Accounting for Merchandising Business ACG 2021 Module 5.ppt

7/22/2019 Accounting for Merchandising Business ACG 2021 Module 5.ppt

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Accounting for Merchandising

Business

ACG 2021: Chapter 5


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Merchandising Business

Revenue activities ofa merchandising

business involve thebuying and selling ofmerchandise

Comparison to

service business

Service Business MerchandisingBusiness

Fees earned Sales

Less Operating

expensesLess Cost of

merchandise

sold

=Net income =Gross Profit

Less Operatingexpenses

=Net Income


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New Accounts on the Income

Statement SALES revenues collected from the sale of merchandise

COST OF MERCHANDISE SOLD

the purchase price plusincidentals of merchandise available for resale

GROSS PROFIT Sales Cost of merchandise sold


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Income Statement

INCOME STATEMENT

Gem City Music

Income Statement

For the Year Ended December 31, 20

Revenue from sales:

Sales $189,300

Less:: Sales returns and allowances $1,700

Sales discounts 500 2,200

Net sales $187,100

Cost of merchandise sold XXXX 100,000

Gross profit $ 87,100

Operating expenses:

Selling expenses:

Sales salaries expense $17,700

Administrative expenses:

Rent expense 7,800Office salaries expense 22,550

Depreciation expenseoffice equipment 2,800 33,150

Total operating expenses 50,850

Income from operations $36,250

Other expense:

Interest expense 2,000

Net income $ 34,250


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Computation of Costs

Computation of Cost of Merchandise SoldPurchasesLess merchandise inventory, December 31

=Cost of merchandise soldComputation of Cost of Merchandise Purchased

PurchasesLess: purchases returns and allowances

Less: purchases discount=Net purchasesAdd: transportation in=Cost of merchandise purchased


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Balance Sheet Accounts

Merchandise inventorymerchandise on handat the end of an accounting period.


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Merchandising Terms

Sales total amount chargedto customers formerchandise sold

Sales returns and allowancesare granted by the seller tocustomers for damaged ordefective merchandiseSales discount are grantedby the seller to customers forearlyNet sales = Sales returns -discount
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Merchandising Terms

Cost of goods sold Cost of merchandise sold to customers

Purchases discounts Offered by the seller to buyer

For early payment

Purchases allowances and returns Buyer may receive a reduction in the intial price at

which the merchandise is purchased.


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Merchandising Terms

Merchandise available for sale =

Beginning merchandise inventory + net purchases

Net purchases = Purchases minus discounts returns and

allowances


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Accounting for Sales

Under the perpetual inventory system, all salesrequire the reporting of the removal of inventory

from the books at the same time.


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Accounting for Sales

CASH SALES

Example 1: Sold merchandise for cash $5,000.

Cost of merchandise sold $3,200Date Account PR Debit Credit

Cash $5,000

Sales $5,000

Cost of merchandise sold 3,200

Merchandise inventory 3,200


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Credit sales

Bank cards

Master card

Visa Monies directly deposited

in business account

Requires a debit to CASH

Service charge must belater recorded asexpense
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Bank cards

Example 9: Sold merchandise on VISA $10,000. Cost ofmerchandise sold is $4,000. Credit card expense is 3% ofsales.

Date Account PR Debit Credit

Cash $10,000

Sales $10,000

Cost of merchandise sold 4,000Merchandise inventory 4,000

Credit card expense 300

Cash 300


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Bank cards

Example 3: Sold merchandise on VISA $6,000.Cost of merchandise sold is $3,000. Credit card

expense is 3% of sales.


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Example 10

Cash 6,000

Sales 6,000

Cost of merchandise 3,000

Merchandise inventory 3,000Credit card expense 180

Cash 180


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Credit sales

Two types:

American express

On accountResults in debit to

ACCOUNTSRECEIVABLE
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Sales of Account

Example 4: Sold merchandise on account $6,000. Cost ofmerchandise sold is $3,000.Date Account PR Debit Credit

Accounts receivable $6,000

Sales 6,000




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Recap

Under the perpetual inventory system, all salestransactions consist of at least two entries.

The first entry records the sale at the selling price with adebit to how it will be paid and credit to sales.

The second entry records the merchandise leaving thebusiness with a debit to cost of merchandise sold and

credit to merchandise inventory for the cost of themerchandise.


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Sales discounts

A reduction in the price of the good for early payment.

This account is a contra SALES

Upon payment of the account receivable, if the payment is within the

discount period, we record the discount.Credit terms terms of when payments for merchandise are to bemade. Net 30 daysfull amount due in 30 days

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2% discount if paid within 10 days
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Example on Sales Discount

Example 5: Sold merchandise on account $5,000, terms 2/10,n/30. Cost of merchandise sold is $4,000.

Sales $5,000Discount 2%

Discount $ $100

Sales $5,000Less discount 100

Net amount 4,900


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Sales discount


Cash 4900

Sales discount 100

Accounts receivable 5000


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Sales Returns and Allowances

Merchandise sold may be returned to the seller

Merchandise sold may be reduced in price due

to defects

This account is CONTRA sales

Increases with a debit


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Sales returns & allowances

Example 6: Sold merchandise on account $7,000,

terms 1/15, n/30. Cost of merchandise sold is

$3,800



Sales 7,000




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Sales returns & allowances

Return merchandise with sales price of $2,000 andcost of $1,000.


Sales returns 2,000

Accounts receivable 2,000




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Recap of Sales Example

Example 7: ABC Merchandising had the following transactions:Sold merchandise and received payment by VISA at $6,000, costof merchandise sold is $4,000.

Sold merchandise on account for $7,500 with credit terms 1/10,n/30. Cost of the merchandise is $4,500.Sold merchandise on account for $4,000, cost of merchandise is$2,500.Received a return of the merchandise in (c ) of sales price of

$2,000 and cost of $1,750.Received payment within the discount period for merchandise in(b).Received payment for merchandise in (c ).


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Accounting for Purchases

Assume a perpetual inventory system

Each purchase and sale of merchandise is recorded as it occurs

Example 1: purchase merchandise for resale $4,000 onaccount


Mar 1 Merchandise inventory $4,000

Accounts payable $4,000


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Purchases Discount

Credit terms

Purchases discounts are

discounts taken by the buyer forearly payment of an invoice.

These discounts reduce the costof the merchandise purchased.

Should be taken when offered ifnot it is a LOSS to the business.


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Purchase discount

Example 9: Purchase merchandise for resale$4,000, terms 2/10, n/30 on account.

Invoice: $4,000Discount (2% x $4,000) 80

Net of discount 3,920


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Purchase discount


Mar 1 Merchandise inventory $4,000


Mar 10 Accounts payable $4,000

Cash $3,920

Merchandise

inventory80


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Purchase Discount

Reduction of the cost of the merchandise isreflected in the merchandise inventory account.

Example 10: Purchase merchandise for resale$6,000, terms 1/15, n/30 on account.


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Purchases Returns and Allowances

Purchase returns merchandise is returned tothe seller

Purchase allowances price adjustmentDebit memorandum notification of the return orallowance by seller


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Purchases Returns and Allowances

Example 11: Returnedmerchandise on account

$2,500.Date Account PR Debit Credit

Mar 09 Accounts payable $2,500

Cash $2,500


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Example

Example 12: Purchased merchandise of$8,000 on terms 2/10,n/30. Ennis pays the

original invoice less a return of $2,500within the discount period. Record theabove entries


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Recap of Purchases Example

Example 7: ABC Merchandising had the following transactions:

Purchased merchandise and received payment by VISA at$6,000.

Purchased merchandise on account for $7,500 with credit terms1/10, n/30.

Purchased merchandise on account for $4,000.

Return of the merchandise in (c ) of sales price of $2,000.

Paid within the discount period for merchandise in (b).Paid for merchandise in (c ).


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Transportation Costs

The terms of a sale should indicate when theownership of the merchandise passes to the buyer.

This point determines which party, the buyer or the seller must paythe transportation costs.


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FOBshipping point

The ownership of the merchandise passes to the buyerwhen the seller delivers the merchandise to thetransportation company.

Buyer pays the transportation costs

Example 13: Purchased merchandise for $4,000

with shipping costs of $50 FOB shipping point.


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FOBshipping point


Merchandise inventory $4,000


Merchandise Inventory $50

Cash $50


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FOBdestination point

The ownership of the merchandise passes to the buyerwhen the seller delivers the merchandise to the buyer.

Seller pays the transportation costs

Example 14: Sold merchandise for $4,000 withshipping costs of $50 FOB destination. Cost of

merchandise sold is $2,000.


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FOBdestination point



Sales $4,000

Cost of merchandise sold 2000

Merchandise inventory 2000

Delivery expense 50

Cash 50


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Transportation costs

FREIGHT TERMSFOB FOBShipping Point Destination

Ownership (title)passes to buyer

when merchandise Delivered to Receivedis freight carrier by buyer

Transportationcosts are paidby Buyer Seller

Risk of loss duringtransportationbelongs to Buyer Seller


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Sales Taxes

Liability to the business

Create a SALES TAX PAYABLE account

Example 15: Sold merchandise on account$7,000, plus 5% sales tax. Cost of merchandise

sold is $3,800.


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Sales Taxes



Sales 7,000

Sales tax payable 350




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Recap of TransactionsSeller Buyer

Sold merchandise on account:

Accounts receivable DR

Sales CR

Cost of merchandise sold DR

Merchandise inventory CR

Purchased merchandise on account:

Merchandise Inventory DR

Accounts Payable CR

Transportation costs Shipping point Transportation costs Shipping point:Merchandise Inventory DR

Cash CR

Transportation costsDestination:

Delivery Expense DR

Cash CR

Transportation costs - Destination

Merchandise returned:

Sales Returns & Allowances DR

Accounts receivable CR

Merchandise inventory DRCost of merchandise sold CR

Merchandise returned:

Merchandise inventory DR

Accounts payable CR

Payment :

Cash DR

Accounts receivable CR

Payment:

Accounts payable DR

Cash CR

Payment with discount:

Cash DR

Sales discount DRAccounts receivable CR

Payment with discount:

Merchandise inventory DR

Cash CR


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Adjusting Entries

Inventory Shrinkage Difference between physical count and books

Example 16: Suppose that physical inventory shows balance of

$20,000 and books show balance of $23,000. Record theshrinkage.





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Closing Entries

Accounts that must be closed

Sales

Rent revenue Sales returns and allowances

Sales discounts

Cost of merchandise sold

All expenses and revenues Dividends

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Accounting for Merchandising Business ACG 2021 Module 5.ppt

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