topic 8 - accounting for merchandising operation

© The McGraw-Hill Companies, Inc., 2007Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Accounting for Merchandising

Operations

Chapter

88 100 Shares

$1 par value

Merchandising?


Learning ObjectivesLearning Objectives Describe merchandising activities

and identify income components for a merchandising company.

Identify and explain the inventory asset of a merchandising company.

Describe both perpetual and periodic inventory systems.

Analyze and record transactions for merchandise purchases using

a perpetual system. Analyze and record transactions

for merchandise sales using a perpetual system.

Analyze and interpret cost flows and operating activities of a merchandising company.

Prepare adjustments and close accounts for a merchandising company.

Define and prepare multiple-step and single-step income statements.

Record and compare merchandising transactions using both periodic and perpetual inventory systems.


Merchandising ActivitiesMerchandising Activities

Service organizations Service organizations sell timesell time to earn revenue. to earn revenue.

Examples: accounting firms, law firms, and Examples: accounting firms, law firms, and plumbing servicesplumbing services

Service organizations Service organizations sell timesell time to earn revenue. to earn revenue.

Examples: accounting firms, law firms, and Examples: accounting firms, law firms, and plumbing servicesplumbing services

RevenuesRevenues ExpensesExpensesMinus Net

incomeNet

incomeEquals


Manufacturer Wholesaler Retailer Customer

Merchandising CompaniesMerchandising Companies

Merchandising ActivitiesMerchandising Activities


Reporting Income for a MerchandiserReporting Income for a Merchandiser

Merchandising companies sell productsproducts to earn revenue.Examples: sporting goods, clothing, and auto parts

stores

Cost ofGoods Sold

GrossProfit

ExpensesNet

IncomeNet

SalesMinus Equals Minus Equals


Operating Cycle for a MerchandiserOperating Cycle for a MerchandiserBegins with the purchase of merchandise and ends

with the collection of cash from the sale of merchandise.

Purchases

Merchandiseinventory

Credit sales

Accountreceivable

CashcollectionPurchases

Merchandiseinventory

Cashsales

Cash SaleCash SaleCash SaleCash Sale Credit SaleCredit SaleCredit SaleCredit Sale


Inventory SystemsInventory Systems

+

+

BeginninginventoryBeginninginventory

Net cost ofpurchasesNet cost ofpurchases

Merchandiseavailable for sale Merchandiseavailable for sale

Ending InventoryEnding InventoryCost of Goods

SoldCost of Goods

Sold

==


Inventory SystemsInventory Systems

PerpetualInventory

System

PeriodicInventory

System

Detailed records of the cost of each

item are maintained, and the cost

of each item sold is determined

from records when the sale occurs.

Cost of goods sold is determined

only at the end of an accounting

period.


Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/07 358-BI

Sold To

Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501

P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx PrepaidItem Description Quanity Price AmountAC417 250 Backup System 500 54.00$ 27,000$

Sub Total 27,000 We appreciate your business! Ship Chg. -

Tax - Total 27,000$

Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount

Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount


Trade DiscountsTrade Discounts

Used by manufacturers and wholesalers to offer Used by manufacturers and wholesalers to offer better prices for greater quantities purchased.better prices for greater quantities purchased.

ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000

units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each

Racer has a list price of $5.25.Racer has a list price of $5.25.

ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000

units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each

Racer has a list price of $5.25.Racer has a list price of $5.25.


Purchase DiscountsPurchase Discounts

A deduction from the invoice price granted to induce early payment of the amount due.

A deduction from the invoice price granted to induce early payment of the amount due.

Terms

Time

Due

Discount Period

Full amountless discount

Credit Period

Full amount due

Purchase or SalePurchase or Sale


2/10,n/302/10,n/30Purchase DiscountsPurchase Discounts

Discount Percent

Discount Percent

Number of Days

Discount Is Available

Number of Days

Discount Is Available

Otherwise, Net (or All)

Is Due

Otherwise, Net (or All)

Is Due CreditPeriod

CreditPeriod


Purchase Returns and AllowancesPurchase 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

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


Transportation CostsTransportation Costs

FOB shipping point(buyer pays)

FOB destination(seller pays)

Merchandise

Seller Buyer


Transportation CostsTransportation Costs

If buyer (purchaser) paid the transportation cost (FOB Shipping point):

Periodic Inventory System

Dr Transportation In/Freight-In

Cr Cash

Perpetual Inventory System

Dr Merchandise Inventory

Cr Cash

*Freight-In is a part of cost of good purchased

If the seller paid the transportation cost (FOB Destination):Periodic and Perpetual

Dr Delivery Expense/Freight-Out

Cr Cash

*Delivery expense/freight out is a part of selling expense


RECORDING MERCHANDISE TRANSACTIONS:PURCHASESRECORDING MERCHANDISE TRANSACTIONS:PURCHASES

On 2 Nov, Z-Mart purchase the merchandise for RM1,200 on credit with terms of 2/10, n/30, FOB Shipping point.

Periodic

Dr Purchase 1,200

Cr Accounts Payable 1,200

Perpetual

Dr Merchandise Inventory 1,200

Cr Accounts Payable 1,200


RECORDING MERCHANDISE TRANSACTIONS:PURCHASES RETURNS AND ALLOWANCESRECORDING MERCHANDISE TRANSACTIONS:PURCHASES RETURNS AND ALLOWANCES

On 5 Nov Z-Mart returned RM300 merchandise purchased on 2 Nov because of defects.

Periodic

Dr Accounts Payable 300

Cr Purchase Returns & Allowance 300

Perpetual


Cr Merchandise Inventory 300


RECORDING MERCHANDISE TRANSACTIONS:PURCHASES DISCOUNTSRECORDING MERCHANDISE TRANSACTIONS:PURCHASES DISCOUNTS On 10 Nov Z-Mart pays the supplier for the purchase on 2

Nov.

Periodic


Cr Purchase Discounts 18

Cr Cash (900-18) 882 (1,200-300=900 * 2/100 =18)* 1,200-300 (return)=900

@

Perpetual


Cr Merchandise Inventory 18

Cr Cash (1,200-24) 882


RECORDING MERCHANDISE TRANSACTION:TRANSPORTATION INRECORDING MERCHANDISE TRANSACTION:TRANSPORTATION IN

Z-Mart paid RM75 freight charge to transport merchandise to its store.

Periodic

Dr Transportation-In / Freight-In 75

Cr Cash 75

Perpetual

Dr Merchandise Inventory 75

Cr Cash 75


RECORDING MERCHANDISE TRANSACTION:SALE OF MERCHANDISERECORDING MERCHANDISE TRANSACTION:SALE OF MERCHANDISE

On Nov 16, Z-Mart sold merchandise on credit to ANN Enterprise, terms 1/12, n/30, FOB destination, RM24,000. The merchandise cost RM12,000.

Periodic

Dr Accounts Receivable 24,000

Cr Sales 24,000

Perpetual

Dr Accounts Receivable 24,000

Cr Sales 24,000

Dr Cost of Sales 12,000

Cr Merchandise Inventory 12,000


RECORDING MERCHANDISE TRANSACTION:RETURN OF MERCHANDISE SOLDRECORDING MERCHANDISE TRANSACTION:RETURN OF MERCHANDISE SOLD

On Nov 18, Z-Mart accepted for full credit the return of merchandise sold to ANN Enterprise on Nov 16, the cost of which was RM500.

Periodic

Dr Sales Return & Allowance 1,000

Cr Accounts Receivable 1,000

Perpetual

Dr Sales Return & Allowance 1,000


Dr Merchandise Inventory 500

Cr Cost of Goods Sold 500


RECORDING MERCHANDISE TRANSACTION:SALES DISCOUNTSRECORDING MERCHANDISE TRANSACTION:SALES DISCOUNTS

On Nov 26, Z-Marts received payment in full of the account from ANN Enterprise

PeriodicDr Cash 22,770 (23,000-230)

Sales Discounts 230 Cr Accounts Receivable 23,000 (24,000-1,000)

24000-1000(return & allowance) = 23,000 * 1/100 = 230

Perpetual

Dr Cash 22,770

Sales Discounts 230



Perpetual Inventory System:Let’s complete the accounting cycle by preparing theclosing entriesclosing entries for

Barton.


Closing Entries: Perpetual Inventory SystemClosing Entries: Perpetual Inventory System

Dec. 31 Sales . . . . . . . . . . . . . . . . . . . . 323,800 Income summary . . . . . . 323,800

To close credit balance in temporary accounts



Dec. 31 Income Summary 310,900

Sales Discounts 4,300

Sales Return & Allowance 2,000

Cost of Sales 233,200

Adm. Salaries Expense 18,200

Sales Salaries Expense 29,600

Insurance Expense 1,200

Rent Expense 8,100

Supplies Expense 1,000

Advertising Expense 13,300

To close debit balances in temporary accounts



Dec. 31 Income Summary 12,900 Barton, Capital 12,900

To close Income Summary account


Closing Entries: Perpetual Inventory System.

Closing Entries: Perpetual Inventory System.

Dec. 31 Barton, Capital 4,000 Barton, Withdrawals 4,000

To close the withdrawals account


Multiple-Step Income Statement (perpetual)

Multiple-Step Income Statement (perpetual)


Single-Step Income Statement (Perpetual)

Single-Step Income Statement (Perpetual)


Classified Balance Sheet(periodic & perpetual inv. system)

Classified Balance Sheet(periodic & perpetual inv. system)

ASSETSNon-current Assets Equipment $16,000

Current Assets Cash 10,200$ Merchandise Inventory 1,200 11,400

Total Assets 27,400$

EQUITY AND LIABILITIES Equity 22,200$

Long-term Liabilities Notes payable $4,000

Current Liabilities Accounts payable 1,200$

Total Equity and Liabilities 27,400$

MERCHANDISING COMPANYBALANCE SHEET

31 DECEMBER 2007ASSETSNon-current Assets Equipment $16,000

Current Assets Cash 10,200$ Merchandise Inventory 1,200 11,400

Total Assets 27,400$

EQUITY AND LIABILITIES Equity 22,200$

Long-term Liabilities Notes payable $4,000

Current Liabilities Accounts payable 1,200$

Total Equity and Liabilities 27,400$

MERCHANDISING COMPANYBALANCE SHEET

31 DECEMBER 2007


DEBIT CREDITCash 9,500Accounts receivable 16,100Merchandise Inventory 36,000Prepaid Insurance 3,800Store Equipment 80,000Accumulated depreciation – Store Equipment

16,000

Accounts Payable 20,400RA Capital 83,000RA, Drawing 15,000Sales 480,000Sales Return & Allowance 12,000Sales Discounts 8,000Purchases 325,000Purchase Return & Allowances 10,400Purchase Discounts 6,800Freight-in 12,200Freight-out/delivery expense 7,000Advertising Expense 16,000Rent Expense 19,000Store Salaries Expense 40,000Utilities expense 17,000

616,600 616,600

PERIODIC INVENTORY SYSTEM –TRIAL BALANCE

Other information: Merchandise Inventory on hand at December 31, RM40,000

HighPoint ElectronicTrial Balance

As At 31 December 2007


CLOSING ENTRIES: PERIODIC INV. SYSTEMCLOSING ENTRIES: PERIODIC INV. SYSTEMDr Merchandise Inventory (ending inventory) 40,000

Sales 480,000

Purchase Returns & Allowances 10,400

Purchase Discounts 6,800

Cr Income Summary 537,200

( To record ending inventory and close accounts with credit balances)

Dr Income Summary 492,200

Cr Merchandise inventory (beginning inventory) 36,000

Sales Returns and Allowances 12,000

Sales Discounts 8,000

Purchases 325,000

Freight-in 12,200

Store Salaries Expense 40,000

Rent Expense 19,000

Freight-out/delivery expense 7,000

Advertising Expense 16,000

Utilities Expense 17,000

(To close beginning inventory and other income statement accounts with debit balances)


CLOSING ENTRIES: PERIODIC INV. SYSTEMCLOSING ENTRIES: PERIODIC INV. SYSTEM

Dr Income Summary 45,000 Cr RA Capital 45,000 (To transfer net income to capital (537,200-

492,200)

Dr RA, Capital 15,000 Cr RA Drawing 15,000 (To close drawings to capital)


Sales Revenue: Sales Less: Sales returns & allowances Sales discounts Net sales

12,000 8,000

480,000

(20,000) 460,000

Cost of Goods Sold: Inventory, Dec 1 Purchase Less:Purchase Returns & allowances 10,400 Purchase discounts 6,800 Net Purchase Add: Freight-in Cost of goods purchased Cost of goods available for sale Inventory, December 31 Cost of goods sold Gross Profit

325,000

(17,200)307,800 12,200

36,000

320,000356,000

(40,000)(316,000)

144,000

Operating expenses:Advertising expenseFreight-out/Delivery ExpenseRent expenseUtility expenseStore salaries expense

16,000 7,00019,00017,00040,000 (99,000)

Net Income 45,000

MULTIPLE-STEP INCOME STATEMENT – PERIODIC INVENTORY SYSTEMHighPoint ElectronicIncome Statement

For the Year Ended December 31, 2007


Single-Step income Statement- Periodic Inventory SystemSingle-Step income Statement- Periodic Inventory System

HighPoint ElectronicIncome Statement

For the Year Ended December 31, 2007Revenue:Net sales 460,000

Expenses:Cost of good sold 316,000Advertising expense 16,000Freight-in/delivery expense 7,000Rent expense 19,000Utilities expense 17,000Store Salaries expense 40,000 (415,000) 45,000


End of Chapter 8End of Chapter 8

topic 8 - accounting for merchandising operation

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