1

1
6
Accounting for
Accounting for
Merchandising
Merchandising
Businesses
Businesses

2
2
1. Distinguish between the activities and financial statements of
service and merchandising businesses.
2. Describe and illustrate the financial
statements of a merchandising
business.
After studying this chapter, you should
be able to:

3
3
3. Describe and illustrate the accounting for merchandise transactions including:
sale of merchandise
purchase of merchandise
transportation costs, sales taxes, trade discounts
dual nature of merchandising transactions.
After studying this chapter, you should
be able to:
4. Describe the adjusting and closing process
for a merchandising business.

4
4
Distinguish between the
activities and financial
statements of service and
merchandising businesses.
bjective 1
bjective 1
bjective 1
bjective 1
6-1

!
!
Service Business
"ees earned
#$$$
perating expenses
%$$$
&et income
#$$$
6-1

'
'
Merchandising Business
(ales #$$$
)ost of *erchandise (old %$$$
+ross ,rofit #$$$
perating -xpenses %$$$
&et .ncome #$$$
6-1

/
/
0hen merchandise is sold, the
revenue is reported as sales, and
its cost is recogni1ed as an
expense called cost of
merchandise sold.
6-1

2
2
3he cost of merchandise sold is
subtracted from sales to arrive at
gross profit. 3his amount is
called gross profit because it is
the profit before deducting the
operating expenses.
6-1

4
4
*erchandise on hand 5not
sold6 at the end of an
accounting period is called
merchandise inventory.
6-1

17
17
n 8ugust 2!, +allatin 9epair (ervice extended an offer of
#12!,777 for land that had been priced for sale at #1!7,777. n
(eptember 3, +allatin 9epair (ervice accepted the seller:s
counteroffer of #13/,777. n ctober 27, the land was assessed
at a value of #42,777 for propert; tax purposes. n December 4,
+allatin 9epair (ervice was offered #1'7,777 for the land b; a
national retail chain. 8t what value should the land be recorded
in +allatin 9epair (ervice:s records<
Follow My Example 1-1
#13/,777. =nder the cost concept, the land should be recorded at
the cost to +allatin 9epair (ervice.
31
1-2
During the current ;ear, merchandise is sold for #2!7,777
cash and for #4/!,777 on account. 3he cost of the
merchandise sold is #/3!,777. 0hat is the amount of the
gross profit<
Follow My Example 6-1
3he gross profit is #447,777 5#2!7,777 > #4/!,777 %
#/3!,7776.
6-1
Example Exercise 6-1
17
"or ,ractice: ,- '?18, ,- '?1@

11
11
11
6-1

12
12
Describe and illustrate the
financial statements of a
merchandising business.
bjective 2
bjective 2
bjective 2
bjective 2
6-2

13
13
3he multiple-step
income statement
contains several sections,
subsections, and
subtotals.
6-2
Multiple-Step Income Statement

14
14
3he Sales account
provides the total amount
charged to customers for
merchandise sold,
including cash sales and
sales on account.
6-2

1!
1!
Sales returns and
allowances are granted b;
the seller to customers for
damaged or defective
merchandise.
6-2

1'
1'
Sales discounts are granted
b; the seller to customers
for earl; pa;ment of
amounts owed.
6-2

1/
1/
Net sales is determined b;
subtracting sales returns
and allowances and sales
discounts from sales.
6-2

12
12 12 (Continued)
Revenue from sales:
Sales $7201!"
#ess: Sales re$urns an% allowances $ 61&0
Sales %iscoun$s "7'0 11'(0
)e$ sales $70!2""
*os$ of merc+an%ise sol% "2"(0"
,ross profi$ $1!2'"0
)e$Solu$ions )e$Solu$ions
-ncome S$a$emen$ -ncome S$a$emen$
For $+e .ear En%e% /ecem0er (1 200' For $+e .ear En%e% /ecem0er (1 200'
6-2
Multiple-Step Income Statement

14
14
1pera$in2 expenses:
Sellin2 expenses:
Sales salaries expense $"(&(0
3%ver$isin2 expense 10!60
/epr4 Expense5s$ore e6uipmen$ (100
/elivery Expense 2!00
Miscellaneous sellin2 expense 6(0
7o$al sellin2 expenses $ 70!20
3%minis$ra$ive expenses:
1ffice salaries expense $21020
Ren$ expense !100
/epr4 expense5office e6uipmen$ 2&'0
-nsurance expense 1'10
1ffice supplies expense 610
Misc4 a%minis$ra$ive expense 760
7o$al a%min4 expenses (&!'0
7o$al opera$in2 expenses 10"710
-ncome from opera$ions $ 772&0
1pera$in2 expenses:
Sellin2 expenses:
Sales salaries expense $"(&(0
3%ver$isin2 expense 10!60
/epr4 Expense5s$ore e6uipmen$ (100
/elivery Expense 2!00
Miscellaneous sellin2 expense 6(0
7o$al sellin2 expenses $ 70!20
3%minis$ra$ive expenses:
1ffice salaries expense $21020
Ren$ expense !100
/epr4 expense5office e6uipmen$ 2&'0
-nsurance expense 1'10
1ffice supplies expense 610
Misc4 a%minis$ra$ive expense 760
7o$al a%min4 expenses (&!'0
7o$al opera$in2 expenses 10"710
-ncome from opera$ions $ 772&0
14
(Continued)

27
27
(Concluded)
1$+er income an% expenses:
Ren$ revenue $ 600
-n$eres$ expense 82&&09 81!&09
)e$ income $7"&00
1$+er income an% expenses:
Ren$ revenue $ 600
-n$eres$ expense 82&&09 81!&09
)e$ income $7"&00
6-2
27

21
21
Cost of merchandise sold
was discussed earlier. .t is
the cost of the merchandise
sold to customers.
6-2

22
22
8s we discussed in (lide 1',
sellers ma; offer customers
sales discounts for earl;
pa;ment of their bills. "rom
the bu;er:s perspective, such
discounts are referred to as
purchase discounts.
6-2

23
23
3he bu;er ma; return merchandise
to the seller 5a purchase return6,
or the bu;er ma; receive a
reduction in the initial price at
which the merchandise was
purchased 5a purchase allowance6.
6-2

24
24 24
Cost of Merchandise
Sold
6-2

2!
2!
6-2
Single-Step Income Statement
8n alternative form of income
statement is the single-step
income statement. 8s shown in
the next slide, the income
statement for &et(olutions
deducts the total of all expenses
in one step from the total of all
revenues.

2'
2' 2'
Revenues:
)e$ sales $70!2""
Ren$ revenue 600
7o$al revenues $70!!""
Expenses:
*os$ of merc+an%ise sol% $"2"(0"
Sellin2 expenses 70!20
3%minis$ra$ive expenses (&!'0
-n$eres$ expense 2&&0
7o$al expenses 6((&""
)e$ income $ 7"&00
NetSolutions NetSolutions
Income Statement Income Statement
For the Year Ended December 31 !""# For the Year Ended December 31 !""#
6-2
E$hibit 3% Single-Step Income Statement

2/
2/ 2/
6-2
E$hibit &% Statement of '(ner)s E*uit+
*+ris *lar: capi$al 1;1;0' $1"(!00
)e$ income for year $7"&00
#ess wi$+%rawals 1!000
-ncrease in owner<s e6ui$y "7&00
*+ris *lar: capi$al 12;(1;0' $211200
*+ris *lar: capi$al 1;1;0' $1"(!00
)e$ income for year $7"&00
#ess wi$+%rawals 1!000
-ncrease in owner<s e6ui$y "7&00
*+ris *lar: capi$al 12;(1;0' $211200
NetSolutions NetSolutions
Statement of '(ner)s E*uit+ Statement of '(ner)s E*uit+
For the Year Ended December 31 !""# For the Year Ended December 31 !""#

22
22
)e$Solu$ions )e$Solu$ions
=alance S+ee$ =alance S+ee$
/ecem0er (1 200' /ecem0er (1 200'
22
3sse$s
*urren$ asse$s:
*as+ $"2'"0
3ccoun$s receiva0le '10!0
Merc+an%ise inven$ory 621"0
1ffice supplies &!0
>repai% insurance 26"0
7o$al curren$ asse$s $20'(10
(Continued)
6-2
E$hibit ,% -eport Form of .alance Sheet

24
24
>roper$y plan$ an% e6uip4:
#an% $20000
S$ore e6uipmen$ $27100
#ess accumula$e%
%eprecia$ion "70021&00
1ffice e6uipmen$ $1""70
#ess accumula$e%
%eprecia$ion &72010!"0 7o$al proper$y
plan$
an% e6uipmen$ "22"0
7o$al asse$s $261"60
24
6-2
(Continued)
E$hibit ,% -eport Form of .alance Sheet

37
37
37
#ia0ili$ies
*urren$ lia0ili$ies:
3ccoun$s paya0le $22&20
)o$e paya0le 8curren$ por$ion9 "000
Salaries paya0le 11&0
?nearne% ren$ 1!00
7o$al curren$ lia0ili$ies $ (0(60
#on2-$erm lia0ili$ies:
)o$e paya0le 8final pm$4 %ue 20179 20000
7o$al lia0ili$ies $ "0(60
1wner<s E6ui$y
*+ris *lar: capi$al 211200
7o$al lia0ili$ies an% owner<s e6ui$y $261"60
#ia0ili$ies
*urren$ lia0ili$ies:
3ccoun$s paya0le $22&20
)o$e paya0le 8curren$ por$ion9 "000
Salaries paya0le 11&0
?nearne% ren$ 1!00
7o$al curren$ lia0ili$ies $ (0(60
#on2-$erm lia0ili$ies:
)o$e paya0le 8final pm$4 %ue 20179 20000
7o$al lia0ili$ies $ "0(60
1wner<s E6ui$y
*+ris *lar: capi$al 211200
7o$al lia0ili$ies an% owner<s e6ui$y $261"60
6-2
(Concluded)
E$hibit ,% -eport Form of .alance Sheet

31
31
6-2
Example Exercise 6-2
@ased upon the following data, determine the cost of
merchandise sold for *a;. =se the format seen in
-xhibit 2.
*erchandise .nventor;, *a; 1 #121,277
*erchandise .nventor;, *a; 31 142,777
,urchases 42!,777
,urchases 9eturns and 8llowances 23,!77
,urchases Discounts 21,777
3ransportation .n 11,377
31

32
32
Follow My Example 6-2
32
*erchandise .nventor;, *a; 1 # 121,277
,urchases #42!,777
Aess: ,urchases returns and allowances #23,!77
,urchases discounts 21,777 44,!77
&et purchases #447,!77
8dd transportation in 11,377
)ost of merchandise purchased 4!1,277
*erchandise available for sale #1,7/3,777
Aess merchandise inventor;, *a; 31 142,777
)ost of merchandise sold # 431,777
6-2
"or ,ractice: ,- '?28, ,- '?2@

33
33
Describe and illustrate the accounting
for merchandise transactions including:
sale of merchandise purchase of
merchandise transportation costs! sales
ta"es! trade discounts dual nature of
merchandise transactions.
bjective 3
bjective 3
bjective 3
bjective 3
6-3

34
34
34
n Banuar; 3, &et(olutions sold
#1,277 of merchandise for cash.
6-3
Cash Sales

3!
3! 3!
6-3
=sing a perpetual inventor;, the #1,277
cost of the inventor; must be recorded.
Cash Sales (continued)

3'
3' 3'
6-3
8t the end of the month, #42 was
sent to pa; the service charge on
credit card sales.
Credit Card Sales

3/
3/ 3/
6-3
Sales on /ccount 0sing a 1erpetual
In2entor+
Ban. 12 8ccounts 9eceivableC(ims )o. !17 77
(ales !17 77
.nvoice &o. /1/2
n Banuar; 12, &et(olutions sold (ims )ompan;
merchandise on account, #!17. 3he cost of the
merchandise to the seller was #227.
12 )ost of *erchandise (old 227 77
*erchandise .nventor; 227 77
)ost of merchandise sold on
.nvoice &o. /1/2.

32
32
3he terms for when pa;ments for
merchandise are to be made, agreed
on b; the bu;er and the seller, are
called credit terms. .f bu;er is
allowed an amount of time to pa;, it
is Dnown as the credit period.
6-3
Sales Discounts

34
34 34
.f invoice is
paid within
17 da;s of
invoice date
.nvoice for
#1,!77
3erms:
2E17, nE37
#1,4/7 paid
5#1,!77 less a
2F discount6
6-3
Credit 3erms

47
47 47
.f invoice is
NOT paid
within 17
da;s of
invoice date
.nvoice for
#1,!77
3erms:
2E17, nE37
"ull amount 5#1,!776
is due within 37 da;s
of invoice date
6-3

41
41 41
Sales Discounts
6-3
n Banuar; 22, &et(olutions receives the
amount due, less the 2 percent discount.
Ban. 22 )ash 1 4/7 77
8ccounts 9eceivable%mega 3ech. 1 !77 77
(ales Discounts 37 77
)ollection of .nvoice &o.
17'?2, less 2F discount.

42
42
Ban. 13 (ales 9eturns and 8llowances 22! 77
8ccounts 9eceivableCGrier )o. 22! 77
)redit *emo &o. 32
13 *erchandise .nventor; 147 77
)ost of +oods (old 147 77
)ost of merchandise returned.
)redit *emo &o. 32.
6-3
42
n Banuar; 13, issued )redit *emo 32 to Grier
)ompan; for merchandise returned to
&et(olutions. (elling price, #22!H cost to
&et(olutions, #147.

43
43
1-2
Bournali1e the following merchandise transactions:
a. (old merchandise on account, #/,!77 with terms of
2E17, nE37. 3he cost of the merchandise sold was
#!,'2!.
b. 9eceived pa;ment less the discount.
6-3
Example Exercise 6-(
43

44
44
Follow My Example 6-(
44
a. 8ccounts 9eceivable /,!77
(ales
/,!77
)ost of *erchandise (old !,'2!
*erchandise .nventor;
!,'2!
b. )ash /,3!7
(ales Discounts 1!7
8ccounts 9eceivable
/,!77
"or ,ractice: ,- '?38, ,- '?3@
6-3

4!
4! 4!
n Banuar; 3, &et(olutions purchased merchandise
for cash from 8lden )ompan;, #2,!17.
1urchase 3ransactions 41erpetual
In2entor+5
6-3
JOURNAL
Date Description
Post.
Ref. Dr Cr.
PAGE 24
Ban. 3 *erchandise .nventor; 2 !17 77
2774
)ash 2 !17 77
,urchased inventor; from
@owen )o.

4'
4' 4'
6-3
Ban. 4 *erchandise .nventor; 4 2!7 77
8ccounts ,a;ableC3homas )orp. 4 2!7 77
,urchased inventor; on
account.
n Banuar; 4, &et(olutions purchased
merchandise on account from 3homas
)orporation, #4,2!7.

4/
4/
8lpha 3echnologies issues
an invoice for #3,777 to
&et(olutions dated *arch
12, with terms 2E17, nE37.
1urchases Discounts
6-3

42
42
&et(olutions borrows cash at an annual interest
rate of 'F. (hould the firm borrow cash to pa;
the invoice within the discount period<
6-3
Discount of 2F on #3,777 #'7.77
.nterest for 27 da;s at the rate
of 'F on #2,447 % 4.27
(avings from borrowing #!7.27
I-(

44
44 44
*ar. 12 *erchandise .nventor; 3 777 77
8ccounts ,a;ableC8lpha 3ech. 3 777 77
,urchased inventor; on
account.
6-3
n *arch 12, &et(olutions purchased
merchandise on account from 8lpha
3echnologies, #3,777.
1urchase 3ransactions 41erpetual
In2entor+5

!7
!7
*ar. 22 8ccounts ,a;ableC8lpha 3echnol. 3 777 77
)ash 2 447 77
*erchandise .nventor; '7 77
,aid 8lpha 3echnologies for
*arch 12 purchase.
6-3
.f pa;ment is made b; *arch 22, &et(olutions
records the discount as a reduction in cost. &otice
that #erchandise $nventory is credited because
&et(olutions maintains a perpetual inventor;.
!7

!1
!1
8pr. 11 8ccounts ,a;ableC8lpha 3echnol. 3 777 77
)ash 3 777 77
,aid 8lpha 3echnologies for
*arch 12 purchase.
6-3
!1
.f &et(olutions does not pa; the invoice until
8pril 11, it would pa; the full amount.

!2
!2
8 purchases return involves actuall;
returning merchandise that is
damaged or does not meet the
specifications of the order.
1urchases -eturn
6-3

!3
!3
0hen the defective or incorrect
merchandise is Dept b; the
bu;er and the vendor maDes a
price adjustment, this is a
purchases allowance.
6-3
1urchases /llo(ance

!4
!4
&et(olutions receives the deliver;
from *axim (;stems and
determines that #477 of the items
are not the merchandise ordered.
Debit memorandum J12 5also
called a debit memo6 is issued to
*axim (;stems.
6-3

!!
!!
*ar. / 8ccounts ,a;ableC*axim (;stems 477 77
Debit *emo &o. 12
*erchandise .nventor; 477 77
6-3
!!
n *arch /, &et(olutions records the
return of the merchandise indicated in
Debit *emorandum &o. 12.

!'
!' !'
n *a; 2, &et(olutions purchased
#!,777 of merchandise from Delta Data
AinD, subject to terms 2E17, nE37.
*a; 2 *erchandise .nventor; ! 777 77
,urchased merchandise.
8ccounts ,a;ableCDelta Data ! 777 77
6-3

!/
!/ !/
n *a; 4, &et(olutions returns
#3,777 of the merchandise.
6-3
4 8ccounts ,a;ableCDelta Data AinD 3 777 77
9eturned portion of the
merchandise purchased.
*erchandise .nventor; 3 777 77

!2
!2 !2
n *a; 12, &et(olutions pa;s the amount due,
#1,4'7 K#2,777 % 5#!,777 %#3,7776 x 2F6L.
12 8ccounts ,a;ableCDelta Data AinDs 2 777 77
,aid invoice K5#!,777 %
#3,7776 x 2F M #47H
#2,777 % #47 M #1,4'7L
)ash 1 4'7 77
*erchandise .nventor; 47 77
6-3

!4
!4
6-3
9ofles )ompan; purchased merchandise on account from a
supplier for #11,!77, terms 2E17, nE37. 9ofles )ompan;
returned #3,777 of the merchandise and received full credit.
Example Exercise 6-&
a. .f 9ofles )ompan; pa;s the invoice within the
discount period, what is the amount of cash reNuired
for the pa;ment<
b. =nder a perpetual inventor; s;stem, what account is
credited b; 9ofles )ompan; to record the return<
!4

'7
'7
Follow My Example 6-&
'7
a. #2,337. ,urchase of #11,!77 less the return of
#3,777 less the discount of #1/7 K5#11,!77 %
#3,7776 x 2FL.
b. *erchandise .nventor;.
"or ,ractice: ,- '?48, ,- '?4@
6-3

'1
'1
.f ownership of the merchandise
passes to the bu;er when the seller
delivers the merchandise to the
freight carrier, it is said to be %&'
(free on board) shipping point.
6-3
3ransportation Costs

'2
'2 '2
n Bune 17, &et(olutions bu;s merchandise from
*agna Data on account, #477, terms "@ shipping
point and pa;s the transportation cost of #!7.
Bune 17 *erchandise .nventor; 477 77
,urchased merchandise,
terms "@ shipping point.
8ccounts ,a;ableC*agna Data
477 77
17 *erchandise .nventor; !7 77
)ash
!7 77
,aid shipping cost .
6-3

'3
'3
.f ownership of the merchandise
passes to the bu;er when the
bu;er receives the merchandise,
the terms are said to be %&'
(free on board) destination.
6-3
3ransportation Costs

'4
'4
n Bune 1!, &et(olutions sells
merchandise to Gran1 )ompan; on
account, #/77, terms "@
destination. 3he cost of the
merchandise sold is #427.
6-3
F'. Destination

'!
'! '!
6-3
Bune 1! 8ccounts 9eceivableCGran1 )o. /77 77
(old merchandise, terms
"@ destination.
(ales
/77 77
1! )ost of *erchandise (old 427 77
*erchandise .nventor;
427 77
9ecord cost of merchandise
sold to Gran1 )ompan;.

''
'' ''
6-3
n Bune 1!, &et(olutions pa;s the
transportation cost of #47.
Bune 1! Deliver; -xpense 47 77
)ash 47 77
,aid shipping cost on
merchandise sold.

'/
'/
n Bune 27, &et(olutions sells
merchandise to ,lanter )ompan;
on account, #277, terms "@
shipping point. 3he cost of the
merchandise sold is #3'7.
6-3
F'. Shipping 1oint

'2
'2 '2
6-3
Bune 27 8ccounts 9eceivableC,lanter )o. 277 77
(old merchandise, terms
"@ shipping point.
(ales
277 77
27 )ost of *erchandise (old 3'7 77
*erchandise .nventor;
3'7 77 9ecord cost of merchandise
sold to ,lanter )ompan;.

'4
'4 '4
6-3
&et(olutions pa;s the transportation
cost of #4! and adds it to the invoice.
Bune 27 8ccounts 9eceivableC,lanter )o. 4! 77
)ash 4! 77
,repaid shipping cost on
merchandise sold.

/7
/7
6-3
Determine the amount to be paid in full settlement of each
of invoices 5a6 and 5b6, assuming that credit for returns and
allowances was received prior to pa;ment and that all
invoices were paid within the discount period.
Example Exercise 6-"
/7
3ransportation 9eturns and
*erchandise ,aid b; (eller 3ransportation 3erms 8llowances
a. #4,!77 #277 "@ shipping point, #277
1E17, nE37
b. #!,777 #'7 "@ destination, #2,!77
2E17, nE37

/1
/1
Follow My Example 6-"
/1
a. #3,2'3. ,urchase of #4,!77 less return of #277
less the discount of #3/ K5#4,!77 % #2776 x 1FL
plus #277 of shipping.
b. #2,4!7. ,urchase of #!,777 less return of
#2,!77 less the discount of #!7 K5#!,777 %
#2,!776 x 2FL.
"or ,ractice: ,- '?!8, ,- '?!@
6-3

/2
/2 12 /2
6-3

/3
/3 12 /3
n 8ugust 12, merchandise is sold
on account to Aemon )ompan;,
#177. 3he state has a 'F sales tax.
8ug. 12 8ccounts 9eceivableCAemon )o. 17' 77
(ales 177 77
(ales 3axes ,a;able ' 77
.nvoice &o. 334
Sales 3a$es
6-3

/4
/4 12 /4
n (eptember 1!, the seller sends in a
pa;ment of #2,477 to the taxing unit for
the 8ugust taxes collected.
(ept. 1! (ales 3ax ,a;able 2 477 77
)ash
2 477 77
,a;ment for sales taxes
collected during 8ugust.
6-3

/!
/!
0hen wholesalers offer special
discounts to certain classes of bu;ers
that order large Nuantities, these
discounts are called trade discounts.
3rade Discounts
6-3

/'
/'
Dual Nature of Merchandise
3ransactions
6-3
-ach merchandising transaction affects a bu;er
and a seller. .n the following illustrations, we
show how the same transactions would be
recorded b; both the seller and the bu;er.
Bul; 1. (cull; )ompan; sold merchandise on
account to @urton )o., #/,!77, terms
"@ shipping point, nE4!. 3he cost of
the merchandise sold was #4,!77.

//
// 12 //
Scully Company (Seller)
8ccounts 9eceivableC@urton )o. /,!77
(ales /,!77
)ost of *erchandise (old 4,!77
*erchandise .nventor; 4,!77
Burton Company (Buyer)
*erchandise .nventor;. /,!77
8ccounts ,a;ableC(cull; )o. /,!77
6-3

/2
/2
Bul; 2 @urton )ompan; paid
transportation charges of #1!7 on
Bul; 1 purchase from (cull;
)ompan;.
6-3

/4
/4 12 /4
Scully Company (Seller)
&o entr;.
Burton Company (Buyer)
*erchandise .nventor; 1!7
)ash 1!7
6-3

27
27
Bul; ! (cull; )ompan; sold merchandise
on account to @urton )o., #!,777,
terms "@ destination, nE37. 3he
cost of the merchandise sold was
#3,!77.
6-3

21
21 12 21
Scully Company (Seller)
8ccounts 9eceivableC@urton )o. !,777
(ales !,777
)ost of *erchandise (old 3,!77
*erchandise .nventor; 3,!77
Burton Company (Buyer)
*erchandise .nventor;. !,777
8ccounts ,a;ableC(cull; )o. !,777
6-3

22
22
Bul; /. (cull; )ompan; paid
transportation costs of #2!7 for
deliver; of merchandise sold to
@urton )ompan; on Bul; !.
6-3

23
23 12 23
Scully Company (Seller)
Deliver; -xpense 2!7
)ash 2!7
Burton Company (Buyer)
&o entr;.
6-3

24
24
Bul; 13. (cull; )ompan; issued @urton
)ompan; a credit memorandum
for #1,777 of merchandise
returned from a Bul; ! purchase
on account. 3he cost of the
merchandise was #/77.
6-3

2!
2! 12 2!
Scully Company (Seller)
(ales 9eturns and 8llowances 1,777
8ccounts 9eceivableC@urton )o. 1,777
*erchandise .nventor; /77
)ost of *erchandise (old /77
Burton Company (Buyer)
8ccounts ,a;ableC(cull; )o. 1,777
*erchandise .nventor; 1,777
6-3

2'
2'
Bul; 1!. (cull; )ompan; received
pa;ment from @urton )ompan;
for purchase of Bul; !.
6-3

2/
2/ 12 2/
Scully Company (Seller)
)ash 4,777
8ccounts 9eceivableC@urton )o. 4,777
Burton Company (Buyer)
8ccounts ,a;ableC(cull; )o. 4,777
)ash 4,777
6-3

22
22
Bul; 12. (cull; )ompan; sold
merchandise on account to
@urton )ompan;, #12,777, terms
"@ shipping point, 2E17, nEeom.
(cull; prepaid transportation
costs of #!77, which were added
to the invoice. 3he cost of the
merchandise sold was #/,277.
6-3

24
24 12 24
Scully Company (Seller)
8ccounts 9eceivableC@urton )o. 12,777
(ales 12,777
8ccounts 9eceivableC@urton )o. !77
)ash !77
)ost of *erchandise (old /,277
*erchandise .nventor; /,277
6-3
Burton Company (Buyer)
*erchandise .nventor; 12,!77
8ccounts ,a;ableC(cull; )o. 12,!77

47
47
Bul; 22. (cull; )ompan; received pa;ment
from @urton )ompan; for purchase
of Bul; 12, less discount 52F x
#12,7776.
6-3

41
41 12 41
Scully Company (Seller)
)ash 12,2'7
(ales Discounts 247
8ccounts 9eceivableC@urton )o. 12,!77
Burton Company (Buyer)
8ccounts ,a;ableC(cull; )o. 12,!77
*erchandise .nventor; 247
)ash 12,2'7
6-3

42
42
1-2
(ievert )o. sold merchandise to @ra; )o. on account,
#11,!77, terms 2E1!, nE37. 3he cost of the merchandise
sold is #',477. (ievert )o. issued a credit memorandum for
#477 for merchandise returned and later received the
amount due within the discount period. 3he cost of the
merchandise returned was #!47. Bournali1e (ievert )o.:s
and @ra; )o.:s entries for the receipt of the checD for the
amount due from @ra; )o.
6-3
Example Exercise 6-6
42

43
43
Follow My Example 6-6
43
6-3
"or ,ractice: ,- '?'8, ,- '?'@
Sievert Company Journal Entries:
)ash 5#11,!77 % #477 % #2126 17,322
(ales Discounts K5#11,!77 % #4776 x 2FL 212
8ccounts 9eceivableC@ra; )o.
5#11,!77 % #4776 17,'77
Bray Company Journal Entries:
8ccounts ,a;ableC(ievert )o. 5#11,!77 %
#4776 17,'77
*erchandise .nventor; K5#11,!77 % #4776
x 2FL 212
)ash 5#11,!77 % #477 % #2126 17,322

44
44
Describe the ad(usting and
closing process for a
merchandising business.
bjective 4
bjective 4
bjective 4
bjective 4
6-4

4!
4!
6-4
*erchandising businesses ma; experience
some loss of inventor; due to shoplifting,
emplo;ee theft, or errors in recording or
counting inventor;. .f the balance of the
#erchandise $nventory account is larger than
the total amount of merchandise count, the
difference is often called inventory shrin)age
or inventory shortage.
In2entor+ Shrin6age

4'
4'
&et(olutions inventor; records
indicate that #'3,4!7 of
merchandise should be
available for sale on December
31, 2774. 3he ph;sical count
reveals that onl; #'2,1!7 is
actuall; available.
6-4

4/
4/ 12 4/
.nventor; records #'3,4!7
.nventor; count '2,1!7
.nventor; shortage # 1,277
Dec. 31 )ost of *erchandise (old 1 277 77
*erchandise .nventor; 1 277 77
8djusting -ntr;
.nventor; shrinDage 5'3,4!7
% #'2,1!76.
6-4

42
42
6-4
Step 1% Closing Entries
)lose the temporar; accounts with credit
balances to $ncome Summary.
2774
ate !tem "# e$it Credit
)losing -ntries
Dec. 31 (ales 417 /27 12! 77
9ent 9evenue '17 '77 77
.ncome (ummar; 312 /27 /2! 77
42

44
44
6-4
44
)lose the temporar; accounts
with debit balances to $ncome
Summary.
6-4
Step !% Closing Entries

177
177
6-4 6-4
Step !% Closing Entries
177
31 .ncome (ummar; 312 '4! 32! 77
(ales 9eturns and 8llow. 411 ' 147 77
(ales Discounts 412 ! /47 77
)ost of *erchandise (old !17 !2! 37! 77
(ales (alaries -xpense !27 !3 437 77
8dvertising -xpense !21 17 2'7 77
Depr. -xp.C(tore -Nuip. !22 3 177 77
Deliver; -xpense !23 2 277 77
*isc. (elling -xpense !24 '37 77
ffice (alaries -xpense !37 21 727 77
9ent -xpense !31 2 177 77
Depr. -xp.Cffice -Nuip. !32 2 447 77
.nsurance -xpense !33 1 417 77
ffice (upplies -xpense !34 '17 77
*isc. 8dministrative -xp. !34 /'7 77
.nterest -xpense /17 2 447 77

171
171
6-4
Step 3% Closing Entries
171
)lose $ncome Summary 5the balance represents
a #/!,477 profit for &et(olutions in 27746 to
Chris Clar)! Capital.
31 .ncome (ummar; 312 /! 477 77
)hris )larD, )apital 317 /! 477 77

172
172
6-4
)lose Chris Clar)! Drawing to Chris
Clar)! Capital.
Step &% Closing Entries
172
31 )hris )larD, )apital 317 12 777 77
)hris )larD, Drawing 311 12 777 77

173
173
1-2
,ulmonar; )ompan;:s perpetual inventor; records indicate
that #322,277 of merchandise should be on hand on *arch
31, 2772. 3he ph;sical inventor; indicates that #3/1,2!7 of
merchandise is actuall; on hand. Bournali1e the adjusting
entr; for the inventor; shrinDage for ,ulmonar; )ompan;
for the ;ear ended *arch 31, 2772.
6-4
Example Exercise 6-7
173
Follow My Example 6-7
"or ,ractice: ,- '?/8, ,- '?/@
*ar. 31 )ost of *erchandise (old 5#322,277 %
5#3/1,2!76 11,!!7
*erchandise .nventor; 11,!!7

174
174
3he ratio of net sales to assets
measures how effectivel; a business is
using its assets to generate sales.
Financial /nal+sis
6-4
&et sales
8verage total assets
9atio of &et
(ales to 8ssets
M

17!
17! 17!
#atio o% Net Sales to &ssets
#atio o% Net Sales to &ssets
#atio o% Net Sales to &ssets
#atio o% Net Sales to &ssets
Sears J' C'
"enney
3otal revenue 5net sales6 #14,/71O #12,424O
3otal assets:
@eginning of ;ear #',7/4 #12,377
-nd of ;ear #2,'!1 #14,12/
8verage #/,3'2.! #1',213.!

#atio o% net sales to assets
#atio o% net sales to assets
(')* to +
(')* to +
+'+, to +
+'+, to +
6-4
Oin millions

17'
17'
6-4
Interpretation
@ased on these ratios, (ears
appears better than B. ).
,enne; in utili1ing its assets to
generate sales.