Accounting for Merchandising

Business

ACG 2021: Chapter 5

 Merchandising Business

Revenue activities of Service Business Merchandising

Business
a merchandising Fees earned Sales
business involve the
Less Operating Less Cost of
buying and selling of expenses merchandise
merchandise sold
=Net income =Gross Profit
Comparison to
service business 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 Statement
INCOME STATEMENT
Gem City Music
Income Statement
For the Year Ended December 31, 20
Revenue from sales:
Sales $189,300
Less:: Sales returns and allowances $1,700
Sales discounts 500 2,200
Net sales $187,100
Cost of merchandise sold XXXX 100,000
Gross profit $ 87,100
Operating expenses:
Selling expenses:
Sales salaries expense $17,700
Administrative expenses:
Rent expense 7,800
Office salaries expense 22,550
Depreciation expenseoffice equipment 2,800 33,150
Total operating expenses 50,850
Income from operations $36,250
Other expense:
Interest expense 2,000
Net income $ 34,250
 Computation of Costs
Computation of Cost of Merchandise Sold
Purchases
Less merchandise inventory, December 31
=Cost of merchandise sold
Computation of Cost of Merchandise Purchased
Purchases
Less: purchases returns and allowances
Less: purchases discount
=Net purchases
Add: 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 sold
Sales returns and allowances
are granted by the seller to
customers for damaged or
defective merchandise
Sales discount are granted
by the seller to customers for
early
Net 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 3,000
Credit card expense 180
Cash 180
 Credit sales

Two types:
American express
On account
Results in debit to
ACCOUNTS
RECEIVABLE
 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 SALES
Upon 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 $5,000
Discount 2%
Discount $ $100

Sales $5,000
Less discount 100
Net amount 4,900
 Sales discount
Date Account PR Debit Credit

Cash 4900

Sales discount 100

Accounts receivable 5000

 Sales Returns and Allowances

Merchandise sold may be returned to the seller

Merchandise sold may be reduced in price due
to defects
This account is CONTRA sales
Increases 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: $4,000
Discount (2% x $4,000) 80
Net 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 80
inventory
 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 seller
Purchase allowances price adjustment
Debit 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 TERMS
FOB FOB
Shipping Point Destination
Ownership (title)
passes to buyer
when merchandise Delivered to Received
is freight carrier by buyer

Transportation
costs are paid
by Buyer Seller

Risk of loss during

transportation
belongs to Buyer Seller
 Sales Taxes

Liability to the business

Create 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 Transactions
Seller Buyer
Sold merchandise on account: Purchased merchandise on account:
Accounts receivable DR Merchandise Inventory DR
Sales CR Accounts Payable CR
Cost of merchandise sold DR
Merchandise inventory CR

Transportation costs Shipping point Transportation costs Shipping point:

Merchandise Inventory DR
Cash CR

Transportation costs Destination: Transportation costs - Destination

Delivery Expense DR
Cash CR

Merchandise returned: Merchandise returned:

Sales Returns & Allowances DR Merchandise inventory DR
Accounts receivable CR Accounts payable CR
Merchandise inventory DR
Cost of merchandise sold CR

Payment : Payment:
Cash DR Accounts payable DR
Accounts receivable CR Cash CR

Payment with discount: Payment with discount:

Cash DR Merchandise inventory DR
Sales discount DR Cash CR
Accounts receivable 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
 Closing Entries

Accounts that must be closed

Sales
Rent revenue
Sales returns and allowances
Sales discounts
Cost of merchandise sold
All expenses and revenues
Dividends