CHAPTER 6 ACCOUNTING FOR MERCHANDISING OPERATIONS STUDY OBJECTIVES

CHAPTER 6 ACCOUNTING FOR MERCHANDISING OPERATIONS STUDY OBJECTIVES After studying this chapter, you should understand: The differences between a service company and a merchandiser Single & multiple step income statements Purchase entries—perpetual inventory How to compute gross profit Revenue entries--perpetual inventory COGS -- periodic inventory Completing the accounting cycle

STUDY OBJECTIVE 1 MERCHANDISER VS. SERVICE COMPANY A merchandiser buys and sells goods to earn a profit. A service company provides a service to earn a profit. Wholesalers/Retailers COGS - No COGS

INCOME MEASUREMENT MERCHANDISER Sales Revenue Less Equals Cost of Goods Sold Gross Profit Less Equals Operating Expenses Net Income (Loss)

OPERATING CYCLE COMPARISON Service Company Receive Cash Perform Services Accounts Receivable Merchandising Company Receive Cash Buy Inventory Sell Inventory Accounts Receivable Merchandise Inventory

INVENTORY SYSTEMS PERPETUAL INVENTORY Inventory purchased Item sold D L O S Record purchase Record revenue & COGS End of period No entry PERIODIC INVENTORY Inventory purchased Record purchase Item sold End of period D L O S Compute and record COGS Record revenue only

STUDY OBJECTIVE 2 PURCHASE ENTRIES – PERPETUAL INVENTORY Cash purchase Credit purchase MERCHANDISE INVENTORY COST CASH COST A/P COST The purchase is normally recorded when the goods are received Credit purchases are normally supported by a purchase invoice

STUDY OBJECTIVE 2 PURCHASE ENTRIES – PERPETUAL INVENTORY Cash purchase Credit purchase 3800 3 800

SHIPPING TERMS – FREE ON BOARD FOB SHIPPING POINT Title transfers to buyer at sellers shipping dock FOB DESTINATION Title transfers to buyer at buyers receiving dock Buyer pays freight costs Seller pays freight costs

ACCOUNTING FOR FREIGHT COSTS PAID BY BUYER GENERAL JOURNAL Date May 6 Account Titles and Explanation Merchandise Inventory Cash (To record payment of freight, terms FOB shipping point) Dr. 150 Cr. 150 Freight costs are part of the cost of inventory purchased.

ACCOUNTING FOR FREIGHT COSTS PAID BY SELLER GENERAL JOURNAL Date May 4 Account Titles and Explanation Freight-out (Delivery Expense) Cash (To record payment of freight on goods sold FOB destination) Dr. 150 Freight costs incurred by the seller are selling expenses called Freight-out. Cr. 150

PURCHASE RETURNS AND ALLOWANCES GENERAL JOURNAL Date May 8 Account Titles and Explanation Accounts Payable Merchandise Inventory (To record return of inoperable goods received from Highpoint Electronic, DM No. 126) Dr. Cr. 300 For purchases returns and allowances, Accounts Payable is debited and Merchandise Inventory is credited. Seller Buyer

PURCHASE DISCOUNTS PAYMENT WITHIN DISCOUNT PERIOD Credit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due. GENERAL JOURNAL Date May 14 Account Titles and Explanation Accounts Payable Cash Merchandise Inventory (To record payment within discount period) Dr. 3, 500 Cr. 3, 430 70 If payment is made within the discount period, Merchandise inventory is credited for the discount taken.

PURCHASE DISCOUNTS PAYMENT AFTER DISCOUNT PERIOD GENERAL JOURNAL Date June 3 Account Titles and Explanation Accounts Payable Cash (To record payment with no discount taken) Debit Credit 3, 500 If payment is made after the discount period, Accounts Payable is debited and Cash is credited for the full amount.

STUDY OBJECTIVE 3 REVENUE ENTRIES – PERPETUAL INVENTORY Revenues are reported when earned in accordance with the revenue recognition principle. In a merchandising company, revenues are earned when the goods are transferred from seller to buyer. All sales should be supported by a cash register tape (cash sales) or sales invoice (credit sales).

REVENUE ENTRIES – PERPETUAL INVENTORY GENERAL JOURNAL Date May 4 4 Account Titles and Explanation Accounts Receivable Sales (To record credit sales to Chelsea Video per invoice #731) Cost of Goods Sold Merchandise Inventory (To record cost of merchandise sold on invoice #731 to Chelsea Video) Dr. Cr. 3, 800 2, 400 For cash sales, simply replace the debit to accounts receivable with a debit to cash. 2, 400

SALES RETURNS & ALLOWANCES SALES RETURN Customer returns goods to the seller for credit or a refund. SALES ALLOWANCE Seller allows a reduction in selling price. Goods are not returned. Seller prepares a CREDIT MEMORANDUM.

RECORDING SALES RETURNS & ALLOWANCES GENERAL JOURNAL Date May 8 8 Account Titles and Explanation Sales Returns and Allowances Accounts Receivable (To record credit granted to Beyer Video, for returned goods) Merchandise Inventory Cost of Goods Sold (To record cost of goods returned) Dr. 300 Cr. 300 140 Sales Returns and Allowances is a CONTRA-REVENUE account. It’s normal balance is a DEBIT.

SALES DISCOUNTS Seller offers customer a cash discount for prompt payment of balance due. Credit terms indicate the discount percent, Discount period, and final due date. 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.

RECORDING SALES DISCOUNTS GENERAL JOURNAL Date May 14 Account Titles and Explanation Cash Sales Discounts Accounts Receivable (To record collection within 2/10, n/30 discount period from Beyer Video) Dr. Cr. 3, 430 70 3, 500 Sales discounts is a CONTRA-REVENUE ACCOUNT. It’s normal balance is a DEBIT.

COMPLETING THE ACCOUNTING CYCLE Study Objective 4 After all adjustments have been posted, closing entries are prepared from the Income Statement section of the worksheet. All accounts that affect the determination of net income are closed to Income Summary. GENERAL JOURNAL Date Dec. 31 Account Titles and Explanation (1) Sales Income Summary (To close income statement accounts with credit balances). Debit Credit 480, 000

CLOSING ENTRIES Cost of Goods Sold is closed to Income Summary. GENERAL JOURNAL Date Dec. 31 Account Titles and Explanation (2) Income Summary Sales Returns and Allowances Sales Discounts Cost of goods sold Store Salaries Expense Rent Expense Freight -out Advertising Expense Utilities Expense Depreciation Expense Insurance Expense (To close income statement accounts with debit balances) Debit Credit 450, 000 12, 000 8, 000 316, 000 45, 000 19, 000 7, 000 16, 000 17, 000 8, 000 2, 000

CLOSING ENTRIES GENERAL JOURNAL Date 2002 Dec. 31 Account Titles and Explanation (3) Income Summary Retained Earnings (To close net income to retained earnings ) Debit Credit 30, 000 (4) 31 Retained Earnings Dividends (To close dividends to retained earnings ) 15, 000 After the closing entries are posted, all temporary accounts have zero balances.

STUDY OBJECTIVE 5 MULTIPLE - STEP INCOME STATEMENT Illustration 5 -6 Computation of Net Sales revenues Sales $480, 000 Less: Sales returns & allowances Sales Discounts Net Sales $12, 000 8, 000 20, 000 $460, 000

STUDY OBJECTIVES 5 & 6 MULTIPLE - STEP INCOME STATEMENT The multiple step income statement arrives at net income in stages. Sellers Electronix Income Statement Net Sales Less: Cost of Goods Sold Gross Profit Operating Expenses Net Income $460, 000 316, 000 $144, 000 114, 000 $30, 000 The multiple step income statement also distinguished between operating and non-operating activities.

MULTIPLE - STEP INCOME STATEMENT NON-OPERATING ACTIVITIES OTHER REVENUES & GAINS OTHER LOSSES & EXPENSES Interest revenue Interest expense Dividend revenue Casualty losses Rent revenue Loss from employee strikes Gains on sale of assets Loss on sale of assets

SINGLE-STEP INCOME STATEMENT Sellers Electronix Income Statement For the Year Ended December 31, 2006 All data are classified under Revenues two categories: Net sales 1 Revenues Interest revenue Gain on sale of equipment 2 Expenses Total revenues Only one step is required in Expenses determining net income or net loss. Cost of goods sold Selling expenses Administrative expenses Interest expense Casualty loss from vandalism Total expenses Net income $ 460, 000 3, 000 600 463, 600 $ 316, 000 76, 000 38, 000 1, 800 200 432, 000 $ 31, 600

STUDY OBJECTIVES 7 COST OF GOODS SOLD—PERIODIC INVENTORY Sellers Electronix Cost of Goods Sold For the year ended December 31, 2006 Cost of Goods Sold: Inventory, January 1 $36, 000 Purchases Less: Purchase returns & allowances Purchase discounts Net purchases Add: Freight-in $325, 000 $10, 400 6, 800 17, 200 307, 800 12, 200 Cost of Goods Purchased 320, 000 Cost of Goods Available for Sale 356, 000 Inventory, December 31 (physical count required) 40, 000 Cost of Goods Sold 316, 000