Accounting for Merchandising Businesses

1. 6 Accounting for Merchandising Businesses Student Version

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

3. 1 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold.

4. 1 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

5. 1

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

7. 2 Multiple-Step Income Statement The multiple-step income statement contains several sections, subsections, and subtotals.

8. Exhibit 1 2 Multiple-Step Income Statement (continued)

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

10. 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).

11. 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.

12. 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.

13. 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.

14. Exhibit 2 2 Cost of Merchandise Sold

15. 2 • Selling expenses are incurred directly in the selling of merchandise. • Administrative expenses sometimes called general expenses , are incurred in the administration or general operation of the business.

16. 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.

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

18. Exhibit 3 2 Single-Step Income Statement

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

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

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

22. 3 Describe and illustrate the accounting for merchandise transactions including: 6-22

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

24. 3 Cash Sales On January 3, NetSolutions sold $1,800 of merchandise for cash.

25. 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.

26. 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.

27. 3 Sales on Account On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.

28. 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.

29. Exhibit 8 3 Credit Terms

30. 3 Receipts on Account On January 22, NetSolutions receives the amount due, less the 2 percent discount. $1,500 x .02

31. 3 Credit Memorandum A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable.

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

33. 3 Purchase Merchandise for Cash * *Assumes a perpetual inventory system is used.

34. 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.

35. 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.

36. 3 3 Discount Taken

37. 3 Discount Not Taken Assume that NetSolutions pays the invoice on April 11.

38. 3 A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.

39. 3 When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, that is a purchases allowance.

40. 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.

41. 3 NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 10 as follows:

42. 3 Price Allowance On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.

43. 3 NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link on May 4.

44. 3 On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.

45. 3 On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50.

46. 3 On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. NetSolutions pays freight of $40.

47. 3

48. 3 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.

49. 3

50. Exhibit 11 3 Freight Terms