Chapter 6 Accounting for Merchandising Businesses Learning Objective 1 Distinguish between the activities and financial statements of service and merchandising businesses. Nature of Merchandising Businesses Service Business Provide services rather than products to customers. Merchandising Business Sell products they purchase from other business to customers. Manufacturing Business Change basic input into products that are sold to customers. Learning Objective 2 Describe and illustrate the financial statements of a merchandising business. Sales is the total amount charged to customers for merchandise sold, including cash sales and sales on account. Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. Trade Discount is granted by the seller to government agencies or business that order large quantities. Sales discounts are granted by the seller to customers for early payment of amounts owed. The buyer may return damaged or defective merchandise to the seller ( purchase return). Sellers may offer customers sales discounts for early payment of their bills. From the buyer’s perspective, such discounts are referred to as purchase discounts.
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Chapter 6
Learning Objective 3 Describe and illustrate the accounting for merchandising transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; dual nature of merchandising transactions. On January 3, Net Solutions sold $1,800 of merchandise for cash. The cost of merchandise sold and the decrease in merchandise inventory are also recorded. The cost of merchandise sold on January 3 is $1,200. On January 12, Net Solutions sold merchandise on account for $510. The cost of merchandise sold was $280. Date Jan. 3 Jan. 3 Jan. 12 Jan. 12
Description Cash Sales Cost of merchandise sold Merchandise inventory Account receivable Sales Cost of merchandise sold Merchandise inventory
Debit 1,800
Credit 1,800
1,200 1,200 510 510 280
280
Sales Discounts The terms for when payments for merchandise are to be made are called credit terms. If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay. Credit Terms To encourage the buyer to pay before the end of the credit period, the seller may offer a discount, such as 2/10, n/30. These terms indicate that a two percent discount can be taken if the invoice is paid within ten days. After ten days the full amount is due by the thirtieth day from the invoice date.
Receipts on Account On January 7, Net solutions sold merchandise on account $1,500 to Kool Co. terms 2/10, n/30. The cost of merchandise sold is $400. Ghazal Zainy
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Chapter 6 On January 17, Net Solutions receives the amount due within ten days, so the buyer deducted $30 ($1,500 x 2%) from the invoice amount. Date Jan. 7 Jan. 7 Jan. 17
Description Accounts Receivable Sales Cost of Merchandise sold Merchandise inventory Cash Sales discounts Account receivable
Debit 1,500
Credit 1,500
400
400
1,470 30 1,500
Credit Memo (sales Retunes and allowance) A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable. On January 13, Net solution issued Credit Memo No. 32 to Krier Company for merchandise returned. Selling price, $225; cost to Net Solutions, $140. Date Jan. 13 Jan. 13
Description Sales returns and allowances Account receivable – Krier Co. Merchandise inventory Cost of merchandise sold
Debit 225
Credit 225
140
140
Purchase Transactions On January 3, Net Solutions purchased merchandise for cash. On January 4, Net Solutions purchased merchandise on account from Thomas Corporation. Date Jan. 3 Jan. 4
Description Merchandise inventory Cash Merchandise inventory Account payable - Thomas Corporation
Debit 2,510 9,250
Credit 2,510 9,250
Purchases Discounts
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Chapter 6 A buyer may receive a discount from the seller (sales discount) for early payment of the amount owed. From the buyer’s perspective, such discounts are called purchases discounts.
Alpha Technologies issued an invoice for $3,000 to Net Solutions dated March 12, with terms 2/10, n/30.
Date Mar. 12
Description Merchandise inventory Account payable - Alpha Technologies
Debit 3,000
Credit 3,000
March 22, Net Solutions pays the amount due, less the discount, on March 22.
Date Mar. 22
Description Account payable - Alpha Technologies Cash Merchandise Inventory
Debit 3,000
Credit 2,940 60
Discount Not Taken Assume that, instead of paying the invoice within the discount period, Net Solutions pays the invoice on April 11. Date Apr. 11
Description Account payable - Alpha Technologies Cash
Debit 3,000
Credit 3,000
Purchases Returns and Allowances A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. From a buyer’s perspective, such returns are called purchases returns and allowances. A debit memorandum , often called a debit memo, informs the seller of the amount the buyer proposes to debit to the account payable due the seller. Debit Memo Net Solutions receives a delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems. Net Solutions records the return of the merchandise as follows: Ghazal Zainy
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Chapter 6 Date Mar. 7
Description Account payable - Maxim Systems Merchandise inventory
Debit 900
Credit 900
Merchandise Purchased On May 2, Net Solutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30. On May 4, Net Solutions returned $3,000 of the merchandise purchased from Delta Data Link.
Date May. 2 May. 4
Description Merchandise inventory Account payable - Delta Data Link Account payable - Delta Data Link Merchandise inventory
Debit 5,000
Credit 5,000
3,000
3,000
Invoice Paid On May 12, Net Solutions paid for the purchase of May 2 less the return and discount. Date May. 12
Description Account payable - Delta Data Link Cash Merchandise inventory
Debit 2,000
Credit 1,960 40
Freight
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Chapter 6 If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, the terms are said to be FOB (free on board) shipping point. If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB (free on board) destination.
On June 10, Net Solutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the shipping cost of $50. Date June. 10 Jan. 10
Description Merchandise inventory Account payable - Magna Data Merchandise inventory Cash
Debit 900 50
Credit 900 50
Sale Plus Freight Cost On June 15, Net Solutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. On June 15, Net Solutions pays freight of $40 on the sale of June 15.
Date June. 15 Jun. 15 June. 15
Description Account receivable - Kranz Company Sales Cost of Merchandise Sold Merchandise inventory Delivery expense Cash
Debit 700
Credit 700
480 480 40 40
‘ Trade Discounts When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts.
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Chapter 6 Financial Statements for a Merchandising Business: Multiple-step Income statementmanes the INCOME STATEMENT contains several sections, subsections and subtotals. Revenue and Sales Sales, Sales returns and allowances and sales discounts. Net Sales is determined by subtracting Sales returns and allowances and Sales discounts from Sales. Net Sales= Sales-(Sales returns and allowances +Sales discounts)
Cost of Merchandising Sold is the cost of merchandising sold to customers, merchandise consist of all the costs acquiring the merchandise and readying it sales, such as purchase and freight cost. Cost of Merchandising Sold =Inventory1/1 +Cost of Purchases- Inventory13/12 Cost of Purchases=Purchases-Purchases returns and allowances-Purchases discounts
Gross Profit is computed subtraction the cost of merchandise from net sales. Gross Profit= Net Sales- Cost of Merchandising Sold Income from Operationis determined by subtracting operation expenses (sales expenses, administrative expense) from gross profit. Income from Operation= Gross Profit- Expenses Other Income and ExpenseItems are not related to the primary operation of the business. For examples interest revenues and interest expenses. Net income = Income from Operation+ Other Income-Other expenses.
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Step Income Statementsfrom emphasizes total revenues and total expenses are determining net income.
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Sales Transactions Cash Sales Cash
Sales on Account
xxx
Sales
Account receivable xxx
xxx
Sales
xxx
Cost of merchandise sold Cost of merchandise sold
xxx
Merchandise inventory No Sales discount
xxx
Sales Discounts (Receipts on Account) Cash
xxx
Sales Discounts
xxx
Account Receivables
xxx
Sales Returns and allowances Sales Returns and allowances
xxx
Cash
Sales Returns and allowances
xxx
xxx
Account Receivables
Merchandise Inventory
xxx
xxx
Cost of merchandise sold
xxx
Purchase Transactions Cash Purchase Merchandise Inventory Cash
Purchased on Account xxx
Merchandise Inventory xxx
No Cash Discount
xxx
Account Payable
xxx
Purchases Discounts Account payable
xxx
Cash
xxx
Merchandise inventory
xxx
Discount Not Taken Account payable
xxx
Cash
xxx
Purchases Returns and Allowances Account payable Cash
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Account payable xxx
Merchandise inventory
xxx xxx
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Net Sales= Sales-(Sales returns and allowances +Sales discounts) Cost of Merchandising Sold =Inventory1/1 +Cost of Purchases- Inventory13/12 Cost of Purchases=Purchases-Purchases returns and allowances-Purchases discounts Gross Profit= Net Sales- Cost of Merchandising Sold Income from Operation= Gross Profit- Expenses Net income = Income from Operation+ Other Income-Other expenses.
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