Chapter Accounting for

Merchandising

8
Operations
100 Shares

Merchandising?
$1 par value

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Learning
Learning Objectives
Objectives
 Describe merchandising activities
and identify income components
for a merchandising company.
 Identify and explain the inventory
asset of a merchandising
company.
 Describe both perpetual and
periodic inventory systems.
 Analyze and record transactions
for merchandise purchases using
a perpetual system . merchandising transactions
 Analyze and record transactions
for merchandise sales using a
perpetual system.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
 Analyze and interpret cost flows
and operating activities of a
merchandising company.
 Prepare adjustments and close
accounts for a merchandising
company.
 Define and prepare multiple-
step and single-step income
statements.
 Record and compare
using both periodic and
perpetual inventory systems.
© The McGraw-Hill Companies, Inc., 2007
 Merchandising
Merchandising Activities
Activities
Service
Service organizations
organizations sell
sell time
time to
to earn
earn revenue.
revenue.

Examples:
Examples: accounting
accounting firms,
firms, law
law firms,
firms, and
and
plumbing
plumbing services
services

Minus Equals Net

Revenues Expenses
income

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 Merchandising
Merchandising Activities
Activities
Merchandising Companies

Manufacturer Wholesaler Retailer Customer

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 Reporting
Reporting Income
Income for
for aa Merchandiser
Merchandiser
Merchandising companies sell products to earn revenue.
Examples: sporting goods, clothing, and auto parts
stores
Net Minus Cost of Equals Gross Minus Equals Net
Expenses
Sales Goods Sold Profit Income

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 Operating
Operating Cycle
Cycle for
for aa Merchandiser
Merchandiser
Begins with the purchase of merchandise and ends
with the collection of cash from the sale of
merchandise.
Cash Sale Credit Sale
Cash
Purchases collection Purchases

Merchandise
Cash Account
inventory
sales receivable

Merchandise
inventory Credit sales
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 Inventory
Inventory Systems
Systems

Beginning Net cost of

inventory + purchases

= Merchandise
available for sale

Cost of Goods
Ending Inventory
+ Sold

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Inventory
Inventory Systems
Systems
Detailed records of the cost of each
Perpetual item are maintained, and the cost
Inventory of each item sold is determined
System
from records when the sale occurs.

Applied in this chapter

Periodic Cost of goods sold is determined

Inventory only at the end of an accounting
System period.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Accounting
Accounting for
for Merchandise
Merchandise Purchases
Purchases
On 20 June, Jason Inc. purchased $14,000 of
Merchandise Inventory paying cash.

Jun. 20 Merchandise Inventory . . . . . . . 14,000

..
Cash . . . . . . . . . . . . . . . . 14,000
Purchase merchandise for cash

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 
Main Source, Inc. Invoice
614 Tech Avenue Date Number
5/4/07 358-BI
Nashville, TN 37651

S
o
l

Name: Barbee, Inc.
Seller Invoice date
d Attn: Tom Bell Purchaser Order number
Address: One Willow Plaza Credit terms Freight terms
T Cookeville, Tennessee
o 38501
Goods Invoice amount


P.O. 167 Sales: 25 Terms 2/10,n/30  
Ship: FedEx Prepaid
Item Description Quanity Price Amount
AC417 250 Backup System 500 $ 54.00 $ 27,000


Sub Total 27,000

We appreciate your business! Ship Chg. -
Tax -
Total $ 27,000


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 Trade
Trade Discounts
Discounts
Used by manufacturers and wholesalers to offer
better prices for greater quantities purchased.

Example
Example
Matrix,
Matrix, Inc.
Inc. offers
offers aa 30%
30% trade
trade
discount
discount onon orders
orders ofof 1,000
1,000
units
units or
or more
more of of their
their popular
popular
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price ofof $5.25.
$5.25.

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 Purchase
Purchase Discounts
Discounts
A deduction from the invoice price granted to
induce early payment of the amount due.

Terms
Discount Period Credit Period
Time
Full amount Full amount due
Due less discount

Purchase or Sale

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 Purchase
Purchase Discounts
Discounts

2/10,n/30
Number
Number ofof
Days
Days Otherwise,
Otherwise,
Discount
Discount Discount
Discount Is
Is Net
Net (or
(or All)
All) Credit
Credit
Percent
Percent Available
Available Is
Is Due
Due Period
Period

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Purchase
Purchase Discounts
Discounts
On
On 77 May,
May, Jason Inc. purchased
purchased $27,000 of
Merchandise
Merchandise Inventory
Inventory on
on account,
account, credit
terms are 2/10, n/30.

May 7 Merchandise Inventory 27,000

Accounts Payable 27,000
Purchase merchandise on account

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Purchase
Purchase Discounts
Discounts
On
On 15 May, Jason Inc. paid the amount due on
the purchase of 7 May.

$27,000 × 2% = $540 discount

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 Purchase
Purchase Discounts
Discounts
After we post these entries, the accounts
involved look like this:

Merchandise Inventory Accounts Payable

5/7 27,000 5/15 540 5/15 27,000 5/7 27,000

Bal. 26,460 Bal. 0

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Failure
Failure to
to Pay
Pay Within
Within the
the Discount
Discount Period
Period
If we fail to take a 2/10, n/30
discount, is it really expensive?

365 days ÷ 20 days × 2% = 36.5% annual rate

Days
Days Number
Number Percent
Percent
in
in aa of
of additional
additional paid
paid to
to
year
year days
days before
before keep
keep
payment
payment money
money

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 Purchase
Purchase Returns
Returns and
and Allowances
Allowances
Purchase Return . . .
Merchandise
Merchandise returned
returned by
by the
the purchaser
purchaser to
to
the
the supplier.
supplier.
Purchase Allowance . . .
A
A reduction
reduction in
in the
the cost
cost of
of defective
defective
merchandise
merchandise received
received by
by aa purchaser
purchaser from
from aa
supplier.
supplier.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Purchase
Purchase Returns
Returns and
and Allowances
Allowances
On
On 99 May,
May, Matrix
Matrix Inc.
Inc. purchased
purchased $20,000
$20,000 of
of
Merchandise
Merchandise Inventory
Inventory on
on account,
account, credit
credit
terms
terms are
are 2/10,
2/10, n/30.
n/30.

May 9 Merchandise Inventory 20,000

Accounts Payable 20,000
Purchased merchandise on account

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Purchase
Purchase Returns
Returns and
and Allowances
Allowances
On
On 10
10 May,
May, Matrix Inc. returned $500 of
defective
defective merchandise
merchandise toto the
the supplier.
supplier.

May 10 Accounts Payable 500

Merchandise Inventory 500
Returned defective merchandise

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Purchase
Purchase Returns
Returns and
and Allowances
Allowances
On 18 May, Matrix Inc. paid the amount owed for
the purchase of 9 May.

May 18 Accounts Payable 19,500

Cash 19,110
Merchandise Inventory 390
Paid account in full

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Transportation
Transportation Costs
Costs
Seller Buyer

FOB shipping point Merchandise FOB destination

(buyer pays) (seller pays)

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Transportation
Transportation Costs
Costs
On 12 May, Jason Inc. purchased $8,000 of
Merchandise Inventory for cash and also paid
$100 transportation costs.

May 12 Merchandise Inventory 8,100

Cash 8,100
Paid for merchandise and transportation

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Quick
Quick Check
Check 

On
On 66 July
July 2007
2007 Seller
Seller Co.
Co. sold
sold $7,500
$7,500 of
of
merchandise
merchandise toto Buyer
Buyer Co.;
Co.; terms
terms of
of 2/10,n/30.
2/10,n/30. The
The
shipping
shipping terms
terms were
were FOB
FOB shipping
shipping point.
point. The
The
shipping
shipping cost
cost was
was $100.
$100. Which
Which ofof the
the following
following will
will
be
be part
part of
of Buyer’s
Buyer’s 6July
6July journal
journal entry?
entry?

a.
a. Credit
Credit Sales
Sales $7,500
$7,500
b.
b. Credit
Credit Purchase
Purchase Discounts
Discounts $150
$150
c.
c. Debit
Debit Merchandise
Merchandise Inventory
Inventory $100
$100
d.
d. Debit
Debit Accounts
Accounts Payable
Payable $7,450
$7,450
FOB shipping point indicates the buyer
ultimately pays the freight. This is recorded with
a debit to Merchandise Inventory.
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 Itemized
Itemized Cost
Cost of
of Merchandise
Merchandise Purchased
Purchased
MATRIC
MATRIC INC.
INC.
TOTAL
TOTAL COST
COST OF
OF MERCHANDISE
MERCHANDISE PURCHASES
PURCHASES
FOR
FOR THE
THE YEAR
YEAR ENDED
ENDED 3131 MAY
MAY 2007
2007
Invoice
Invoice cost
cost of
of merchandise
merchandise purchases
purchases $$ 692,500
692,500

Purchase
Purchase discounts
discounts (10,388)
(10,388)
Purchase
Purchase returns
returns and
and allowances
allowances (4,275)
(4,275)

Freight-in
Freight-in 4,895
4,895
Total
Total cost
cost of
of merchandise
merchandise purchases
purchases $$ 682,732
682,732

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Accounting
Accounting for
for Merchandise
Merchandise Sales
Sales

Sales
Sales discounts
discounts and
and returns
returns and
and allowances
allowances are
are Contra
Contra Revenue
Revenue accounts.
accounts.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Sales
Sales of
of Merchandise
Merchandise
On 18 March, Diamond Store sold $25,000 of
merchandise on account. The merchandise was
carried in inventory at a cost of $18,000.

Mar. 18 Accounts Receivable 25,000

Sales 25,000
Sales of merchandise on credit

Cost of Sales 18,000

Merchandise Inventory 18,000
To record cost of sales

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Sales
Sales Discounts
Discounts
On
On 88 June,
June, Barton
Barton Co.
Co. sold
sold merchandise
merchandise costing
costing $3,500
$3,500
for
for $6,000
$6,000 on
on account.
account. Credit
Credit terms
terms were
were 2/10,
2/10, n/30.
n/30.
Let’s
Let’s prepare
prepare the
the journal
journal entries.
entries.

Jun. 8 Accounts Receivable 6,000

Sales 6,000
Sales of merchandise on credit

Cost of Sales 3,500

Merchandise Inventory 3,500
To record cost of sales

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Sales
Sales Discounts
Discounts
On 17 June, Barton Co. received a check for
$5,880 in full payment of the 8 June sale.

Jun. 17 Cash 5,880

Sales Discount 120
Accounts Receivable 6,000
Received payment less discount

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Sales
Sales Returns
Returns and
and Allowances
Allowances
On 12 June, Barton Co. sold merchandise
costing $4,000 for $7,500 on account The
credit terms were 2/10, n/30.

Jun. 12 Accounts Receivable 7,500

Sales 7,500
Sales of merchandise on credit

Cost of Sales 4,000

Merchandise Inventory 4,000
To record cost of sales

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Sales
Sales Returns
Returns and
and Allowances
Allowances
On 14 June, merchandise with a sales price of $800 and
a cost of $470 was returned to Barton. The return is
related to the 12 June sale.

Jun. 14 Sales Returns and Allowances 800

Accounts Receivable 800
Customer returned merchandise

Merchandise Inventory 470

Cost of Sales 470
Returned goods placed in inventory

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Sales
Sales Returns
Returns and
and Allowances
Allowances
On 20 June, Barton received the amount owed
to it from the sale of 12 June.
Jun. 20 Cash 6,566
Sales Discount 134
Accounts Receivable 6,700
Received payment less discount

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Let’s complete the
accounting cycle
by preparing the
closing entries for
Barton.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Step
Step 11:: Close
Close Credit
Credit Balances
Balances in
in Temporary
Temporary Accounts
Accounts
to
to Income
Income Summary.
Summary.
Dec. 31 Sales . . . . . . . . . . . . . . . . . . . . 323,800
Income summary . . . . . . 323,800
To close credit balance in temporary accounts

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Step
Step 22:: Close
Close Debit
Debit Balances
Balances in
in Temporary
Temporary Accounts
Accounts
to
to Income
Income Summary.
Summary.
Dec. 31 Income Summary 310,900
Sales Discounts 4,300
Sales Return & Allowance 2,000
Cost of Sales 233,200
Adm. Salaries Expense 18,200
Sales Salaries Expense 29,600
Insurance Expense 1,200
Rent Expense 8,100
Supplies Expense 1,000
Advertising Expense 13,300
To close debit balances in temporary accounts

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Step
Step 33:: Close
Close Income
Income Summary
Summary to
to Owner’s
Owner’s Capital
Capital

Dec. 31 Income Summary 12,900

Barton, Capital 12,900
To close Income Summary account

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Step
Step 44:: Close
Close Withdrawals
Withdrawals Account
Account to
to Owner’s
Owner’s Capital.
Capital.

Dec. 31 Barton, Capital 4,000

Barton, Withdrawals 4,000
To close the withdrawals account

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Income
Income Statement
Statement Formats
Formats

Multiple-Step

Single-Step

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 Multiple-Step
Multiple-Step Income
Income Statement
Statement

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 Single-Step
Single-Step Income
Income Statement
Statement

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 Classified
Classified Balance
Balance Sheet
Sheet
MERCHANDISING COMPANY
BALANCE SHEET
31 DECEMBER 2007
ASSETS
Non-current Assets
Equipment $16,000
Current Assets
Cash $ 10,200
Merchandise Inventory 1,200 11,400
Total Assets $ 27,400

EQUITY AND LIABILITIES

Equity $ 22,200
Long-term Liabilities
Notes payable $4,000

Current Liabilities
Accounts payable $ 1,200
Total Equity and Liabilities $ 27,400
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007