Accounting Basics

6
Accounting for
Merchandising Businesses
Accounting for Merchandising Businesses
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After studying this chapter, you should be able to:
Click to edit Master text styles
Distinguish between the activities and

1
Second
level
financial
statements of service and
merchandising
businesses.
Third
level
2
3
6-2
Fourth level
Describe
and illustrate the financial
Fifth level
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.
Accounting for Merchandising Businesses (continued)
the adjusting
and
closing
After
studying this
chapter, you
should
be able to:
4 Describe
process for a merchandising business.
6-3
1
Distinguish between the
activities and financial
statements of service and
merchandising businesses.
6-4
1
Nature of Merchandising
Businesses
Service Business
Fees earned
Operating expenses
Net income
6-5
$XXX
XXX
$XXX
1
Nature of Merchandising
Businesses
Merchandising Business
Sales
Cost of Merchandise Sold
Gross Profit
Operating Expenses
Net Income
6-6
$XXX
XXX
$XXX
XXX
$XXX
When merchandise is sold, the revenue

is reported as sales, and its cost is
recognized as an expense called cost
of merchandise sold.
6-7
Merchandise on hand (not

sold) at the end of an
accounting period is called
merchandise inventory.
6-8
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?
Follow My Example 6-1
The gross profit is $490,000 ($250,000 + $975,000

Follow
My Example 6-1
$735,000).
For Practice: PE 6-1A, PE 6-1B
6-9
6-9
6-10
2
Describe and illustrate
the financial statements
of a merchandising
business.
6-11
Multiple-Step Income Statement
The multiple-step income

statement contains several
sections, subsections, and
subtotals.
6-12
2
Exhibit 1
Multiple-Step Income Statement
(continued on Slide 19)

6-13
The Sales account provides

the total amount charged to
customers for merchandise
sold, including cash sales
and sales on account.
6-14
Sales returns and allowances

are granted by the seller to
customers for damaged or
defective merchandise.
6-15
Sales discounts are granted

by the seller to customers for
early payment of amounts
owed.
6-16
Net sales is determined by

subtracting sales returns
and allowances and sales
discounts from sales.
6-17
The cost of merchandise sold

is the cost of the merchandise
sold to customers.
6-18
2
Exhibit 1
Multiple-Step Income Statement (continued)
(continued on Slide 28)

6-19
The buyer may return merchandise

to the seller (a purchase return),
or the buyer may receive a
reduction in the initial price at
which the merchandise was
purchased (a purchase allowance).
6-20
You have seen how sellers may

offer customers sales discounts
for early payment of their bills.
From the buyers perspective,
such discounts are referred to as
purchase discounts.
6-21
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.
6-22
Under the perpetual inventory

system of accounting, the amounts
of inventory available for sale and
sold are continuously (perpetually)
updated in the inventory records.
6-23
2
Exhibit 2
6-24
Selling expenses are incurred directly

in the selling of merchandise.
Sales salaries
Store supplies used
Depreciation of store
equipment
Delivery expense
Advertising
6-25
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
6-26
Other income is revenue from
6-27
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.
2
Exhibit 1
MultipleStep
Income
Statement
(concluded)
6-28
2
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
142,000
Purchases
985,000
Purchases Returns and Allowances
23,500
Purchases Discounts
21,000
Transportation In
11,300
6-29
6-29
Example Exercise 6-2 (continued)

Purchases
Less: Purchases ret. and allow. $23,500
Purchases discounts
21,000
Net purchases
Add transportation in
Cost of merchandise purchased
Merchandise available for sale
Less merchandise inventory, May 31
Cost of merchandise sold
$ 121,200
$985,000
44,500
$940,500
11,300
951,800
$1,073,000
142,000
$ 931,000

6-30
6-30
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.
6-31
2
Exhibit 3
6-32
Single-Step Income Statement
2
Exhibit 4
6-33
Statement of Owners Equity

for Merchandising Business
2
Exhibit 5
6-34
Report Form of Balance Sheet
(Continued)
2
Exhibit 5
6-35
Report Form of Balance Sheet (continued)
3
Describe and illustrate
the accounting for
merchandise
transactions including:
6-36
6-36
3
Sale of merchandise
Purchase of merchandise
Freight, sales taxes, and trade
discounts
Dual nature of merchandise
transactions
6-37
6-37
3
Exhibit 6
6-38
Chart of Accounts for NetSolutions

3
Cash Sales
On January 3, NetSolutions sold $1,800 of
merchandise for cash.
6-39
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.
6-40
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.
6-41
3
Sales on Account
On January 12, NetSolutions sold merchandise
on account for $510. The cost of merchandise
sold was $280.
6-42
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.
6-43
3
Exhibit 7
Invoice
Wireless
PC Card
6-44
3
Exhibit 8
6-45
Credit Terms
3
Receipts on Account
On January 22, NetSolutions receives the
amount due, less the 2 percent discount.
$1,500 x .02
6-46
Credit Memorandum
A credit memorandum, often

called a credit memo, authorizes
a credit to (decreases) the
buyers account receivable.
6-47
3
Exhibit 9
6-48
Credit Memo
3
On January 13, issued Credit Memo 32 to Krier
Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.
6-49
3
Sales Transactions
Journalize the following merchandise
transactions:
a. Sold merchandise on account, $7,500
with terms of 2/10, n/30. The cost of the
merchandise sold was $5,625.
b. Received payment less the discount.
6-50
6-50
a. Accounts Receivable. 7,500
Sales..
7,500
Cost of Merchandise Sold. 5,625

Merchandise Inventory.
5,625
b. Cash. 7,350
Sales Discounts
Accounts Receivable.
150
7,500

6-51
6-51
3
Purchase Merchandise
for Cash
*Assumes a perpetual inventory system is used.
6-52
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.
6-53
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.
6-54
NetSolutions borrows cash at an annual interest

rate of 6%. Should the firm borrow cash to pay
the invoice within the discount period?
Discount of 2% on $3,000
Interest for 20 days at the rate
of 6% on $2,940
Savings from borrowing
6-55
YES
$60.00
9.80
$50.20
3
3
Discount Taken
6-56
Discount Not Taken
Assume that NetSolutions pays the

invoice on April 11.
6-57
A purchases return involves

actually returning merchandise
that is damaged or does not meet
the specifications of the order.
6-58
When the defective or

incorrect merchandise is
kept by the buyer and
the vendor makes a
price adjustment, that is
a purchases allowance.
6-59
3
Exhibit 10
6-60
Debit Memo
NetSolutions receives the delivery

from Maxim Systems and
determines that $900 of the items
are not the merchandise ordered.
Debit memorandum #18 (also
called a debit memo) is issued to
Maxim Systems.
6-61
NetSolutions records the return of the

merchandise indicated in the debit
memo in Exhibit 10 as follows:
6-62
Price Allowance
On May 2, NetSolutions purchased

$5,000 of merchandise on account from
Delta Data Link, terms 2/10, n/30.
6-63
NetSolutions returned $3,000 of the

merchandise purchased from Delta
Data Link on May 4.
6-64
On May 12, NetSolutions paid for the

purchase of May 2 less the return and
discount.
6-65
3
Purchase Transactions
Rofles Company purchased merchandise on account
from a supplier for $11,500, terms 2/10, n/30. Rofles
Company returned $3,000 of the merchandise and
received full credit.
a. If Rofles Company pays the invoice within the
discount period, what is the amount of cash
required for the payment?
b.
6-66
6-66
Under a perpetual inventory system, what account

is credited by Rofles Company to record the
return?
a. $8,330. Purchase of $11,500 less the return of
$3,000 less the discount of $170 [($11,500 $3,000)

2%].
b. Merchandise inventory
6-67
6-67
Freight
If ownership of the merchandise passes

to the buyer when the seller delivers the
merchandise to the freight carrier, it is
said to be FOB (free on board) shipping
point.
6-68
3
On June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB shipping
point and pays the transportation cost of $50.
6-69
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.
6-70
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.
6-71
6-72
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.
6-73
6-74
3
Exhibit 11
6-75
Freight Terms
3
Freight Terms
Determine the amount to be paid in full settlement of
each of invoices (a) and (b), assuming that credit for
returns and allowances was received prior to payment
and that all invoices were paid within the discount
period.
Merchandise
Freight
Paid by Seller
a.
$4,500
$200
b.
$5,000
60
6-76
6-76
Freight Terms
FOB shipping point,
1/10, n/30
FOB destination,
2/10, n/30
Returns and
Allowances
$ 800
2,500
a.
$3,863. Purchase of $4,500 less return of $800 less the

discount of $37 [($4,500 $800) 1%] plus $200 of
shipping.
b.
$2,450. Purchase of $5,000 less return of $2,500 less

the discount of $50 [($5,000 $2,500) 2%].
6-77
6-77
3
Sales Taxes
On August 12, merchandise is sold on account

to Lemon Company, $100. The state has a 6%
sales tax.
6-78
3
Sales Taxes
On a regular basis, the seller pays to the taxing

authority (state) the amount of the sales taxes
collected.
6-79
Trade Discounts
When wholesalers offer special

discounts to certain classes of
buyers who order large quantities,
these discounts are called trade
discounts.
6-80
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.
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.
6-81
3
Scully Company (Seller)
Accounts ReceivableBurton Co. 7,500

Sales
7,500

Merchandise Inventory
4,500
4,500
Burton Company (Buyer)
Accounts PayableScully Co.
6-82
7,500
7,500
July 2. Burton Company paid

transportation charges of
$150 on the July 1 purchase
from Scully Company.
6-83
3
No entry.
Cash
6-84
150
150
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.
6-85
3

Sales
5,000

3,500
3,500
6-86
5,000
5,000
July 7. Scully Company paid

transportation costs of $250
for delivery of merchandise
sold to Burton Company on
July 5.
6-87
3
Delivery Expense
Cash
No entry.
6-88
250
250
July 13. Scully Company issued

Burton Company a credit
memorandum for
merchandise returned,
$1,000. The cost of the
merchandise returned was
$700.
6-89
3
Sales Returns and Allowances

1,000
Accounts ReceivableBurton Co.
1,000
700
700

6-90
1,000
1,000
July 15. Scully Company received

payment from Burton
Company for purchase of
July 5.
6-91
3
Cash
4,000
4,000

Cash
6-92
4,000
4,000
July 18. Scully Company sold

merchandise on account to
Burton Company, $12,000,
terms FOB shipping point,
2/10, n/eom. Scully prepaid
transportation costs of $500,
which were added to the
invoice. The cost of the
merchandise sold was $7,200.
6-93
3

Sales
12,000
500
Cash
500
7,200
7,200
12,500
12,500
6-94
July 28. Scully Company received

payment from Burton
Company for purchase of July
18, less discount (2%
$12,000).
6-95
3
Cash
12,260
Sales Discounts
240
12,500

Cash
6-96
12,500
240
12,260
3
Transactions for Buyer and Seller
Sievert Co. sold merchandise to Bray Co. on
account, $11,500, terms 2/15, n/30. The cost of the
merchandise sold is $6,900. Sievert Co. issued a
credit memorandum for $900 for merchandise
returned and later received the amount due within
the discount period. The cost of the merchandise
returned was $540. Journalize Sievert Co.s and
Bray Co.s entries for the payment of the amount
due.
6-97
6-97
Cash ($11,500 $900 $212).. 10,388

Sales Discounts [($11,500 $900) 2%].....................
212
Accounts ReceivableBray Co ($11,500 $900)
10,600
Bray Company Journal Entries:
Accounts PayableSievert Co. ($11,500 $900)... 10,600
Merchandise Inventory [($11,500 $900) 2%]
212
Cash ($11,500 $900 $212)....................
10,388

6-98
6-98
4
Describe the adjusting
and closing process for
a merchandising
business.
6-99
6-99
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
the merchandise count, the difference is
often called inventory shrinkage or
inventory shortage.
6-100
NetSolutions inventory records indicate the

following on December 31, 2011:
Account balance of Merchandise Inventory
Physical merchandise inventory on hand
Inventory shrinkage
6-101
Dec. 31, 2011

$63,950
62,150
$ 1,800
At the end of the accounting period,

inventory shrinkage is recorded by
the following adjusting entry:
6-102
Step 1: Closing Entries

Debit each temporary account with a credit balance, such as
Sales, for its balance and credit Income Summary.
6-103
4
Credit each temporary account with a debit balance, such as an
expense, for the balance and credit Income Summary.
6-104

Debit Income Summary for the amount of its
balance (net income) and credit the owners equity
account.
6-105

Debit the owners capital account for the balance of
the drawing account and credit the drawing
account.
6-106
4
NetSolutions Income Summary account after the
closing entries have been posted is as follows:
6-107
4
Inventory Shrinkage
Pulmonary Companys perpetual inventory
records indicate that $382,800 of merchandise
should be on hand on March 31, 2010. The
physical inventory indicates that $371,250 of
merchandise is actually on hand. Journalize the
adjusting entry for the inventory shrinkage for
Pulmonary Company for the year ended March 31,
2010.
6-108
6-108
Mar. 31 Cost of Merchandise Sold. 11,550

11,550
Inventory shrinkage
($382,800 $371,250).
6-109
6-109
Appendix 1:
Accounting Systems for
Merchandisers
6-110
6-110
Manual Accounting Systems

Special Journal
Sales journal
Purchases journal
Cash receipts journal
Cash payments journal
6-111
Type of Transaction
Sales on account
Purchases on
account
Cash receipts
Cash payments
Exhibit 12
6-112
Sales Journal for a Merchandising Business
Exhibit 13
6-113
Purchases Journal for a

Exhibit 14
6-114
Cash Receipts Journal for a

Exhibit 15
6-115
Cash Payments Journal for a

Exhibit 16
6-116
Enter Bills Form
Exhibit 17
6-117
Create Invoice Form
Appendix 2:
The Periodic Inventory
System
6-118
6-118
Exhibit 18
6-119
Determining Cost of Merchandise Sold

Using the Periodic System
Exhibit 19
6-120
Chart of Accounts Under the

Periodic Inventory System
Exhibit 20
6-121
Transactions Using the Periodic

and Perpetual Inventory Systems
Exhibit 20
6-122
Transactions Using the Periodic and

Perpetual Inventory Systems (continued)
Closing Entries for NetSolutions
6-123
6-124

Accounting Basics

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6

Accounting for Merchandising Businesses

Click to edit Master title style

Click to edit Master text styles

Distinguish between the activities and

Describe and illustrate the accounting for

Accounting for Merchandising Businesses (continued)

When merchandise is sold, the revenue

Merchandise on hand (not

Example Exercise 6-1

The gross profit is $490,000 ($250,000 + $975,000

Multiple-Step Income Statement

The multiple-step income

Multiple-Step Income Statement

(continued on Slide 19)

The Sales account provides

Sales returns and allowances

Sales discounts are granted

Net sales is determined by

The cost of merchandise sold

Multiple-Step Income Statement (continued)

(continued on Slide 28)

The buyer may return merchandise

You have seen how sellers may

If merchandise inventory at the

Under the perpetual inventory

Cost of Merchandise Sold

Selling expenses are incurred directly

Administrative expenses sometimes

Other income is revenue from

sources other than the primary

Example Exercise 6-2 (continued)

Follow My Example 6-2

Merchandise Inventory, May 1

For Practice: PE 6-2A, PE 6-2B

An alternative form of income

Single-Step Income Statement

Statement of Owners Equity

Report Form of Balance Sheet

Report Form of Balance Sheet (continued)

Chart of Accounts for NetSolutions

A credit memorandum, often

Example Exercise 6-3 (continued)

Follow My Example 6-3

a. Accounts Receivable. 7,500

Cost of Merchandise Sold. 5,625

For Practice: PE 6-3A, PE 6-3B

*Assumes a perpetual inventory system is used.

*Assumes a perpetual inventory system is used.

Alpha Technologies issues

NetSolutions borrows cash at an annual interest

Discount Not Taken

Assume that NetSolutions pays the

A purchases return involves

When the defective or

NetSolutions receives the delivery

NetSolutions records the return of the

On May 2, NetSolutions purchased

NetSolutions returned $3,000 of the

On May 12, NetSolutions paid for the

Under a perpetual inventory system, what account

Example Exercise 6-4 (continued)

Follow My Example 6-4

a. $8,330. Purchase of $11,500 less the return of