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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