Ch06 accounting for merchandising businesses

Prepared by: C. Douglas Cloud
Professor Emeritus of
Accounting
Pepperdine University
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Student Version
Accounting for Merchandising Businesses
Chapter 6
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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 1

Distinguish between the activities and
financial statements of service and
merchandising businesses.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
LO 1
Nature of Merchandising Businesses

Most service businesses, such as plumbing
repair and accounting services, have no
merchandise.

Merchandising businesses, such as a

department store or sandwich shop, generate
revenue by selling a product.

Merchandise on hand (not sold) at the end of
an accounting period is called merchandise
inventory.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 2

Distinguish between the activities and
financial statements of service and
merchandising businesses.

Describe and illustrate the financial
statements of a merchandising business.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
LO 2
Multiple-Step Income Statement

The multiple-step income statement contains
several sections, subsections, and subtotals.
The first segment reports revenue from
sales.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
LO 2


Sales is the total amount charged customers for
merchandise sold, including cash sales and sales
on account.

Sales returns and allowances are granted by the
seller to customers for damaged or defective
merchandise.

Sales discounts are granted by the seller to
customers for early payment of amounts owed.

Net sales is determined by subtracting sales returns
and allowances and sales discounts from sales.
Multiple-Step Income Statement
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
LO 2

The second segment of the multiple-step
income statement is the cost of merchandise
sold section.

The cost of merchandise sold is the cost of
the merchandise sold to customers.
Merchandise costs consist of all the costs of
acquiring the merchandise and readying it
for sale, such as purchase and freight costs.
Multiple-Step Income Statement

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
LO 2

The buyer may return merchandise to the
seller (purchase return), or the buyer may
receive a reduction in the initial price at
which the merchandise was purchased
(purchase allowance).

Sellers may offer customers sales discounts
for early payment of their bills. From the
buyer’s perspective, such discounts are
referred to as purchase discounts.
Multiple-Step Income Statement
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
LO 2

If merchandise inventory at the end of the
period is determined by taking a physical
count of inventory on hand, a periodic
inventory system is being used.

Under the perpetual inventory system, the
amounts of inventory purchased, available
for sale, and sold are continuously
(perpetually) updated in the inventory

records.
Multiple-Step Income Statement
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
LO 2
Gross Profit

Gross profit is computed by subtracting the
cost of merchandise sold from net sales.
Gross
Profit
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
LO 2

Selling expenses are incurred directly in the
selling of merchandise.
Multiple-Step Income Statement

Administrative expenses, sometimes called
general expenses, are incurred in the
administration or general operations of the
business.

Income from operations, sometimes called
operating income, is determined by
subtracting operating expenses from gross
profit.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
LO 2

Other income is revenue from sources other
than the primary operating activity of a
business.

Other expense is an expense that cannot be
traced directly to the normal operations of
the business.

Subtracting other income and expenses from
“income from operations” provides the net
income or loss.
Multiple-Step Income Statement
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Balance Sheet

The form of balance sheet with the assets on
the left-hand side and the liabilities and
owner’s equity on the right-hand side is
called the account form.
LO 2
LO 2

When the balance sheet is presented in a
downward sequence in three sections, it has

been prepared using the report form.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 3

Distinguish between the activities and
financial statements of service and
merchandising businesses.

Describe and illustrate the financial
statements of a merchandising business.

Describe and illustrate the accounting for
merchandising transactions including: sale
of merchandise; purchase of merchandise;
freight; sales taxes and trade discounts; dual
nature of merchandising transactions.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On January 3, NetSolutions sold $1,800 of
merchandise for cash.
Cash Sales
LO 3
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Using the perpetual inventory system, the cost
of merchandise sold and the decrease in
merchandise inventory are also recorded. The
cost of merchandise sold on January 3 is

$1,200.
LO 3
LO 3
Cash Sales
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Sales made to customers using credit cards are
recorded as cash sales. Assume that NetSolutions
paid credit card processing fees of $48 on
January 31.
Cash Sales
LO 3
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On January 12, NetSolutions sold merchandise
on account for $510. The cost of merchandise
sold was $280.
Sales on Account
LO 3
LO 3
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The terms for when payments for
merchandise are to be made are called
credit terms.

If payment is required on delivery, the
terms are cash or net cash. Otherwise, the

buyer is allowed an amount of time, known
as the credit period, in which to pay.
Sales Discounts
LO 3
LO 3
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Credit Terms

To encourage the buyer to pay before the
end of the credit period, the seller may offer
a discount, such as 2/10, n/30. These terms
indicate that a two percent discount can be
taken if the invoice is paid within ten days.
After ten days the full amount is due by the
thirtieth day from the invoice date.
LO 3
LO 3
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On January 17, NetSolutions receives the amount
due within ten days, so the buyer deducted $30
($1,500 x 2%) from the invoice amount.
Receipts on Account
LO 3
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Credit Memo
LO 3

LO 3

A credit memorandum, often called a credit
memo, authorizes a credit to (decreases) the
buyer’s account receivable.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On January 13, issued Credit Memo No. 32 to Krier
Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.
Credit Memo
LO 3
LO 3
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
*
Purchase Transactions
LO 3
LO 3
On January 3, NetSolutions purchased merchandise
for cash.
NOTE: Assume a perpetual
NOTE: Assume a perpetual
inventory system is used.
inventory system is used.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
*
Purchase Transactions
LO 3

LO 3
On January 4, NetSolutions purchased merchandise
on account from Thomas Corporation.