return merchandise to the seller (purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (purchase allowance). LO 2 Multiple-Step Income Statement • 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.

  9. If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand, a periodicinventory system is being used. LO 2 Multiple-Step Income Statement • Under the perpetual inventory system, the amounts of inventory purchased, available for sale, and sold are continuously (perpetually) updated in the inventory records.

  10. LO 2 Gross Profit • Gross profit is computed by subtracting the cost of merchandise sold from net sales. GrossProfit

  11. Selling expenses are incurred directly in the selling of merchandise. LO 2 Multiple-Step Income Statement • Administrative expenses, sometimes called general expenses, are incurred in the administration or general operations of the business. • Income from operations, sometimes called operating income, is determined by subtracting operating expenses from gross profit.

  12. Other income is revenue from sources other than the primary operating activity of a business. Other expense is an expense that cannot be traced directly to the normal operations of the business. Subtracting other income and expenses from “income from operations” provides the net income or loss. LO 2 Multiple-Step Income Statement

  13. Balance Sheet The form of balance sheet with the assets on the left-hand side and the liabilities and owner’s equity on the right-hand side is called the account form. LO 2 • When the balance sheet is presented in a downward sequence in three sections, it has been prepared using the report form.

  14. Learning Objective 3 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 merchandising transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; dual nature of merchandising transactions.

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

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

  17. Cash Sales LO 3 Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 31.

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

  19. Sales Discounts LO 3 • 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.

  20. Credit Terms To encourage the buyer to pay before the end of the credit period, the seller may offer a discount, such as 2/10, n/30. These terms indicate that a two percent discount can be taken if the invoice is paid within ten days. After ten days the full amount is due by the thirtieth day from the invoice date. LO 3

  21. Receipts on Account LO 3 On January 17, NetSolutions receives the amount due within ten days, so the buyer deducted $30 ($1,500 x 2%) from the invoice amount.

  22. Credit Memo LO 3 • A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable.

  23. Credit Memo LO 3 On January 13, issued Credit Memo No. 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.

  24. Purchase Transactions LO 3 On January 3, NetSolutions purchased merchandise for cash. * NOTE: Assume a perpetual inventory system is used.

  25. Purchase Transactions LO 3 On January 4, NetSolutions purchased merchandise on account from Thomas Corporation. *

  26. Purchases Discounts A buyer may receive a discount from the seller (sales discount) for early payment of the amount owed. From the buyer’s perspective, such discounts are called purchases discounts. LO 3

  27. LO 3 LO 3 Purchase Transactions Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions is trying to determine if it should pay the invoice within the discount period.

  28. Purchase Transactions LO 3 Alpha Technologies issued an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. Based on the calculation in the previous slide, NetSolutions pays the amount due, less the discount, on March 22.

  29. Discount Not Taken LO 3 Assume that, instead of paying the invoice within the discount period, NetSolutions pays the invoice on April 11.

  30. Purchases Returns and Allowances A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. From a buyer’s perspective, suchreturns are called purchasesreturns and allowances. LO 3 • A debit memorandum, often called a debit memo,informs the seller of the amount the buyer proposes to debit to the account payable due the seller.

  31. Debit Memo LO 3 NetSolutions receives a delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems. NetSolutions records the return of the merchandise as follows:

  32. Merchandise Purchased On May 4 , NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link. LO 3 On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.

  33. Invoice Paid LO 3 On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.

  34. Freight If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, the terms are said to be FOB (free on board) shipping point. LO 3 • If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB(free on board) destination.

  35. LO 3 Freight On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the shipping cost of $50.

  36. Sale Plus Freight Cost LO 3 On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480.

  37. LO 3 Sale Plus Freight Cost On June 15, NetSolutions pays freight of $40 on the sale of June 15.

  38. LO 3 Seller Prepays Freight On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost of the merchandise sold is $360.

  39. LO 3 Seller Prepays Freight

  40. Sales Taxes LO 3 On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax. On a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected.

  41. Trade Discounts When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called tradediscounts. LO 3

  42. Dual Nature of Merchandise Transactions LO 3 • 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.

  43. LO 3 Dual Nature of Merchandise Transactions July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,500.

  44. Dual Nature of Merchandise Transactions Burton Company (Buyer) Merchandise Inventory 7,500 Accounts Payable—Scully Co. 7,500 LO 3 Scully Company (Seller) Accounts Receivable—Burton Co. 7,500 Sales 7,500 Cost of Merchandise Sold 4,500 Merchandise Inventory 4,500

  45. Dual Nature of Merchandise Transactions LO 3 July 2. Burton Company paid transportation charges of $150 on the July 1 purchase from Scully Company.

  46. Dual Nature of Merchandise Transactions Scully Company (Seller) Burton Company (Buyer) Merchandise Inventory 150 Cash 150 LO 3 No entry.

  47. Dual Nature of Merchandise Transactions LO 3 July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.

  48. Dual Nature of Merchandise Transactions Scully Company (Seller) Burton Company (Buyer) Merchandise Inventory. 5,000 Accounts Payable—Scully Co. 5,000 LO 3 Accounts Receivable—Burton Co. 5,000 Sales 5,000 Cost of Merchandise Sold 3,500 Merchandise Inventory 3,500

  49. Dual Nature of Merchandise Transactions LO 3 July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.

  50. Dual Nature of Merchandise Transactions Burton Company (Buyer) No entry. LO 3 Scully Company (Seller) Delivery Expense 250 Cash 250

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