Merchandising Business
Revenue activities of a merchandising business involve the buying and selling of merchandiseComparison to service business
Service Business Merchandising Business
Fees earned Sales
Less Operating expenses
Less Cost of merchandise sold
=Net income =Gross Profit
Less Operating expenses
=Net Income
New Accounts on the Income Statement
– SALES – revenues collected from the sale of merchandise
– COST OF MERCHANDISE SOLD – the purchase price plus incidentals of merchandise available for resale
– GROSS PROFIT – Sales – Cost of merchandise sold
Income StatementINCOME STATEMENT
Gem City MusicIncome Statement
For the Year Ended December 31, 20—Revenue from sales:Sales $189,300 Less:: Sales returns and allowances $1,700 Sales discounts 500 2,200Net sales $187,100Cost of merchandise sold XXXX 100,000Gross profit $ 87,100Operating expenses: Selling expenses:
Sales salaries expense $17,700 Administrative expenses: Rent expense 7,800 Office salaries expense 22,550 Depreciation expense—office equipment 2,800 33,150
Total operating expenses 50,850 Income from operations $36,250Other expense:
Interest expense 2,000Net income $ 34,250
Computation of Costs
Computation of Cost of Merchandise SoldPurchasesLess merchandise inventory, December 31=Cost of merchandise sold
Computation of Cost of Merchandise PurchasedPurchasesLess: purchases returns and allowancesLess: purchases discount=Net purchasesAdd: transportation in=Cost of merchandise purchased
Balance Sheet Accounts
Merchandise inventory – merchandise on hand at the end of an accounting period.
Merchandising Terms
Sales – total amount charged to customers for merchandise soldSales returns and allowances – are granted by the seller to customers for damaged or defective merchandiseSales discount – are granted by the seller to customers for earlyNet sales = Sales –returns - discount
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.
Merchandising Terms
Merchandise available for sale =– Beginning merchandise inventory + net purchases
Net purchases =– Purchases minus discounts – returns and
allowances
Accounting for Sales
Under the perpetual inventory system, all sales require the reporting of the removal of inventory from the books at the same time.
Accounting for Sales
CASH SALES
Example 1: Sold merchandise for cash $5,000. Cost of merchandise sold $3,200
Date Account PR Debit Credit
Cash $5,000
Sales $5,000
Cost of merchandise sold 3,200
Merchandise inventory 3,200
Credit sales
Bank cards– Master card– Visa– Monies directly deposited
in business account– Requires a debit to CASH
Service charge must be later recorded as expense
Bank cards
Example 9: Sold merchandise on VISA $10,000. Cost of merchandise sold is $4,000. Credit card expense is 3% of sales.
Date Account PR Debit Credit
Cash $10,000
Sales $10,000
Cost of merchandise sold 4,000
Merchandise inventory 4,000
Credit card expense 300
Cash 300
Bank cards
Example 3: Sold merchandise on VISA $6,000. Cost of merchandise sold is $3,000. Credit card expense is 3% of sales.
Example 10
Cash 6,000 Sales 6,000
Cost of merchandise 3,000 Merchandise inventory 3,000Credit card expense 180 Cash 180
Sales of Account
Example 4: Sold merchandise on account $6,000. Cost of merchandise sold is $3,000. Date Account PR Debit Credit
Accounts receivable $6,000
Sales 6,000
Cost of merchandise 3,000
Merchandise inventory 3,000
Recap
Under the perpetual inventory system, all sales transactions consist of at least two entries.
The first entry records the sale at the selling price with a debit to how it will be paid and credit to sales.
The second entry records the merchandise leaving the business with a debit to cost of merchandise sold and credit to merchandise inventory for the cost of the merchandise.
Sales discounts
A reduction in the price of the good for early payment.This account is a contra – SALESUpon 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 be made.– Net 30 days – full amount due in 30 days– 2/10 – 2% discount if paid within 10 days
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 100Net amount 4,900
Sales Returns and Allowances
Merchandise sold may be returned to the sellerMerchandise sold may be reduced in price due to defectsThis account is CONTRA – salesIncreases with a debit
Sales returns & allowances Example 6: Sold merchandise on account $7,000, terms 1/15, n/30. Cost of merchandise sold is $3,800
Date Account PR Debit Credit
Accounts receivable $7,000
Sales 7,000
Cost of merchandise 3,800
Merchandise inventory 3,800
Sales returns & allowances
Return merchandise with sales price of $2,000 and cost of $1,000.
Date Account PR Debit Credit
Sales returns 2,000
Accounts receivable 2,000
Merchandise inventory 1,000
Cost of merchandise sold 1,000
Recap of Sales Example
Example 7: ABC Merchandising had the following transactions:Sold merchandise and received payment by VISA at $6,000, cost of 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 ).
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 on
account
Date Account PR Debit Credit
Mar 1 Merchandise inventory $4,000
Accounts payable $4,000
Purchases Discount
Credit terms– Purchases discounts are
discounts taken by the buyer for early payment of an invoice.
– These discounts reduce the cost of the merchandise purchased.
– Should be taken when offered if not it is a LOSS to the business.
Purchase discount
Example 9: Purchase merchandise for resale $4,000, terms 2/10, n/30 on account.
Invoice: $4,000Discount (2% x $4,000) 80Net of discount 3,920
Purchase discount
Date Account PR Debit Credit
Mar 1 Merchandise inventory $4,000
Accounts payable $4,000
Mar 10 Accounts payable $4,000
Cash $3,920
Merchandise inventory
80
Purchase Discount
Reduction of the cost of the merchandise is reflected in the merchandise inventory account.
Example 10: Purchase merchandise for resale $6,000, terms 1/15, n/30 on account.
Purchases Returns and Allowances
Purchase returns – merchandise is returned to the sellerPurchase allowances – price adjustmentDebit memorandum – notification of the return or allowance by seller
Purchases Returns and Allowances
Example 11: Returned merchandise on account $2,500.
Date Account PR Debit Credit
Mar 09 Accounts payable $2,500
Cash $2,500
Example
Example 12: Purchased merchandise of $8,000 on terms 2/10,n/30. Ennis pays the original invoice less a return of $2,500 within the discount period. Record the above entries
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 terms 1/10, 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 ).
Transportation Costs
The terms of a sale should indicate when the ownership of the merchandise passes to the buyer.
• This point determines which party, the buyer or the seller must pay the transportation costs.
Transportation Costs
– FOB – shipping point• The ownership of the merchandise passes to the buyer
when the seller delivers the merchandise to the transportation company.
• Buyer pays the transportation costs
Example 13: Purchased merchandise for $4,000 with shipping costs of $50 FOB shipping point.
FOB – shipping point
Date Account PR Debit Credit
Merchandise inventory $4,000
Accounts payable $4,000
Merchandise Inventory $50
Cash $50
Transportation Costs
– FOB – destination point• The ownership of the merchandise passes to the buyer
when the seller delivers the merchandise to the buyer.• Seller pays the transportation costs
Example 14: Sold merchandise for $4,000 with shipping costs of $50 FOB destination. Cost of merchandise sold is $2,000.
FOB – destination point
Date Account PR Debit Credit
Accounts receivable $4,000
Sales $4,000
Cost of merchandise sold 2000
Merchandise inventory 2000
Delivery expense 50
Cash 50
Transportation costs
FREIGHT TERMSFOB FOBShipping Point
DestinationOwnership (title)passes to buyerwhen merchandise Delivered to Receivedis freight carrier by buyer
Transportationcosts are paidby Buyer Seller
Risk of loss duringtransportationbelongs to Buyer Seller
Sales Taxes
Liability to the businessCreate a SALES TAX PAYABLE account
Example 15: Sold merchandise on account $7,000, plus 5% sales tax. Cost of merchandise sold is $3,800.
Sales Taxes
Date Account PR Debit Credit
Accounts receivable $7,350
Sales 7,000
Sales tax payable 350
Cost of merchandise 3,800
Merchandise inventory 3,800
Recap of TransactionsSeller Buyer
Sold merchandise on account: Accounts receivable DR Sales CRCost 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 costs – Destination:Delivery Expense DR Cash CR
Transportation costs - Destination
Merchandise returned:Sales Returns & Allowances DR Accounts receivable CRMerchandise inventory DR Cost 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 DRSales discount DR Accounts receivable CR
Payment with discount:Merchandise inventory DR Cash CR
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 the shrinkage.
Date Account PR Debit Credit
Cost of merchandise sold 3,000
Merchandise inventory 3,000