Chapter 6 Power Notes
Accounting for Merchandising Businesses
Learning Objectives
1. Nature of Merchandising Business
2a. Accounting for Purchases
2b. Accounting for Sales C6
2c. Transportation Costs
2d. Merchandise Transactions
3. Merchandising Chart of Accounts
4. Merchandising Income Statement
5. Merchandising Accounting Cycle
6. Financial Analysis and Interpretation
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Chapter 6 Power Notes
Accounting for Merchandising Businesses
Slide # Power Note Topics
3 • Nature of Merchandising Businesses
6 • Inventory Costs and Relationships
8 • Perpetual Inventory Systems
13 • Merchandising Transactions
25 • Merchandising Chart of Accounts
27 • Merchandising Financial Statements
34 • Ratio of Net Sales to Assets
Note: To select a topic, type the slide # and press Enter.
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Merchandising and Inventory
Merchandising involves selling inventory
Inventory is usually an important asset
Inventory must be accounted for
periodically or perpetually
Traditional periodic method is often being
replaced by perpetual inventory accounting
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Income Statement Comparison
Service Business
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000 20% of revenues
Merchandising Business
Sales revenue $600,000
Cost of mdse. sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000 5% of revenues
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Income Statement Comparison
Service Business
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000 20% of revenues
Merchandising Business
Sales revenue $600,000
Cost of mdse. sold 450,000 75% of revenues
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000 5% of revenues
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Inventory Costs and Relationships
LIABILITIES
Merchandise ASSETS OWNER’S
Inventory EQUITY
Net Income
Cost of COSTS & REVENUES
Mdse. Sold EXPENSES
If merchandise inventory is . . . . . . . overstated
Cost of merchandise sold is . . . . . . understated
Gross profit and net income are . . . overstated
Ending owner’s equity is . . . . . . . . . overstated
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Inventory Costs and Relationships
LIABILITIES
Merchandise ASSETS OWNER’S
Inventory EQUITY
Net Income
Cost of COSTS & REVENUES
Mdse. Sold EXPENSES
If merchandise inventory is . . . . . . . understated
Cost of merchandise sold is . . . . . . overstated
Gross profit and net income are . . . understated
Ending owner’s equity is . . . . . . . . . understated
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Advantages of Using Perpetual Inventory
Continuous determination of inventory value
Continuous determination of gross profit
Affordable with computers, scanners, and bar
codes on most products
Perpetual inventory accounting provides
management controls
Managers know which items are selling fastest
and the profit margin on those items
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Perpetual Inventory System
General Journal General Ledger
Description Debit Credit
Mdse. Inventory
Mdse. Inventory 5,000
A Accts. Payable 5,000
A 5,000
Cost of Mdse. Sold
In a perpetual system,
A Purchase on account Mdse. Inventory is an
active asset account.
B Return of merchandise All changes are recorded
as they occur.
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Perpetual Inventory System
General Journal General Ledger
Description Debit Credit
Mdse. Inventory
Mdse. Inventory 5,000
A Accts. Payable 5,000
A 5,000 1,000 B
Bal 4,000
B Accts. Payable 1,000
Mdse. Inventory 1,000
Cost of Mdse. Sold
In a perpetual system,
A Purchase on account Mdse. Inventory is an
active asset account.
B Return of merchandise All changes are recorded
C Sale of merchandise as they occur.
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Perpetual Inventory System
General Journal General Ledger
Description Debit Credit
Mdse. Inventory
Mdse. Inventory 5,000
A Accts. Payable 5,000
A 5,000 1,000 B
2,500 C
B Accts. Payable 1,000
Bal 1,500
Mdse. Inventory 1,000
Accts. Receivable 3,250 Cost of Mdse. Sold
C Sales 3,250
C 2,500
Cost of Mdse. Sold 2,500
Mdse. Inventory 2,500
In a perpetual system,
A Purchase on account Mdse. Inventory is an
active asset account.
B Return of merchandise All changes are recorded
C Sale of merchandise as they occur.
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Perpetual Inventory System
General Journal General Ledger
Description Debit Credit
Mdse. Inventory
Mdse. Inventory 5,000
A Accts. Payable 5,000
A 5,000 1,000 B
2,500 C
B Accts. Payable 1,000
Bal 1,500
Mdse. Inventory 1,000
Accts. Receivable 3,250 Cost of Mdse. Sold
C Sales 3,250
C 2,500
Cost of Mdse. Sold 2,500
Mdse. Inventory 2,500
In a perpetual system,
A Purchase on account Mdse. Inventory is an
active asset account.
B Return of merchandise All changes are recorded
C Sale of merchandise as they occur.
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Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice
paid within 10 Full amount is due
days of No within 30 days of
invoice invoice date.
date?
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Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice
paid within 10 Full amount is due
days of No within 30 days of
invoice invoice date.
date?
Yes
2% of invoice
amount is
allowed as a
cash discount.
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Credit Terms, Cash Discounts
Credit Terms: 2/10, n/30
Is invoice
paid within 10 Full amount is due
days of No within 30 days of
invoice invoice date.
date?
Yes Example: Merchandise was
purchased for $1,500 with credit
2% of invoice terms of 2/10, n/30. Payment
amount is within 10 days is calculated as:
allowed as a Invoice $1,500
cash discount. Less 2% discount 30
Net cost paid $1,470
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Selling and Buying Merchandise Inventory
Seller Buyer
Description Debit Credit Description Debit Credit
Accts. Receivable 1,500 Mdse. Inventory 1,470
Sales 1,500 Accts. Payable 1,470
Cost of Mdse. Sold 900 Recorded at net cost
Mdse. Inventory 900 $1,500 - $30 (discount)
Jan 12. Merchandise was sold with credit terms of 2/10, n/30.
Jan 22. Payment was made within the discount period.
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Selling and Buying Merchandise Inventory
Seller Buyer
Description Debit Credit Description Debit Credit
Accts. Receivable 1,500 Mdse. Inventory 1,470
Sales 1,500 Accts. Payable 1,470
Cost of Mdse. Sold 900 Recorded at net cost
Mdse. Inventory 900 $1,500 - $30 (discount)
Jan 12. Merchandise was sold with credit terms of 2/10, n/30.
Cash 1,470 Accts. Payable 1,470
Sales Discounts 30 Cash 1,470
Accts. Receivable 1,500
Jan 22. Payment was made within the discount period.
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Selling and Buying Merchandise Inventory
Seller Buyer
Description Debit Credit Description Debit Credit
Accts. Receivable 1,500 Mdse. Inventory 1,500
Sales 1,500 Accts. Payable 1,500
Cost of Mdse. Sold 900 Recorded at full cost
Mdse. Inventory 900
Jan 12. Merchandise was sold with credit terms of 2/10, n/30.
Cash 1,470 Accts. Payable 1,500
Sales Discounts 30 Mdse. Inventory 30
Accts. Receivable 1,500 Cash 1,470
Jan 22. Payment was made within the discount period.
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Accounting for Merchandise Transactions
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit Description Debit Credit
Accts. Receivable 5,000 Mdse. Inventory 5,000
Sales 5,000 Accts. Payable 5,000
Cost of Mdse. Sold 3,500
Mdse. Inventory 3,500
July 5. Scully Company sold merchandise on account to
Burton Co., $5,000, terms FOB destination, n/30. The cost
of the merchandise sold was $3,500.
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Accounting for Merchandise Transactions
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit Description Debit Credit
Accts. Receivable 5,000 Mdse. Inventory 5,000
Sales 5,000 Accts. Payable 5,000
Cost of Mdse. Sold 3,500
Mdse. Inventory 3,500
Transportation Out 250 No entry.
Cash 250
July 7. Scully Company paid transportation costs of $250
for delivery of merchandise sold to Burton Co. on July 5.
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Accounting for Merchandise Transactions
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit Description Debit Credit
Accts. Receivable 5,000 Mdse. Inventory 5,000
Sales 5,000 Accts. Payable 5,000
Cost of Mdse. Sold 3,500
Mdse. Inventory 3,500
Transportation Out 250 No entry.
Cash 250
Sales Ret. & Allow. 1,000 Accts. Payable 1,000
Accts Receivable 1,000 Mdse. Inventory 1,000
Mdse. Inventory 700
Cost of Mdse. Sold 700
July 13. Scully Company issued Burton Co. a credit memo for
merchandise returned, $1,000. The merchandise cost was $700.
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Accounting for Merchandise Transactions
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit Description Debit Credit
Cash 4,000 Accts. Payable 4,000
Accts. Receivable 4,000 Cash 4,000
July 15. Scully Company received payment from
Burton Co. for purchase of July 5.
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Accounting for Merchandise Transactions
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit Description Debit Credit
Cash 4,000 Accts. Payable 4,000
Accts. Receivable 4,000 Cash 4,000
Accts. Receivable 12,500 Mdse. Inventory 12,500
Sales 12,000 Accts. Payable 12,500
Cash 500
Cost of Mdse. Sold 7,200
Mdse. Inventory 7,200
July 18. Scully Company sold merchandise on
account to Burton Co., $12,000, terms FOB
shipping point, 2/10, n/eom. Scully Company
prepaid transportation costs of $500. Cost of
merchandise sold was $7,200.
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Accounting for Merchandise Transactions
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit Description Debit Credit
Cash 4,000 Accts. Payable 4,000
Accts. Receivable 4,000 Cash 4,000
Accts. Receivable 12,500 Mdse. Inventory 12,500
Sales 12,000 Accts. Payable 12,500
Cash 500
Cost of Mdse. Sold 7,200
Mdse. Inventory 7,200
Cash 12,260 Accts. Payable 12,500
Sales Discounts 240 Mdse. Inventory 240
Accts. Receivable 12,500 Cash 12,260
July 28. Scully Company received payment from
Burton Co. less discount (2% x $12,000).
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NetSolutions
Merchandising Chart of Accounts
Balance Sheet Accounts
100 Assets 200 Liabilities
110 Cash 210 Accounts Payable
111 Notes Receivable 211 Salaries Payable
112 Accounts Receivable 212 Unearned Rent
113 Interest Receivable 215 Notes Payable
115 Merchandise Inventory
116 Office Supplies 300 Owner’s Equity
117 Prepaid Insurance 310 Chris Clark, Capital
120 Land 311 Chris Clark, Drawing
123 Store Equipment 312 Income Summary
124 Accumulated Depreciation—
Store Equipment
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
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NetSolutions
Merchandising Chart of Accounts
Income Statement Accounts
400 Revenues 500 Costs and Expenses
410 Sales 510 Cost of Merchandise Sold
411 Sales Returns and 520 Sales Salaries Expense
Allowances 521 Advertising Expense
412 Sales Discounts 522 Depreciation Expense—
Store Equipment
600 Other Income 523 Transportation Out
610 Rent Income 529 Misc. Selling Expense
611 Interest Income 530 Office Salaries Expense
531 Rent Expense
700 Other Expense 532 Depreciation Expense—
710 Interest Expense Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Misc. Admin. Expense
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NetSolutions
Income Statement (Multiple-Step)
For the Year Ended December 31, 2002
Revenue from sales:
Sales $720,185
Less:Sales returns and allow. $ 6,140
Sales discounts 5,790 11,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
Continued
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Operating expenses:
Selling expenses:
Sales salaries expense $60,030
Advertising expense 10,860
Depr. expense–store equip. 3,100
Miscellaneous selling expense 630
Total selling expenses $ 74,620
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr. expense–office equip. 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. admin. expenses 760
Total admin. expenses 34,890
Total operating expenses 109,510
Income from operations $ 73,440
Continued C6 - 28
Other income:
Interest revenue $ 3,800
Rent revenue 600
Total other income $ 4,400
Other expense:
Interest expense 2,440 1,960
Net income $75,400
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NetSolutions
Income Statement (Single-Step)
For the Year Ended December 31, 2002
Revenues:
Net sales $708,255
Interest revenue 3,800
Rent revenue 600
Total revenues $712,655
Expenses:
Cost of merchandise sold $525,305
Selling expenses 74,620
Administrative expenses 34,890
Interest expense 2,440
Total expenses 637,255
Net income $ 75,400
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NetSolutions
Balance Sheet
December 31, 2002
Assets
Current assets:
Cash $ 52,950
Notes receivable 40,000
Accounts receivable 60,880
Interest receivable 200
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650
Total current assets $219,310
Continued
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NetSolutions
Balance Sheet
December 31, 2002
Property, plant, and
equipment:
Land $ 10,000
Store equipment $ 27,100
Less accum. depreciation 5,700 21,400
Office equipment $ 15,570
Less accum. depreciation 4,720 10,850
Total property, plant, and
equipment 42,250
Total assets $261,560
Continued
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NetSolutions
Balance Sheet
December 31, 2002
Liabilities
Current liabilities:
Accounts payable $ 22,420
Note payable (current portion) 5,000
Salaries payable 1,140
Unearned rent 1,800
Total current liabilities $30,360
Long-term liabilities:
Note payable (due 2004) 20,000
Total liabilities $ 50,360
Owner’s Equity
Chris Clark, capital 211,200
Total liabilities and owner’s equity $261,560
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Profitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the
effectiveness and efficiency of operations as well
as resources available.
Profitability analysis focuses primarily on the
relationship between operating results reported in
the income statement and resources reported in
the balance sheet.
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Profitability Measures — Effective Use of Assets
Ratio of Net Sales to Assets
2003 2002
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
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Profitability Measures — Effective use of Assets
Ratio of Net Sales to Assets
2003 2002
Net sales on account $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
Ratio of net sales to assets 1.4 to 1 1.2 to 1
Use: To assess the effectiveness
in the use of assets
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Chapter 6 Power Notes
Accounting for Merchandising Businesses
This is the last slide in Chapter 6.
Note: To see the topic slide, type 2 and press Enter.
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