Chapter 5

Accounting for
Merchandising
Businesses
 Objectives
1) DistinguishAfter
the activities
studying of a service
business from those of
this chapter, a
merchandising business.
you should be
2) Describe and illustrate
able to: the financial
statements of a merchandising
business.
3) Describe the accounting for the sale
of merchandise.
4) Describe the accounting for the
purchase of merchandise.
 Nature
Nature of
of
Businesses
Businesses
I. Service Business
Fees earned $XXX
Operating expenses–XXX
Net income $XXX
 Nature of
Businesses
Merchandising Business
Sales $XXX
Cost of Merchandise Sold–XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX
 Multiple-
Step
Income
Statement
 Net Solutions
Income Statement
For the Year Ended December 31, 2007
Revenue from sales:
Sales $720,185
Less: Sales returns and allowances$ 6,140
Sales discounts 5,790 11,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950

Continued
Operating expenses:
Selling expenses:
Sales salaries expense $56,230
Advertising expense 10,860
Depr. Expense–store equipment 3,100
Miscellaneous selling expense 630
Total selling expenses $ 70,820
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr. expense–office equipment 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. administrative expense 760
Total admin. expenses 34,890
Total operating expenses
105,710
Income from operations $
77,240

Continued
Other income and expenses:
Rent revenue $ 600
Interest expense (2,440) (1,840)
Net income $75,400

Concluded
Periodic vs. Perpetual Methods
of 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 vs. Perpetual Methods
of 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 of Merchandise
Purchases Purchased $521,980
Less: Purchase returns and
allowances $9,100
Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased
$527,755
 Cost of Merchandise
$ 59,700
Sold
Merchandise inventory, 1/1/07

Purchases $521,980
Less: Purchase returns and
allowances $9,100
Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased
527,755
Merchandise available for sale
$587,455
Less merchandise inventory, 12/31/07
 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 $525,305
Selling expenses 70,820
Administrative expenses 34,890
Interest expense 2,440
Total expenses 633,455
Net income $ 75,400
 Statement of
Owner’s Equity
for a
Merchandising
Business
 NetSolutions
Statement of Owner’s Equity
For the Year Ended December 31, 2007

Ato Megabi, capital, 1/1/07 $153,800

Net income for year $75,400
Less withdrawals 18,000
Increase in owner’s equity 57,400
Ato Megabi, capital, 12/31/07 $211,200
Balance
Sheet
 NetSolutions
Balance Sheet
December 31, 2007
Assets
Current assets:
Cash $52,950
Accounts receivable 91,080
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650
Total current assets
$209,310

Continued
Property, plant, and equipment:
Land $20,000
Store equipment $27,100
Less accumulated
depreciation 5,700 21,400
Office equipment $15,570
Less accumulated
depreciation 4,720 10,850
Total property, plant, and
equipment 52,250
Total assets $261,560

Continued
 Liabilities
Liabilities
Current
Current liabilities:
liabilities:
Accounts
Accounts payable
payable $22,420
$22,420
Note
Note payable
payable (current
(current portion)
portion) 5,000
5,000
Salaries
Salaries payable
payable 1,140
1,140
Unearned
Unearned rent rent 1,800
1,800
Total
Total current
current liabilities
liabilities $$ 30,360
30,360
Long-term
Long-term liabilities:
liabilities:
Note
Note payable
payable (due(due 2017)
2017) 20,000
20,000
Total
Total liabilities
liabilities $$ 50,360
50,360
Owner’s
Owner’s Equity
Equity
Ato
Ato Megabi,
Megabi, capital
capital 211,200
211,200
Total
Total liabilities
liabilities and
and owner’s
owner’s equity
equity
$261,560
$261,560

Concluded
 Sales
Transactions
 I. Cash Sales
JOURNAL PAGE 26
Post.
Date Description Dr
2007 Ref. Cr.
1 Jan. 3Cash 1 800 00
2 Sales 1
3 800 00
To record cash sales.
4
5

On January 3, a firm sold $1,800

of merchandise for cash.
 Cash Sales

6 3 Cost of
7 Merchandise Sold Inventory
Merchandise 1 280100
280 00
8 To record the cost of
9 merchandise sold.
10

Using a perpetual inventory, the

inventory cost of $1,280 must be
recorded.
 II. Sales on Account
Jan. 12 Accounts Receivable—Sims Co. 510 00
Sales 510 00
Invoice No. 7172.

12 Cost of Merchandise Sold 280 00

Merchandise Inventory 280 00
Cost of merchandise sold
on Invoice No. 7172.

On January 12, a firm sold Sims

Company merchandise on account,
$510. The cost of the merchandise to
 Sales Discounts
Credit Terms
The terms for when payments are to
be made are called credit terms
Credit Period
If buyer is allowed an amount of time to
pay, it is known as the Credit Period
Sales Discounts
Credit Terms
If invoice
is paid Invoice for
within 10 $1,500
days of Terms:
invoice 2/10, n/30
date
$1,470 paid
(less 2% as a
cash discount)
 Sales Discounts
Credit Terms

If invoice
Invoice for is NOT
$1,500 paid within
Terms: 10 days of
2/10, n/30 invoice
$1,500 PAID date
 Sales Discounts

Jan. 21 Cash 499 80

Sales Discounts 10 20
Accounts Receivable—Sims Co. 510 00
Collection of Invoice
No. 7172, less discount.

On January 21, the firm

receives the amount due from
Sims (refer to Slide 25), less
the 2 percent discount.
 Sales Returns and
Allowances
SALES RETURN
Merchandise that is returned to the
vendor is referred to as a sales return.

SALES ALLOWANCE
If there is a defect in the product or the
wrong item was shipped, the seller may
reduce the initial price at which the
goods were sold. This is known as a
sales allowance.
 Sales Returns and
Allowances
Jan. 13 Sales Returns and Allowances 225 00
Accounts Receivable—Krier Co. 225 00
Credit Memo No. 32.

13 Merchandise Inventory 140 00

Cost of Merchandise Sold 140 00
Cost of merchandise
returned—Credit Memo 32.

On January 13, issued Credit Memo 32 to

Krier Company for merchandise returned to
NetSolutions. Selling price, $225; cost to
NetSolutions, $140.
 Purchase Transactions
Post.
Date Description Ref. Dr Cr.
2007
1 Jan. 3 Merchandise Inventory 2 510 00
2 Cash 2 510 00
3 Purchased inventory from
4
Bowen Co.
5

On January 3, Purchased merchandise

for cash from Bowen Company, $2,510.
Purchase Discounts
What’s the
last day the
invoice can
be paid?
Alpha
Technologies
issues an invoice
for $3,000 to
NetSolutions
dated March 12,
with terms 2/10,
Purchase Discounts

The full amount

Let’s
is due do a
on April
simple
11.
calculation.
Invoice period 30
Days in March31
Date of invoice12
Remaining days 19
April 11
 Purchase Discounts
JOURNAL PAGE 27
Post.
Date Description Ref. Dr Cr.
2007
1 Mar. 12 Merchandise Inventory 3 000 00
2 Accounts Payable—Alpha
3 Technologies 3 000 00
4
5

On March 12, NetSolutions

purchased merchandise on
account from Alpha
 Purchase Discounts
JOURNAL PAGE 27
Post.
Date Description Ref. Dr Cr.
2007
1 Mar. 22 Accounts Payable—Alpha Technol. 3 000 00
2 Cash 2 940 00
3 Merchandise Inventory 60 00
4
5

If payment is made by March 22

NetSolutions records the discount as a
reduction in cost.
 Purchase Discounts
JOURNAL PAGE 27
Post.
Date Description Ref. Dr Cr.
2007
1 Apr. 11 Accounts Payable—Alpha Technol. 3 000 00
2 Cash 3 000 00
3
4
5

If NetSolutions does not pay the

invoice until April 11, it would pay the
full amount.
 Purchases Returns and
Allowances
 A purchases return involves
 actually returning
merchandise
 that is damaged or does not
meet
 When the the specifications
defective of
or incorrect
the order.is kept by the buyer
merchandise
and the vendor makes a price
adjustment, this is a purchases
allowance.
 Purchases Returns and
NetSolutions received the
Allowances
delivery from Maxim Systems
and determined that $900 of
the items were not the
merchandise ordered.
 Debit memorandum #18 is
issued to Maxim Systems.
Purchases Returns and Allowances

Mar. 7 Accounts Payable—Maxim Systems 900 00

Merchandise Inventory 900 00
Debit Memo No. 18
Purchases Returns and Allowances

On May 2, NetSolutions
purchased $5,000 of merchandise
from Delta Data Link, subject to
terms 2/10, n/30.
May 2 Merchandise Inventory 5 000 00
Accounts Payable—Delta Data 5 000 00
Purchased merchandise.
Purchases Returns and Allowances

On May 4, NetSolutions
returns $3,000 of the
merchandise.
May 4 Accounts Payable—Delta Data Links 3 000 00
Merchandise Inventory 3 000 00
Returned portion of
merchandise purchased.
Purchases Returns and Allowances

On May 12, NetSolutions pays the

amount due.

May 12 Accounts Payable—Delta Data Links 2 000 00

Cash ($5,000 – 1 960 00
Merchandise Inventory $3,000) x 40 00
Paid invoice. 2%
Transportatio
n Costs
 Transportation Costs
 The Sales Agreement should
indicate whether the seller or the
buyer is to pay the cost of
transporting.
FOB Shipping Point
1) Goods delivered to shipping point by
seller
2) Buyer pays freight costs from
shipping point to destination
FOB Destination
1) Goods delivered to destination by
 FOB Shipping Point
Buyer pays freight costs and debits
Merchandise Inventory

Fruit Express

Title passes to
buyer as shipment
leaves shipping
point.
 FOB Shipping Point
June 10 Merchandise Inventory 900 00
Accounts Payable—Magna Data 900 00
Purchased merchandise, terms
FOB shipping point.

10 Merchandise Inventory 50 00
Cash 50 00
Paid shipping cost .

On June 10, NetSolutions buys

merchandise from Magna Data on account,
$900, terms FOB shipping point and pays
 FOB Destination
Seller pays freight costs and debits
Transportation Out

Fruit Express

Title passes to
buyer upon arrival
at destination.
 FOB Destination
June 15 Accounts Receivable—Kranz Co. 700 00
Sales 700 00
Sold merchandise, terms FOB
destination.

15 Cost of Merchandise Sold 480 00

Merchandise Inventory 480 00
Cost of sale of Kranz Co .

On June 15, NetSolutions sells merchandise to

Kranz Company on account, $700, terms FOB
destination. The cost of the merchandise sold is
$480. NetSolutions pays the transportation cost
 FOB Destination

June 15 Transportation Out 40 00

Cash 40 00
Paid shipping cost on
merchandise sold.

On June 15, NetSolutions sells merchandise

to Kranz Company on account, $700, terms
FOB destination. The cost of the
merchandise sold is $480. NetSolutions
 Sales Taxes
Aug. 12 Accounts Receivable—Lemon Co. 106 00
Sales 100 00
Sales Taxes Payable 6 00
Invoice No. 339

On August 12, merchandise is sold on

account to Lemon Company, $100. The
state has a 6% sales tax.
 Sales Taxes
Sept.15 Sales Tax Payable 2 900 00
Cash 2 900 00
Payment for sales taxes
collected during August.

On September 15, the seller sends in a

payment of $2,900 to the taxing unit for
the August taxes collected.
 Illustration of Accounting for
Merchandise Transactions
July 1. Scully Company sold merchandise on account
to Burton Co., $7,500, terms FOB shipping point,
n/45. The cost of the merchandise sold was
$4,500.
July 2. Burton Company paid transportation charges
of $150 on July 1 purchase from Scully Company.
July 5. Scully Company sold merchandise on account
to Burton Co., $5,000, terms FOB shipping point,
n/30. The cost of the merchandise sold was
$3,500.
July 7. Scully Company paid transportation costs of
$250 for delivery of merchandise sold to Burton
Company on July 5.
July 13. Scully Company issued Burton Company a
credit memorandum for $1,000 of merchandise
returned from a July 5 purchase on account. The
 Illustration of Accounting for
Merchandise Transactions
July 15. Scully Company received payment
from Burton Company for purchase of July
5.
July 18. Scully Company sold merchandise
on account to Burton Company, $12,000,
terms FOB shipping point, 2/10, n/eom.
Scully prepaid transportation costs of
$500, which were added to the invoice.
The cost of the merchandise sold was
$7,200.
July 28. Scully Company received payment
from Burton Company for purchase of July
18, less discount (2% x $12,000).
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co. 7,500
Sales 7,500

Cost of Merchandise Sold 4,500

Merchandise Inventory 4,500
Burton Company (Buyer)
Merchandise Inventory. 7,500
Accounts Payable—Scully Co. 7,500

July 1. Scully Company sold merchandise on

account to Burton Co., $7,500, terms FOB
shipping point, n/45. The cost of the
 Illustration of Accounting for
Merchandise Transactions

Scully Company (Seller)

No entry.

Burton Company (Buyer)

Merchandise Inventory 150
Cash 150

July 2. Burton Company paid transportation

charges of $150 on July 1 purchase from
Scully Company.
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co. 5,000
Sales 5,000

Cost of Merchandise Sold 3,500

Merchandise Inventory 3,500
Burton Company (Buyer)
Merchandise Inventory. 5,000
Accounts Payable—Scully Co. 5,000

July 5. Scully Company sold merchandise on

account to Burton Co., $5,000, terms FOB
shipping point, n/30. The cost of the
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Transportation Out 250
Cash 250

Burton Company (Buyer)

No entry.

July 7. Scully Company paid

transportation costs of $250 for
delivery of merchandise sold to Burton
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Sales Returns and Allowances 1,000
Accounts Receivable—Burton Co. 1,000

Merchandise Inventory 700

Cost of Merchandise Sold 700
Burton Company (Buyer)
Accounts Payable—Scully Co. 1,000
Merchandise Inventory 1,000
July 13. Scully Company issued Burton
Company a credit memorandum for $1,000 of
merchandise returned from a July 5 purchase on
account. The cost of the merchandise was
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Cash 4,000
Accounts Receivable—Burton Co. 4,000

Burton Company (Buyer)

Accounts Payable—Scully Co. 4,000
Cash 4,000

July 15. Scully Company received

payment from Burton Company
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co. 12,000
Sales 12,000

Accounts Receivable—Burton Co. 500

Cash 500
Burton Company (Buyer)
Merchandise Inventory 12,500
Accounts Payable—Scully Co. 12,500
July 18. Scully Company sold merchandise on
account to Burton Company, $12,000, terms FOB
shipping point, 2/10, n/eom. Scully prepaid
transportation costs of $500, which were added
 Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Cost of Merchandise Sold 7,200
Merchandise Inventory 7,200

Burton Company (Buyer)

July 18. Scully Company sold merchandise on

account to Burton Company, $12,000, terms FOB
shipping point, 2/10, n/eom. Scully prepaid
transportation costs of $500, which were added
to the invoice. The cost of the merchandise sold
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Cash 12,260
Sales Discounts 240
Accounts Receivable—Burton Co. 12,500

Burton Company (Buyer)

Accounts Payable—Scully Co. 12,500
Merchandise Inventory 240
Cash 12,260

July 28. Scully Company received

payment from Burton Company for
purchase of July 18, less discount (2% x
 NetSolutions
Chart of Accounts
Balance Sheet Accounts
100 Assets 200 Liabilities
110 Cash 210 Accounts Payable
112 Accounts Receivable 211 Salaries Payable
115 Merchandise Inventory 212 Unearned Rent
116 Office Supplies 215 Notes Payable
117 Prepaid Insurance
120 Land 300 Owner’s Equity
123 Store Equipment 310 Ato Megabi, Capital
124 Accumulated Depreciation— 311 Ato Megabi, Drawing
Store Equipment 312 Income Summary
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
 NetSolutions
Chart of Accounts
Income Statement Accounts
400 Revenues 500 Costs and Expenses
410 Sales 510 Cost of Merchandise Sold
411 Sales Returns and 520 Sales Salaries Expense
Allowances 521 Advertising Expense
412 Sales Discounts 522 Depreciation Expense—
Store Equipment
600 Other Income 523 Transportation Out
610 Rent Revenue 529 Miscellaneous Selling Expense
530 Office Salaries Expense
700 Other Expense 531 Rent Expense
710 Interest Expense 532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Miscellaneous Admin. Expense
 Merchandise Inventory
Shrinkage
NetSolutions inventory
records indicate that
$63,950 of merchandise
should be available for
sale on December 31,
2007. The physical
count reveals that only
$62,150 is actually
available.
 Merchandise Inventory
Shrinkage

Adjusting Entry
Dec. 31 Cost of Merchandise Sold 1 800 00
Merchandise Inventory 1 800 00

Inventory records$63,950
Inventory count 62,150
Inventory shortage$ 1,800