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Transcript of Accounting for Merchandising Businessesss 1224048145696217 8
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Accounting forAccounting forMerchandising BusinessesMerchandising Businesses
Financial and Managerial Accounting
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Some of the action has been automated,
so click the mouse when you see this
lightning bolt in the lower right-handcorner of the screen. You can point and
click anywhere on the screen.
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1. Distinguish the activities of a servicebusiness from those of a merchandisingbusiness.
2. Describe and illustrate the financialstatements of a merchandisingbusiness.
3. Describe the accounting for the sale of
merchandise.4. Describe the accounting for the
purchase of merchandise.
ObjectivesObjectives
After studying thisAfter studying this
chapter, you shouldchapter, you should
be able to:be able to:
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5. Describe the accounting for transportationcosts, sales taxes, and trade discounts.
6. Illustrate the dual nature of merchandisingtransactions.
7. Prepare a chart of accounts for amerchandising business.
8. Describe the accounting cycle for amerchandising business.
9. Compute the ratio of net sales to assetsas a measure of how effectively abusiness is using its assets.
ObjectivesObjectives
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Service Business
Fees earned $XXX
Operating expenses XXX
Net income $XXX
Nature of BusinessesNature of Businesses
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Merchandising Business
Sales $XXX
Cost ofMerchandise Sold XXX
Gross Profit $XXX
Operating Expenses XXX
Net Income $XXX
Nature of BusinessesNature of Businesses
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PurchasingPurchasing
ActivityActivity
Raw Materials
ProductionProduction
ActivityActivity
Products
SalesSales
ActivityActivity
AccountsReceivable
CollectionCollection
ActivityActivityCash
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Multiple-Step
Income
Statement
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NetSolutions
Income Statement For the Year Ended December 31,
2007
Revenue from sales:
Sales $720,185Less: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
ContinuedContinued
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Operating expenses:
Selling expenses:Sales salaries expense $56,230Advertising expense 10,860Depr. Expensestore equipment 3,100Miscellaneous selling expense 630
Total selling expenses $ 70,820
Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expenseoffice equipment 2,490Insurance expense 1,910Office supplies expense 610Misc. administrative expense 760
Total admin. expenses 34,890Total operating expenses 105,710
Income from operations $ 77,240
ContinuedContinued
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Other income and expenses:
Rent revenue $ 600Interest expense (2,440) (1,840)
Net income $75,400
ConcludedConcluded
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Periodic vs. PerpetualMethods ofPeriodic vs. PerpetualMethods of
AccountingAccounting
Periodic Method
A method of determining the cost of merchandisesold and the amount of merchandise on hand
Under this method, the inventory records do not
show the amount available for sale or the amountsold during the period
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Under this method, each purchase and sale ofmerchandise 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 inthe inventory records.
Periodic vs. PerpetualMethods ofPeriodic vs. PerpetualMethods of
AccountingAccounting
Perpetual Method
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Cost ofMerchandise PurchasedCost ofMerchandise Purchased
Purchases $521,980
Less: Purchase returns and
allowances $9,100Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased $527,755
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Cost ofMerchandise SoldCost ofMerchandise Sold
Merchandise inventory, 1/1/07 $ 59,700
Purchases $521,980
Less: Purchase returns and
allowances $9,100
Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased 527,755
Merchandise available for sale $587,455
Less merchandise inventory, 12/31/07 62,150
Cost of merchandise sold $525,305
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Single-Step Income
Statement for a
MerchandisingBusiness
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NetSolutions
Income Statement
For the Year Ended December 31, 2007
Revenues:
Net sales $708,255
Rent revenue 600
Total revenues $708,855Expenses:
Cost of merchandise sold $525,305
Selling expenses 70,820
Administrative expenses 34,890
Interest expense 2,440Total expenses 633,455
Net income $ 75,400
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Retained Earnings
Statement
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Retained earnings, 1/1/07 $128800
Net income for year $75,400Less dividends 18,000Increase in owners equity 57,400Retained earnings, 12/31/07 $186,200
NetSolutionsRetained Earnings Statement
For the Year Ended December 31, 2007
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Balance Sheet
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NetSolutions
Balance Sheet
December 31, 2007
Assets
Current assets:
Cash $52,950
Accounts receivable 91,080Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650
Total current assets $209,310
ContinuedContinued
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Property, plant, and equipment:Land $20,000Store equipment $27,100
Less accumulateddepreciation 5,700 21,400
Office equipment $15,570
Less accumulateddepreciation 4,720 10,850Total property, plant, andequipment 52,250
Total assets $261,560
ContinuedContinued
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Liabilities
Current liabilities:Accounts payable $22,420
Note payable (current portion) 5,000
Salaries payable 1,140
Unearned rent 1,800
Total current liabilities $ 30,360Long-term liabilities:
Note payable (due 2017) 20,000
Total liabilities $ 50,360
Stockholders EquityCapital stock $ 25,000
Retained earnings 186,200 211,200
Total liab. and stockholders equity $261,560
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Sales TransactionsSales Transactions
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JOURNAL
Date DescriptionPost.
Ref. Dr Cr.
1
2
3
4
PAGE 26
5
Jan. 3 Cash 1 800 002007
Sales 1 800 00
To record cash sales.
On January 3, a firm sold $1,800On January 3, a firm sold $1,800
of merchandise for cash.of merchandise for cash.
Cash SalesCash Sales
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Cash SalesCash Sales
Using a perpetual inventory, the inventoryUsing a perpetual inventory, the inventorycost of $1,200 must be recorded.cost of $1,200 must be recorded.
6
7
8
9
3 Cost of Merchandise Sold 1 200 00
Merchandise Inventory 1 200 00
To record the cost of
merchandise sold.
10
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Credit card sales (MasterCard orCredit card sales (MasterCard or
Visa) are recorded as cash sales.Visa) are recorded as cash sales.
At the end of the month, $48 wasAt 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.
12
3
4
PAGE 28
5
Cash 48 00Jan. 31 Credit Card Expense 48 00
2007
Cash SalesCash Sales
To record service charges
on credit card sales for the
month.
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Jan. 12 Accounts ReceivableSims Co. 510 00
Invoice No. 7172.
Sales 510 00
12 Cost ofMerchandise 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 CompanyOn January 12, a firm sold Sims Company
merchandise on account, $510. The cost ofmerchandise on account, $510. The cost of
the merchandise to the seller was $280.the merchandise to the seller was $280.
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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.
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If invoice is
paid within
10 days of
invoice date
Sales DiscountsSales Discounts
Credit Terms
Invoice for$1,500
Terms:
2/10, n/30
$1,470 paid (less2% as a cash
discount)
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If invoice is
NOTpaid
within 10
days of
invoice date
Sales DiscountsSales Discounts
Credit Terms
Invoice for
$1,500
Terms:
2/10, n/30
$1,500 PAID
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Sales DiscountsSales Discounts
On January 22, the firm receives $1,470On January 22, the firm receives $1,470
from Sims Co. which is the amount due offrom Sims Co. which is the amount due of
$1,500 less a 2 percent discount.$1,500 less a 2 percent discount.
Jan. 22 Cash 1 470 00
Accounts ReceivableSims Co. 1 500 00
Sales Discounts 30 00
Collection of Invoice
No. 7172, less discount.
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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 asa sales allowance.
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Jan. 13 Sales Returns and Allowances 225 00
CreditMemo No. 32.
Accounts ReceivableKrier Co. 225 00
13 Merchandise Inventory 140 00
Cost ofMerchandise Sold 140 00
Cost of merchandise
returnedCreditMemo 32.
Sales Returns and AllowancesSales Returns and Allowances
On January 13, issued Credit Memo 32 to KrierOn 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.
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PurchasePurchaseTransactionsTransactions
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Date DescriptionPost.
Ref. Dr Cr.
1
2
3
4
5
Jan. 3 Merchandise Inventory 2 510 002007
Cash 2 510 00
Purchased inventory from
Bowen Co.
Purchase Transactions
On January 13, Purchased merchandiseOn January 13, Purchased merchandise
for cash from Alden Company, $2,510.for cash from Alden Company, $2,510.
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Whats the last
day the invoice
can be paid?
Purchase DiscountsPurchase Discounts
Alpha Technologies
issues an invoice for
$3,000 to
NetSolutions datedMarch 12, with terms
2/10, n/30.
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Invoice period 30
Days in March 31
Date of invoice 12Remaining days 19
April 11
Lets do a simplecalculation.
The full amount is
due on April 11.
Purchase DiscountsPurchase Discounts
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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)?
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Discount $60.00
Interest for 20 days
at the rate of 6%on $2,940 9.80
Savings from
borrowing $50.20
Lets see Interest on the
amount due of $3,000 lessthe 2 percent
Purchase DiscountsPurchase Discounts
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Looks like we should take
advantage of the discount even if we
have to borrow the money.
Purchase DiscountsPurchase Discounts
Discount $60.00
Interest for 20 days
at the rate of 6%on $2,940 9.80
Savings from
borrowing $50.20
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JOURNAL
Date DescriptionPost.
Ref. Dr Cr.
1
2
3
4
PAGE 27
5
OnMarch 12, NetSolutions purchasedOnMarch 12, NetSolutions purchased
merchandise on account from Alphamerchandise on account from Alpha
Technologies, $3,000.Technologies, $3,000.
Mar. 12 Merchandise Inventory 3 000 002007
Accounts PayableAlpha
Technologies 3 000 00
Purchase DiscountsPurchase Discounts
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JOURNAL
Date DescriptionPost.
Ref. Dr Cr.
1
2
3
4
PAGE 27
5
If payment is made by March 22 NetSolutionsIf 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 PayableAlpha Technol. 3 000 00
Cash 2 940 00
Merchandise Inventory 60 00
2007
Purchase DiscountsPurchase Discounts
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JOURNAL
Date DescriptionPost.
Ref. Dr Cr.
1
2
3
4
PAGE 27
5
If NetSolutions does not pay the invoice untilIf 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 PayableAlpha Technol. 3 000 00
Cash 3 000 00
2007
Purchase DiscountsPurchase Discounts
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Purchases Returns and AllowancesPurchases Returns and Allowances
Apurchases 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 andthe vendor makes a price adjustment,
this is apurchases allowance.
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NetSolutions received theNetSolutions received the
delivery from Maximdelivery from Maxim
Systems and determined thatSystems and determined that
$900 of the items were not$900 of the items were notthe merchandise ordered.the merchandise ordered.
DebitDebit memorandummemorandum #18 is#18 is
issued toM
axim Systems.issued toM
axim Systems.
Purchases Returns and AllowancesPurchases Returns and Allowances
You sent me the wrong interface cards.
Well send a debit memorandum with the
returned items.
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Mar. 7 Accounts PayableMaxim Systems 900 00
DebitMemo No. 18
Merchandise Inventory 900 00
Purchases Returns and AllowancesPurchases Returns and Allowances
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Purchases Returns and AllowancesPurchases Returns and Allowances
OnMay 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 PayableDelta Data 5 000 00
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Purchases Returns and AllowancesPurchases Returns and Allowances
OnMay 4, NetSolutions returns
$3,000 of the merchandise.
May 4 Accounts PayableDelta Data Links 3 000 00
Returned portion of
merchandise purchased.
Merchandise Inventory 3 000 00
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Purchases Returns and AllowancesPurchases Returns and Allowances
OnMay 12, NetSolutions pays the amount due.
May 12 Accounts PayableDelta 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%
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TransportationTransportationCostsCosts
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FOB Shipping PointFOB Shipping Point
Buyer pays freight costs and debits
Merchandise Inventory
Fruit Express
Title passes to buyer as
shipment leaves
shipping point.
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June 10 Merchandise Inventory 900 00
Purchased merchandise, terms
FOB shipping point.
Accounts PayableMagna Data 900 00
10 Merchandise Inventory 50 00
Cash 50 00
Paid shipping cost on
merchandise purchased.
On June 10, NetSolutions buys merchandise fromOn June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB shippingMagna 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
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FOB DestinationFOB Destination
Title passes to buyer
upon arrival at
destination.
Seller pays freight costs and debits
Transportation Out
Fruit Express
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On June 15, NetSolutions sells merchandise to KranzOn 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 Destination
June 15 Accounts ReceivableKranz Co. 700 00
Sold merchandise, terms FOB
destination.
Sales 700 00
15 Cost ofMerchandise Sold 480 00
Merchandise Inventory 480 00
Cost of sale of Kranz Co .
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FOB DestinationFOB Destination
June 15 Transportation Out 40 00
Cash 40 00
Paid shipping cost on
merchandise sold.
On June 15, NetSolutions sells merchandise to KranzOn 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.
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Sales TaxesSales Taxes
On August 12, merchandise is sold onOn August 12, merchandise is sold onaccount to Lemon Company, $100. Theaccount to Lemon Company, $100. The
state has a 6% sales tax.state has a 6% sales tax.
Aug. 12 Accounts ReceivableLemon Co. 106 00
Sales 100 00
Sales Taxes Payable 6 00Invoice No. 339
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Sales TaxesSales Taxes
On September 15, the seller sends in aOn September 15, the seller sends in apayment of $2,900 to the taxing unit forpayment 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 00
Payment for sales taxescollected during August.
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Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 1. Scully Company sold merchandise on accountJuly 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 ReceivableBurton Co. 7,500Sales 7,500
Cost ofMerchandise Sold 4,500Merchandise Inventory 4,500
Burton Company (Buyer)
Merchandise Inventory. 7,500
Accounts PayableScully Co. 7,500
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Illustration of Accounting forIllustration 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 ofJuly 2. Burton Company paid transportation charges of
$150 on July 1 purchase from Scully Company.$150 on July 1 purchase from Scully Company.
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Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 5. Scully Company sold merchandise on accountJuly 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 ReceivableBurton Co. 5,000Sales 5,000
Cost ofMerchandise Sold 3,500Merchandise Inventory 3,500
Burton Company (Buyer)
Merchandise Inventory. 5,000
Accounts PayableScully Co. 5,000
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Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 7. Scully Company paid transportation costsJuly 7. Scully Company paid transportation costs
of $of $250250 for delivery of merchandise sold tofor delivery of merchandise sold toBurton Company on July 5.Burton Company on July 5.
Scully Company (Seller)
Transportation Out 250Cash 250
Burton Company (Buyer)
No entry.
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Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 13. Scully Company issued Burton Company a creditJuly 13. Scully Company issued Burton Company a credit
memorandum for $1,000 of merchandise returned from a July 5memorandum 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 1,000Accounts ReceivableBurton Co. 1,000
Merchandise Inventory 700Cost ofMerchandise Sold 700
Burton Company (Buyer)
Accounts PayableScully Co. 1,000
Merchandise Inventory 1,000
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Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 15. Scully Company received paymentJuly 15. Scully Company received payment
from Burton Company for purchase ofJuly 5.from Burton Company for purchase ofJuly 5.
Scully Company (Seller)
Cash 4,000Accounts ReceivableBurton Co. 4,000
Burton Company (Buyer)
Accounts PayableScully Co. 4,000
Cash 4,000
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Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 18. Scully Company sold merchandise on account to BurtonJuly 18. Scully Company sold merchandise on account to Burton
Company, $12,000, terms FOB shipping point, 2/10, n/eom. ScullyCompany, $12,000, terms FOB shipping point, 2/10, n/eom. Scully
prepaid transportation costs of $500, which were added to theprepaid 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 ofMerchandise Sold 7,200Merchandise Inventory 7,200
Burton Company (Buyer)
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Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 18. Scully Company sold merchandise on account to BurtonJuly 18. Scully Company sold merchandise on account to Burton
Company, $12,000, terms FOB shipping point, 2/10, n/eom. ScullyCompany, $12,000, terms FOB shipping point, 2/10, n/eom. Scully
prepaid transportation costs of $500, which were added to theprepaid 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)Cost ofMerchandise Sold 7,200Merchandise Inventory 7,200
Burton Company (Buyer)
Merchandise Inventory 12,500
Accounts PayableScully Co. 12,500
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Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 28. Scully Company received paymentJuly 28. Scully Company received payment
from Burton Company for purchase ofJulyfrom Burton Company for purchase ofJuly
18, less discount (2% x $12,000).18, less discount (2% x $12,000).
Scully Company (Seller)
Cash 12,260Sales Discounts 240
Accounts ReceivableBurton Co. 12,500
Burton Company (Buyer)
Accounts PayableScully Co. 12,500Merchandise Inventory 240
Cash 12,260
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Balance Sheet Accounts
200 Liabilities
210 Accounts Payable
211 Salaries Payable
212 Unearned Rent
215 Notes Payable
300 Stockholders Equity
310 Capital Stock
311 Retained Earnings
312 Dividends
313 Income Summary
100 Assets
110 Cash
112 Accounts Receivable
115 Merchandise Inventory
116 Office Supplies
117 Prepaid Insurance120 Land
123 Store Equipment
124 Accumulated Depreciation
Store Equipment
125 Office Equipment
126 Accumulated DepreciationOffice Equipment
NetSolutions
Chart of Accounts
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Income Statement Accounts
600 Other Income
610 Rent Revenue
700 Other Expense
710 Interest Expense
400 Revenues
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
500 Costs and Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense
Store Equipment
523 TransportationOut
529 Miscellaneous Selling Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Miscellaneous Admin. Expense
NetSolutions
Chart of Accounts
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Merchandise InventoryMerchandise 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.
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Merchandise InventoryMerchandise Inventory
ShrinkageShrinkage
Dec. 31 Cost ofMerchandise Sold 1 800 00
Merchandise Inventory 1 800 00
Adjusting Entry
Inventory records $63,950Inventory count 62,150
Inventory shortage $ 1,800
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Profitability MeasuresProfitability Measures ---- Effective Use of AssetsEffective Use of Assets
Ratio ofNet Sales to AssetsRatio ofNet Sales to AssetsRatio ofNet Sales to AssetsRatio ofNet Sales to AssetsSears Penney
Net sales $41,366,000 $31,846,000
Total assets:
Beginning of year $50,409,000 $19,742,000End of year $44,317,000 $20,908,000
Average $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.
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The EndThe End