Download Merchandising Business

1
Accounting for
Merchandising
Businesses
6
1
2
After studying this chapter, you should
be able to:
1. Distinguish between the activities and
financial statements of service and
merchandising businesses.
2. Describe and illustrate the financial
statements of a merchandising
business.
2
3
After studying this chapter, you should
be able to:
3. Describe and illustrate the accounting for
merchandise transactions including:
 sale of merchandise
 purchase of merchandise
 transportation costs, sales taxes, trade discounts
 dual nature of merchandising transactions.
4. Describe the adjusting and closing process
for a merchandising business.
3
4
6-1
Objective 1
Distinguish between the
activities and financial
statements of service and
merchandising businesses.
4
Reporting Financial Performance
Service organizations sell time to earn revenue.
Examples: accounting firms, law firms, and
plumbing services
Revenues
Minus
Expenses
Equals
Net
income
5
6
6-1
Service Business
Fees earned
Operating expenses
Net income
$XXX
–XXX
$XXX
6
Reporting
Financial
Performance
Merchandising companies sell products to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
Net
Sales
Minus
Cost Mds Sold
Equals
Gross
Minus
Expenses
Equals
Net
Income
Profit
Merchandising Company
Income Statement
For Year Ended December 31, 2002
Sales revenues
Cost of goods sold
Gross profit
Operating expenses
Net income
$ 150,000
80,000
$ 70,000
46,500
$ 23,500
7
8
6-1
Merchandising Business
Sales
Cost of Merchandise Sold
Gross Profit
Operating Expenses
Net Income
$XXX
–XXX
$XXX
–XXX
$XXX
8
9
6-1
When merchandise is sold, the
revenue is reported as sales, and
its cost is recognized as an
expense called cost of
merchandise sold.
9
10
6-1
The cost of merchandise sold is
subtracted from sales to arrive at
gross profit. This amount is
called gross profit because it is
the profit before deducting the
operating expenses.
10
11
6-1
Merchandise on hand (not
sold) at the end of an
accounting period is called
merchandise inventory.
11
12
1-2
6-1
Example Exercise 6-1
On August 25, Gallatin Repair Service extended an offer of
During
year,
soldatfor
$250,000
$125,000the
forcurrent
land that
had merchandise
been priced forissale
$150,000.
On
cash
and for
$975,000
on account.
The costthe
ofseller’s
the
September
3, Gallatin
Repair
Service accepted
merchandise
is $735,000.
What20,
is the
theland
amount
of the
counteroffer ofsold
$137,000.
On October
was assessed
gross
profit?
at a value
of $98,000 for property tax purposes. On December 4,
Gallatin Repair Service was offered $160,000 for the land by a
Follow
Myretail
Example
6-1what value should the land be recorded
national
chain. At
in Gallatin Repair Service’s records?
The gross profit is $490,000 ($250,000 + $975,000 –
$735,000).
Follow
My Example 1-1
$137,000. Under the cost concept, the land should be recorded at
the cost to Gallatin Repair Service.
10
12
For Practice: PE 6-1A, PE 6-1B
31
13
6-1
1311
14
6-2
Objective 2
Describe and illustrate the
financial statements of a
merchandising business.
14
15
Multiple-Step Income Statement
6-2
The multiple-step
income statement
contains several sections,
subsections, and
subtotals.
15
16
6-2
The Sales account
provides the total amount
charged to customers for
merchandise sold,
including cash sales and
sales on account.
16
17
6-2
Sales returns and
allowances are granted by
the seller to customers for
damaged or defective
merchandise.
17
18
6-2
Sales discounts are granted
by the seller to customers
for early payment of
amounts owed.
18
19
6-2
Net sales is determined by
subtracting sales returns
and allowances and sales
discounts from sales.
19
20
6-2
Multiple-Step Income Statement
NetSolutions
Income 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)
20
18
21
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
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
Total operating expenses
Income from operations
(Continued)
$ 70,820
34,890
105,710
21
$ 77,240
19
22
6-2
Other income and expenses:
Rent revenue
Interest expense
Net income
(Concluded)
$ 600
(2,440)
(1,840)
$75,400
22
20
23
6-2
Cost of merchandise sold
was discussed earlier. It is
the cost of the merchandise
sold to customers.
23
24
6-2
As we discussed in Slide 16,
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.
24
25
6-2
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).
25
26
Cost of Merchandise
Sold
6-2
26
24
27
Single-Step Income Statement
6-2
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.
27
28
6-2
Exhibit 3: Single-Step Income Statement
NetSolutions
Income Statement
For the Year Ended December 31, 2009
Revenues:
Net sales
Rent revenue
Total revenues
Expenses:
Cost of merchandise sold
Selling expenses
Administrative expenses
Interest expense
Total expenses
Net income
$708,255
600
$708,855
$525,305
70,820
34,890
2,440
633,455
$ 75,400
28
26
29
6-2
Exhibit 4: Statement of Owner’s Equity
NetSolutions
Statement of Owner’s Equity
For the Year Ended December 31, 2009
Chris Clark, capital, 1/1/09
Net income for year
Less withdrawals
Increase in owner’s equity
Chris Clark, capital, 12/31/09
$153,800
$75,400
18,000
57,400
$211,200
29
27
30
6-2
Exhibit 5: Report Form of Balance Sheet
NetSolutions
Balance Sheet
December 31, 2009
Assets
Current assets:
Cash
Accounts receivable
Merchandise inventory
Office supplies
Prepaid insurance
Total current assets
$52,950
91,080
62,150
480
2,650
(Continued)
$209,310
30
28
31
6-2
Exhibit 5: Report Form of Balance Sheet
Property, plant, and equip.:
Land
Store equipment
Less accumulated
depreciation
Office equipment
Less accumulated
depreciation
Total property, plant,
and equipment
Total assets
$20,000
$27,100
5,700
$15,570
21,400
4,720
10,850
(Continued)
52,250
$261,560
31
29
32
Exhibit 5: Report Form of Balance Sheet
6-2
Liabilities
Current liabilities:
Accounts payable
$22,420
Note payable (current portion)
5,000
Salaries payable
1,140
Unearned rent
1,800
Total current liabilities
$ 30,360
Long-term liabilities:
Note payable (final pmt. due 2017)
20,000
Total liabilities
$ 50,360
Owner’s Equity
Chris Clark, capital
211,200
Total liabilities and owner’s equity
$261,560
(Concluded)
32
30
33
6-2
Example Exercise 6-2
Based upon the following data, determine the cost of
merchandise sold for May. Use the format seen in
Exhibit 2.
Merchandise Inventory, May 1
Merchandise Inventory, May 31
Purchases
Purchases Returns and Allowances
Purchases Discounts
Transportation In
$121,200
142,000
985,000
23,500
21,000
11,300
33
31
34
6-2
Follow My Example 6-2
Merchandise Inventory, May 1
Purchases
Less: Purchases returns and allowances
Purchases discounts
Net purchases
Add transportation in
Cost of merchandise purchased
Merchandise available for sale
Less merchandise inventory, May 31
Cost of merchandise sold
For Practice: PE 6-2A, PE 6-2B
$ 121,200
$985,000
$23,500
21,000
44,500
$940,500
11,300
951,800
$1,073,000
142,000
$ 931,000
32
34
35
6-3
Objective 3
Describe and illustrate the accounting
for merchandise transactions including:
sale of merchandise; purchase of
merchandise; transportation costs, sales
taxes, trade discounts; dual nature of
merchandise transactions.
35
Exh.
6-5
Inventory Systems
Beginning
Net cost of
inventory
purchases
+
 = Merchandise
available for sale
Ending Inventory
+
Cost of Goods
Sold
36
Inventory Systems
Perpetual Method
Gives a continual record of the amount of inventory on hand.
When an item is sold it is recorded in the Cost of Goods Sold
account.
Periodic Method
Requires updating the inventory account only at the end of the
period. Acquisition of merchandise inventory is recorded in a
temporary Purchases account.
37
Inventory Systems
Perpetual Method
Gives a continual record of the amount of inventory on hand.
When an item is sold it is recorded in the Cost of Goods Sold
account.
Because of advances in computer
Periodic
Methodmethod
technology,
the perpetual
Requires updating
the inventory
only
is widely
used inaccount
practice
andat the end of the
period. Acquisition
of merchandise inventory is recorded in a
will be the focus of our discussion.
temporary Purchases account.
38
Merchandising and Inventory
4
Merchandising involves selling inventory
4
Inventory is usually an important asset
4
Inventory must be accounted for periodically or
perpetually
4
Traditional periodic method is often being
replaced by perpetual inventory accounting
39
Income Statement Comparison
Service Business
Fees earned
$150,000
Operating expenses
120,000
Net income
$ 30,000
20% of revenues
Merchandising Business
Sales revenue
Cost of mdse. sold
Gross profit
$600,000
450,000
$150,000
Operating expenses
120,000
Net income
$ 30,000
5% of revenues
40
Income Statement Comparison
Service Business
Fees earned
$150,000
Operating expenses
120,000
Net income
$ 30,000
20% of revenues
Merchandising Business
Sales revenue
Cost of mdse. sold
Gross profit
$600,000
450,000
75% of revenues
$150,000
Operating expenses
120,000
Net income
$ 30,000
5% of revenues
41
Advantages of Using Perpetual Inventory

Continuous determination of inventory value

Continuous determination of gross profit

Affordable with computers, scanners, and bar codes
on most products

Perpetual inventory accounting provides
management controls

Managers know which items are selling fastest and
the profit margin on those items
42
43
Cash Sales
6-3
On January 3, NetSolutions sold
$1,800 of merchandise for cash.
43
34
44
Cash Sales (continued)
6-3
Using a perpetual inventory, the $1,200
cost of the inventory must be recorded.
44
35
45
Credit Card Sales
6-3
At the end of the month, $48 was
sent to pay the service charge on
credit card sales.
45
36
46
6-3
Sales on Account Using a Perpetual
Inventory
Jan. 12 Accounts Receivable—Sims Co.
Sales
510 00
510 00
Invoice No. 7172
12 Cost of Merchandise Sold
Merchandise Inventory
Cost of merchandise sold on
Invoice No. 7172.
280 00
280 00
On January 12, NetSolutions sold Sims Company
merchandise on account, $510. The cost of the
46
37
merchandise to the seller was $280.
Merchandise Purchases
On June 20, Melton Company purchased $14,000 of
Merchandise Inventory paying cash.
GENERAL JOURNAL
Date
Description
Jun 20 Merchandise Inventory
Cash
Page 55
PR
Debit
Credit
14,000
14,000
47
48
Sales Discounts
6-3
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.
48
Exh.
6-7
Purchase Discounts
A deduction from the invoice price granted to
induce early payment of the amount due.
Terms
Discount Period
Credit Period
Full amount
Full amount due
Time
Due
less discount
Purchase or Sale
49
Purchase Discounts
2/10,n/30
Number of
Discount
Percent
Days
Discount Is
Available
Otherwise,
Net (or All)
Is Due
Credit
Period
50
Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice paid
within 10 days
of invoice
date?
Full amount is due
No
within 30 days of
invoice date.
51
Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice paid
within 10 days
of invoice
date?
Full amount is due
No
within 30 days of
invoice date.
Yes
2% of invoice
amount is
allowed as a
cash discount.
52
Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice paid
within 10 days
of invoice
date?
Yes
2% of invoice
amount is
allowed as a
cash discount.
Full amount is due
No
within 30 days of
invoice date.
Example: Merchandise was
purchased for $1,500 with credit
terms of 2/10, n/30. Payment within
10 days is calculated as:
 Invoice
$1,500
 Less 2% discount
30
 Net cost paid
$1,470
53
Managing Discounts
If we fail to take a 2/10, n/30
discount, is it really expensive?
365 days ÷ 20 days × 2% = 36.5% annual rate
Days
Number
Percent
in a
of additional
paid to
year
days before
keep
payment
money
54
Purchase Discounts
On May 7, Martin, Inc. purchased $27,000 of
Merchandise Inventory on account, credit terms are
2/10, n/30.
GENERAL JOURNAL
Date
May
Description
7 Merchandise Inventory
Accounts Payable
Page 49
PR
Debit
Credit
27,000
27,000
55
Purchase Discounts
On May 15, Martin, Inc. paid the amount due on
the purchase of May 7.
GENERAL JOURNAL
Date
Description
May 15 Accounts payable
Page 55
PR
Debit
Credit
27,000
Cash
Merchandise inventory
$27,000 × 2% = $540 discount
26,460
540
56
Purchase Discounts
After we post these entries, the accounts
involved look like this:
Merchandise Inventory
5/7
27,000
Bal. 26,460
5/15
540
 Accounts Payable
5/15
27,000
5/7 27,000
Bal.
0
57
58
6-3
Credit Terms
If invoice is
paid within
10 days of
invoice date
$1,470 paid
($1,500 less a
2% discount)
Invoice for
$1,500
Terms:
2/10, n/30
58
39
59
6-3
Invoice for
$1,500
Terms:
2/10, n/30
If invoice is
NOT paid
within 10
days of
invoice date
Full amount ($1,500)
is due within 30 days
of invoice date
59
40
60
6-3
Sales Discounts
Jan. 22 Cash
Sales Discounts
1 470 00
30 00
Accounts Receivable–Omega Tech.
Collection of Invoice No.
106-8, less 2% discount.
1 500 00
On January 22, NetSolutions receives the
amount due, less the 2 percent discount.
60
41
61
6-3
Jan. 13 Sales Returns and Allowances
Accounts Receivable—Krier Co.
225 00
225 00
Credit Memo No. 32
13 Merchandise Inventory
140 00
Cost of Goods Sold
Cost of merchandise returned.
Credit Memo No. 32.
On January 13, issued Credit Memo 32 to Krier
Company for merchandise returned to
NetSolutions. Selling price, $225; cost to
NetSolutions, $140.
140 00
61
42
62
1-2
6-3
Example Exercise 6-3
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.
62
43
63
6-3
Follow My Example 6-3
a.
b.
Accounts Receivable
Sales
Cost of Merchandise Sold
Merchandise Inventory
7,500
Cash
Sales Discounts
Accounts Receivable
7,350
150
For Practice: PE 6-3A, PE 6-3B
7,500
5,625
5,625
7,500
44
63
64
6-3
Purchase Transactions (Perpetual
Inventory)
JOURNAL
Description
Jan. 3 Merchandise Inventory
Cash
Purchased inventory from
Bowen Co.
Date
2009
PAGE 24
Post.
Ref.
Dr
Cr.
2 510 00
2 510 00
On January 3, NetSolutions purchased merchandise
for cash from Alden Company, $2,510.
64
45
65
6-3
Jan. 4 Merchandise Inventory
9 250 00
Accounts Payable—Thomas Corp.
Purchased inventory on
account.
On January 4, NetSolutions purchased
merchandise on account from Thomas
Corporation, $9,250.
9 250 00
65
46
66
Purchases Discounts
6-3
Alpha Technologies issues
an invoice for $3,000 to
NetSolutions dated March
12, with terms 2/10, n/30.
66
67
6-3
NetSolutions borrows cash at an annual interest
rate of 6%. Should the firm borrow cash to pay
the invoice within the discount period?
YES
Discount of 2% on $3,000
Interest for 20 days at the rate
of 6% on $2,940
Savings from borrowing
$60.00
– 9.80
$50.20
67
68
6-3
Purchase Transactions (Perpetual
Inventory)
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.
68
49
69
6-3
Mar. 22 Accounts Payable—Alpha Technol.
Cash
Merchandise Inventory
Paid Alpha Technologies for
March 12 purchase.
3 000 00
2 940 00
60 00
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.
69
50
70
6-3
Apr. 11 Accounts Payable—Alpha Technol.
Cash
Paid Alpha Technologies for
March 12 purchase.
3 000 00
3 000 00
If NetSolutions does not pay the invoice until
April 11, it would pay the full amount.
70
51
Purchase Returns and
Allowances
Purchase Return . . .
Merchandise returned by the purchaser to the
supplier.
Purchase Allowance . . .
A reduction in the cost of defective merchandise
received by a purchaser from a supplier.
71
Purchase Returns and
Allowances
On May 9, Barbee, Inc. purchased $20,000 of
Merchandise Inventory on account, credit terms are
2/10, n/30.
GENERAL JOURNAL
Date
May
Description
9 Merchandise Inventory
Accounts Payable
Page 34
PR
Debit
Credit
20,000
20,000
72
73
Purchases Return
6-3
A purchases return involves actually
returning merchandise that is
damaged or does not meet the
specifications of the order.
73
74
Purchases Allowance
6-3
When the defective or incorrect
merchandise is kept by the
buyer and the vendor makes a
price adjustment, this is a
purchases allowance.
74
75
6-3
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.
75
76
6-3
Mar. 7 Accounts Payable—Maxim Systems
900 00
Merchandise Inventory
Debit Memo No. 18
900 00
On March 7, NetSolutions records the
return of the merchandise indicated in
Debit Memorandum No. 18.
76
55
77
6-3
On May 2, NetSolutions purchased
$5,000 of merchandise from Delta Data
Link, subject to terms 2/10, n/30.
May 2 Merchandise Inventory
Accounts Payable—Delta Data
Purchased merchandise.
5 000 00
5 000 00
77
56
78
6-3
On May 4, NetSolutions returns
$3,000 of the merchandise.
4 Accounts Payable—Delta Data Link
Merchandise Inventory
3 000 00
3 000 00
Returned portion of the
merchandise purchased.
78
57
79
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
Cash
Merchandise Inventory
Paid invoice [($5,000 –
$3,000) x 2% = $40;
$2,000 – $40 = $1,960]
2 000 00
1 960 00
40 00
79
58
80
6-3
Example Exercise 6-4
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.
Under a perpetual inventory system, what account is
credited by Rofles Company to record the return?
59
80
81
6-3
Follow My Example 6-4
a.
$8,330. Purchase of $11,500 less the return of
$3,000 less the discount of $170 [($11,500 –
$3,000) x 2%].
b.
Merchandise Inventory.
For Practice: PE 6-4A, PE 6-4B
60
81
Exh.
6-9
Seller
Transportation Costs
FOB shipping point
(buyer pays)
Terms
FOB shipping point
FOB destination
Merchandise
Buyer
FOB destination
(seller pays)
Ownership transfers
to buyer when goods
are passed to
Transportation
costs paid by
Carrier
Buyer
Buyer
Seller
82
83
Transportation Costs
6-3
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.
83
84
6-3
June 10 Merchandise Inventory
Accounts Payable—Magna Data
Purchased merchandise,
terms FOB shipping point.
10 Merchandise Inventory
Cash
Paid shipping cost .
900 00
900 00
50 00
50 00
On June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB shipping
62
point and pays the transportation cost of $50. 84
85
Transportation Costs
6-3
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.
85
86
FOB Destination
6-3
On June 15, NetSolutions sells
merchandise to Kranz Company on
account, $700, terms FOB
destination. The cost of the
merchandise sold is $480.
86
87
6-3
June 15 Accounts Receivable—Kranz Co.
Sales
Sold merchandise, terms
FOB destination.
15 Cost of Merchandise Sold
Merchandise Inventory
Record cost of merchandise
sold to Kranz Company.
700 00
700 00
480 00
480 00
87
65
88
6-3
June 15 Delivery Expense
40 00
Cash
Paid shipping cost on
merchandise sold.
40 00
On June 15, NetSolutions pays the
transportation cost of $40.
88
66
89
FOB Shipping Point
6-3
On June 20, NetSolutions sells
merchandise to Planter Company
on account, $800, terms FOB
shipping point. The cost of the
merchandise sold is $360.
89
90
6-3
June 20 Accounts Receivable—Planter Co.
Sales
Sold merchandise, terms
800 00
800 00
FOB shipping point.
20 Cost of Merchandise Sold
Merchandise Inventory
Record cost of merchandise
360 00
360 00
sold to Planter Company.
90
68
91
6-3
June 20 Accounts Receivable—Planter Co.
Cash
Prepaid shipping cost on
merchandise sold.
45 00
45 00
NetSolutions pays the transportation
cost of $45 and adds it to the invoice.
91
69
92
6-3
Example Exercise 6-5
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
a. $4,500
b.
$5,000
Transportation
Returns and
Paid by Seller Transportation Terms Allowances
$200
FOB shipping point,
$800
1/10, n/30
$60
FOB destination,
$2,500
2/10, n/30
70
92
93
6-3
Follow My Example 6-5
a.
$3,863. Purchase of $4,500 less return of $800
less the discount of $37 [($4,500 – $800) x 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) x 2%].
For Practice: PE 6-5A, PE 6-5B
71
93
94
6-3
94
72
18
95
6-3
Sales Taxes
Aug. 12 Accounts Receivable—Lemon Co.
106 00
Sales
Sales Taxes Payable
Invoice No. 339
100 00
6 00
On August 12, merchandise is sold
on account to Lemon Company,
$100. The state has a 6% sales tax.
95
73
18
96
6-3
Sept. 15 Sales Tax Payable
2 900 00
Cash
Payment for sales taxes
collected during August.
2 900 00
On September 15, the seller sends in a
payment of $2,900 to the taxing unit for
the August taxes collected.
96
74
18
97
Trade Discounts
6-3
When wholesalers offer special
discounts to certain classes of buyers
that order large quantities, these
discounts are called trade discounts.
97
98
Dual Nature of Merchandise
Transactions
6-3
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.
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.
98
99
6-3
Scully Company (Seller)
Accounts Receivable—Burton Co. 7,500
Sales
7,500
Cost of Merchandise Sold
Merchandise Inventory
4,500
4,500
Burton Company (Buyer)
Merchandise Inventory.
Accounts Payable—Scully Co.
7,500
7,500
99
77
18
100
6-3
July 2 Burton Company paid
transportation charges of $150 on
July 1 purchase from Scully
Company.
100
101
6-3
Scully Company (Seller)
No entry.
Burton Company (Buyer)
Merchandise Inventory
Cash
150
150
101
79
18
102
6-3
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.
102
103
6-3
Scully Company (Seller)
Accounts Receivable—Burton Co. 5,000
Sales
5,000
Cost of Merchandise Sold
Merchandise Inventory
3,500
3,500
Burton Company (Buyer)
Merchandise Inventory.
Accounts Payable—Scully Co.
5,000
5,000
103
81
18
104
6-3
July 7. Scully Company paid
transportation costs of $250 for
delivery of merchandise sold to
Burton Company on July 5.
104
105
6-3
Scully Company (Seller)
Delivery Expense
Cash
250
250
Burton Company (Buyer)
No entry.
105
83
18
106
6-3
July 13. Scully Company issued Burton
Company a credit memorandum
for $1,000 of merchandise
returned from a July 5 purchase
on account. The cost of the
merchandise was $700.
106
107
6-3
Scully Company (Seller)
Sales Returns and Allowances
1,000
Accounts Receivable—Burton Co.
1,000
Merchandise Inventory
Cost of Merchandise Sold
700
700
Burton Company (Buyer)
Accounts Payable—Scully Co.
Merchandise Inventory
1,000
1,000
107
85
18
108
6-3
July 15. Scully Company received
payment from Burton Company
for purchase of July 5.
108
109
6-3
Scully Company (Seller)
Cash
4,000
Accounts Receivable—Burton Co.
4,000
Burton Company (Buyer)
Accounts Payable—Scully Co.
Cash
4,000
4,000
109
87
18
110
6-3
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.
110
111
6-3
Scully Company (Seller)
Accounts Receivable—Burton Co. 12,000
Sales
12,000
Accounts Receivable—Burton Co.
500
Cash
500
Cost of Merchandise Sold
7,200
Merchandise Inventory
7,200
Burton Company (Buyer)
Merchandise Inventory
12,500
Accounts Payable—Scully Co.
12,500
111
89
18
112
6-3
July 28. Scully Company received payment
from Burton Company for purchase
of July 18, less discount (2% x
$12,000).
112
113
6-3
Scully Company (Seller)
Cash
12,260
Sales Discounts
240
Accounts Receivable—Burton Co.
12,500
Burton Company (Buyer)
Accounts Payable—Scully Co.
Merchandise Inventory
Cash
12,500
240
12,260
113
91
18
114
6-3
1-2
Example Exercise 6-6
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 receipt of the check for the
amount due from Bray Co.
92
114
115
6-3
Follow My Example 6-6
Sievert Company Journal Entries:
Cash ($11,500 – $900 – $212)
Sales Discounts [($11,500 – $900) x 2%]
Accounts Receivable—Bray Co.
($11,500 – $900)
10,388
212
Bray Company Journal Entries:
Accounts Payable—Sievert Co. ($11,500 –
$900)
10,600
Merchandise Inventory [($11,500 – $900)
x 2%]
Cash ($11,500 – $900 – $212)
10,600
212
10,388
93
115
For Practice: PE 6-6A, PE 6-6B
116
6-4
Objective 4
Describe the adjusting and
closing process for a
merchandising business.
116
117
Inventory Shrinkage
6-4
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.
117
118
6-4
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.
118
119
6-4
Adjusting Entry
Dec. 31 Cost of Merchandise Sold
Merchandise Inventory
Inventory shrinkage (63,950
– $62,150).
Inventory records
Inventory count
Inventory shortage
1 800 00
1 800 00
$63,950
62,150
$ 1,800
119
97
18
120
6-4
Step 1: Closing Entries
Close the temporary accounts with credit
balances to Income Summary.
Date
Item
Closing Entries
2009
Dec. 31 Sales
Rent Revenue
Income Summary
PR
Debit
Credit
410 720 185 00
610
600 00
312
720 785 00
120
98
121
Step 2: Closing Entries
6-4
Close the temporary accounts
with debit balances to
Income Summary.
121
99
122
6-4
Step 2: Closing Entries
31 Income Summary
Sales Returns and Allow.
Sales Discounts
Cost of Merchandise Sold
Sales Salaries Expense
Advertising Expense
Depr. Exp.—Store Equip.
Delivery Expense
Misc. Selling Expense
Office Salaries Expense
Rent Expense
Depr. Exp.—Office Equip.
Insurance Expense
Office Supplies Expense
Misc. Administrative Exp.
Interest Expense
312
411
412
510
520
521
522
523
529
530
531
532
533
534
539
710
645 385 00
6 140 00
5 790 00
525 305 00
53 430 00
10 860 00
3 100 00
2 800 00
630 00
21 020 00
8 100 00
2 490 00
1 910 00
610 00
760 00
2 440 00
122
100
123
6-4
Step 3: Closing Entries
Close Income Summary (the balance represents
a $75,400 profit for NetSolutions in 2009) to
Chris Clark, Capital.
31 Income Summary
Chris Clark, Capital
312
310
75 400 00
75 400 00
123
101
124
6-4
Step 4: Closing Entries
Close Chris Clark, Drawing to Chris
Clark, Capital.
31 Chris Clark, Capital
Chris Clark, Drawing
310
311
18 000 00
18 000 00
124
102
125
6-4
1-2
Example Exercise 6-7
Pulmonary Company’s perpetual inventory records indicate
that $382,800 of merchandise should be on hand on March
31, 2008. 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, 2008.
Follow My Example 6-7
Mar. 31 Cost of Merchandise Sold ($382,800 –
($371,250)
Merchandise Inventory
For Practice: PE 6-7A, PE 6-7B
11,550
11,550
103
125
126
6-4
Financial Analysis
The ratio of net sales to assets
measures how effectively a business is
using its assets to generate sales.
Ratio of Net
Sales to Assets =
Net sales
Average total assets
126
127
6-4
Ratio of Net Sales to Assets
Total revenue (net sales)
Total assets:
Beginning of year
End of year
Average
Ratio of net sales to assets
*in millions
Sears
$19,701*
J. C. Penney
$18,424*
$6,074
$8,651
$7,362.5
$18,300
$14,127
$16,213.5
2.68 to 1
1.14 to 1
127
105
128
Interpretation
6-4
Based on these ratios, Sears
appears better than J. C.
Penney in utilizing its assets to
generate sales.
128