ACCOUNTING—

INDONESIA ADAPTATION
4 TH EDITION—VOLUME 1
Carl S. Warren
James M. Reeve
Jonathan E.Duchac
Ersa Tri Wahyuni
Amir Abadi Jusuf
 CHAPTER 6

ACCOUNTING FOR
MERCHANDISING BUSINESS
 Contents
Nature of Merchandising Businesses

Business Connection: PT Angkasa Pura II Versus PT Matahari Putra Prima

Merchandising Transactions
Integrity, Objectivity, and Ethics in Business: The Case of the Fraudulent Price
Tags
Business Connection: Taxes for Merchandising Company

Financial Statements for a Merchandising Business

The Adjusting and Closing Process

Financial Analysis and Interpretation: Ratio of Net Sales to Assets

The Periodic Inventory System

Nature of Merchandising Businesses
(slide 1 of 2)
 The difference between service business and merchandising
business are reflected in the operating cycles of a service and
merchandising business as well as in their financial
statements.
Nature of Merchandising Businesses
(slide 2 of 2)
 The difference between service business and merchandising
business illustrated in the following condensed income
statements:
Merchandising Transactions

 Merchandise transactions are recorded in the accounts, using

the rules of debit and credit that are described and illustrated
in Chapter 2.
 Use computerized accounting systems with reports that are
similar to special journals and subsidiary ledgers.
Purchases Transactions

Perpetual Periodic
The inventory does not
Each purchase and sale
show the amount of
recorded in the inventory
merchandise available for
account
sale and the amount sold

Amount of merchandise A listing of inventory on

available and sold hand is prepared at the end
continuously updated of the accounting period
Recording Merchandising
Transactions - Perpetual
Exhibit 2: Invoice
Credit Term (slide 1 of 2)

Credit term: The terms for when payments for

merchandise are to be made.

If payment is required on delivery, the terms are cash

or net cash.
If the buyer is not required to pay on delivery or
allowed an amount of time, known as the credit
period.
Credit Term (slide 2 of 2)

The credit period usually begins with the date of the

sale as shown on the invoice.

If payment is due within a stated number of days after

the invoice date, such as 30 days, the terms are net 30
days, n/30

If payment is due by the end of the month n/eom.

Purchase Discount
 Purpose: To encourage the buyer to pay before the end of the
credit period.
 Example of purchase discount:
Term: 2/10, n. 30.
A seller may offer a 2% discount if the buyer pays within 10
days of the invoice date.
If the buyer does not take the discount, the total invoice
amount is due within 30 days.
Example of Purchase Discount (slide 1 of 3)
Example of Purchase Discount (slide 2 of 3)

 The last day of the discount period is January 15 (invoice date

of January 5 plus 10 days).
 Assume that in order to pay the invoice on January 15,
SolusiNet borrows Rp2,940,000, (Rp3,000,000 × 2%).
 If an annual interest rate of 6% and a 360-day year is also
assumed, the interest on the loan is Rp2,940,000
(Rp2,940,000 × 6% × 20/360).
Example of Purchase Discount (slide 3 of 3)

 The net savings to SolusiNet

Exhibit 3: Credit Terms
Recording Purchase Transaction

 SolusiNet would record the Sigma Technologies invoice and

its payment at the end of the discount period as follows:

 Assume that SolusiNet does not take the discount.

 Purchase Returns and Allowance

Purchase
Returned Return
Merchandise
damaged or
defective Price Purchase
Allowance Allowance
Exhibit 4: Debit Memo
Recording Purchase Return and
Allowance Transaction (slide 1 of 3)
 SolusiNet records the return of the merchandise indicated in
the debit memo in Exhibit 4 as follows:
Recording Purchase Return and
Allowance Transaction (slide 2 of 3)
Assume the following data concerning a purchase of
merchandise by SolusiNet on May 2:
 May 2. Purchased Rp5,000,000 of merchandise on account
from Fajar Data Link, terms 2/10, n/30.
 May 4. Returned Rp1,000,000 of the merchandise
purchased on May 2.
 May 12. Paid for the purchase of May 2 less the return and
discount.
Recording Purchase Return and Allowance
Transaction (slide 3 of 3)
Sales Transactions (slide 1 of 2)

 Revenue from merchandise sales is usually recorded as Sales.

 A business may sell merchandise for cash.
Sales Transactions (slide 2 of 2)

 The perpetual inventory system:

 the cost of merchandise sold, and
 the decrease in merchandise inventory are also recorded
 Assume that the cost of merchandise sold on March 3 is
Rp1,200,000.
Sales Transactions Using Credit Cards

 Assume that SolusiNet paid credit card processing fees of

Rp4,150,000 on March 31.
Sales on Account
 Debit to Accounts Receivable and a credit to Sales.
Sales Discounts (slide 1 of 2)
 A seller may offer the buyer credit terms that include a
discount for early payment.
 Such discounts knowns as sales discounts.
 Sales discounts are recorded in a separate sales discounts
account, which is a contra (or offsetting) account to Sales.
Sales Discounts (slide 2 of 2)
 SolusiNet sold Rp18,000,000 of merchandise to CV Seruni
Digital on March 10 with credit terms 2/10, n/30.
 CV Seruni Digital pays the invoice on March 19.
 SolusiNet would record the receipt of the cash as follows:
Customer Returns and Allowances
(slide 1 of 2)

 Merchandise sold may be returned to the seller (return).

 In other cases, the seller may reduce the initial selling price
(allowance).
 From a seller’s perspective, these are termed customer
returns and allowances, sometimes called sales returns and
allowances.
Customer Returns and Allowances
(slide 2 of 2)

A credit memo
A credit memo
authorizes a credit
indicates the mount
(decrease) to the
and reason for the
buyer’s account
credit.
receivable.
Exhibit 5: Credit Memo
Example of Customer Returns
and Allowances
 To illustrate, the credit memo shown in Exhibit 5 is used.
 CV Saba Sentosa intends to credit Bondan & Sons account
receivable for Rp900,000 as an allowance for merchandise
that was damaged in shipment.
 Bondan & Sons has agreed to keep the merchandise and make
any necessary repairs.
 CV Saba Sentosa would record issuance of the credit memo as
follows:
Freight (slide 1 of 2)
 The terms of a sale indicate when ownership (title and
control) of the merchandise passes from the seller to the
buyer.
 This point determines whether the buyer or the seller pays the
freight costs.
Freight (slide 2 of 2)
 FOB shipping poin: the ownership of the merchandise may
pass to the buyer when the seller delivers the merchandise to
the freight carrier.
 The buyer pays the freight costs from the shipping point to the
final destination.
 Such costs are part of the buyer’s total cost of purchasing
inventory and are added to the cost of the inventory by
debiting Merchandise Inventory.
Example of Freight Transaction
(slide 1 of 2)

 Assume on June 10, SolusiNet purchased merchandise as

follows:
 June 10. Purchased merchandise from CV Data Digital,
Rp900,000, terms FOB shipping point.
 June 10. Paid freight of Rp50,000 on June 10 purchase
from CV Data Digital.
Example of Freight Transaction
(slide 2 of 2)
FOB Destination

 The ownership of the merchandise may pass to the buyer

when the buyer receives the merchandise.
 The seller pays the freight costs from the shipping point to the
buyer’s final destination.
 the seller debits Delivery Expense or Freight Out.
 Delivery Expense is reported on the seller’s income statement
as a selling expense.
Example of FOB Destination (slide 1 of 2)

 Assume that SolusiNet sells merchandise as follows:

 June 15.

Sold merchandise to CV Kalila Eka Buana on account,

Rp700,000, terms FOB destination. The cost of the
merchandise sold is Rp480,000.
 June 15.

SolusiNet pays freight of Rp40,000 on the sale of June 15.

Example of FOB Destination (slide 2 of 2)
Freight

The seller may prepay the freight, even though

the terms are FOB shipping point.
The buyer debits Merchandise Inventory for the
total amount of the invoice, including the
freight.
Any discount terms would not apply to the
prepaid freight.
Example of Freight (slide 1 of 2)

 Assume that SolusiNet sells merchandise as follows:

 June 20.
 Sold merchandise to Pandu Wijaya on account, Rp800,000,
terms FOB shipping point.
 SolusiNet paid freight of Rp45,000, which was added to
the invoice.
 The cost of the merchandise sold is Rp360,000.
Example of Freight (slide 2 of 2)
E xhibit 6: Freight Terms
Summary: Recording Merchandise
Inventory Transactions
Dual Nature of Merchandise
Transactions (slide 1 of 2)
Dual Nature of Merchandise
Transactions (slide 2 of 2)
Chart of Accounts for SolusiNet, a
Merchandising Business
SolusiNet’ Chart of Accounts

Consists of three-digit account numbers.

1. The first digit indicates the major financial statement
classification (1 for assets, 2 for liabilities, and so on).
2. The second digit indicates the sub-classification (e.g., 11
for current assets, 12 for noncurrent assets, etc.).
3. The third digit identifies the specific account (e.g., 110 for
Cash, 123 for Store Equipment, etc.).
Sales Taxes and Trade Discounts

Sales Taxes
• Almost all states levy a tax on sales of
merchandise.
• The liability for the sales tax is incurred
when the sale is made.
Example of Sales and Sales Tax Transaction (slide
1 of 2)

 The seller would record a sale of Rp100,000 on account,

subject to a tax of 6%, as follows:
Example of Sales and Sales Tax Transaction (slide
2 of 2)

 On a regular basis, the seller pays to the taxing authority

(Direktorat Jenderal Pajak) the amount of the sales tax
collected.
Trade Discounts
 Special discounts offered by wholesalers to government
agencies or businesses that order large quantities.
 Sellers and buyers do not normally record the list prices of
merchandise and trade discounts in their accounts.
 Assume that an item has a list price of Rp1,000,000 and a
40% trade discount.
 The seller records the sale of the item at Rp600,000
[Rp1,000,000 less the trade discount of Rp400,000
(Rp1,000,000 × 40%)].
 The buyer records the purchase at Rp600,000.
Financial Statements for a Merchandising
Business

 Merchandising transactions affect the income statement.

 An income statement for a merchandising business is
normally prepared using either a multiple-step or single-step
format.
Multiple-Step Income Statement
(slide 1 of 4)
Multiple-Step Income Statement
(slide 2 of 4)

Sales is the total amount of sales to customers for

cash and on account is reported in this section.

Cost of Merchandise is the cost of merchandise sold

to customers. Cost of merchandise sold may also be
reported as cost of goods sold or cost of sales.

Gross Profit is the excess of sales over cost of

merchandise sold is gross profit.
Multiple-Step Income Statement
(slide 3 of 4)

Income from operations, sometimes called operating income, is

determined by subtracting operating expenses from gross profit.

Operating expenses are normally classified as either selling

expenses or administrative expenses.

Selling expenses are incurred directly in the selling of

merchandise.
Administrative expenses, sometimes called general expenses,
are incurred in the administration or general operations of the
business.
 Multiple-Step Income Statement
(slide 4 of 4)

Other income and expense items are not related to the

primary operations of the business.
Other income is revenue from sources other than the
primary operating activity of a business, income from
interest, rent, and gains resulting from the sale of fixed
assets.
Other expense is an expense that cannot be traced directly
to the normal operations of the business, interest expense
and losses from disposing of fixed assets.
Single-Step Income Statement
Statement of Owner’s Equity
Statement of Financial Position
The Adjusting and
Closing Process

In this discussion, the focus will

be on the elements of the
accounting cycle that differ from
those of a service business.
Adjusting Entry for Inventory
Shrinkage (slide 1 of 4)
 Under the perpetual inventory system, the balance of the
merchandise inventory account is the amount of merchandise
available for sale at that point in time.
 Retailers normally experience some loss of inventory due to
shoplifting, employee theft, or errors.
 The physical inventory on hand at the end of the accounting
period is usually less than the balance of Merchandise Inventory.
 This difference is called inventory shrinkage or inventory
shortage.
Adjusting Entry for Inventory
Shrinkage (slide 2 of 4)
 SolusiNet’ inventory records indicate the following on
December 31, 2017:
Adjusting Entry for Inventory
Shrinkage (slide 3 of 4)
 At the end of the accounting period, inventory shrinkage is
recorded by the following adjusting entry:
Adjusting Entry for Inventory
Shrinkage (slide 4 of 4)
 Inventory shrinkage cannot be totally eliminated and
considered a normal cost of operations.
 If the amount of the shrinkage is unusually large, it may be
disclosed separately on the income statement under a separate
account, such as Loss from Merchandise Inventory
Shrinkage.
Closing Entries
1. Debit each temporary account with a credit balance, such as
Sales, for its balance and credit Income Summary.
2. Credit each temporary account with a debit balance, such as
the various expenses, and debit Income Summary.
3. Debit Income Summary for the amount of its balance (net
income) and credit the owner’s capital account. The
accounts debited and credited are reversed if there is a net
loss.
4. Debit the owner’s capital account for the balance of the
drawing account and credit the drawing account.
Example of Closing Entries for
SolusiNet (slide 1 of 2)
 SolusiNet’ income summary account after the closing entries
have been posted is as follows:
Example of Closing Entries for
SolusiNet (slide 2 of 2)
Financial Analysis and Interpretation:
Ratio of Sales to Assets

 The ratio of sales to assets measures how effectively a

business is using its assets to generate sales.
 The ratio of sales to assets is computed as follows:
Ratio of Sales to Assets

 The following data were taken from recent annual reports of

PT Midi Utama Indonesia (AlfaMidi), one of the retail
supermarkets (in billion rupiah):
Appendix: Periodic Inventory
System (slide 1 of 2)
 Small merchandise businesses, such as a local hardware store,
may use a manual accounting system.
 A manual perpetual inventory system is time consuming and
costly to maintain.
 In this case, the periodic inventory system may be used.
Appendix: Periodic Inventory
System (slide 2 of 2)
 Under the periodic inventory system, purchases are normally
recorded at their invoice amount.
 If the invoice is paid within the discount period, the
discount is recorded in a separate account called Purchases
Discounts.
 Likewise, purchase returns are recorded in a separate
account called Purchase Returns and Allowances.
Chart of Accounts Under the
Periodic Inventory System
Appendix: Recording Merchandise Transactions
Under the Periodic Inventory System (slide 1 of 2)

 Purchases of inventory are recorded in a purchases account

rather than in the merchandise inventory account.
Purchases is debited for the invoice amount of a purchase.
 Purchases Discounts are normally recorded in a separate
purchases discounts account.
Purchases Discounts is a contra (or offsetting) account to
Purchases.
Appendix: Recording Merchandise Transactions
Under the Periodic Inventory System (slide 2 of 2)

 Purchases Returns and Allowances are recorded in a

similar manner as purchases discounts.
Purchases Returns and Allowances is a contra (or offsetting)
account to Purchases.
 Freight In under FOB shipping point, the buyer pays for the
freight.
Under the periodic inventory system, freight paid when
purchasing merchandise FOB shipping point is debited to
Freight In or Transportation In.
Transactions Using the Periodic
Inventory System
Appendix: Adjusting Process Under the
Periodic Inventory System (slide 1 of 2)

 The adjusting process is the same under the periodic and

perpetual inventory systems except for the inventory
shrinkage adjustment.
 The ending merchandise inventory is determined by a
physical count under both systems.
Appendix: Adjusting Process Under the
Periodic Inventory System (slide 2 of 2)

 Under the perpetual inventory system, the ending inventory

physical count is compared to the balance of Merchandise
Inventory. The difference is the amount of inventory
shrinkage.
 The inventory shrinkage is then recorded as a debit to Cost of
Merchandise Sold and a credit to Merchandise Inventory.
Appendix: Financial Statements Under
the Periodic Inventory System

 The financial statements are similar under the perpetual and

periodic inventory systems. When the multiple-step format of
income statement is used, the cost of merchandise sold may
be reported as shown in Exhibit 16.
Appendix: Closing Entries Under the
Periodic Inventory System (slide 1 of 2)

 The closing entries differ in the periodic inventory system in

that there is no cost of merchandise sold account to close to
Income Summary.
 The purchases, purchases discounts, purchases returns and
allowances, and freight in accounts are closed to Income
Summary.
 In addition, the merchandise inventory account is adjusted to
the end-of-period physical inventory count during the closing
process.
Appendix: Closing Entries Under the
Periodic Inventory System (slide 2 of 2)