acfn-ch03 (2).pptx

5-1
CHAPTER3
Accounting for
Merchandising
Operations

5-2
Service Business
Fees earned BrXXX
Operating expenses –XXX
Net income BrXXX
Merchandising
Business
Sales BrXXX
Cost of Mdse Sold –XXX
Gross Profit BrXXX
Operating Expenses –XXX
Net Income BrXXX
For a merchandising business:
1. The primary source of revenue is sales revenue
2. Expenses are divided into two categories:
a. Cost of goods sold=expired cost of merchandise sold
b. Operating expenses =administrative and selling expenses
Nature of Merchandising Business

5-3
Merchandising Companies
Buy and Sell Goods E.g. supermarkets, drugstores,
stationery shops, car dealers, electronic shops, spare part
shops, etc.
Wholesaler Retailer Consumer
The primary source of revenues is referred to as
sales revenue or sales.
Merchandising Operations

5-4
Accounting for Merchandising Businesses
Supplier/
Vendor
Customer
Merchandising
Enterprise
I
II
Inventory Systems
1. Periodic Inventory System
2. Perpetual Inventory System
Sales
Revenue
Cost=Asset
Cost of
Goods
Sold=Expense
Purchase
Returns & A.
Sales
Returns & A.
Purchase of
Inventory
Sale of
Inventory
Inward
Freight
Outward
Freight
Discounts:
Trade & Cash

5-5
Income Measurement
Cost of goods sold is the total
cost of merchandise sold during
the period.
Not used in a
Service business.

5-6
The operating cycle
of a merchandising
company ordinarily
is longer than that of
a service
company.
Operating
Cycles

5-7
Flow of Costs
Current
Purchases
Past/Previous
Purchases
Asset
Asset
When on
Hand
Expense
When Sold
Income
Stat.
Balance
sheet
Expense Asset

5-8
Perpetual Inventory System
 Maintain detailed records of the cost of each inventory purchase and sale.
 Records continuously show inventory that should be on hand.
 Company determines cost of goods sold each time a sale occurs.
 Traditionally used for merchandise with high unit values.
 Requires additional clerical work and additional cost to maintain inventory records.
 Calculation of Ending Inventory:
 Provides better control over inventories.
Beginning inventory [known -per book] xxx
Add: Purchases, net [known-per book] xxx
Goods available for sale xxx
Less: Cost of goods sold [known-per book] xxx
Ending inventory [unknown-solved for] xxx
Inventory records xxx
Inventory count xxx
Inventory shortage xxx

5-9
 Record revenues when sales are made.
 Do not record cost of merchandise sold on the date of sale.
 Physical inventory count conducted once at end of a period
determines:
► Cost of merchandise on hand and
► Cost of merchandise sold during the period.
 Record purchases in Purchases account.
 Purchase returns and allowances, Purchase discounts, and
Freight costs are recorded in separate accounts.
Periodic Inventory System
 Calculation of Cost of Goods Sold:
Beginning inventory [known-per book] xxx
Add: Purchases, net [known-per book] xxx
Goods available for sale xxx
Less: Ending inventory [known-physical count] xxx
Cost of goods sold [unknown-solved for] xxx

5-11
 Made using cash or credit (on account).
 Normally recorded when goods are received.
 Purchase invoice should support each credit purchase.
 Purchasing procedures
• Issuance of purchase requisition
• Issuance of purchase order
• Preparation of receiving report
• Recording purchase
• Settlement of invoices
Accounting Purchases of Merchandise
Inventory xxx
Cash/ Accounts Payable xxx

5-12
Illustration 1: On May 4 ABC Co. purchased merchandise costing Br.
3,800 for cash from XYZ Co.
May 4 Merchandise Inventory 3800
Cash 3800
Illustration 2: On May 4 ABC Co. purchased merchandise costing Br. 3,800
on account from XYZ Co.
Accounts Payable 3800

5-13
Seller places goods Free On
Board the carrier, and buyer
pays freight costs.
Seller places goods Free On
Board to the buyer’s place of
business, and seller pays
freight costs.
Freight Costs – Terms of Sale: Shipping Terms
Freight costs incurred by the seller are an operating expense.

5-14
Illustration 3: Assume that ABC Co. purchased the merchandise on
May 4 with freight terms of FOB Shipping point and paid Br. 150 freight
charges upon delivery of the goods on May 6, the entry on ABC’s books
is:
Illustration 4: Assume that the freight terms on the purchase by ABC
Co. (buyer) had been FOB Destination and required XYZ Co. (seller) to
pay the freight charges. The entry on ABC’s books is:
No entry
Cash 150

5-15
pay the freight charges. However, the freight of Br 150 was paid by
ABC. The entry on ABC’s books is:
Accounts receivable 150
cash 150

5-16
Purchaser may be dissatisfied because goods are damaged or
defective, of inferior quality, or do not meet specifications.
Purchase Returns and Allowances
Return goods for credit if the sale
was made on credit, or for a cash
refund if the purchase was for cash.
May choose to keep the
merchandise if the seller will
grant an allowance (deduction)
from the purchase price.
Purchase Return
Purchase Allowance
•A purchases return involves actually returning merchandise that is
damaged or does not meet the specifications of the order.
•When the defective or incorrect merchandise is kept by the buyer
and the vendor makes a price adjustment, this is a purchases
allowance.

5-17
Credit terms may permit buyer to claim a cash discount for prompt
payment.
Advantages:
 Purchaser saves money.
 Seller shortens the operating cycle.
 Example: Alpha Technologies issues an invoice for $3,000 to
Net Solutions dated March 12, with terms 2/10, n/30.
Purchase Discounts
Example: Credit terms may
read 2/10, n/30.
Determine last day to pay invoice and receive discount:
Invoice period 30
Days in March 31
Date of invoice 12
Remaining days 19
April 11

5-18
• Credit terms specify the amount of the cash discount and time
period in which it is offered. They also indicate the time period in
which the purchaser is expected to pay the full invoice price.
• Credit terms are 2/10, n/30, which is read “two-ten, net thirty.”
This means that the buyer may take a 2% cash discount on the
invoice price less (“net of”) any returns or allowances:
1. If payment is made within 10 days of the invoice date (the
discount period).
2. Otherwise, the invoice price, less any returns or allowances, is
due 30 days from the invoice date.

5-19
Alternatively, the discount period may extend to a specified
number of days following the month in which the sale occurs.
Example: 1/10 EOM (end of month) means that a 1% discount is
available if the invoice is paid within the first 10 days of the next
month.
When the seller elects not to offer a cash discount for prompt
payment, credit terms will specify only the maximum time period
for paying the balance due.
Example: The invoice may state the time period as n/30, n/60, or
n/10 EOM. This means, respectively, that the buyer must pay the
net amount (due) in 30 days, 60 days, or within the first 10 days of
the next month.

5-20
Illustration 5: Assume that on May 8 ABC returned to XYZ goods
costing $300.
Accounts payable/Cash 300
May 8
Inventory 300
Illustration 6: Assume ABC pays the balance due of $3,500 (gross
invoice price of $3,800 less purchase returns and allowances of
$300) on May 14, the last day of the discount period.
(Discount = $3,500 x 2% = $70)
Invoice paid within Discount Period
May 14 Accounts Payable 3500
Inventory 70
Cash 3430

5-21
Illustration: If ABC failed to take the discount, and instead
made full payment of $3,500 on June 3, the journal entry would
be:
Invoice paid after Discount Period
June 3 Accounts Payable 3500
Cash 3500
Summary of Purchasing Transactions:
Net purchases=Gross purchases- (Purchase returns & allowances +
Purchase discounts)

5-22
Inventory
Debit Credit
$3,500 8th - Return
$300
Balance
4th - Purchase
$3,580
70 14th - Discount
Summary of Purchasing Transactions
150
6th – Freight-in

5-23
 Made using cash or credit (on account).
 Normally recorded when
earned, usually when goods
transfer from seller to buyer.
 Sales invoice should support
each credit sale.
 Selling procedures:
• Approving purchase orders
• Inventory dispatch order
• Issuance of sales invoice
• Recording sales
• Collection of invoices
Accounting Sales of Merchandise

5-24
Journal Entries to Record a Sale
Cash or Accounts receivable XXX
Sales revenue XXX
#1
Cost of goods sold XXX
Inventory XXX
#2
Selling
Price
Cost

5-25
Accounts receivable 3,800
May 4
Sales revenue 3,800
Illustration 1: Assume XYZ Audio Supply records its May 4
sale of $3,800 to ABC on account as follows. Assume the
merchandise cost XYZ Audio Supply $2,400.
Cost of goods sold 2,400
4
Inventory 2,400

5-26
 “Flipside” of purchase returns and allowances.
 Contra-revenue account (debit).
 Sales not reduced (debited) because:
► Would obscure importance of sales returns and
allowances as a percentage of sales.
► Could distort comparisons.
Sales Returns and Allowances

5-27
Illustration 2: Prepare the entry XYZ Audio Supply would
make to record the credit for returned goods that had a $300
selling price (assume a $140 cost). Assume the goods were
not defective.
Sales returns and allowances 300
May 8
Inventory 140
8
Cost of goods sold 140

5-28
Sales returns and allowances 300
May 8
Inventory 50
8
Illustration 3: Assume the returned goods were defective
and had a scrap value of $50, XYZ Audio would make the
following entries:

5-29
 Offered to customers to promote prompt payment.
 “Flipside” of purchase discount.
 Contra-revenue account (debit).
Sales Discount

5-30
If invoice is
paid within 10
days of invoice
date
Invoice for
$3,500
Terms:
2/10, n/30
$3,430 paid
($3,500 less 2% as
a cash discount)
If invoice is
NOT paid
within 10 days
of invoice date
$3,500 PAID

5-31
Cash 3,430
May 14
Sales discounts 70
* [($3,800 – $300) X 2%]
*
Illustration 4: Assume ABC pays the balance due of $3,500
(gross invoice price of $3,800 less purchase returns and
allowances of $300) on May 14, the last day of the discount
period. Prepare the journal entry XYZ Audio Supply makes to
record the receipt on May 14.

5-32
Illustration 5: Assume that ABC Co. purchased the merchandise on
May 4 with freight terms of FOB Shipping point and paid Br. 150 freight
charges upon delivery of the goods on May 6, the entry on XYZ’s books
is:
pay the freight charges. The entry on XYZ’s books is:
No Entry
May 6 Transportation out 150
Cash 150
Summary of Sales Transactions:
Net sales = Gross sales – (Sales returns & allowances + Sales discounts)

5-33
Sales Taxes
Aug. 12 Accounts Receivable—ABC Co. 106 00
Sales 100 00
Sales Taxes Payable 6 00
Invoice No. 339
Sept.15 Sales Tax Payable 2 900 00
Cash 2 900 00
Payment for sales taxes
collected during August.

5-34
 Generally the same as a service company.
 One additional adjustment to make the records agree with
the actual inventory on hand.
 Involves adjusting Inventory and Cost of Goods Sold.
Completing the Accounting Cycle
Adjusting Entries

5-35
Illustration: Suppose that PW Audio Supply has an unadjusted
balance of $40,500 in Merchandise Inventory. Through a physical
count, PW Audio determines that its actual merchandise inventory
at year-end is $40,000. The company would make an adjusting
entry as follows.
Inventory 500
Completing the Accounting Cycle
Merchandise Inventory Shrinkage

5-36
 Shows several steps in determining net income.
 Two steps relate to principal operating activities.
 Distinguishes between operating and non-operating
activities.
Multiple-Step Income Statement
Forms of Financial Statements

5-37
Income
Statement
Presentation
of Sales

5-38
Gross Profit
Key Items:
 Net sales
 Gross profit
 Gross profit
rate

5-39
Key Items:
 Net sales
 Gross profit
 Operating
expenses
Operating
Expenses

5-40
Key Items:
 Net sales
 Gross profit
 Operating
expenses
 Non-
operating
activities
 Net income
Forms of
Financial
Statements

5-41
Key Items:
 Net sales
 Gross profit
 Operating
expenses
 Non-
operating
activities
 Net income
Forms of
Financial
Statements

5-42
Determining Cost of Goods Sold

5-43
Classified Balance Sheet

5-44
Comparison of Entries—Perpetual Vs. Periodic

5-45
Comparison of Entries—Perpetual Vs. Periodic

5-46
Worksheet For Merchandising Enterprise

5-47
The unadjusted trial balance of Alpha Trading Private Limited Company on December
31, 2002 is presented below.
Debit Credit
Cash Br 2,300
Accounts Receivable 12,500
Prepaid Insurance 5,600
Merchandise Inventory 23,700
Supplies 5,700
Equipment 17,300
Accumulated Depreciation-Equipment Br3,500
Accounts Payable 3,500
Notes Payable 19,600
Sales Tax Payable 3,400
Larson, Capital 25,600
Larson, Drawing 3,000
Sales 110,200
Sales Returns and Allowance 3,100
Sales Discount 2,300
Purchases 67,800
Purchase Returns and Allowance 1,200
Purchase Discount 1,300
Freight-In 3,900
Salary Expense 11,400
Miscellaneous Expense 9,700
Total Br168,300 Br168,300
Alpha Trading Plc
Unadjusted Trial Balance
December 31, 2002

5-48
Additional Information:
a. The ending merchandise inventory amount is Br18,500.
b. Accrued salary expense on December 31, 2002 amounts Br3,500.
c. The prepaid insurance reported on the trial balance is an amount paid
on January 1, 2002. This amount applies for four years starting from
the date of payment.
d. Supplies on hand amounts Br3,100 as of December 31, 2002.
e. The depreciation expense for 2002 is Br500.
Required: Prepare the following items for Alpha Trading Private Limited
Company.
a. Ten column worksheet
b. Multiple-step income statement; the capital statement; and report form
balance sheet.
c. Pass the necessary adjusting and closing entries

5-49
Account Titles Trial balance Adjustments
Income Statement
Balance sheet
Debit Credit Debit Credit Debit Credit Debit Credit
Cash 2,300 2300
Accounts Receivable 12,500 12500
Prepaid Insurance 5600 (d)1400 4,200
Merchandise Inventory 23,700 (b)18500 (a)23700 18500
Supplies 5,700 (e)2600 3100
Equipment 17,300 17300
Accumulated Depreciation-Equipment 3500 (f)500 4000
Accounts Payable 3500 3500
Notes Payable 19600 19600
Sales Tax Payable 3400 3400
Lemma, Capital 25600 25600
Lemma, Drawing 3,000 3,000
Sales 110,200 110,200
Sales Returns and Allowance 3100 3100
Sales Discount 2300 2300
Purchases 67,800 67,800
Purchase Returns and Allowance 1200 1200
Purchase Discount 1300 1300
Freight-In 3900 3900
Salary Expense 11400 (c)3500 14900
Miscellaneous Expense 9700 9700
Total 168,300 168,300
Income Summary (a)23700 (b)18500 23700 18500
Salary Payable (c)3500 3500
Insurance expense (d)1400 1400
Supplies expense (e)2600 2600
Depreciation Expense (f)500 500
Total 50200 50200 129900 131200 60900 59600
Net Income 1300 1300
Total 131200 131200 60900 60900
Alpha Trading Plc
Worksheet
For the year ended December 31, 2002
a. Worksheet

5-50
Revenue from sale:
Sales Br110,200
Less: Sales returns and allowance Br3,100
Sales discount 2,300
Net sales 5,400
Cost of merchandise sold: Br104,800
Merchandise inventory, Br23,700
Purchases Br67,800
Add: Fright-in 3,900 Br71,700
Less: Purchase discount 1,300
Purchase returns and allowance 1,200 2,500
Net purchases 69,200
Merchandise available for sale Br92,900
Less: Merchandise inventory, 18,500
Cost of merchandise sold 74,400
Gross profit Br30,400
Operating expenses:
Salary expense Br14,900
Supplies expense 2,600
Insurance expense 1,400
Depreciation expense-Equip. 500
Miscellaneous expense 9,700
Total operating expenses 29,100
Net income Br1,300
Alpha Trading Plc
Income Statement
For Year Ended December 31, 2002
b. Multiple–Step Income Statement

5-51
Capital, Lemma Br25,600
Add: Net income Br 1,300
Deduct: Drawing (3,000)
Decrease in capital (1,700)
Capital, Lemma Br23,900
Alpha Trading Plc
Capital Statement
For Year Ended December 31, 2002
c. Capital Statement

5-52
Assets
Current assets:
Cash Br2,300
Merchandise inventory 18,500
Supplies 3,100
Prepaid insurance 4,200
Total current assets Br40,600
Plant assets:
Equipment Br17,300
Accumulated depreciation-Equipment 4,000
Total plant assets 13,300
Total assets Br53,900
Liabilities
Accounts payable Br3,500
Notes payable 19,600
Sales tax payable 3,400
Salaries payable 3,500
Total liabilities Br30,000
Capital
Lemma, Capital 23,900
Total liabilities and capital Br53,900
Alpha Trading Plc
Balance Sheet
December 31, 2002
d. Report form Balance Sheet

5-53
e. Adjusting Entries:
a. Income Summary 23,700
Merchandise Inventory 23,700
b. Merchandise Inventory 18,500
Income Summary 18,500
c. Salary Expense 3,500
Salary Payable 3,500
d. Insurance Expense 1,400
Prepaid Insurance 1,400
e. Supplies Expense 2,600
Supplies 2,600
f. Depreciation Expense-Equipment 500
Accumulated Depreciation-Equipment 500
f. Closing Entries:
a. Sales 110,200
Purchases Discount 1,300
Purchase Returns and Allowance 1,200
Income Summary 112,700
b. Income Summary 106,200
Sales Returns and Allowance 3,100
Sales Discount 2,300
Purchases 67,800
Freight-In 3,900
Salary Expense 14,900
Insurance Expense 1,400
Supplies Expense 2,600
Depreciation Expense-Equipment 500
Miscellaneous Expense 9,700
c. Income Summary 1,300
Lemma, Capital
d. Lemma, Capital 3,000
Lemma, Drawing 3,000

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