This document provides an overview of accounting for merchandising activities. It discusses key concepts such as merchandising companies, inventory, perpetual and periodic inventory systems, adjusting entries, income statements, and sales taxes. The document contains learning objectives, definitions, journal entries, examples, and review questions to help explain accounting for merchandising businesses.

1. AAccccoouunnttiinngg ffoorr
MMeerrcchhaannddiissiinngg
AAccttiivviittiieess
CHAPTER
5
PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
© 2013 McGraw-Hill Ryerson Limited.

2. LLeeaarrnniinngg OObbjjeeccttiivveess
1. Describe merchandising and identify and
explain the important income statement
and balance sheet components for a
merchandising company. (LO1)
2. Describe both periodic and perpetual
merchandise inventory systems. (LO2)
3. Analyze and record transactions for
merchandise purchases and sales using a
perpetual system. (LO3)
2 © 2013 McGraw-Hill Ryerson Limited.

3. LLeeaarrnniinngg OObbjjeeccttiivveess
4. Prepare adjustments for a merchandising
company. (LO4)
5. Define, prepare, and use merchandising
income statements. (LO5)
6. Prepare closing entries for a merchandising
company. (LO6)
© 2013 McGraw-Hill Ryerson Limited.
3

4. LLeeaarrnniinngg OObbjjeeccttiivveess
7. Record and compare merchandising
transactions using both periodic and
perpetual inventory systems.
(Appendix 5A) (LO7)
8. Explain and record Provincial Sales Tax
(PST) and Goods and Services Tax
(GST). (Appendix 5B) (LO8)
© 2013 McGraw-Hill Ryerson Limited.
4

5. MMeerrcchhaannddiissiinngg AAccttiivviittiieess
Merchandiser: A company that earns net
income by buying and selling merchandise.
Wholesaler: A company that buys products
from manufacturers or other wholesalers
and sells them to retailers or other
wholesalers.
© 2013 McGraw-Hill Ryerson Limited.
LO 1
5

6. CCoommppuuttiinngg NNeett IInnccoommee
Merchandiser Service Company
Net Sales
Cost of Goods
Sold
Gross Profit
Operating
Expenses
Revenues
Operating
Expenses
Net Income Net Income
© 2013 McGraw-Hill Ryerson Limited. LO 1
6

7. IInnvveennttoorryy
Products a company owns for the purpose
of selling to customers.
• It is often referred to as Merchandise
Inventory.
• Is classified as a current asset.
© 2013 McGraw-Hill Ryerson Limited.
LO 1
7

8. MMeerrcchhaannddiissee IInnvveennttoorryy
Cost of merchandise inventory
includes:
• Costs incurred to purchase the goods.
• Shipping costs.
• Other costs required to make goods
ready for sale.
© 2013 McGraw-Hill Ryerson Limited.
LO 1
8

9. MMeerrcchhaannddiissiinngg CCoosstt FFllooww
Beginning
Merchandise
Inventory
Ending
Merchandise
inventory
Cost of goods
© 2013 McGraw-Hill Ryerson Limited.
sold
LO 1
9
Net cost of
Purchases
Merchandise
available for
sale

10. MMeerrcchhaannddiissee IInnvveennttoorryy SSyysstteemmss
Perpetual
Provides a continuous record of:
• The amount of merchandise inventory on hand.
• Cost of goods sold to date.
Periodic
Requires a physical count of goods to determine:
• The amount of merchandise inventory on hand.
• Cost of goods sold.
© 2013 McGraw-Hill Ryerson Limited.
LO 2
10

11. Perpetual System-Example
Purchases
Nov. 2 Merchandise Inventory 1,200
Accounts Payabl1,200 e
Purchased merchandise inv. on account
Purchase Returns and Allowances
Nov.5 Accounts Payable 300
3 0 0 Merchandise Inventory
Purchase allowance re: debit memo
© 2013 McGraw-Hill Ryerson Limited.
LO 3
11

12. Terms
Time
Due
PPuurrcchhaassee//SSaalleess DDiissccoouunnttss
A deduction from the invoice price granted to
induce early payment of the amount due.
Example – 2/10, n30
Discount Period
= 10 days
Credit Period = 30 days
Nov.2 Nov.12 Dec.2
(Full amount minus 2%
discount) due between
Nov.2 and Nov.12
Full amount due
anytime between
Nov.13 and Dec.2
Purchase or Sale
© 2013 McGraw-Hill Ryerson Limited. LO 3
12

13. Perpetual System — Example
Purchase Discounts- Assume the purchase of
merchandise inventory on November 2 was on the
terms 2/10,n30.
Case 1-Discount taken
Nov.12 Accounts Payable 900
Merchandise 18 Inventory
8 8 2 Cash
2% x (1,200 - 300) = 18
Case 2-Discount not taken
Nov.12 Accounts Payable 900
9 0 0 Cash
© 2013 McGraw-Hill Ryerson Limited.
LO 3
13

14. MMiinnii--QQuuiizz
Prepare journal entries for each of the following
transactions. Assume a perpetual merchandise
inventory system.
October 6: Purchased 650 units of merchandise inventory
at $5 per unit.
The seller offered a cash discount of 2/10, n/30.
October 8: Returned 25 defective units and received full
credit.
October 10:Paid the amount in full, less the returned items.
© 2013 McGraw-Hill Ryerson Limited.
LO 3
14

15. MMiinnii--QQuuiizz
Oct.6 Merchandise Inventory 3,250
A/P
3,250
(650 x 5)
8 A/P 125
Merchandise Inventory
125
(25 x 5)
11 A/P 3,125
Merchandise Inventory
62.50
© 2013 McGraw-Hill Ryerson Limited. LO 3
Cash
15
3,062.50 (3,250-125) x

16. TTrraannssppoorrttaattiioonn CChhaarrggeess ––
PPeerrppeettuuaall SSyysstteemm
Seller Goods Buyer
FOB Shipping Point
(Buyer pays
shipping charges)
FOB Destination
(Seller pays for
shipping charges)
Carrier
© 2013 McGraw-Hill Ryerson Limited. LO 3
16

17. Perpetual System — Example
Transportation Costs
Nov.24 Merchandise Inventory 75
Cash 75
Paid freight charges on purchased merchandise.
© 2013 McGraw-Hill Ryerson Limited.
LO 3
17

18. Perpetual System — Example
Sales of Merchandise
Nov.12 Accounts Receivable 1,000
Sales 1,000
Sold merchandise on terms 2/10,n60
Cost of goods sold 600
Merchandise Inventor600 y
To record cost of merchandise sold
© 2013 McGraw-Hill Ryerson Limited.
LO 3
18

19. Perpetual System — Example
Customer Payment
Case 1-Customer pays in 60 days
Jan.11 Cash 1,000
Accounts receivable 1,000
Received payment for Nov. 12 sale
Case 2-Customer pays in 10 days
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Nov.22 Cash 980
Sales discounts 20
Accounts receivable 1,000
Received payment less the discount
19

20. Perpetual System — Example
Sales Returns and Allowances
Nov.6 Sales Returns & Allowance 800
Accounts Receivabl800 e
Customer returned merchandise
Merchandise Inventory 600
6 0 0 Cost of Goods Sold
Returned goods to merchandise inventory
© 2013 McGraw-Hill Ryerson Limited.
LO 3
20

21. AAddjjuussttmmeennttss--
PPeerrppeettuuaall MMeerrcchhaannddiissee IInnvveennttoorryy
• Perpetual merchandise inventory systems
keep a running total of inventory levels by
recording sales and purchase transactions.
• Periodic adjustments must be made to
account for shrinkage (loss due to theft or
deterioration of merchandise inventory).
© 2013 McGraw-Hill Ryerson Limited.
LO 4
21

22. Perpetual System — Example
Inventory per accounting records: $21,250
Inventory per physical count: -$21,000
Difference (shrinkage) $250
Adjustment required:
Dec.31 Cost of Goods Sold 250
Merchandise Inventory 250
To record inventory shrinkage revealed
by physical count.
© 2013 McGraw-Hill Ryerson Limited.
LO 4
22

23. IInnccoommee SSttaatteemmeenntt FFoorrmmaattss
Income statements may be formatted
in a variety of ways.
Typical formats are:
• Classified, Multiple-Step
• Multiple-Step
• Single-Step
© 2013 McGraw-Hill Ryerson Limited.
LO 5
23

24. MEC
Income Statement
For Year Ended December 31, 2014
Sales $ 321,000
Less: Sales discounts $ 4,300
Sales returns and allowances 2,000 6,300
Net sales 314,700
Cost of goods sold 230,400
Gross profit 84,300
Operating expenses:
Selling expenses:
Sales salaries expense $ 18,500
Advertising expense 11,300
Rent expense, selling space 8,100
Depreciation expense, store equipment 3,000
Store supplies expense 1,200
Total selling expenses $ 42,100
General and administrative expenses:
Office salaries expense $25,300
Office supplies expense 1,800
Rent expense,office space 900
Depreciation expense, office equipment 700
Insurance expense 600
Total general and administrative expenses 29,300
Total operating expenses 71,400
Income from operations $ 12,900
Other revenues and expenses:
Rent revenue $ 2,800
Interest expense (360) 2,440
Net income $ 15,340
Classified
Multi-step
Format
(for internal
reporting)
© 2013 McGraw-Hill Ryerson Limited. LO 5
24

25. MEC
Income Statement
For Year Ended December 31, 2014
Sales, net $ 314,700
Cost of goods sold 230,400
Gross profit 84,300
Operating expenses:
Sales salaries expense $ 43,800
Advertising expense 11,300
Rent expense 9,000
Depreciation expense 3,700
Supplies expense 3,000
Insurance expense 600
Total operating expense 71,400
Income from operations $ 12,900
Other revenues and expenses:
Rent revenue 2,800
Interest expense (360) 2,440
Net income $ 15,340
Multi-step
Format
(for external
reporting)
© 2013 McGraw-Hill Ryerson Limited. LO 5
25

26. Revenues:
MEC
Income Statement
For Year Ended December 31, 2014
Net $ 314,700
Rent revenue 2,800
Total revenues 317,500
Expenses:
Cost of goods sold $ 230,400
Selling expense 42,100
General and administrative expense 29,300
Interest expense 360
Total expenses 302,160
Net income $ 15,340
Single-step
Format
(for external
reporting)
© 2013 McGraw-Hill Ryerson Limited. LO 5
26

27. GGrroossss PPrrooffiitt RRaattiioo
• The amount of gross profit expressed as a
percentage of net sales.
• May be tracked over time and/or compared
to similar businesses.
• May be calculated for whole business,
departments, products.
Gross profit from sales
Net sales
© 2013 McGraw-Hill Ryerson Limited.
Gross
profit ratio =
X 100%
LO 5
27

28. Closing EEnnttrriieess--PPeerrppeettuuaall SSyysstteemm
• The closing process is similar for
merchandising and service companies.
• Merchandising companies have additional
temporary accounts that must be closed.
These include:
• Sales
• Sales Returns & Allowances
• Sales Discounts
• Cost of Goods Sold
© 2013 McGraw-Hill Ryerson Limited.
LO 6
28

29. RReevviieeww
Q Identify and explain the components of income
for a merchandising company.
A The basic components of income start with net
sales. From net sales is subtracted the cost of
goods sold. The resulting amount is called
gross profit or gross margin. Selling and
general and administrative expenses are
subtracted from gross profit to determine
income from operations.
© 2013 McGraw-Hill Ryerson Limited.
29

30. RReevviieeww
Q Explain the difference between single-step and
multiple-step income statements.
A A single-step income statement format
includes cost of goods sold as an operating
expense, and shows only one subtotal for total
expenses. Operating expenses are highly
summarized.
A multiple-step income statement shows
intermediate totals between sales and net
income. It also includes detailed computations
of net sales and cost of goods sold.
© 2013 McGraw-Hill Ryerson Limited.
30

31. AAppppeennddiixx 55AA-- PPeerriiooddiicc aanndd PPeerrppeettuuaall
MMeerrcchhaannddiissee IInnvveennttoorryy SSyysstteemmss
CCoommppaarreedd
Periodic systems
Merchandise Inventory is updated at the end
of the period based on a physical count.
Perpetual systems
Merchandise Inventory is updated after each
sale or purchase.
© 2013 McGraw-Hill Ryerson Limited.
LO 7
31

32. Appendix 5A - Example
Periodic System Perpetual System
Purchase of Merchandise
Purchases 1200 Merchandise Inventory 1200
Accounts Payable 1200 Accounts Payable 1200
Return of Merchandise
Accounts Payable 300 Accounts Payable 300
Purchase Returns 300 Merchandise Inventory 300
© 2013 McGraw-Hill Ryerson Limited.
LO 7
32

33. Appendix 5A - Example
Periodic System Perpetual System
Purchase Discount Taken (2/10, n30)
Accounts Payable 900 Accounts Payable 900
Purchase Discounts 18 Merchandise Inventory 18
Cash 882 Cash 882
Transportation Charges
Transportation-in 75 Merchandise Inventory 75
Cash 75 Cash 75
© 2013 McGraw-Hill Ryerson Limited.
LO 7
33

34. Appendix 5A - Example
Periodic System Perpetual System
Sale of merchandise
Accounts Receivable 2400 Accounts Receivable 2400
Sales 2400 Sales 2400
© 2013 McGraw-Hill Ryerson Limited.
LO 7
34
Cost of Goods Sold 1600
Merchandise Inventory 1600

35. Appendix 5A - Example
Periodic System Perpetual System
Sales Returns & Allow. 800 Sales Returns & Allow. 800
Accounts Receivable 800 Accounts Receivable
800
© 2013 McGraw-Hill Ryerson Limited.
Sales Return
LO 7
35
Merchandise Inventory 600
Cost of Goods Sold
600

36. Appendix 55BB –– SSaalleess TTaaxx
Provincial Sales Tax (PST)
A consumption tax applied on sales to the
final consumers of products or services.
•Is not applicable to all sales.
•Varies from province to province.
•Amount collected is a liability.
© 2013 McGraw-Hill Ryerson Limited. LO 8
36

37. Appendix 55BB -- SSaalleess TTaaxx
Goods and Services Tax (GST)
A 5% tax on almost all goods and services
provided in Canada.
•Is ultimately paid by the final consumer.
•Is uniform from province to province.
•Amount collected by a business is a liability.
•Amount paid by a business offsets the GST
owing.
© 2013 McGraw-Hill Ryerson Limited. LO 8
37

38. AAppppeennddiixx 55BB -- SSaalleess TTaaxx
Harmonized Sales Tax (HST)
Is a combined GST and PST rate applied
to taxable supplies.
© 2013 McGraw-Hill Ryerson Limited. LO 8
38

39. Appendix 5B - Example
Purchase of Merchandise
Assume: Perpetual system and 5% GST.
Merchandise Inventory 600
GST Receivable 30
Accounts Payable 630
© 2013 McGraw-Hill Ryerson Limited.
LO 8
39

40. Appendix 5B - Example
Sale of Merchandise
Assume: Perpetual system, 7% PST and 5% GST.
Accounts Receivable 1,008
Sale900 s
6 3 PST Payable
4 5 GST Payable
T o record sale of merchandise
Cost of goods sold 600
6 0 0 Merchandise Inventory
To record cost of merchandise sold
© 2013 McGraw-Hill Ryerson Limited.
LO 8
40

41. EEnndd ooff CChhaapptteerr
41 © 2013 McGraw-Hill Ryerson Limited.