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Ch06 accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

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Chapter Chapter 6 6 Accounting for Accounting for Merchandising Merchandising Businesses Businesses Accounting, 21 st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South- Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
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Page 1: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Chapter Chapter 66Accounting for Accounting for

Merchandising BusinessesMerchandising BusinessesAccounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.

Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

Page 2: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand

corner of the screen. You can point and click anywhere on the screen.

Page 3: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

1. Distinguish the activities of a service business from those of a merchandising business.

2. Describe and illustrate the financial statements of a merchandising business.

3. Describe the accounting for the sale of merchandise.

4. Describe the accounting for the purchase of merchandise.

ObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

Page 4: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

5. Describe the accounting for transportation costs, sales taxes, and trade discounts.

6. Illustrate the dual nature of merchandising transactions.

7. Prepare a chart of accounts for a merchandising business.

8. Describe the accounting cycle for a merchandising business.

9. Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets.

ObjectivesObjectives

Page 5: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Service Business

Fees earned $XXXOperating expenses –XXXNet income $XXX

Nature of BusinessesNature of Businesses

Page 6: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Merchandising Business

Sales $XXXCost of Merchandise Sold –XXXGross Profit $XXXOperating Expenses –XXXNet Income $XXX

Nature of BusinessesNature of Businesses

Page 7: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Multiple-Step Income

Statement

Page 8: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Revenue from sales:Sales $720,185Less:Sales returns and allowances $ 6,140

Sales discounts 5,790 11,930Net sales $708,255

Cost of merchandise sold 525,305Gross profit $182,950

NetSolutionsIncome Statement For the Year Ended

December 31, 2007

ContinuedContinued

Page 9: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Operating expenses:Selling expenses:

Sales salaries expense $56,230Advertising expense 10,860Depr. Expense–store equipment 3,100Miscellaneous selling expense 630 Total selling expenses $ 70,820

Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expense–office equipment 2,490Insurance expense 1,910Office supplies expense 610Misc. administrative expense 760 Total admin. expenses 34,890

Total operating expenses 105,710Income from operations $ 77,240

ContinuedContinued

Page 10: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Other income and expenses:Rent revenue $ 600Interest expense (2,440) (1,840)

Net income $75,400

ConcludedConcluded

Page 11: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Periodic vs. Perpetual Methods of Periodic vs. Perpetual Methods of AccountingAccounting

Periodic Method• A method of determining the cost of merchandise sold and the amount of merchandise on hand

• Under this method, the inventory records do not show the amount available for sale or the amount sold during the period

Page 12: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

• Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts.

• The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records.

Periodic vs. Perpetual Methods of Periodic vs. Perpetual Methods of AccountingAccounting

Perpetual Method

Page 13: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Cost of Merchandise PurchasedCost of Merchandise Purchased

Purchases $521,980Less: Purchase returns and

allowances $9,100Purchase discounts 2,525 11,625

Net purchases $510,355Add transportation-in 17,400 Cost of merchandise purchased $527,755

Page 14: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Cost of Merchandise SoldCost of Merchandise SoldMerchandise inventory, 1/1/07 $ 59,700Purchases $521,980Less: Purchase returns and

allowances $9,100Purchase discounts 2,525 11,625

Net purchases $510,355Add transportation-in 17,400

Cost of merchandise purchased 527,755Merchandise available for sale $587,455Less merchandise inventory, 12/31/07 62,150Cost of merchandise sold $525,305

Page 15: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Single-Step Income Statement for a Merchandising

Business

Page 16: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Revenues:Net sales $708,255Rent revenue 600

Total revenues $708,855Expenses:

Cost of merchandise sold $525,305Selling expenses 70,820Administrative expenses 34,890Interest expense 2,440

Total expenses 633,455Net income $ 75,400

NetSolutionsIncome Statement

For the Year Ended December 31, 2007

Page 17: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Statement of Owner’s Equity for

a Merchandising Business

Page 18: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Chris Clark, capital, 1/1/07 $153,800Net income for year $75,400Less withdrawals 18,000Increase in owner’s equity 57,400Chris Clark, capital, 12/31/07 $211,200

NetSolutionsStatement of Owner’s Equity

For the Year Ended December 31, 2007

Page 19: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Balance Sheet

Page 20: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

AssetsCurrent assets:

Cash $52,950Accounts receivable 91,080Merchandise inventory 62,150Office supplies 480Prepaid insurance 2,650 Total current assets $209,310

NetSolutionsBalance Sheet

December 31, 2007

ContinuedContinued

Page 21: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Property, plant, and equipment: Land $20,000Store equipment $27,100 Less accumulated depreciation 5,70021,400Office equipment $15,570 Less accumulated depreciation 4,72010,850 Total property, plant, andequipment 52,250

Total assets $261,560

ContinuedContinued

Page 22: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

LiabilitiesCurrent liabilities:

Accounts payable $22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800

Total current liabilities $ 30,360Long-term liabilities:

Note payable (due 2017) 20,000Total liabilities $ 50,360

Owner’s EquityChris Clark, capital 211,200Total liabilities and owner’s equity $261,560

ConcludedConcluded

Page 23: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Sales TransactionsSales Transactions

Page 24: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

JOURNAL

Date DescriptionPost. Ref. Dr Cr.

1

2

34

PAGE 26

5

Jan. 3 Cash 1 800 002007

Sales 1 800 00

To record cash sales.

On January 3, a firm sold $1,800 On January 3, a firm sold $1,800 of merchandise for cash.of merchandise for cash.

Cash SalesCash Sales

Page 25: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Cash SalesCash Sales

Using a perpetual inventory, the inventory Using a perpetual inventory, the inventory cost of $1,200 must be recorded.cost of $1,200 must be recorded.

6

7

89

3 Cost of Merchandise Sold 1 200 00

Merchandise Inventory 1 200 00

To record the cost ofmerchandise sold.

10

Page 26: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Credit card sales (MasterCard or Credit card sales (MasterCard or Visa) are recorded as cash sales.Visa) are recorded as cash sales.At the end of the month, $48 was At the end of the month, $48 was sent to cover this service charge.sent to cover this service charge.

JOURNAL

Date DescriptionPost. Ref. Dr Cr.

1

2

34

PAGE 28

5

Cash 48 00Jan. 31 Credit Card Expense 48 002007

Cash SalesCash Sales

To record service chargeson credit card sales for themonth.

Page 27: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Jan. 12 Accounts Receivable—Sims Co. 510 00

Invoice No. 7172. Sales 510 00

12 Cost of Merchandise Sold 280 00 Merchandise Inventory 280 00

Cost of merchandise sold on Invoice No. 7172.

Sales on AccountSales on Account

On January 12, a firm sold Sims Company On January 12, a firm sold Sims Company merchandise on account, $510. The cost of merchandise on account, $510. The cost of

the merchandise to the seller was $280.the merchandise to the seller was $280.

Page 28: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Sales DiscountsSales Discounts

The terms for when payments for merchandise are to be made are

called credit terms.

If buyer is allowed an amount of time to pay, it is known as the credit period.

Page 29: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

If invoice is paid within 10 days of

invoice date

Sales DiscountsSales DiscountsCredit Terms

Invoice for $1,500Terms:

2/10, n/30

$1,470 paid (less 2% as a cash

discount)

Page 30: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

If invoice is NOT paid within 10 days of

invoice date

Sales DiscountsSales DiscountsCredit Terms

Invoice for $1,500Terms:

2/10, n/30

$1,500 PAID

Page 31: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Sales DiscountsSales Discounts

On January 21, the firm receives the On January 21, the firm receives the amount due from Sims (refer to Slide amount due from Sims (refer to Slide

25), less the 2 percent discount.25), less the 2 percent discount.

Jan. 21 Cash 499 80

Accounts Receivable—Sims Co. 510 00

Sales Discounts 10 20

Collection of Invoice No. 7172, less discount.

Page 32: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Sales Returns and AllowancesSales Returns and Allowances

Merchandise that is returned to the vendor is referred to as a sales return.

If there is a defect in the product or the wrong item was shipped, the seller

may reduce the initial price at which the goods were sold. This is known as

a sales allowance.

Page 33: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Jan. 13 Sales Returns and Allowances 225 00

Credit Memo No. 32. Accounts Receivable—Krier Co. 225 00

13 Merchandise Inventory 140 00 Cost of Merchandise Sold 140 00

Cost of merchandise returned—Credit Memo 32.

Sales Returns and AllowancesSales Returns and Allowances

On January 13, issued Credit Memo 32 to Krier On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Company for merchandise returned to NetSolutions.

Selling price, $225; cost to NetSolutions, $140.Selling price, $225; cost to NetSolutions, $140.

Page 34: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Purchase Purchase TransactionsTransactions

Page 35: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Date DescriptionPost. Ref. Dr Cr.

1

2

34

5

Jan. 3 Merchandise Inventory 2 510 002007

Cash 2 510 00

Purchased inventory from

Bowen Co.

Purchase Transactions

On January 13, Purchased merchandise On January 13, Purchased merchandise for cash from Alden Company, $2,510.for cash from Alden Company, $2,510.

Page 36: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

What’s the last day the invoice

can be paid?

Purchase DiscountsPurchase Discounts

Alpha Technologies issues an invoice for

$3,000 to NetSolutions dated

March 12, with terms 2/10, n/30.

Page 37: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Invoice period 30Days in March 31Date of invoice 12Remaining days 19April 11

Let’s do a simple calculation.

The full amount is due on April 11.

Purchase DiscountsPurchase Discounts

Page 38: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

We can borrow at an annual interest rate of 6%. Should we borrow the to pay the

invoice within the discount period?

Purchase DiscountsPurchase Discounts

$60 discount (2% x

$3,000)?

Page 39: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Discount $60.00Interest for 20 days

at the rate of 6%on $2,940 –9.80

Savings from borrowing $50.20

Let’s see… Interest on the amount due of $3,000

less the 2 percent…

Purchase DiscountsPurchase Discounts

Page 40: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Looks like we should take advantage of the discount even if

we have to borrow the money.

Purchase DiscountsPurchase Discounts

Discount $60.00Interest for 20 days

at the rate of 6%on $2,940 –9.80

Savings from borrowing $50.20

Page 41: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

JOURNAL

Date DescriptionPost. Ref. Dr Cr.

1

2

34

PAGE 27

5

On March 12, NetSolutions purchased On March 12, NetSolutions purchased merchandise on account from Alpha merchandise on account from Alpha

Technologies, $3,000.Technologies, $3,000.

Mar. 12 Merchandise Inventory 3 000 002007

Accounts Payable—Alpha

Technologies 3 000 00

Purchase DiscountsPurchase Discounts

Page 42: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

JOURNAL

Date DescriptionPost. Ref. Dr Cr.

1

2

34

PAGE 27

5

If payment is made by March 22 NetSolutions If payment is made by March 22 NetSolutions records the discount as a reduction in cost.records the discount as a reduction in cost.

Mar. 22 Accounts Payable—Alpha Technol. 3 000 00

Cash 2 940 00

Merchandise Inventory 60 00

2007

Purchase DiscountsPurchase Discounts

Page 43: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

JOURNAL

Date DescriptionPost. Ref. Dr Cr.

1

2

34

PAGE 27

5

If NetSolutions does not pay the invoice until If NetSolutions does not pay the invoice until April 11, it would pay the full amount.April 11, it would pay the full amount.

Apr. 11 Accounts Payable—Alpha Technol. 3 000 00

Cash 3 000 00

2007

Purchase DiscountsPurchase Discounts

Page 44: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Purchases Returns and AllowancesPurchases Returns and Allowances

A purchases return involves actually returning merchandise that is damaged or does not meet the

specifications of the order.

When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment,

this is a purchases allowance.

Page 45: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

NetSolutions received the NetSolutions received the delivery from Maxim delivery from Maxim

Systems and determined that Systems and determined that $900 of the items were not $900 of the items were not the merchandise ordered. the merchandise ordered.

DebitDebit memorandummemorandum #18 is #18 is issued to Maxim Systems.issued to Maxim Systems.

Purchases Returns and AllowancesPurchases Returns and Allowances

You sent me the wrong interface cards. We’ll send a debit

memorandum with the returned items.

Page 46: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Mar. 7 Accounts Payable—Maxim Systems 900 00

Debit Memo No. 18

Merchandise Inventory 900 00

Purchases Returns and AllowancesPurchases Returns and Allowances

Page 47: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Purchases Returns and AllowancesPurchases Returns and Allowances

On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link,

subject to terms 2/10, n/30.

May 2 Merchandise Inventory 5 000 00

Purchased merchandise.

Accounts Payable—Delta Data 5 000 00

Page 48: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Purchases Returns and AllowancesPurchases Returns and Allowances

On May 4, NetSolutions returns $3,000 of the merchandise.

May 4 Accounts Payable—Delta Data Links 3 000 00

Returned portion of merchandise purchased.

Merchandise Inventory 3 000 00

Page 49: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Purchases Returns and AllowancesPurchases Returns and Allowances

On May 12, NetSolutions pays the amount due.

May 12 Accounts Payable—Delta Data Links 2 000 00

Paid invoice.

Cash 1 960 00

Merchandise Inventory 40 00($5,000 ($5,000 – – $3,000) x $3,000) x

2%2%

Page 50: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Transportation Transportation CostsCosts

Page 51: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

FOB Shipping PointFOB Shipping Point

Buyer pays freight costs and debits Merchandise Inventory

Fruit Express

Title passes to buyer as shipment leaves shipping point.

Page 52: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

June 10 Merchandise Inventory 900 00

Purchased merchandise, terms FOB shipping point.

Accounts Payable—Magna Data 900 00

10 Merchandise Inventory 50 00 Cash 50 00

Paid shipping cost .

On June 10, NetSolutions buys merchandise from On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping Magna Data on account, $900, terms FOB shipping

point and pays the transportation cost of $50.point and pays the transportation cost of $50.

FOB Shipping PointFOB Shipping Point

Page 53: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

FOB DestinationFOB Destination

Title passes to buyer upon arrival at

destination.

Seller pays freight costs and debits Transportation Out

Fruit Express

Page 54: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

On June 15, NetSolutions sells merchandise to Kranz On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. Company on account, $700, terms FOB destination.

The cost of the merchandise sold is $480. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.

FOB DestinationFOB DestinationJune 15 Accounts Receivable—Kranz Co. 700 00

Sold merchandise, terms FOB destination.

Sales 700 00

15 Cost of Merchandise Sold 480 00 Merchandise Inventory 480 00

Cost of sale of Kranz Co .

Page 55: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

FOB DestinationFOB Destination

June 15 Transportation Out 40 00

Cash 40 00Paid shipping cost on merchandise sold.

On June 15, NetSolutions sells merchandise to Kranz On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. Company on account, $700, terms FOB destination.

The cost of the merchandise sold is $480. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.

Page 56: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Sales TaxesSales Taxes

On August 12, merchandise is sold on On August 12, merchandise is sold on account to Lemon Company, $100. The account to Lemon Company, $100. The

state has a 6% sales tax.state has a 6% sales tax.

Aug. 12 Accounts Receivable—Lemon Co. 106 00Sales 100 00Sales Taxes Payable 6 00

Invoice No. 339

Page 57: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Sales TaxesSales Taxes

On September 15, the seller sends in a On September 15, the seller sends in a payment of $2,900 to the taxing unit for payment of $2,900 to the taxing unit for

the August taxes collected.the August taxes collected.

Sept.15 Sales Tax Payable 2 900 00

Cash 2 900 00Payment for sales taxes collected during August.

Page 58: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions

July 1. Scully Company sold merchandise on account July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. to Burton Co., $7,500, terms FOB shipping point, n/45.

The cost of the merchandise sold was $4,500. The cost of the merchandise sold was $4,500.

Scully Company (Seller)Accounts Receivable—Burton Co. 7,500

Sales 7,500

Cost of Merchandise Sold 4,500Merchandise Inventory 4,500

Burton Company (Buyer)Merchandise Inventory. 7,500

Accounts Payable—Scully Co. 7,500

Page 59: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions

Scully Company (Seller)No entry.

Burton Company (Buyer)Merchandise Inventory 150

Cash 150

July 2. Burton Company paid transportation charges of July 2. Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.$150 on July 1 purchase from Scully Company.

Page 60: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions

July 5. Scully Company sold merchandise on account July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB shipping point, to Burton Co., $5,000, terms FOB shipping point,

n/30. The cost of the merchandise sold was $3,500.n/30. The cost of the merchandise sold was $3,500.

Scully Company (Seller)Accounts Receivable—Burton Co. 5,000

Sales 5,000

Cost of Merchandise Sold 3,500Merchandise Inventory 3,500

Burton Company (Buyer)Merchandise Inventory. 5,000

Accounts Payable—Scully Co. 5,000

Page 61: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions

July 7. Scully Company paid transportation costs July 7. Scully Company paid transportation costs of $of $250250 for delivery of merchandise sold to for delivery of merchandise sold to

Burton Company on July 5.Burton Company on July 5.

Scully Company (Seller)Transportation Out 250

Cash 250

Burton Company (Buyer)No entry.

Page 62: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions

July 13. Scully Company issued Burton Company a credit July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 memorandum for $1,000 of merchandise returned from a July 5

purchase on account. The cost of the merchandise was $700.purchase on account. The cost of the merchandise was $700.

Scully Company (Seller)Sales Returns and Allowances 1,000

Accounts Receivable—Burton Co. 1,000

Merchandise Inventory 700Cost of Merchandise Sold 700

Burton Company (Buyer)Accounts Payable—Scully Co. 1,000

Merchandise Inventory 1,000

Page 63: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions

July 15. Scully Company received payment July 15. Scully Company received payment from Burton Company for purchase of July 5.from Burton Company for purchase of July 5.

Scully Company (Seller)Cash 4,000

Accounts Receivable—Burton Co. 4,000

Burton Company (Buyer)Accounts Payable—Scully Co. 4,000

Cash 4,000

Page 64: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions

July 18. Scully Company sold merchandise on account to Burton July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully

prepaid transportation costs of $500, which were added to the prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.invoice. The cost of the merchandise sold was $7,200.

Scully Company (Seller)Accounts Receivable—Burton Co. 12,000

Sales 12,000

Accounts Receivable—Burton Co. 500Cash 500

Burton Company (Buyer)Merchandise Inventory 12,500

Accounts Payable—Scully Co. 12,500

Page 65: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions

July 18. Scully Company sold merchandise on account to Burton July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully

prepaid transportation costs of $500, which were added to the prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.invoice. The cost of the merchandise sold was $7,200.

Continued (Seller) Cost of Merchandise Sold 7,200

Merchandise Inventory 7,200

Burton Company (Buyer)

Page 66: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions

July 28. Scully Company received payment July 28. Scully Company received payment from Burton Company for purchase of July from Burton Company for purchase of July

18, less discount (2% x $12,000).18, less discount (2% x $12,000).

Scully Company (Seller)Cash 12,260Sales Discounts 240

Accounts Receivable—Burton Co. 12,500

Burton Company (Buyer)Accounts Payable—Scully Co. 12,500

Merchandise Inventory 240Cash 12,260

Page 67: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Balance Sheet Accounts

200 Liabilities210 Accounts Payable211 Salaries Payable212 Unearned Rent215 Notes Payable

300 Owner’s Equity310 Chris Clark, Capital311 Chris Clark, Drawing312 Income Summary

100 Assets110 Cash112 Accounts Receivable115 Merchandise Inventory116 Office Supplies117 Prepaid Insurance120 Land123 Store Equipment124 Accumulated Depreciation—

Store Equipment125 Office Equipment126 Accumulated Depreciation—

Office Equipment

NetSolutionsChart of Accounts

Page 68: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Income Statement Accounts

600 Other Income610 Rent Revenue

700 Other Expense710 Interest Expense

400 Revenues410 Sales411 Sales Returns and

Allowances412 Sales Discounts

500 Costs and Expenses510 Cost of Merchandise Sold520 Sales Salaries Expense521 Advertising Expense522 Depreciation Expense—

Store Equipment523 Transportation Out529 Miscellaneous Selling Expense530 Office Salaries Expense531 Rent Expense532 Depreciation Expense—

Office Equipment533 Insurance Expense534 Office Supplies Expense539 Miscellaneous Admin. Expense

NetSolutionsChart of Accounts

Page 69: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Merchandise Inventory Merchandise Inventory ShrinkageShrinkage

NetSolutions inventory records indicate that

$63,950 of merchandise should be available for sale

on December 31, 2007. The physical count reveals

that only $62,150 is actually available.

Page 70: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Merchandise Inventory Merchandise Inventory ShrinkageShrinkage

Dec. 31 Cost of Merchandise Sold 1 800 00

Merchandise Inventory 1 800 00

Adjusting Entry

Inventory records $63,950Inventory count 62,150Inventory shortage $ 1,800

Page 71: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

Profitability Measures -- Effective Use of AssetsProfitability Measures -- Effective Use of Assets

Ratio of Net Sales to AssetsRatio of Net Sales to AssetsSears Penney

Net sales $41,366,000 $31,846,000Total assets:

Beginning of year $50,409,000 $19,742,000End of year $44,317,000 $20,908,000Average $47,363,000 $20,325,000 Ratio of net sales to assetsRatio of net sales to assets .87 to 1.87 to 1 1.57 to 11.57 to 1

Ratio Use: To assess the effectiveness in the use of assets to generate sales.

Page 72: Ch06   accounting for merchandising business, intro accounting, 21st edition warren reeve fess eng

The End

Chapter 6Chapter 6


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