Accounting for Merchandising Businesses Chapter 4 A200 Survey of Accounting University of Tennessee 2 Merchandising Operations A merchandiser is both a buyer and a seller of goods 1 Purchases goods from manufacturers Cost of merchandise purchased is recorded on the balance sheet as the current asset Inventory 2 Sells goods to customers Cost of merchandise sold is removed from Inventory on the balance sheet and is recorded on the income statement as Cost of Goods Sold Expense matching it with the revenue from the sale 3 Costs of running the business are recorded as Selling Expense and Administrative Expense on the income statement 4 Income and expenses not related to buying and selling merchandise normal operations are recorded as Other Income or Other Expense on the income statement 3 Merchandising Business Income Statement Merchandising Company Income Statement Multi Step For the year ended 12 31 12 Revenue Sales xx Sales Returns Allowances Sales Discounts Net Sales xx xx xx Expenses Cost of Merchandise Sold Expense Gross Profit xx xx 4 Merchandising Business Income Statement continued Gross Profit xx Operating Expenses Selling Expenses xx Administrative Expenses xx Income from operations xx Other income Other expenses Net income xx xx 5 Merchandiser Returns and Allowances Merchandiser as Seller Sales Returns and Allowances Price reductions given by merchandisers sellers to customers when customers return goods Sales R A reduce the seller s Sales Revenue for the period thus is defined as contra revenue Merchandiser as Buyer Purchase Returns and Allowances Cost reductions taken by merchandisers buyers when they purchase goods from manufacturers and then return them Purchase R A reduce the buyer s cost of Inventory Not pre set amounts negotiated situation by situation Merchandiser Discounts Merchandiser as Seller Sales Discounts Price reductions given by merchandisers sellers when they sell goods to customers to encourage customers to pay quickly Sales Discounts reduce the seller s Sales Revenue for the period thus is defined as contra revenue Merchandiser as Buyer Purchase Discounts Cost reductions taken by merchandisers buyers when they buy goods from manufacturers and then pay quickly Purchase Discounts reduce the buyer s cost of Inventory Typical discount terms 2 10 net 30 a 2 discount is offered if payment is made within 10 days otherwise full payment is due within 30 days n 30 or net 30 no discount is offered full payment is due within 30 days n eom no discount is offered full payment is due at the end of the month 6 7 Discount Example On July 1 Sharp Company sold on account 100 units of product to Bean Company for 3 500 Sharp offered a discount of 2 10 net 30 1 How much will Bean pay to Sharp if it pays the invoice on July 5 3 430 3 500 3 500 x 02 Purchase discount to the buyer Bean reduces cost of Inventory Sales discount to the seller Sharp reduces Sales Revenue 2 How much will Bean pay to Sharp if it pays the invoice on July 25 3 500 8 Freight cost transportation in a Merchandising business Who owns the goods during transit Who is responsible for shipping costs FOB Shipping Point The Buyer owns the goods during transit The Buyer pays the shipping costs which increase buyer s cost of inventory a current asset on the Balance Sheet FOB Destination The Seller owns the goods during transit The Seller pays the shipping costs which increase seller s Transportation Out a selling expense on the Income Statement Note Whoever owns the goods during transit pays for the shipping 9 Freight transportation Example On August 1 Best Company purchased on account 100 units of product from Slope Company for 4 600 The credit terms are n eom and shipping costs are 50 Slope Company pre paid the shipping costs because the trucking company demanded payment before it would take the shipment 1 How much will Best pay to Slope if the shipping terms were FOB shipping point 4 650 2 How much will Best pay to Slope if the shipping terms were FOB destination 4 600 Merchandiser as Seller accounting for the sale of merchandise 10 Transaction 1 Seller On May 1 Sink Company sold goods on account to Boots Company for 2 500 Sink s cost of merchandise sold is 1 500 Terms are 2 10 net 30 FOB shipping point Transportation costs of 75 were paid by Boots Sink will record two separate entries 1 Record the revenue and 2 Remove the inventory from their books Note Always ask yourself who pays for shipping before you work a problem Sink seller will record Effect on Statement of Cash Flows Effect on Income Statement and Stmt of Retained Earnings Balance Sheet Assets Accounts Receivable Merchandise Inventory 2 500 1 500 Liabilities Equity Retained Earnings 2 500 2 500 Sales Revenue 1 500 1 500 COGS Expense Merchandiser as Buyer accounting for the purchase of merchandise 11 Transaction 1 Buyer On May 1 Sink Company sold goods on account to Boots Company for 2 500 Sink s cost of merchandise sold is 1 500 Terms are 2 10 net 30 FOB shipping point Transportation costs of 75 were paid by Boots in cash Boots will record two separate transactions 1 The purchase of the inventory and 2 The payment for shipping expense Boots buyer will record Effect on Statement of Cash Flows Balance Sheet Assets Cash 75 Cash out Operating Effect on Income Statement and Stmt of Retained Earnings 75 Merchandise Inventory Liabilities Accounts Payable 2 500 75 2 500 Equity Retained Earnings Merchandiser as Seller accounting for the return of goods to the seller Transaction 2 Seller On May 5 Boots returned 500 worth of merchandise to 12 Sink Sink s cost of the returned merchandise was 350 Sink will record Increase Sales Returns Allowances contra revenue 500 Decrease Accounts Receivable asset 500 Increase Merchandise Inventory asset 350 Decrease Cost of Goods Sold expense 350 Sink seller will record Effect on Statement of Cash Flows Effect on Income Statement and Stmt of Retained Earnings Balance Sheet Assets Accounts Receivable Merchandise Inventory 500 350 Liabilities Equity Retained Earnings 500 500 Sales Returns Allowances 350 350 COGS Expense Merchandiser as Buyer accounting for the return of goods 13 Transaction 2 buyer On May 5 Boots returned 500 worth of merchandise to Sink Sink s cost of the returned merchandise was 350 Boots buyer will record Decrease Merchandise Inventory Asset 500 Decrease Accounts Payable Liability 500 Boots buyer will record Effect on Statement of Cash Flows Effect on Income Statement and Stmt of Retained Earnings Balance