Merchandising Operations and the Accounting Cycle pdf

Merchandising
Operations
and the Accounting Cycle
Chapter
5

Service Co.
Income Statement
Year ended June 30, 20xx
Service revenue $xxx
Expenses:
Salary expense x
Depreciation expense x
Income tax expense x
Net income $ xx
Service Co.
Income Statement
Year ended June 30, 20xx
Service revenue $xxx
Expenses:
Salary expense x
Depreciation expense x
Income tax expense x
Net income $ xx
Merchandising Co.
Income Statement
Year ended June 30, 20xx
Sales revenue $xxx
Cost of goods sold x
Gross profit xx

Operating expenses:
Salary expense x
Depreciation expense x
Net income $ xx
Merchandising Co.
Income Statement
Year ended June 30, 20xx
Sales revenue $xxx
Cost of goods sold x
Gross profit xx
Operating expenses:
Salary expense x
Depreciation expense x
Net income $ xx
Income Statements

Account for the purchase
of inventory.
Objective 1

Purchase of Inventory
Merchant
prepares
purchase
order
Suppliers
send
merchandise
and a bill
Compares

Purchase of Inventory Example
✔
On May 1, the Sporting Store acquired on
account $2,000 of various items for resale.
✔
The supplier sent the merchandise along
with a bill stating the quantity, price, and
terms of sale.
✔
What is the journal entry?

May 1
Inventory $2,000
Accounts Payable $2,000
Purchased inventory on account
Inventory Accounts Payable
2,000 2,000
Purchase of Inventory Example

Recording Purchase Returns
and Allowances Example
✔
Assume that on May 4 a $100 item was
returned prior to payment of the invoice.
✔
What is the journal entry?
May 4
Accounts Payable 100
Inventory 100

Merchandise was returned

Recording Purchase Returns
and Allowances Example
✔
Assume that one of the items of merchandise
is slightly damaged, and the store was given
a $10 allowance.
✔
What is the journal entry?
May 4
Accounts Payable 10
Inventory 10
Received a purchase allowance

Recording Purchase Returns
and Allowances Example
Inventory
2,000 100
10
Bal. 1,890
Accounts Payable
100 2,000
10
Bal. 1,890

Purchase Discounts
✔
Credit terms are stated in expressions such as:
✔

2/10, N/30, meaning that a discount of 2% is
allowed if the invoice is paid within 10 days;
otherwise the full (net) amount is due within
30 days.

Purchase Discounts Example
✔
Assume the Sporting Store purchased
merchandise for $1,000 with terms of
2/10, N/30.
✔
The store paid within the discount period.
✔
The 2% discount ($20) is deducted from the
amount due ($1,000) and $980 is remitted.

Purchase Discounts Example
✔
What is the journal entry?
Accounts Payable 1,000
Cash 980
Inventory 20
To record payment of invoice within the
discount period

Recording Transportation Costs
✔
Transportation costs are the cost of moving
inventory from seller to buyer.
✔

FOB stands for Free on Board and governs
the passing of title of the goods.
✔
Selling/buying agreements usually specify
FOB terms.

Recording Transportation Costs
FOB Shipping Point
FOB Destination

Freight Charges Example
✔
Assume that on May 9 the Sporting Store
paid $60 for freight.
✔
What is the journal entry?
May 9
Inventory 60
Cash 60

Paid a freight bill

Objective 2
Account for the sale of inventory

Sale of inventory
✔
The amount a business earns from selling
merchandise is called sales revenue
✔

Inventory that has been sold to customers is
called cost of goods sold

Sporting Store Example
✔
Assume that on May 11 the store sold
merchandise costing $1,800 for $2,600
in cash.
✔
What are the journal entries?

Sporting Store Example
May 11
Cash 2,600
Sales Revenue 2,600
To record sale of merchandise
May 11
Cost of Goods Sold 1,800
Inventory 1,800
To record the cost of merchandise sold

Sporting Store Example
✔
On May 15, the store sold to Maria Gym
$5,000 worth of merchandise with a cost
of $3,000.
✔
Terms are 2/10, N/30.
Invoice
Maria Gym Terms 2/10, N/30

Total $5,000

Sales Discounts and Sales
Returns and Allowances
Example
✔
On May 17, Maria Gym returned $1,500
worth of goods that cost $900.
✔
In addition, a credit of $100 was allowed
for merchandise that was damaged.
✔
What are the journal entries?

Sales Discounts and Sales
Returns and Allowances
Example
May 17
Sales Returns and Allowance 1,500
Accounts Receivable 1,500
Received returned merchandise
May 17
Inventory 900
Cost of Goods Sold 900
Returned goods to inventory

Sales Discounts and Sales
Returns and Allowances
Example
✔

There is no entry required for inventory
since the goods were not returned.
May 17
Sales Returns and Allowance 100
Accounts Receivable 100
Credit granted for damaged goods

Accounts Receivable May 15 = $5,000
Less May 17 returns and allowances $1,600
Equals May 20 balance due of $3,400
Sales Discounts and Sales
Returns and Allowances
Example
✔
On May 20, the store received a check from
Maria Gym for the balance due.
✔
What is the balance due?

Sales Discounts and Sales
Returns and Allowances
Example
✔
Maria took advantage of the sales terms –
2/10, N/30.
May 20
Cash 3,332
Sales Discounts 68
Accounts Receivable 3,400
Cash collected within the discount period