Chapter 5 Accounting for Merchandising Business Nature of Merchandising Business Revenue activities of a merchandising business involve the buying and selling of merchandise They purchase merchandise which is resold to customers Comparison to Service Business Service Business Merchandising Business Fees earned Sales Less Operating expenses Less Cost of merchandise sold Net income Gross Profit Less Operating expenses Net Income New Accounts on the Income Statement o SALES revenues collected from the sale of merchandise o COST OF MERCHANDISE SOLD the purchase price plus incidentals of merchandise available for resale o GROSS PROFIT Sales COMS INCOME STATEMENT Gem City Music Income Statement For the Year Ended December 31 20 Revenue from sales Sales 189 300 Less Sales returns and allowances 1 700 Sales discounts 500 2 200 Net sales 187 100 Cost of merchandise sold XXXX 100 000 Gross profit 87 100 Operating expenses Selling expenses Sales salaries expense 17 700 Administrative expenses Rent expense 7 800 Office salaries expense 22 550 Depreciation expense office equipment 2 800 33 150 Total operating expenses 50 850 Income from operations 36 250 Other expense Interest expense 2 000 Net income 34 250 Fall 2007 Prof M Mari Page 1 Chapter 5 Accounting for Merchandising Business XXXX Computation of Cost of Merchandise Sold Purchases Less merchandise inventory December 31 Cost of merchandise sold Computation of Cost of Merchandise Purchased Purchases Less purchases returns and allowances Less purchases discount Net purchases Add transportation in Cost of merchandise purchased New Accounts on the Balance Sheet o Merchandise inventory merchandise on hand at the end of an accounting period Merchandising Transactions Chart of Accounts for Merchandising Business Assets Cash Accounts receivable Merchandise inventory Office Supplies Prepaid Insurance Store Equipment Acc Depreciation Office Equipment Acc Depreciation Liabilities Accounts payable Salaries payable Unearned rent Fall 2007 Prof M Mari Page 2 Chapter 5 Accounting for Merchandising Business Notes payable Stockholder s Equity Capital stock Retained earnings Dividends Income Summary Revenues Sales Sales returns and allowances Sales discounts Costs and Expenses Sales salaries expense Advertising expense Depreciation expense Misc selling expense Office salaries expense Rent expense Insurance expense Office supplies expense Other income Rent revenue Other expense Interest expense Accounting for Sales Under the perpetual inventory system all sales require the reporting of the removal of inventory from the books at the same time 1 CASH SALES Example 1 Sold merchandise for cash 5 000 Cost of merchandise sold 3 200 Date Account PR Debit Credit Cash 5 000 Sales 5 000 Fall 2007 Prof M Mari Page 3 Chapter 5 Accounting for Merchandising Business Cost of merchandise sold Merchandise inventory 3 200 3 200 Note that sales are credited for the sales price and merchandise inventory is credited for the COST 2 MASTERCARD OR VISA The transaction requires a debit to CASH since the money is deposited in the vendor s account overnight But a reduction of the cash account must be made for the service charge from the credit card company which is directly taken out of the account Example 2 Sold merchandise on VISA 10 000 Cost of merchandise sold is 4 000 Credit card expense is 3 of sales Date Account PR Cash Sales Debit 10 000 Credit 10 000 Cost of merchandise sold Merchandise inventory 4 000 Credit card expense Cash 300 4 000 300 Example 3 Sold merchandise on VISA 6 000 Cost of merchandise sold is 3 000 Credit card expense is 3 of sales Date Fall 2007 Prof M Mari Page 4 Account PR Debit Credit Chapter 5 Accounting for Merchandising Business 3 SALES ON ACCOUNT Includes sales to nonblank credit cards such as AMERICAN EXPRESS Example 4 Sold merchandise on account 6 000 Cost of merchandise sold is 3 000 Date Account Accounts receivable Sales Cost of merchandise Merchandise inventory PR Debit 6 000 Credit 6 000 3 000 3 000 Recap Under the perpetual inventory system all sales transactions consist of at least two entries The first entry records the sale at the selling price with a debit to how it will be paid and credit to sales The second entry records the merchandise leaving the business with a debit to cost of merchandise sold and credit to merchandise inventory for the cost of the merchandise Sales Discounts A reduction in the price of the good for early payment This account is a contra SALES Upon payment of the account receivable if the payment is within the discount period we record the discount Credit terms terms of when payments for merchandise are to be made Net 30 days full amount due in 30 days 2 10 2 discount if paid within 10 days Example 5 Sold merchandise on account 5 000 terms 2 10 n 30 Cost of merchandise sold is 4 000 Sales Discount Fall 2007 Prof M Mari Page 5 5 000 2 Chapter 5 Accounting for Merchandising Business Date Discount 100 Sales Less discount Net amount 5 000 100 4 900 Account PR Cash Sales discount Accounts receivable Debit 4900 100 Credit 5000 Sales Returns and Allowances Merchandise sold may be returned to the seller Merchandise sold may be reduced in price due to defects This account is CONTRA sales Increases with a debit Example 6 Sold merchandise on account 7 000 terms 1 15 n 30 Cost of merchandise sold is 3 800 Date Account Accounts receivable Sales PR Debit 7 000 Credit 7 000 Cost of merchandise Merchandise inventory 3 800 3 800 Return merchandise with sales price of 2 000 and cost of 1 000 Date Account Sales returns Accounts receivable Merchandise inventory Cost of merchandise sold Fall 2007 Prof M Mari Page 6 PR Debit 2 000 Credit 2 000 1 000 1 000 Chapter 5 Accounting for Merchandising Business Example 7 ABC Merchandising had the following transactions a Sold merchandise and received payment by VISA at 6 000 cost of merchandise sold is 4 000 b Sold merchandise on account for 7 500 with credit terms 1 10 n 30 Cost of the merchandise is 4 500 c Sold merchandise on account for 4 000 cost of merchandise is 2 500 d Received a return of the merchandise in c of sales price of 2 000 and cost of 1 750 e Received payment within the discount period for merchandise in b f Received payment for merchandise in c Record the Transactions Accounting for Purchases Under perpetual inventory system Example 8 Purchase merchandise for resale 4 000 on account Date Mar 1 Account Merchandise inventory Accounts payable PR Debit 4 000 Credit 4 000