1 / 69

Accounting for Merchandising Businesses

These slides should be viewed using the presentation mode (left click your mouse on the icon). Accounting for Merchandising Businesses. Chapter 5. Student Version. Learning Objective 1. Distinguish between the activities and financial statements of service and merchandise businesses.

tpatterson
Download Presentation

Accounting for Merchandising Businesses

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. These slides should be viewed using the presentation mode (left click your mouse on the icon). Accounting for Merchandising Businesses Chapter 5 Student Version

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

  3. LO 1 Nature of Merchandising Businesses • Most services 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.

  4. Learning Objective 2 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. Below is the revenue section for NetSolutions. LO 2

  6. Revenue from Sales Sales is the total amount charged customers for merchandise sold, including cash sales and sales on account. LO 2 • Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.

  7. Revenue from Sales 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. LO 2

  8. Cost of Merchandise Sold 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. A single figure for cost of merchandise sold is shown on the multiple-step income statement on the next slide. LO 2

  9. Cost of Merchandise Sold 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). You have seen that 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. LO 2

  10. Cost of Merchandise Sold 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 • Under the perpetual inventory system, the amounts of inventory purchased, available for sale, and sold are continuously (perpetually) updated in the inventory records.

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

  12. 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.

  13. Other Income and Expense 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. LO 2

  14. Single-Step Income Statement 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. LO 2

  15. Balance Sheet The form of balance sheet with the assets on the left-hand side and the liabilities and stockholders’ 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.

  16. Learning Objective 3 Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; dual nature of merchandising transactions.

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

  18. 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.

  19. 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.

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

  21. 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.

  22. 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.

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

  24. 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.

  25. Purchase Transactions LO 3 On January 3, NetSolutions purchased merchandise for cash (assume a perpetual inventory is used).

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

  27. 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

  28. 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.

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

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

  31. 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

  32. Debit Memo 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.

  33. Debit Memo • NetSolutions records the return of the merchandise as follows: 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 System.

  34. 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.

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

  36. LO 3 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. • 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.

  37. 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. Two entries are required.

  38. 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. Again, two entries are required.

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

  40. 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.Three entries are needed. These are shown on the next slide.

  41. LO 3 Seller Prepays Freight

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

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

  44. LO 3 Dual Nature of Merchandise Transactions • 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.

  45. 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.

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

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

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

  49. LO 3 Dual Nature of Merchandise Transactions 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.

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

More Related