Accounting 21th waren reeve fess chapter 06

Chapter 6
Accounting for
Merchandising Businesses
Accounting, 21st Edition
Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

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Some
Some of
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action has
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automated, so
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click the
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mouse when
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see this
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lightningbolt
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lower right-hand
right-hand
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screen. You
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can point
point and
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anywhere on
on the
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screen.


Objectives
Objectives
1. Distinguish the activities of a service business

from those ofAfter
a merchandising
business.
studying
After
studying this
this
2. Describe andchapter,
illustrateyou
the financial
statements of
should
chapter, you should
a merchandising business.
be
able
to:
be
able
to:
3. Describe the accounting for the sale of
merchandise.
4. Describe the accounting for the purchase of
merchandise.


Objectives
Objectives
5. Describe the accounting for transportation costs,
sales taxes, and trade discounts.

6. Illustrate the dual nature of merchandising
transactions.
7. Prepare a chart of accounts for a merchandising
business.
8. Describe the accounting cycle for a
merchandising business.
9. 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)


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 amount of merchandise on hand
• Under this method, the inventory records do not
show the amount available for sale or the amount
sold during the period


Periodic
Periodic vs.
vs. Perpetual
Perpetual Methods
Methods of
of
Accounting
Accounting
Perpetual Method
• Under this method, each purchase and sale of
merchandise is recorded in the inventory and the
cost of merchandise sold accounts.
• The amount of merchandise available for sale
and the amount sold are continuously disclosed in
the inventory records.

Cost
Cost of
of Merchandise
Merchandise Purchased
Purchased
Purchases
$521,980
Less: Purchase returns and
allowances
Purchase discounts
11,625
Net purchases
$510,355
Add transportation-in
17,400

$9,100
2,525


Cost
Cost of
of Merchandise
Merchandise Sold
Sold
Merchandise inventory, 1/1/07
$ 59,700
Purchases
Less: Purchase returns and

allowances
$9,100
Purchase discounts
2,525
Net purchases
Add transportation-in
Cost of merchandise purchased
527,755
Merchandise available for sale
$587,455
Less merchandise inventory, 12/31/07

$521,980
11,625
$510,355
17,400


Single-Step Income
Statement for a
Merchandising
Business


NetSolutions
Income Statement
For the Year Ended December 31, 2007
Revenues:
Net sales
$708,255

Rent revenue
600
Total revenues
$708,855
Expenses:
Cost of merchandise sold
Selling expenses
Administrative expenses
Interest expense
Total expenses
633,455
Net income

$525,305
70,820
34,890
2,440

$


Statement of
Owner’s Equity for
a Merchandising
Business


NetSolutions
Statement of Owner’s Equity
For the Year Ended December 31, 2007

Chris Clark, capital, 1/1/07
Net income for year
Less withdrawals
Increase in owner’s equity
Chris Clark, capital, 12/31/07

$153,800
$75,400
18,000
57,400
$211,200


Balance Sheet


NetSolutions
Balance Sheet
December 31, 2007
Assets
Current assets:
Cash
Accounts receivable
Merchandise inventory
Office supplies
Prepaid insurance
Total current assets
$209,310

Continued

$52,950
91,080
62,150
480
2,650


Property, plant, and equipment:
Land
Store equipment
Less accumulated
depreciation
Office equipment
Less accumulated
depreciation
Total property, plant, and
equipment
52,250
Total assets
$261,560
Continued

$27,100

$20,000

5,700 21,400
$15,570

4,72010,850


Liabilities
Liabilities
Current
Current liabilities:
liabilities:
Accounts
Accounts payable
payable
Note
Notepayable
payable(current
(currentportion)
portion)
Salaries
Salariespayable
payable
Unearned
Unearnedrent
rent
Total
Total current
current liabilities
liabilities
30,360
30,360
Long-term
Long-termliabilities:

liabilities:
Note
Notepayable
payable(due
(due2017)
2017)
20,000
20,000
Total
Total liabilities
liabilities
50,360
50,360
Owner’s
Owner’sEquity
Equity
Chris
ChrisClark,
Clark,capital
capital
211,200
211,200
Total
Total liabilities
liabilities and
andowner’s
owner’s equity
equity
$261,560
Concluded

$261,560

$22,420
$22,420
5,000
5,000
1,140
1,140
1,800
1,800

$$

$$


Sales
Sales Transactions
Transactions


Cash
Cash Sales
Sales
JOURNAL
Description

Date
1
2

3
4

2007

Jan. 3

PAGE 26
Post.
Ref.

Dr

Cash

Sales

To record cash sales.

5

On
On January
January 3,
3, aa firm
firm sold
sold $1,800
$1,800
of
of merchandise

merchandise for
for cash.
cash.

Cr.

1 800 00
1 800 00


Cash
Cash Sales
Sales
6

3 Cost of Merchandise Sold

7

Merchandise Inventory

8
9

1 280 00
1 280 00

To record the cost of
merchandise sold.

10

Using
Using aa perpetual
perpetual inventory,
inventory, the
the inventory
inventory
cost
cost of
of $1,200
$1,200 must
must be
be recorded.
recorded.