Acc4201#5

Chapter 5 Accounting for Merchandising Operations Prepared by Mohd.Mohsin Assistant Professor of Finance Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

1 identify the differences between a service enterprise and a merchandising company 2 explain the entries for purchases under a perpetual inventory system 3 explain the entries for sales revenues under a perpetual inventory system 4 explain the steps in the accounting cycle for a merchandising company After studying this chapter, you should be able to: CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

5 distinguish between a multiple-step and a single-step income statement 6 explain the computation and importance of gross profit 7 determine the cost of goods sold under a periodic system CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS After studying this chapter, you should be able to: Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

MERCHANDISING COMPANY A merchandising company buys and sells goods to earn a profit. 1) Wholesalers sell to retailers 2) Retailers sell to consumers Primary source of revenue is Sales Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Expenses for a merchandiser are divided into two categories: 1 Cost of goods sold The total cost of merchandise sold during the period 2 Operating expenses Expenses incurred in the process of earning sales revenue (Examples: sales salaries and insurance expense) Gross profit is equal to Sales Revenue less Cost of Goods Sold MEASURING NET INCOME Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

INCOME MEASUREMENT PROCESS FOR A MERCHANDISING COMPANY Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

OPERATING CYCLES FOR A SERVICE COMPANY AND A MERCHANDISING COMPANY Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

INVENTORY SYSTEMS Merchandising entities may use either: 1) Perpetual Inventory Detailed records of the cost of each item are maintained, and the cost of each item sold is determined from records when the sale occurs . 2) Periodic Inventory Cost of goods sold is determined only at the end of an accounting period . Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

PERPETUAL VS. PERIODIC Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

COST OF GOODS SOLD To determine the cost of goods sold under a periodic inventory system : 1) Determine the cost of goods on hand at the beginning of the accounting period, 2) Add to it the cost of goods purchased, and 3) Subtract the cost of goods on hand at the end of the accounting period. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Merchandise is purchased for resale to customers, the account Merchandise Inventory is debited for the cost of goods. Like sales, purchases may be made for cash or on account (credit). The purchase is normally recorded by the purchaser when the goods are received from the seller. Each credit purchase should be supported by a purchase invoice . PURCHASES OF MERCHANDISE STUDY OBJECTIVE 2 Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

PURCHASES OF MERCHANDISE SALES INVOICE Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

PURCHASES OF MERCHANDISE For purchases on account, Merchandise Inventory is debited and Accounts Payable is credited. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC 3,800 3,800

A purchaser may be dissatisfied with merchandise received because the goods: 1) are damaged or defective, 2) are of inferior quality, or 3) are not in accord with the purchaser’s specifications. The purchaser initiates the request for a reduction of the balance due through the issuance of a debit memorandum (purchaser’s debit decreases A/P!). The debit memorandum is a document issued by a buyer to inform a seller that the seller’s account has been debited because of unsatisfactory merchandise. PURCHASE RETURNS AND ALLOWANCES Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

PURCHASE RETURNS AND ALLOWANCES For purchases returns and allowances, Accounts Payable is debited and Merchandise Inventory is credited. 300 300 Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

A sales agreement should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of business. FOB Shipping Point 1) Goods placed free on board the carrier by seller 2) Buyer pays freight costs FOB Destination 1) Goods placed free on board at buyer’s business 2) Seller pays freight costs FREE ON BOARD Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Merchandise Inventory is debited if buyer pays freight. Freight-out (or Delivery Expense ) is debited if seller pays freight. ACCOUNTING FOR FREIGHT COSTS Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

ACCOUNTING FOR FREIGHT COSTS When the purchaser directly incurs the freight costs, the account Merchandise Inventory is debited and Cash is credited. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC 150 150

ACCOUNTING FOR FREIGHT COSTS Freight costs incurred by the seller on outgoing merchandise are debited to Freight-out (or Delivery Expense ) and Cash is credited. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC 150 150

PURCHASE DISCOUNTS Credit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due. The buyer calls this discount a purchase discount . Like a sales discount, a purchase discount is based on the invoice cost less returns and allowances, if any. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

PURCHASE DISCOUNTS If payment is made within the discount period, Accounts Payable is debited, Cash is credited, and Merchandise inventory is credited for the discount taken. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC 3,500 3,430 70

PURCHASE DISCOUNTS If payment is made after the discount period, Accounts Payable is debited and Cash is credited for the full amount. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC 3,500 3,500

A buyer should usually take all available discounts. If Beyer Video takes the discount, it pays $70 less in cash. If it forgoes the discount and invests the $3,500 for 20 days at 10% interest, it will earn only $19.44 in interest. The savings obtained by taking the discount is calculated as follows: SAVINGS OBTAINED BY TAKING PURCHASE DISCOUNT Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Revenues – ( Revenue recognition principle ) Earned when the goods are transferred from seller to buyer All sales should be supported by a document such as a cash register tape or sales invoice . SALES TRANSACTIONS STUDY OBJECTIVE 3 Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

RECORDING CASH SALES For cash sales, Cash is debited and Sales is credited. For the cost of goods sold for cash, Cost of Goods Sold is debited and Merchandise Inventory is credited. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC 2,200 2,200 1,400 1,400

RECORDING CREDIT SALES For credit sales, Accounts Receivable is debited and Sales is credited. For the cost of goods sold on account, Cost of Goods Sold is debited and Merchandise Inventory is credited. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC 3,800 3,800 2,400 2,400

Sales Returns Customers dissatisfied with merchandise and are allowed to return the goods to the seller for credit or a refund. Sales Allowances Result when customers are dissatisfied and the seller allows a deduction from the selling price. SALES RETURNS AND ALLOWANCES Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Credit memorandum the seller prepares a form to inform the customer that a credit has been made to the customer’s account receivable Sales Returns and Allowances Contra revenue account to the Sales account The normal balance of Sales Returns and Allowances is a debit SALES RETURNS AND ALLOWANCES Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

RECORDING SALES RETURNS AND ALLOWANCES The seller’s entry to record a credit memorandum involves a debit to the Sales Returns and Allowances account and a credit to Accounts Receivable. The entry to record the cost of the returned goods involves a debit to Merchandise Inventory and a credit to Cost Goods Sold . Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC 300 300 140 140

Sales discount Offer of a cash discount to a customer for the prompt payment of a balance due Is a contra revenue account with a normal debit balance Example: Credit sale has the terms 3/10, n/30, a 3% discount is allowed if payment is made within 10 days. After 10 days there is no discount, and the balance is due in 30 days. SALES DISCOUNTS Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

CREDIT TERMS Credit terms specify the amount and time period for the cash discount Indicates the length of time in which the purchaser is expected to pay the full invoice price 2/10, n/30 A 2% discount may be taken if payment is made within 10 days of the invoice date. 1/10 EOM A 1% discount is available if payment is made by the 10 th of the next month. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

RECORDING SALES DISCOUNTS When cash discounts are taken by customers, the seller debits Sales Discounts . Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC 3,430 70 3,500

CLOSING ENTRIES STUDY OBJECTIVE 4 Adjusting entries are journalized from the adjustment columns of the work sheet. All accounts that affect the determination of net income are closed to Income Summary . Data for the preparation of closing entries may be obtained from the income statement columns of the work sheet. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC 480,000 480,000

CLOSING ENTRIES Cost of Goods Sold is a new account that must be closed to Income Summary . Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

CLOSING ENTRIES After the closing entries are posted, all temporary accounts have zero balances It addition, R. A. Lamb, Capital has a credit balance of $98,000 ($83,000 + $30,000 - $15,000). Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Under a perpetual inventory system, acquisition of merchandise for resale is debited to the purchases account supplies account merchandise inventory account cost of goods sold account

Includes sales revenue, cost of goods sold, and gross profit sections Additional nonoperating sections may be added for: 1) revenues and expenses resulting from secondary or auxiliary operations 2) gains and losses unrelated to operations MULTIPLE-STEP INCOME STATEMENT STUDY OBJECTIVE 5 Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Operating expenses may be subdivided into: a) Selling expenses b) Administrative expenses Nonoperating sections are reported after income from operations and are classified as: a) Other revenues and gains b) Other expenses and losses MULTIPLE-STEP INCOME STATEMENT Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

All data are classified under two categories: 1 Revenues 2 Expenses Only one step is required in determining net income or net loss. SINGLE-STEP INCOME STATEMENT Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Gross profit is determined as follows: Net sales $ 460,000 Cost of goods sold 316,000 Gross profit $ 144,000 COMPUTATION OF GROSS PROFIT STUDY OBJECTIVE 6 Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Net income is determined as follows: Gross profit $ 144,000 Operating expenses 114,000 Net income $ 30,000 OPERATING EXPENSES IN COMPUTING NET INCOME Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Gross profit for a merchandiser is net sales minus operating expenses cost of goods sold sales discounts cost of goods available for sale

PERIODIC INVENTORY SYSTEMS Appendix 5A Revenues from the sale of merchandise are recorded when sales are made in the same way as in a perpetual system No attempt is made on the date of sale to record the cost of merchandise sold Physical inventories are taken at end of period to determine: The cost of merchandise on hand The cost of the goods sold during the period Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Determining Cost of Goods Sold Periodic STUDY OBJECTIVE 7 Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Purchases Merchandise purchased for resale to customers May be made for cash or on account (credit) Normally recorded by the purchaser when the goods are received from the seller Credit purchase should be supported by a purchase invoice RECORDING MERCHANDISE TRANSACTIONS UNDER A PERIODIC INVENTORY SYSTEM Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

RECORDING PURCHASES OF MERCHANDISE To illustrate the recording of merchandise transactions under a periodic system, we will use the purchase/sale transactions between Seller and Buyer. For purchases on account, Purchases is debited and Accounts Payable is credited for merchandise ordered from Seller. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC May 4 Purchases 3,800 Accounts Payable 3,800

A sales return and allowance on the seller’s books is recorded as a purchase return and allowance on the books of the purchaser. Purchase Returns and Allowances contra account to Purchases Normal credit balance Debit memorandum Purchaser initiates the request for a reduction of the balance due through the issuance of a debit memorandum A document issued by a buyer to inform a seller that the seller’s account has been debited because of unsatisfactory merchandise PURCHASE RETURNS AND ALLOWANCES Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

RECORDING PURCHASE RETURNS AND ALLOWANCES For purchases returns and allowances, Accounts Payable is debited and Purchase Returns and Allowances is credited. Because $300 of merchandise received from Seller is inoperable, Buyer returns the goods and issues a debit memo. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC May 8 Accounts Payable 300 Purchase Returns and Allowances 300

Freight-in is debited if buyer pays freight Freight-out (or Delivery Expense ) is debited if seller pays freight ACCOUNTING FOR FREIGHT COSTS Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

ACCOUNTING FOR FREIGHT COSTS When the purchaser directly incurs the freight costs, the account Freight-in (or Transportation-in ) is debited and Cash is credited. In this example, Buyer pays Acme Freight Company $150 for freight charges on its purchase from Seller. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC May 9 Freight-in 150 Cash 150

PURCHASE DISCOUNTS If payment is made within the discount period, Accounts Payable is debited, Purchase Discounts is credited for the discount taken, and Cash is credited. On May 14 Buyer pays the balance due on account to Seller taking the 2% cash discount allowed by Seller for payment within 10 days. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC May 14 Accounts Payable 3,500 Purchase Discounts 70 Cash 3,430

RECORDING SALES OF MERCHANDISE For credit sales, Accounts Receivable is debited and Sales is credited. In this illustration, the sale of $3,800 of merchandise to Buyer on May 4 is recorded by the Seller. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC May 4 Accounts Receivable 3,800 Sales 3,800

RECORDING SALES RETURNS AND ALLOWANCES The seller’s entry to record a credit memorandum involves a debit to the Sales Returns and Allowances account and a credit to Accounts Receivable . Based on the debit memo received from Buyer on May 8 for returned goods, Seller records the $300 sales returns above. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC May 8 Sales Returns and Allowances 300 Accounts Receivable 300

RECORDING SALES DISCOUNTS When cash discounts are taken by customers, the seller debits Sales Discounts . On May 15, Seller receives payment of $3,430 on account from Buyer. Seller honors the 2% discount and records the payment of Buyer’s accounts receivable. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC May 15 Cash 3,430 Sales Discounts 70 Accounts Receivable 3,500

WORK SHEET FOR A MERCHANDISING COMPANY Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

USING A WORK SHEET Appendix 5B Trial Balance Columns 1 Data from the trial balance are obtained from the ledger balances of Sellers Electronix at December 31 2 The amount shown for Merchandise Inventory , $40,500 , is the year-end inventory amount which results from the application of a perpetual inventory system Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

USING A WORK SHEET Adjustments Columns 1 A merchandising company usually has the same types of adjustments as a service company 2 Work sheet adjustments b , c , and d are for insurance, depreciation, and salaries Adjusted Trial Balance - The adjusted trial balance shows the balance of all accounts after adjustment at the end of the accounting period Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

USING A WORK SHEET Income Statement Columns 1 The accounts and balances that affect the income statement are transferred from the adjusted trial balance columns to the income statement columns for Sellers Electronix at December 31 2 All of the amounts in the income statement credit column should be totaled and compared to the total of the amounts in the income statement debit column Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

USING A WORK SHEET Balance Sheet Columns 1 The major difference between the balance sheets of a service company and a merchandising company is inventory 2 For Sellers Electronix, the ending Merchandise Inventory amount of $40,000 is shown in the balance sheet debit column 3 The information to prepare the owner’s equity statement is also found in these columns Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

COPYRIGHT Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Mohd.Mohsin,Assistant Professor of Finance,IIUC,DC

Acc4201#5

More Related Content

Similar to Acc4201#5 (20)

More from International Islamic University Chittagong (18)

Recently uploaded (20)

Acc4201#5

Editor's Notes