Chapter Accounting for Merchandising Businesses Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives Distinguish the activities of a service business from those ofAfter a merchandising business studying After studying this this Describe andchapter, illustrateyou the financial statements of should chapter, you should a merchandising business be able to: be able to: Describe the accounting for the sale of merchandise Describe the accounting for the purchase of merchandise Objectives Objectives Describe the accounting for transportation costs, sales taxes, and trade discounts Illustrate the dual nature of merchandising transactions Prepare a chart of accounts for a merchandising business Describe the accounting cycle for a merchandising business Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets Nature Nature of of Businesses Businesses Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX Nature Nature of of Businesses Businesses Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Multiple-Step Income Statement NetSolutions Income Statement For the Year Ended December 31, 2007 Revenue from sales: Sales Less:Sales returns and allowances Sales discounts Net sales $708,255 Cost of merchandise sold 525,305 Gross profit $182,950 Continued $720,185 $ 6,140 5,790 11,930 Operating expenses: Selling expenses: Sales salaries expense Advertising expense Depr Expense–store equipment Miscellaneous selling expense Total selling expenses Administrative expenses: Office salaries expense Rent expense Depr expense–office equipment Insurance expense Office supplies expense Misc administrative expense Total admin expenses Total operating expenses 105,710 Income from operations $ 77,240 Continued $56,230 10,860 3,100 630 $21,020 8,100 2,490 1,910 610 760 $ 70,820 34,890 Other income and expenses: Rent revenue Interest expense (1,840) Net income $75,400 Concluded $ 600 (2,440) Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller) Accounts Receivable—Burton Co Sales 7,500 7,500 Cost of Merchandise Sold Merchandise Inventory Burton Company (Buyer) 4,500 Merchandise Inventory Accounts Payable—Scully Co 7,500 4,500 7,500 July Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45 The cost of the merchandise sold was $4,500 Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller) No entry Burton Company (Buyer) Merchandise Inventory Cash 150 150 July Burton Company paid transportation charges of $150 on July purchase from Scully Company Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller) Accounts Receivable—Burton Co Sales 5,000 5,000 Cost of Merchandise Sold Merchandise Inventory Burton Company (Buyer) 3,500 Merchandise Inventory Accounts Payable—Scully Co 5,000 3,500 5,000 July Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB shipping point, n/30 The cost of the merchandise sold was $3,500 Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller) Transportation Out Cash 250 250 Burton Company (Buyer) No entry July Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller) Sales Returns and Allowances Accounts Receivable—Burton Co 1,000 1,000 Merchandise Inventory 700 Cost of Merchandise Sold Burton Company (Buyer) 700 Accounts Payable—Scully Co 1,000 Merchandise Inventory 1,000 July 13 Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July purchase on account The cost of the merchandise was $700 Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller) Cash Accounts Receivable—Burton Co 4,000 4,000 Burton Company (Buyer) Accounts Payable—Scully Co Cash 4,000 4,000 July 15 Scully Company received payment from Burton Company for purchase of July Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller) Accounts Receivable—Burton Co Sales 12,000 12,000 Accounts Receivable—Burton Co Cash Burton Company (Buyer) 500 Merchandise Inventory Accounts Payable—Scully Co 12,500 500 12,500 July 18 Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom Scully prepaid transportation costs of $500, which were added to the invoice The cost of the merchandise sold was $7,200 Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Continued (Seller) Cost of Merchandise Sold Merchandise Inventory 7,200 7,200 Burton Company (Buyer) July 18 Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom Scully prepaid transportation costs of $500, which were added to the invoice The cost of the merchandise sold was $7,200 Illustration Illustration of of Accounting Accounting for for Merchandise Merchandise Transactions Transactions Scully Company (Seller) Cash Sales Discounts Accounts Receivable—Burton Co 12,500 12,260 240 Burton Company (Buyer) Accounts Payable—Scully Co 12,500 Merchandise Inventory 240 Cash 12,260 July 28 Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000) NetSolutions Chart of Accounts Balance Sheet Accounts 110 112 115 116 117 120 123 124 125 126 100 Assets Cash Accounts Receivable Merchandise Inventory Office Supplies Prepaid Insurance Land Store Equipment Accumulated Depreciation— Store Equipment Office Equipment Accumulated Depreciation— Office Equipment 210 211 212 215 200 Liabilities Accounts Payable Salaries Payable Unearned Rent Notes Payable 300 Owner’s Equity 310 Chris Clark, Capital 311 Chris Clark, Drawing 312 Income Summary NetSolutions Chart of Accounts Income Statement Accounts 400 Revenues 410 Sales 411 Sales Returns and Allowances 412 Sales Discounts 600 Other Income 610 Rent Revenue 700 Other Expense 710 Interest Expense 500 Costs and Expenses 510 Cost of Merchandise Sold 520 Sales Salaries Expense 521 Advertising Expense 522 Depreciation Expense— Store Equipment 523 Transportation Out 529 Miscellaneous Selling Expense 530 Office Salaries Expense 531 Rent Expense 532 Depreciation Expense— Office Equipment 533 Insurance Expense 534 Office Supplies Expense 539 Miscellaneous Admin Expense Merchandise Merchandise Inventory Inventory Shrinkage Shrinkage NetSolutions NetSolutions inventory inventory records records indicate indicate that that $63,950 $63,950 of of merchandise merchandise should should be be available available for for sale sale on on December December 31, 31, 2007 2007 The The physical physical count count reveals reveals that that only only $62,150 $62,150 isis actually actually available available Merchandise Merchandise Inventory Inventory Shrinkage Shrinkage Adjusting Entry Dec 31 Merchandise Sold Merchandise Inventory Inventory records $63,950 Inventory count 62,150 Cost of 800 00 800 00 Profitability Measures Effective Use of Assets Ratio Ratioof of Net Net Sales Sales to toAssets Assets Sears Penney $41,366,000 Net sales $31,846,000 Total assets: Beginning of year $50,409,000 $19,742,000 of year Ratio of End net sales to assets 87 to 1$44,317,000 1.57 to $20,908,000 Average $47,363,000 Ratio in Ratio Use: Use: To To assess assess the the effectiveness effectiveness in the the $20,325,000 use use of of assets assetsto to generate generate sales sales Chapter The The End End ... studying this this Describe andchapter, illustrateyou the financial statements of should chapter, you should a merchandising business be able to: be able to: Describe the accounting for the sale of... the accounting for the sale of merchandise Describe the accounting for the purchase of merchandise Objectives Objectives Describe the accounting for transportation costs, sales taxes, and trade... Concluded $ 600 (2,440) Periodic Periodic vs vs Perpetual Perpetual Methods Methods of of Accounting Accounting Periodic Method • A method of determining the cost of merchandise sold and the