ACCOUNTING FOR

MERCHANDISING BUSINESS
 Type of Company

• Service Business
– Providing services to customers
– Revenues from services reported as fee earned
– Expenses incurred in providing the services are subtracted from the fees
earned to arrive at net income
• Merchandising Business
– Buying and selling of merchandise
– When merchandise is sold, Revenues reported as sales and its costs called as
Cost of Merchandise Sold
– COMS is subtracted from sales to arrive at gross profit
• Manufacturing Business
– Manufacturing is the use of machines, tools and labor to produce
goods for use or sale.
 Differences from Income Statement
perspective

SERVICE MERCHANDISING MANUFACTURING

Fees earned xxx Sales xxx Sales xxx
Operating expenses (x) COMS (x) COMS (x)
Net income xxx Gross Profit xxx Gross Profit xxx
Operating expenses (x) Operating expenses (x)
Net income xxx Net income xxx
 Differences from Balance Sheet
perspective

SERVICE MERCHANDISING MANUFACTURING

Cash xxx Cash xxx Cash xxx
Account Receivable xxx Account Receivable xxx Account Receivable xxx
Merchandise Inventory xxx Raw Material inventory xxx
Work in Process xxx
Finished good inventory xxx
Current Assets xxx Current Assets xxx Current Assets xxx
 Financial Statement for
Merchandising Business

• Multiple-Step Income Statement

• Single-step Income Statement
• Statement of Owner’s Equity
• Balance Sheet
 Multiple-Step & Single-Step
Income Statement

• Multiple-Step: Separates the operating and non-operating

activities and classifies revenue and expense accordingly. The
end result is a better comparison of performance and ratio to
ratio computations of the company’s finances.
• Single-Step: Recording of two groups of information: income
and expense and the net result. Expenses are deducted from
revenues, and no separation of operating activities or
expenses is provided.
 Multiple-step Income Statement

• Sales : the total amount charged customers for merchandise sold,

including cash sales and sales on account.
• Sales returns and allowances : granted by the seller to customers for
damaged or defective merchandise.
• Sales discount : granted by the seller to customer for early payment of
amount owed. Example: 2/10,n/30 – means 2% discount will be apply
for payment within 10 days, no discount if payment within 30 days
• Net sales : determined by subtracting sales returns and allowances and
sales discounts from sales
• Cost of merchandise sold : the cost of the merchandise sold to
customers
 Multiple-step Income Statement
SolusiNet
Income Statement
For the Year Ended December 31, 2009
Revenue from sales
Sales Rp720,185.00
Less: Sales returns and allowances Rp 6,140.00
Sales discounts Rp 5,790.00 Rp 11,930.00
Net Sales Rp 708,255.00
Cost of Merchandise Sold Rp 525,305.00
Gross profit Rp182,950.00
Operating expenses:
Selling expenses:
Sales salaries expense Rp53,430.00
Advertising expense Rp10,860.00
Depr. expense-store equipment Rp 3,100.00
Delivery expense Rp 2,800.00
Miscellaneous selling expense Rp 630.00
Total selling expenses Rp 70,820.00
 SolusiNet
Income Statement
For the Year Ended December 31, 2009
Administrative expenses:
Office salaries expense Rp21,020.00
Rent expense Rp 8,100.00
Depr. expense-office equipment Rp 2,490.00
Insurance expense Rp 1,910.00
Office supplies expense Rp 610.00
Misc. administrative expense Rp 760.00
Total administrative expenses Rp 34,890.00
Total operating expenses Rp105,710.00
Income from operations Rp 77,240.00
Other income and expense:
Rent revenue Rp 600.00
Interest expense Rp (2,440.00) Rp (1,840.00)
Net income Rp 75,400.00
 Single-step Income Statement

SolusiNet
Income Statement
For the Year Ended December 31, 2009
Revenue
Net Sales Rp 708,255.00
Rent revenue Rp 600.00
Total Revenues Rp708,855.00
Expenses:
Cost of merchandise sold Rp525,305.00
Selling expenses Rp 70,820.00
Administrative expenses: Rp 34,890.00
Interest expense Rp 2,440.00
Rp633,455.00
Net income Rp 75,400.00
Statement of Owner's Equity

SolusiNet
Statement of Owner's Equity
For the Year Ended December 31, 2009
Capital, January 1, 2009 153,800,000
Net income for year 75,400,000
Less withdrawals 18,000,000
Increase in owner's equity 57,400,000
Capital, December, 2009 211,200,000
 Example

Merchandise inventory, May 1 Rp. 121,200,000

Merchandise inventory, May 31 Rp. 142,000,000
Purchases Rp. 985,000,000
Purchases returns and allowances Rp. 23,500,000
Purchases discount Rp. 21,000,000
Transportation in Rp. 11,300,000
 Answer

Merchandise inventory, May 1 Rp 121,200,000

Purchases Rp 985,000,000
Purchases returns and
Less: allowances Rp 23,500,000
Purchases discounts Rp 21,000,000 Rp (44,500,000) (-)
Net purchases Rp 940,500,000
Add transportation in Rp 11,300,000 (+)
Cost of merchandise
purchased Rp 951,800,000
Merchandise available for sale Rp 1,073,000,000
Less merchandise inventory,
May 31 Rp (142,000,000)
Cost of merchandise sold Rp 931,000,000
 Merchandising Transactions

• Chart of accounts for a merchandising business

• Sales transactions
• Purchase transactions
• Transportation costs, sales taxes and trade discount
• Dual nature of merchandise transactions
 Balance Sheet Accounts Income Statement Accounts
100 - Assets 400 - Revenues
110 Cash 410 Sales
112 Accounts Receivable 411 Sales Returns and Allowances
Chart of accounts for a
merchandising business 115 Merchandise inventory 412 Sales Discounts
116 Office Supplies
117 Prepaid Insurance 500 - Costs and Expenses
120 Land 510 Cost of Merchandise Sold
123 Store Equipment 520 Sales Salaries Expense
124 Accum. Depreciation-store eqpt 521 Advertising Expense
125 Office Equipment 522 Depreciation Expense - Store Eqpt
126 Accum. Depreciation-Office eqpt 523 Delivery Expense
529 Miscellaneous Selling Expense
200 - Liabilities 530 Office Salaries Expense
210 Accounts Payable 531 Rent Expense
211 Salaries Payable 532 Depreciation Expense - Office Eqpt
212 Unearned Rent 533 Insurance Expense
215 Notes Payable 534 Office Supplies Expense
539 Misc. Administrative Expense
300 - Owner's Equity
310 Capital 600 - Other Revenue
311 Drawing 610 Rent Revenue
312 Income Summary
700 - Other Expense
710 Interest Expense
 Sales Transactions (Cash)

1. Jan 3, SolusiNet sells merchandise Rp.1,800,000

Dr Cash Rp.1,800,000
Cr Sales Rp. 1,800,000
2. Assume that cost of merchandise sold on Jan 3 : Rp.1,200,000
Dr COMS Rp.1,200,000
Cr Merchandising Inventory Rp. 1,200,000
3. Sales which payment with Credit Card
Dr Credit Card Expense Rp.48,000
Cr Cash Rp. 48,000
 Sales Transactions (on account)

4. Jan 12, SolusiNet sells merchandise Rp.510,000, the COMS: Rp.280,000

Dr Accounts Receivable Rp.510,000
Cr Sales Rp. 510,000
Dr COMS Rp.280,000
Cr Merchandising Inventory Rp. 280,000
5. Sales Discount : from above sales terms of payment 2/10, n/30,
customer paid on Jan 22, journal for payment received :
Dr Cash Rp.499,800
Dr Sales Discounts Rp.10,200
Cr Accounts Receivable Rp. 510,000
 Sales Returns and allowances

6. Sales returns is 225,000 with COMS 140,000

Dr Sales returns & allowances Rp.225,000
Cr Accounts Receivable Rp.225,000

Dr Merchandising Inventory Rp.140,000

Cr COMS Rp.140,000
 Purchase Transactions

7. Purchase of merchandise (Cash):

Dr Merchandising Inventory Rp.2,510,000
Cr Cash Rp. 2,510,000
8. Purchase of merchandise (On account) :
Dr Merchandising Inventory Rp.9,250,000
Cr Accounts Payable Rp. 9,250,000
 Purchase Discounts

SolusiNet purchase merchandise Rp.3,000,000 with terms of payment 2/10,

n/30. On the last day of the discount SolusiNet borrows money with annual
interest rate 6%. How much is their savings from borrowing?
Discount = 3,000,000 x 2% = 60,000
Interest = 2,940,000 x 6% x 20/360 = 9,800
Savings = Discount earned – interest
= 60,000 – 9,800 = 50,200
Saving in 20 days = 2%
In a year = 2% x 360/20 = 2% x 18
= 36%
 Purchase Discounts

9. Upon receiving merchandise :

Dr Merchandising Inventory Rp.3,000,000
Cr Accounts Payable Rp. 3,000,000
10. On payment with discount :
Dr Accounts Payable Rp.3,000,000
Cr Cash Rp. 2,940,000
Cr Merchandising Inventory Rp. 60,000
11. On payment without disount :
Dr Accounts Payable Rp.3,000,000
Cr Cash Rp.3,000,000
 Purchase Returns and
Transportation Cost
12. Upon returning merchandise :
Dr Accounts Payable Rp.3,000,000
Cr Merchandise Inventory Rp. 3,000,000

13. As a Buyer : SolusiNet buys merchandise on account Rp.900,000,

terms FOB shipping point, and pays transportation cost Rp.50,000
Dr Merchandise Inventory Rp.900,000
Cr Accounts Payable Rp.900,000
Dr Merchandise Inventory Rp. 50,000
Cr Cash Rp. 50,000
 Transportation Costs for Seller
(FOB destination)
14. As a Seller: SolusiNet sells merchandise on account Rp.700,000, COMS
is Rp.480,000, terms FOB destination and SolusiNet pays
transportation cost Rp.40,000
Dr Accounts Receivable Rp.700,000
Cr Sales Rp.700,000

Dr COMS Rp. 480,000

Cr Merchandise Inventory Rp. 480,000

Dr Delivery expense Rp. 40,000

Cr Cash Rp. 40,000
 Transportation Costs for Seller
(FOB shipping point)
15. As a Seller: SolusiNet sells merchandise on account Rp.800,000, COMS
is Rp.360,000, terms FOB shipping point and SolusiNet prepays
transportation cost Rp.45,000
Dr Accounts Receivable Rp.800,000
Cr Sales Rp.800,000

Dr COMS Rp. 360,000

Cr Merchandise Inventory Rp. 360,000

Dr Accounts Receivable Rp. 45,000

Cr Cash Rp. 45,000
 Sales Tax & Trade Discounts

16. Most of product sold by merchandising company are subject of

10% Value Added Tax (PPN – Pajak Pertambahan Nilai)
Dr Accounts Receivable Rp.100,000
Cr Sales Rp.100,000
Cr VAT payable Rp. 10,000

17. Seller sold their merchandise amounted to Rp.1,000,000 with

40% discount
Dr Accounts Receivable Rp.600,000
Cr Sales Rp.600,000
 Merchandising transactions using Perpetual & Periodic System
Perpetual Inventory System Periodic Inventory System
1.SELLING MERCHANDISE Dr Accounts Receivable Dr Accounts Receivable
CR Sales CR Sales

Dr COMS
CR Merchandise Inventory

1.SELLING MERCHANDISE Dr Accounts Receivable Dr Accounts Receivable

CR Sales

CR Sales

3. TRANSPORTATION PAID BY
SELLER Dr Delivery Expense No entry
(FOB DESTINATION) CR Cash

4. PURCHASE RETURNS Dr Sales Returns & Allowances Dr Accounts Payable

CR Account Receivable CR Merchandise Inventory
 SELLER BUYER
5. RECEIVED PAYMENT FROM
BUYER Dr Cash Dr Accounts Payable
CR Account Receivable CR Cash

6. MERCHANDISE SOLD, TERMS

FOB SHIPPING POINT, Dr Accounts Receivable Dr Merchandise Inventory
2/10, n/30, CR Sales CR Accounts Payable
TRANSPORTATION PREPAID BY
SELLER
Dr Accounts Receivable
CR Cash
(to record transportation)

Dr COMS
CR Merchandise Inventory

7. PAYMENT RECEIVED ON
DISCOUNT PERIOD Dr Cash Dr Accounts Payable
Dr Sales Discounts CR Merchandise Inventory
CR Account Receivable CR Cash
 Shrinkage Inventories

Shrinkage Inventories: happened when the physical inventory taken at the

end of the accounting period is differ from the amount of inventory
shown in the balance of the merchandise inventory account. Normally, the
amount of merchandise inventory account is higher than the physical
inventory, the difference called as inventory shrinkage or inventory
shortage.
Journal:
Dr Cost of Merchandise Sold Rp.100,000
Cr Merchandise Inventory Rp. 100,000
 Closing Entries

There are 4 (four) closing entries that we have to prepare:

1.Closing entries for Sales/Revenue

Closing entries Debit Credit
Sales/Revenue xxx
Income summary xxx

2. Closing entries for Expenses

Closing entries Debit Credit
Income summary xxx
Expenses xxx
 Closing Entries

3. Closing entries for Income

Closing entries Debit Credit

Income summary xxx
Capital xxx

4. Closing entries for drawing

Closing entries Debit Credit

Capital xxx
Drawing xxx
 Example of closing entries

PT XYZ – Income Statement

Sales/Revenue 12,900,000
Telephone expense 1,000,000
Insurance expense 250,000
Depreciation expense 9,000,000
Salary expense 2,000,000
Total expense (12,250,000)
Gross Profit 650,000

1. CLosing entries for revenue:

Sales/Revenue 12,900,000
Income summary 12,900,000
 Example of closing entries

2. Closing entries for Expenses

Income summary 12,250,000
Telephone expense 1,000,000
Insurance expense 250,000
Depreciation expense 9,000,000
Salary expense 2,000,000

3. Closing entries for Income

Income summary 650,000
Capital 650,000

4. Closing entries for drawing

Capital 650,000
Drawing 650,000
 Reversal Journal

Reversal journal: use to reverse accruals, estimates, errors or temporary

adjustments and reclassifications.
Reversal Journal consists of:
1. Cost payable (Hutang biaya)
2. Revenue receivable (Piutang Pendapatan)
3. Unearned revenue (Pendapatan diterima dimuka)
4. Prepaid expenses (Biaya dibayar dimuka)
 Reversal Journal

No. Journal Entries Adjustment Entries Reversal Journal

Salary expense Salary payable

1. Cost payable 100 100 100 100
Salary payable Salary expense

Interest receivable Interest income

2. Interest receivable 150 150 150 150
Interest income Interest receivable

Revenue Unearned revenue

3. Unearned revenue 200 200 200 200
Unearned revenue Revenue

Prepaid rent Rental expense

4. Prepaid expenses 900 900 900 900
Rental expense Prepaid rent
 Financial Analysis and
Interpretation
Ratio of net sales to assets = measures how effectively a business is using its assets to
generate sales. A high ratio indicates an effective use of assets.

Ratio of Net Sales to Assets = Net Sales

Average Total Assets
Example: Total Assets:
Beginning of year 1,615,240
End of year 1,753,298
Average total assets 1,684,269
Net Sales 5,147,229

Ratio of Net Sales to Assets = 5,147,229 =3,06

(1,615,240+1,753,298)/2
 Manual Accounting System

SALES JOURNAL
Account Post. Accts. Rec Dr Cost of merchandise sold Dr
Date Invoice No. Debited Ref Sales Cr Merchandise Inventory Cr
1 Mar 2 810 Banu P 2,750,000 2,000,000
2 14 811 Hudi P 4,260,000 3,470,000
3 19 812 Johan P 5,800,000 4,650,000
4 26 813 Koko P 4,500,000 3,840,000
17,310,000 13,960,000
(112) (410) (510) (115)
 Manual Accounting System

PURCHASES JOURNAL
Account Post. Accounts Merchandise Other Post.
Date Debited Ref Payable Cr Inventory Dr Accounts Dr Ref Amount
1 Mar 4 Compu-tek P 13,880,000 13,880,000
2 7 Omega Tech P 4,650,000 4,650,000
3 15 Dale Furniture Co. P 5,700,000 Store Eqpt. 123 5,700,000
4 22 Delta Data Link P 3,840,000 3,840,000
5 29 Power Electronics P 3,200,000 3,200,000
31,270,000 25,570,000 5,700,000
(210) (115) (P )
 Manual Accounting System

CASH RECEIPTS JOURNAL

Account Post Cost of Merchandise Sold Dr Accounts Sales
Date Credited Ref Merchandise Inventory Cr Sales Cr Receivable Cr Discount Dr Cash Dr

1 Mar 3 Sales P 400,000 600,000 600,000

2 12 CV Baru P 2,750,000 55,000 2,695,000

CASH RECEIPTS JOURNAL

Account Post. Accounts Merchandise
Date Credited Ref Payable Dr Inventory Cr Cash Dr

1 Mar 16 Compu-Tek P 13,880,000 13,880,000

2 17 Omega Tech P 4,650,000 93,000 4,557,000

Computerized Accounting System
(Sales Journal)
Computerized Accounting System
(Purchases Journal)
 Balance Sheet Accounts Income Statement Accounts
100 - Assets 400 - Revenues

merchandising business using

110 Cash 410 Sales
112 Accounts Receivable 411 Sales Returns and Allowances
115 Merchandise inventory 412 Sales Discounts
Chart of accounts for a
116 Office Supplies
117 Prepaid Insurance 500 - Costs and Expenses
120 Land 510 Purchases
123 Store Equipment 511 Purchases Returns and Allowances
periodic system
124 Accum. Depreciation-store eqpt 512 Purchases Discounts
125 Office Equipment 513 Transportation in
126 Accum. Depreciation-Office eqpt 520 Sales Salaries Expense
521 Advertising Expense
200 - Liabilities 522 Depreciation Expense - Store Eqpt
210 Accounts Payable 523 Delivery Expense

211 Salaries Payable 529 Miscellaneous Selling Expense

212 Unearned Rent 530 Office Salaries Expense
215 Notes Payable 531 Rent Expense
532 Depreciation Expense - Office Eqpt
300 - Owner's Equity 533 Insurance Expense
310 Capital 534 Office Supplies Expense
311 Drawing 539 Misc. Administrative Expense
312 Income Summary
600 - Other Revenue
610 Rent Revenue

700 - Other Expense

710 Interest Expense
 Transactions using periodic-perpetual system

Periodic Inventory System Perpetual Inventory System

1. Purchase Dr. Purchases Dr. Merchandise Inventory
Cr. Accounts Payable Cr. Accounts Payable
Note: in Periodic system, no inventory is recorded only Purchases
2. Returned merchandise purchased Dr. Accounts Payable Dr. Accounts Payable
Cr. Purchases Returns and
Allowances Cr. Merchandise Inventory
Note: in Perpetual, there's no account for purchases returns, returned merchandise is directly less the inventory
3. Payment of purchase less disc Dr. Accounts Payable Dr. Accounts Payable
Cr. Cash Cr. Cash
Cr. Purchases Discounts Cr. Merchandise Inventory
Note: in Perpetual, there's no account for purchases discount, discount is directly less the inventory
4. Purchases with transportation cost Dr. Purchases Dr. Merchandise Inventory
Cr. Transportation in Cr. Accounts Payable
Cr. Accounts Payable
Note: in Perpetual, there's no account for transportation in, transportation cost is add into Accounts payable
 Transactions using periodic-perpetual system
Periodic Inventory System
5. Sales Dr. Accounts Receivable
Cr. Sales
Note: in Periodic, there's no calculation for COMS during the year, calculation made at year-end
6. Sold merchandise returned Dr. Sales Returns and Allowances
Cr. Accounts Receivable
7. Sales payment received (on account) Dr. Cash
Dr. Sales Discounts
Note: both record are same Cr. Accounts Receivable
8. Cash sales payment received Dr. Cash
Cr. Sales
Perpetual Inventory System
Dr. Accounts Receivable
Cr. Sales
Dr. Cost of Merchandise Sold
Cr. Merchandise Inventory
Dr. Sales Returns and Allowances
Cr. Accounts Receivable
Dr. Merchandise Inventory
Dr. Cost of Merchandise Sold
Dr. Cash
Dr. Sales Discounts
Cr. Accounts Receivable
Dr. Cash
Cr. Sales
Dr. Cost of Merchandise Sold
Cr. Merchandise Inventory
Thank you