Chapter 6 - Accounting for Merchandising Businesses

What are administrative expenses?

These expenses are part of operating expenses. They are incurred in the administration or general operations of the business. They are sometimes referred to as general expenses

What are goods available for sale?

This amount is computed as follows: Beginning Inventory plus net Purchases. It represents all the merchandise the retailer has available for sale during the specific accounting period.

What are net purchases?

This amount is computed as follows: The gross purchases by a retailer from a wholesaler or vendor, less any purchase returns and allowances if any, less any purchase discounts, plus freight-in paid by the retailer to have the goods shipped to its warehouse

What is freight-in?

When merchandise is purchased by a retailer from a wholesaler or vendor and the retailer pays for the shipping charges, these shipping charges increase the cost basis of the asset (specifically-merchandise inventory) rather than being treated as expenses. This account is added to the gross purchases account in determining net purchases.

What is inventory shrinkage?

The physical inventory on hand at the end of the accounting period often differs from the physical inventory listed in the business's accounting records. This difference is usually due to theft, breakage, and spoilage. This phenomenon is also called inventory shortage.

What are sales discounts?

A contra revenue account that is recorded by the retailer to customers for early payment of amounts owed. The amount of the discount is often stated in percentage terms (e.g. 5% off of the retail price of the goods).

What is a perpetual inventory system?

A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.

What are selling expenses?

A type of operating expense. Includes expenses that are directly related to the selling of merchandise. Examples include advertising expenses, sales salaries expenses, sales commissions expenses.

What is a FOB Shipping Point contract?

If the terms of the sale between the wholesaler or vendor and the retailer indicate that the retailer is responsible for paying the shipping charges, then title to the goods passes from the wholesaler or vendor to the retailer when the goods are delivered to the common carrier. The terms of the contract indicate that the retailer pays the freight costs from the shipping point to the final destination and the retailer acquires title to the goods once they are delivered to the common carrier.

What are purchase returns and allowances?

This contra expense account is recorded when the wholesaler or vendor gives the retailer credit for the return of non-conforming merchandise purchased by the retailer from the wholesaler or vendor. This account is subtracted from gross purchases in determining net purchases.

What are purchase discounts?

This contra expense account is recorded when the wholesaler or vendor grants the retailer a discount for early payment on merchandise purchased. These discounts are often expressed in the following manner: 2/10 net 30. This account is subtracted from gross purchases in determining net purchases.

What are sales returns and allowances?

This contra revenue account is recorded when the retailer takes back from the customer non-conforming merchandise. In such cases, the customer may either return the merchandise to the retailer or accept an allowance from the retailer for the non-conforming goods.

What is the cost of goods sold account?

This expense account on the multiple-step income statement is computed as follows: Beginning Inventory plus Net Purchases equals Goods Available for Sale less Ending Inventory. This expense account is debited when merchandise is sold at an amount equal to the cost of the merchandise.

What is merchandise inventory?

This figure on the balance sheet of the retailer represents merchandise on hand (not sold) at the end of the accounting period. It is reported as a current asset on the balance sheet.

What are net sales?

This figure on the multiple-step income statement is computed as follows: Gross Sales less Sales Returns and Allowances less Sales Discounts.

What is gross profit?

This item appears on the multiple-step income statement as the difference between Net Sales and Cost of Goods Sold. It represents the mark-up on all goods the retailer has sold. It also represents the profit the business earns before deducting operating expenses.

What is income from operations?

This number on the income statement is calculated by subtracting operating expenses from the gross profit. It is also known as operating income.

What is a multiple-step income statement?

This type of income statement contains several sections, subsections, and subtotals. The basic format of this type of income statement is as follows: Net Sales less Cost of Goods Sold equals Gross Profit less Operating Expenses equals Income from Operations.

What is a single-step income statement?

combines all revenue and gains at top of I/S and subtracts all expenses and losses below OR A type of income statement that combines all revenue accounts into one section and also combines all expense accounts into one section. This type of income statement emphasizes the total revenues and total expenses in determining net income.

What is a periodic inventory system?

updates the accounting records for merchandise transactions only at the end of a period OR Under this system, when the retailer makes a sale, only the sale is recorded for accounting purposes. The accompanying reduction in inventory is ignored until a physical inventory count is taken. Also under this system, the inventory records do not show the amount available for sale or the amount sold during the accounting period