CH. 5 - Accounting for Merchandising Businesses

Service Business Net Income

Fees earned - Operating Expenses = NET INCOME

Purchases Returns and Allowances

From the buyer's perspective, returned merchandise or an adjustment for defective merchandise.

Sales Discount

From the seller's perspective, discounts that a seller may offer the buyer for early payment.

Sales Returns and Allowances

From the seller's perspective, returned merchandise or an adjustment for defective or damaged merchandise.

Income From Operations

Gross profit less operating expenses AKA Net Income

2/10, n/30

How "2% discount if paid within 10 days, net amount due within 30 days" is written.

n/eom

How "payment due at the end of the month" is written out.

Debiting Delivery Expense or Freight Out. Recorded as a selling expense

How are FOB Destination cost recorded?

Debiting Merchandise Inventory

How are FOB Shipping Point cost recorded?

Debiting Accounts Receivable

How are PREPAID FOB Destination costs recorded?

n/30

How net 30 is written out.

Examples of Other Expense

Interest expense and losses from disposing of fixed assets.

Examples of Other Income

Interest, rent, and gains resulting from the sale of fixed assets

Special Journals

Journals designed to be used for recording similar types of transactions.

Merchandise Inventory

Merchandise on hand (not sold) at the end of an accounting period.

Accounts payable subsidiary ledger

OR creditors ledger, lists individual creditor accounts in alphabetical order. The controlling account in the general ledger is Accounts Payable.

Accounts receivable subsidiary ledger

OR customers ledger, lists the individual customer accounts in alphabetical order. The controlling account in the general ledger is Accounts Receivable.

Inventory subsidiary ledger

OR inventory ledger, lists individual inventory by item (bar code) number. The controlling account in the general ledger is Inventory. An inventory subsidiary ledger is used in a perpetual inventory system.

Purchases Discount - Periodic Inventory System

Purchases discounts are normally recorded in a separate purchases discounts account. The balance of the purchases discounts account is reported as a deduction from Purchases for the period. Thus, Purchases Discounts is a contra (or offsetting) account to Purchases.

Purchases - Periodic Inventory System

Purchases of inventory are recorded in a purchases account rather than in the merchandise inventory account. Purchases is debited for the invoice amount of a purchase.

Purchases Returns and Allowances - Periodic Inventory System

Purchases returns and allowances are recorded in a similar manner as purchases discounts. A separate purchases returns and allowances account is used to record returns and allowances. Purchases returns and allowances are reported as a deduction from Purchases for the period. Thus, Purchases Returns and Allowances is a contra (or offsetting) account to Purchases.

Net Sales/Average Total Assets

Ratio of Net Sales to Assets Equation

Ratio of Net Sales to Assets

Ratio that measures how effectively a company uses its assets to generate sales, computed as net sales divided by average total assets.

1.) Sales Discount 2.) Sales Return 3.) Sales Allowance

Reasons for reducing sales revenue

Net Sales

Revenue received for merchandise sold to customers less any sales returns and allowances and sales discounts.

Increase: Debit Decrease: Credit Balance: Debit

Rules of Contra Account to Sales

Increase: Debit Decrease: Credit Balance: Debit

Rules of Contra Account to Sales Returns and Allowances

Increase: Debit Decrease: Credit Balance: Debit

Rules of Merchandise Inventory

Increase: Credit Decrease: Debit Balance: Credit

Rules of Merchandise Sold

Merchandising Business Net Income

Sales - Cost of Merchandise sold = Gross Profit Gross Profit - Operating Expense = NET INCOME

Gross Profit

Sales minus the cost of merchandise sold.

Credit Terms

Terms for payment on account by the buyer to the seller.

Controlling Account

The account in the general ledger that summarizes the balances of the accounts in a subsidiary ledger.

Credit Period

The amount of time the buyer is allowed in which to pay the seller.

Invoice

The bill that the seller sends to the buyer.

Cost of Merchandise Sold

The cost that is reported as an expense when merchandise is sold; determined by subtracting the ending merchandise inventory from the cost of merchandise available for sale.

Perpetual Inventory System

The inventory system in which each purchase and sale of merchandise is recorded in an inventory account.

Periodic Inventory System

The inventory system in which the inventory records do not show the amount available for sale or sold during the period.

General Ledger

The primary ledger, when used in conjunction with subsidiary ledgers, that contains all of the balance sheet and income statement accounts.

Operating Cycle

The purchase of merchandise for sale (purchasing), the sale of the products to customers (sales), and the receipt of cash from customers (collection).

Purchasing

The purchase of merchandise for sale.

Collection

The receipt of cash from customers

Sales

The total amount charged customers for merchandise sold, including cash sales and sales on account.

Perpetual and Periodic

There are two systems for accounting for merchandise transactions:

Purchases, purchase discounts, and purchase returns and allowances

Under the PERIODIC INVENTORY SYSTEM, purchases do not go under MERCHANDISE INVENTORY ACCOUNT. What accounts are used instead?

They are not recorded. At the end of the period, a physical account on hand is taken.

Under the PERIODIC INVENTORY SYSTEM, the sales of merchandise are not recorded in the inventory account. Where are they recorded?

FOB (free on board) destination

WE PAY FREIGHT: Freight terms in which the seller pays the freight costs from the shipping point to the buyer's final destination. (BUYERS OWNS MERCHANDISE WHEN PACKAGE IS RECEIVED)

Asset

What is "Merchandise Inventory" reported in a balance sheet?

Freight In

When merchandise is purchased FOB shipping point, the buyer pays for the freight. Under the periodic inventory system, freight paid when purchasing merchandise FOB shipping point is debited to Freight In, Transportation In, or a similar account.

Contra Account to Sales

An asset account where the cost of sales discount is recorded

FOB (free on board) shipping point

BUYER PAYS FREIGHT: Freight terms in which the buyer pays the freight costs from the shipping point to the final destination. (BUYER OWNS MERCHANDISE ONCE FREIGHT COMPANY RECEIVES PACKAGE)

Report Form

Balance sheet presented in a downward sequence in three sections. Top is Assets, middle is Liabilities, and bottom is Stockholders' Equity

Account Form

Balance sheet where Assets are to the left and Liabilities and Stockholders' Equity is to the right

Physical Inventory

A detailed listing of merchandise on hand.

Single-step Income Statement

A form of income statement in which the total of all expenses is deducted in one step from the total of all revenues

Multi-step Income Statement

A form of income statement that contains several sections, subsections, and subtotals.

Debit Memorandum

A form used by a buyer to inform the seller of the amount the buyer proposes to debit to the account payable due the seller

Credit Memorandum

A form used by a seller to inform the buyer of the amount the seller authorizes to credit to the buyer's account receivable

Subsidiary Ledger

A ledger containing individual accounts with a common characteristic.

How the "Periodic Inventory System" works

A listing of inventory on hand is prepared at the end of the accounting period. This physical inventory is used to determine the cost of merchandise on hand at the end of the period and the cost of merchandise sold during the period.

Administrative Expenses

AKA General expenses - Expenses incurred in the administration or general operations of the business.

Inventory Shrinkage

AKA Inventory Shortage - The amount by which the merchandise for sale, as indicated by the balance of the merchandise inventory account, is larger than the total amount of merchandise counted during the physical inventory.

Trade Discounts

Discounts from the list prices in published catalogs or special discounts offered to certain classes of buyers.

Purchases Discount

Discounts taken by the buyer for early payment of an invoice.

Selling Expenses

Expenses that are incurred directly in the selling of merchandise.

A subsidiary ledger is a secondary ledger that supports a controlling account in the general ledger.

Explain the General Ledger and the accounts within it common to Merchandising businesses