Chapter 6: Accounting for merchandising business

Credit terms:

The terms for when payments for merchandise are to be made - if a payment is required on delivery, the terms are cash or net cash -n/30: payment is due 30 days after the invoice date. net 30 days. -n/eom: payment is due by the end of the month

FOB shipping point (FREE ON BOARD)

The terms of a sale indicate when ownership of the merchandise passes from the seller to the buyer. This point determines whether the buyer or the seller pays the freight costs. -The BUYER pays the freight costs from the shipping point to the final destination.

Physical inventory- periodic invent. system (Merchandising transactions)

Used to determine the cost of merchandise on hand at the end of the period and the cost of merchandise sold during the period.

Sales

When merchandise is sold, the revenue is reported as SALES, and its cost is recognized as an expense- the expense is called COST OF MERCHANDISE SOLD

Post-closing entries

assets, contra asset, liability, and owner's capital accounts with balances *also on the end-of-the period balance sheet

Selling expense vs. administrative expense or general expense

selling expense: incurred directly in the selling of merchandise (sales salaries, store supplies used, depreciation of store equipment, delivery expense, and advertising) administrative expense: incurred in the administrative operations of the business (office salaries, depreciation of office equipment, office supplies used)

Purchases returns and allowances (Buyer)

A buyer may request an allowance for merchandise that is returned or a price allowance-lower price (purchases allowance) for damaged or defective merchandise. -the buyer sends the seller a debit memorandum (debit memo) to notify the seller of reasons for the return or to request a price reduction (purchase allowance)

Multi-step income statement

1. Revenue from sales: sales, sales returns and allowances, sales discounts, and net sales 2. Cost of merchandise sold: cost of goods sold or cost of sales 3. Gross Profit 4. Income from operations (selling expenses or administrative expenses) 5. Other income and expense

Single step income statement *criticized for not containing gross profit and income from operations

1. Revenues: net sales, rent revenue 2. Expenses: cost of merchandise sold, selling expenses, administrative expenses, interest expense 3. Net income

Aug 10. Returned merchandise purchased on Aug 5 from Kramer Co., 1,300

10. Accounts payable (Dr) 1,300 Merchandise inventory (Cr) 1,300 -returned merchandise on account

May 12. Paid for the purchase of May 2 LESS THE RETURN and DISCOUNT

12. Accounts payable- control (Dr) 2,000 Merchandise inventory (Cr) 40 Cash (Cr) 1,960 Accounts payable: 5,000 - 3,000 = 2,000 Merchandise inventory: (2,000)(.02) = 40 Cash: 2,000-40 = 1,960

Aug 15. Paid Kramer Co. on account for purchase of Aug 5, LESS RETURN of Aug 10 and DISCOUNT

15. Accounts payable (Dr) 7,200 Merchandise inventory (Cr) 72 Cash (Cr) 7,128 accounts payable: 8,500 - 1,300 = 7,200 merchandise inventory: (7,200)(.01) = 72 cash: 7,200 - 72 = 7,128

EXAMPLE: MERCHANDISE PURCHASE May 2. Purchased 5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30 (May 2)

2. Merchandise inventory (Dr) 5,000 Accounts payable - control (Cr) 5,000 -purchased merchandise

May 4. Returned 3,000 of the merchandise purchased on May 2

4. Accounts payable- control (Dr) 3,000 Merchandise inventory (Cr) 3,000 -Returned portion of merchandise purchased

EXAMPLE: MERCHANDISE PURCHASE Aug 5. Purchased merchandise on account from Kramer Co., 8,500, terms FOB destination, 1/10, n/30 *FOB: free on board shipping poing

5. Merchandise inventory (Dr) 8,500 Accounts payable- control (Cr) 8,500 -purchased merchandise on account

Debit memorandum

A debit memo. it informs the seller of the amount the buyer proposes to debit to the account payable due the seller states the reason for the return or the request for the price reduction (allowance)

To return merchandise or be granted a price allowance

Accounts payable (Dr) 900 Merchandise inventory (Cr.) 900

Purchases discounts (BUYER)

Discounts taken by the buyer for early payment of an invoice. reduces the cost of the merchandise purchased by buyer. Encourages the buyer to pay before the end of the credit period. 2/10, n/30: 2% discount if paid within 10 days, net amount due within 30 days.

Sales on account (Sales of merchandise on account)

EXAMPLE: March 10. Sold merchandise on account to Comer Co., 3,480, terms, 2/10, n/30. The cost of merchandise sold was 1,400. March 10. Accounts receivable- control (Dr) 3,480 Sales (Cr) 3,480 March 10. Cost of merchandise sold (Dr) 1,400 Merchandise Inventory (Cr) 1,400

Perpetual inventory system (Merchandising transactions)

Each purchase and sale of merchandise is recorded in the inventory account and related subsidiary ledger. -The amount of merchandise available for sale and the amount sold are continuously (perpetually updated in the inventory records

Other income Other expense

Other income: revenue from sources other than the primary operating activity of a business (income from: interest, rent, the sale of fixed assets) Other expense: an expense that cannot be traced directly to the normal operations of the business (interest expense

Sales transactions (Sales of merchandise) -cash sales, credit cards

REVENUE from merchandise sales is recorded as SALES or SALES OF MERCHANDISE EXAMPLE: May 1. Sold merchandise for cash, 1,800. The cost of merchandise sold was 1,200. May 1. Cash (Dr) 1,800 Sales (Cr) 1,800 May 1. Cost of merchandise sold (Dr) 1,200 Merchandise inventory (Cr) 1,200 (merchandise on hand-not sold) EXAMPLE: Paid credit card processing fees, 4,150 (From customer) Credit card expense (Dr) 4,150 Cash (Cr) 4,150

SALES TAX: a tax on sales of merchandise. the liability for the sales tax is incurred when the sale is made. -recording the sale of tax

Sale of tax: accounts receivable (Dr) 106 sales (Cr) 100 sales tax payable (Cr) 6 tax payment: sales tax payable (Dr) 1,800 cash (Cr) 1,800

Sales Discounts (SELLER) *recorded in a separate sales discounts account- a CONTRA (or offsetting) account to SALES

Seller may offer the buyer credit terms that include a discount for early payment. REDUCES SALES REVENUE. EXAMPLE: May 6. Sold merchandise on account to C.F Howell Co., list price 4,000, trade discount 30%, terms 2/10, n/30. The cost of merchandise sols was 1,125. Accounts receivable- control (Dr) 2,800 Sales (Cr) 2,800 ((.30)(4,000) = 1,200; 4,000-1,200= 2,800) May 6. Cost of merchandise sold (Dr) 1,125 Merchandise inventory (Cr) 1,125 May 16. received cash on account from sale of May 6 to C.F Howell Co., less discount. (SALES DISCOUNT) Cash (Dr) 2,744 (2,800- 56 = 2,744) Sales Discount (Dr) 56 ((.02)(2,800) = 56) Accounts receivable (Cr) 2,800

Periodic inventory system (Merchandising transactions)

The inventory does not show the amount of merchandise available for sale and the amount sold. Instead, a listing of inventory on hand, called a physical inventory is prepared at the end of the accounting period.

FOB destination

The ownership of merchandise may pass to the buyer when the buyer receives the merchandise. -The SELLER pays the freight cost from the shipping point to the buyer's final destination.

Credit period

an amount of time the buyer is given to pay

Ration of net sales to assets= Net sales/average total assets

measures how effectively a business is using its assets to generate sales (high ratio- effective use of assets)

Merchandising business

the revenue activities of a merchandising business involve the BUYING and SELLING of MERCHANDISE. -First, purchase merchandise to sell to customers -when merchandise is sold, the revenue is reported as SALES, and its cost is considered an expense -the expense is called the COST OF MERCHANDISE SOLD -Sales - cost of merchandise sold = gross profit *MERCHANDISE ON HAND (not sold) at the end of an acct period is called MERCHANDISE INVENTORY -merchandise inventory is reported as a current asset on the balance sheet

Service business

the revenue activities of a service business involve PROVIDING SERVICES TO CUSTOMERS. -income statement: the revenues from services are reported as FEES EARNED -Fees earned - the operating expenses incurred in providing services= net income