Chapter

ACCOUNTING FOR MERCHANDISING ACTIVITIES

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Operating Cycle of a Merchandising Company

of se se ha di rc an Pu ch 1. er m
ol re lec ce t i iv on ab o le f t s he

Cash

Accounts Receivable

3.

Inventory
2. Sale of merchandise on account

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Comparing Merchandising Activities with Manufacturing Activities

Purchase inventory in ready!to!sell condition.
Manufacture inventory and have a longer and more com le" o erating cycle

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Merchandising Com any

Manufacturing Com any

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Retailers and Wholesalers

#holesalers buy merchandise from several different manufacturers and then sell this merchandise to several retailers.
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Retailers sell merchandise directly to the ublic. The McGraw-Hill Companies, Inc., 2002

Income Statement of a Merchandising Company

Com uter $arn Condensed Income Statement %or the &ear 'nded (ecember 31) 2**2 Revenue from sales , +**)*** -ess. Cost of goods sold /0*)*** 1ross rofit , 32*)*** -ess. '" enses 23*)*** 4et income , +*)***

Cost of goods sold re resents the e" ense of goods that are sold to customers.

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1ross rofit is a useful means of measuring the rofitability of sales transactions. The McGraw-Hill Companies, Inc., 2002

General Ledger Accounts

Although general ledger accounts rovide useful information) they do not rovide much of the detailed information needed in the daily business o erations.
1eneral -edger Accounts Receivable (ebit Credit $alance 1*)*** 3)*** 1*)*** 3)***

(ate 2**1 5une 1 1/

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#ho #ho o6es o6es us us money7 money7

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Subsidiary Ledgers A Source of !eeded "etails

Controlling Account
(ate 2**1 5une 1 1/ 1eneral -edger Accounts Receivable (ebit Credit $alance 1*)*** 3)*** 1*)*** 3)***

(ate 2**1 5une 1 1/

Subsidiary -edger 5a9e S ar9s (ebit Credit 3)*** 1)*** Subsidiary -edger 8eather 5acobs (ebit Credit

$alance 3)*** 2)***

(ate 2**1 5une 1 3)*** 1/ McGraw-Hill/Irwin

$alance 3)*** /)***

2)***

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#wo Approaches $sed in Accounting for Merchandise #ransactions

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%erpetual Inventory System

:he inventory account is continuously u dated to reflect items on hand.

-et;s loo9 at some entries<

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%erpetual Inventory System

On September 5, Worley Co. purchased 100 laser lights for resale for $30 per unit from lectronic City on account .

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%erpetual Inventory System

On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to !"C #adios. 1* 1* ,3* ,3* = = ,3** ,3**

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%erpetual Inventory System

On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to !"C #adios.
Retail

Cost
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%erpetual Inventory System

On September 15, Worley Co. paid lectronic City $3,000 for the September 5 purchase.

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%erpetual Inventory System

On September $$, Worley Co. recei%ed $500 from !"C #adios as payment in full for their purchase on September 10.

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#he Inventory Subsidiary Ledger

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At the end of the eriod) management com ares the hysical inventory count 6ith the inventory ledger to determine inventory shrin9age.

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#a&ing a %hysical Inventory

In order to ensure the accuracy of their er etual records) most businesses ta9e a com lete hysical count of the merchandise on hand at least once a year.
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#a&ing a %hysical Inventory

Reasonable amounts of inventory shrin9age are vie6ed as a normal cost of doing business. '"am les include brea9age) s oilage and theft.

>n (ecember 31) #orley Co. counts its inventory. An inventory shortage of ,2)*** is discovered.

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%eriodic Inventory System

4o effort is made to 9ee u !to!date records of either inventory or cost of goods sold.

-et;s loo9 at some entries<

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%eriodic Inventory System

On September 5, Worley Co. purchased 100 laser lights for resale for $30 per unit from lectronic City on account .
4otice 4otice that that no no entry entry is is made made to to Inventory. Inventory.

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%eriodic Inventory System

On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to !"C #adios.
Retail

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%eriodic Inventory System

On September 15, Worley Co. paid lectronic City $3,000 for the September 5 purchase.

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%eriodic Inventory System

On September $$, Worley Co. recei%ed $500 from !"C #adios as payment in full for their purchase on September 10.

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Computing Cost of Goods Sold in a %eriodic Inventory System

:he :he accounting accounting records records of of Party Party Su Su ly ly sho6 sho6 the the follo6ing. follo6ing. Inventory) Inventory) 5an. 5an. 1) 1) 2**3 2**3 , , 10)*** 10)*** Purchases Purchases ?during ?during 2**3@ 2**3@ 13*)*** 13*)*** At At (ecember (ecember 31) 31) 2**3) 2**3) Party Party Su Su ly ly counted counted the the merchandise merchandise on on hand hand at at ,12)***. ,12)***. Calculate Party Su ly;s cost of goods sold for 2**3. The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin

Computing Cost of Goods Sold in a %eriodic Inventory System

Cost of 1oods Sold can be calculated as follo6s.

Inventory ?beginning of the year@ Add. Purchases Cost of goods available for sale -ess. Inventory ?end of year@ Cost of goods sold
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, 10)*** 13*)*** 100)*** 12)*** , 132)***

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Creating Cost of Goods Sold in a %eriodic Inventory System

4o6) Party Su ly must create the Cost of 1oods Sold account.

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Creating Cost of Goods Sold in a %eriodic Inventory System

4o6) Party Su ly must record the ending inventory amount.

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Comparison of %erpetual and %eriodic Inventory Systems

Per etual Inventory System Periodic Inventory System

-arge (e artment McGraw-Hill/Irwin Stores

5o;s (ress Sho

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Credit #erms and Cash "iscounts

#hen manufacturers and 6holesalers sell their roducts on account) the credit terms are stated in the invoice.

2/10, n/30
Read as. A:6o ten) net thirtyB
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Credit #erms and Cash "iscounts

2/10, n/30
Percentage of (iscount C of (ays (iscount Is Available >ther6ise) the %ull Amount Is (ue C of (ays 6hen %ull Amount Is (ue
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Credit #erms and Cash "iscounts

Purchases are recorded at their net amounts.

4et Method

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Purchase discounts lost are recorded 6hen ayment is made outside the discount eriod. The McGraw-Hill Companies, Inc., 2002

Credit #erms and Cash "iscounts

On &uly ', (lay Clothes purchased $),000 of merchandise on credit *ith terms of $+10, n+30 from ,id-s Clothes. (repare the .ournal entry for (lay Clothes.

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,0)*** ,0)*** +DE +DE = = ,3)+2* ,3)+2*

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Credit #erms and Cash "iscounts

On &uly 15, (lay Clothes pays the full amount due to ,id-s Clothes. (repare the .ournal entry for (lay Clothes.

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Credit #erms and Cash "iscounts

/o*, assume that (lay Clothes *aited until &uly $0 to pay the amount due in full to ,id-s Clothes. (repare the .ournal entry for (lay Clothes.
4on!o 4on!o erating erating '" '" ense ense

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Recording %urchases at Gross Invoice %rice

Purchases are recorded at their gross amounts.

1ross Method

Purchase discounts ta9en are recorded 6hen ayment is made inside the discount eriod.
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Recording %urchases at Gross Invoice %rice

On &uly ', (lay Clothes purchased $),000 of merchandise on credit *ith terms of $+10, n+30 from ,id-s Clothes. (repare the .ournal entry for (lay Clothes.

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Recording %urchases at Gross Invoice %rice

On &uly 15, (lay Clothes pays the full amount due to ,id-s Clothes. (repare the .ournal entry for (lay Clothes.
Reduces ReducesCost Costof of 1oods 1oodsSold Sold

,0)*** ,0)*** +DE +DE = = ,3)+2* ,3)+2*

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Recording %urchases at Gross Invoice %rice

/o*, assume that (lay Clothes *aited until &uly $0 to pay the full amount due to ,id-s Clothes. (repare the .ournal entry for (lay Clothes.

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Returns of $nsatisfactory Merchandise

>n August /) Play Clothes returned ,/** of unsatisfactory merchandise urchased from Fid;s Clothes on credit terms of 2G1*) nG3*. :he urchase 6as originally recorded at net cost. Pre are the Hournal entry for Play Clothes.

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,/** ,/** +DE +DE = = ,0+* ,0+*

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#ransportation Costs on %urchases

:rans :rans ortation ortation costs costs related related to to the the acIuisition acIuisition of of assets assets are are art art of of the the cost cost of of the the asset asset being being acIuired. acIuired.

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#ransactions Relating to Sales

Com uter $arn Partial Income Statement %or the &ear 'nded (ecember 31) 2**2 Revenue Sales -ess. Sales returns and allo6ances , Sales discounts 4et sales , +12)*** D)*** 0)*** 12)*** , +**)***

Credit terms and merchandise returns affect the amount of revenue earned by the seller.
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Sales Returns and Allowances

On !ugust $, ,id-s Clothes sold $$,000 of merchandise to (lay Clothes on credit terms $+10, n+30. ,id-s Clothes originally paid $1,000 for the merchandise. "ecause ,id-s Clothes uses a perpetual in%entory system, they must ma0e t*o entries.

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Sales Returns and Allowances

On !ugust $, ,id-s Clothes sold $$,000 of merchandise to (lay Clothes on credit terms $+10, n+30. ,id-s Clothes originally paid $1,000 for the merchandise. "ecause ,id-s Clothes uses a perpetual in%entory system, they must ma0e t*o entries.

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Sales Returns and Allowances

On !ugust 5, (lay Clothes returned $500 of unsatisfactory merchandise to ,id-s Clothes from the !ugust $ sale. ,id-s Clothes cost for this merchandise *as $$50. "ecause ,id-s Clothes uses a perpetual in%entory system, they must ma0e t*o entries.

Contra!revenue Contra!revenue

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Sales Returns and Allowances

On !ugust 5, (lay Clothes returned $500 of unsatisfactory merchandise to ,id-s Clothes from the !ugust $ sale. ,id-s Clothes cost for this merchandise *as $$50. "ecause ,id-s Clothes uses a perpetual in%entory system, they must ma0e t*o entries.

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Sales "iscounts
On &uly ', ,id-s Clothes sold $),000 of merchandise to (lay Clothes on credit *ith terms of $+10, n+30. 1he merchandise originally cost ,id-s Clothes $$,000. "ecause ,id-s Clothes uses a perpetual in%entory system, they must ma0e t*o entries.

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Sales "iscounts
On &uly ', ,id-s Clothes sold $),000 of merchandise to (lay Clothes on credit *ith terms of $+10, n+30. 1he merchandise originally cost ,id-s Clothes $$,000. "ecause ,id-s Clothes uses a perpetual in%entory system, they must ma0e t*o entries.

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Sales "iscounts
On &uly 15, ,id-s Clothes recei%es the full amount due from (lay Clothes. (repare the .ournal entry for ,id-s Clothes.
,0)*** ,0)*** +DE +DE = = ,3)+2* ,3)+2*

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Sales "iscounts
/o*, assume that it *asn-t until &uly $0 that ,id-s Clothes recei%ed the full amount due from (lay Clothes. (repare the .ournal entry for ,id-s Clothes.

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"elivery '(penses
(elivery (elivery costs costs incurred incurred by by sellers sellers are are debited debited to to (elivery (elivery '" '" ense) ense) an an o o erating erating e" e" ense. ense.

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Accounting for Sales #a(es

$usinesses collect sales ta" at the oint of sale. :hen) they remit the ta" to the a ro riate governmental agency at times s ecified by la6. ,1)*** ,1)*** sale sale 3E 3Eta" ta" = = ,3* ,3* sales sales ta" ta"

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'valuating the %erformance of a Merchandising Company

4et Sales 1ross Profit Margins
221ross 1ross Profit Profit 4et 4et Sales Sales 22 >verall >verall 1ross 1rossProfit Profit Margin Margin 22 1ross 1rossProfit ProfitMargins Marginsby by (e (e artment artmentand and Products The McGraw-Hill Companies, Inc., 2002 Products

22:rends :rendsovertime overtime 22Com Com arable arablestore storesales sales 22Sales Sales er ersIuare sIuarefoot foot of of selling selling s s ace ace
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