Chapter

6 ACCOUNTING FOR
MERCHANDISING
ACTIVITIES

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 Operating
Operating Cycle
Cycle of
of aa Merchandising
Merchandising
Company
Company

1.
s he

Pu ch
Cash

m
le f t

er
rc a n
ab o

ha di
i v on

se se
c e ti
re lec

of
ol
C
3.

Accounts
Inventory
Receivable 2. Sale of merchandise
on account

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Comparing
Comparing Merchandising
Merchandising Activities
Activities
with
with Manufacturing
Manufacturing Activities
Activities
Manufacture
Purchase inventory and
inventory in have a longer
ready-to-sell and more
condition. complex
operating cycle

Merchandising Manufacturing
Company Company
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 Retailers
Retailers and
and Wholesalers
Wholesalers

Wholesalers buy
merchandise from
several different
manufacturers and
then sell this Retailers sell
merchandise to merchandise directly
several retailers. to the public.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 Income
Income Statement
Statement of
of aa
Merchandising
Merchandising Company
Company
Computer Barn Cost of
Condensed Income Statement goods sold
For the Year Ended December 31, 2002 represents
Revenue from sales $ 900,000 the expense
Less: Cost of goods sold 540,000 of goods
Gross profit $ 360,000 that are
Less: Expenses 270,000
sold to
Net income $ 90,000
customers.
Gross profit is a useful means of measuring
the profitability of sales transactions.
© The McGraw-Hill Companies, Inc., 20
McGraw-Hill/Irwin
 What
What Accounting
Accounting Information
Information Does
Does
aa Merchandising
Merchandising Company
Company Need?
Need?
Examples
Financial Reporting • Revenues
Requirements • Expenses

Daily Business Operating

Requirements • Customer
Ledgers

Special Reporting
Requirements
•Tax Reports
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 General
General Ledger
Ledger Accounts
Accounts
Although general ledger accounts provide
useful information, they do not provide
much of the detailed information needed in
the daily business operations.

General Ledger
Accounts Receivable Who
Date Debit Credit Balance
Who
2001
owes
owes us
us
June 1 10,000 10,000 money?
money?
15 3,000 7,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 Subsidiary
Subsidiary Ledgers:
Ledgers: A
A Source
Source of
of
Needed
Needed Details
Details
General Ledger
Controlling Account Accounts Receivable
Date Debit Credit Balance
2001
June 1 10,000 10,000
Subsidiary Ledger 15 3,000 7,000
Jake Sparks
Date Debit Credit Balance
2001
June 1 3,000 3,000
15 1,000 2,000
Subsidiary Ledger
Heather Jacobs
Date Debit Credit Balance
2001
June 1 7,000 7,000
15
McGraw-Hill/Irwin 2,000 5,000 © The McGraw-Hill Companies, Inc., 20
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 Two
Two Approaches
Approaches Used
Used in
in Accounting
Accounting
for
for Merchandise
Merchandise Transactions
Transactions

Perpetual Periodic
Inventory Inventory
System System

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 Perpetual
Perpetual Inventory
Inventory System
System
The inventory account is continuously
updated to reflect items on hand.

Let’s look
at some
entries!

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 Perpetual
Perpetual Inventory
Inventory System
System
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account .

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Perpetual
Perpetual Inventory
Inventory System
System
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.
10 
10  $30
$30 == $300
$300

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 Perpetual
Perpetual Inventory
Inventory System
System
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.
Retail

Cost
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 Perpetual
Perpetual Inventory
Inventory System
System
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Perpetual
Perpetual Inventory
Inventory System
System
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 The
The Inventory
Inventory Subsidiary
Subsidiary Ledger
Ledger

At the end of the period, management

compares the physical inventory count with
the inventory ledger to determine inventory
shrinkage. © The McGraw-Hill Companies, Inc., 20
McGraw-Hill/Irwin
 Taking
Taking aa Physical
Physical Inventory
Inventory
In order to ensure
the accuracy of
their perpetual
records, most
businesses take a
complete physical
count of the
merchandise on
hand at least once
a year.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 Taking
Taking aa Physical
Physical Inventory
Inventory
Reasonable amounts of inventory shrinkage are viewed as
a normal cost of doing business. Examples include
breakage, spoilage and theft.
On December 31, Worley Co. counts its inventory.
An inventory shortage of $2,000 is discovered.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Closing
Closing Entries
Entries in
in aa Perpetual
Perpetual
Inventory
Inventory System
System
 Close Revenue accounts
(including Sales) to The closing
Income Summary. entries are the
same!
Close Expense accounts
(including Cost of
Goods Sold) to Income
Summary.
 Close Income Summary
account to Retained
Earnings.
Close Dividends to
Retained Earnings. © The McGraw-Hill Companies, Inc., 20
McGraw-Hill/Irwin
 Next is the
periodic
inventory
system!

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 Periodic
Periodic Inventory
Inventory System
System
No effort is made to keep up-to-date
records of either inventory or cost of
goods sold.

Let’s look
at some
entries!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Periodic
Periodic Inventory
Inventory System
System
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account .
Notice
Notice that
that no
no entry
entry is
is
made
made to to Inventory.
Inventory.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Periodic
Periodic Inventory
Inventory System
System
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.

Retail

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Periodic
Periodic Inventory
Inventory System
System
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Periodic
Periodic Inventory
Inventory System
System
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Computing
Computing Cost
Cost of
of Goods
Goods Sold
Sold in
in aa
Periodic
Periodic Inventory
Inventory System
System
The
The accounting
accounting records
records of
of Party
Party
Supply
Supply show
show the
the following:
following:
Inventory,
Inventory, Jan.
Jan. 1,
1, 2003
2003 $$ 14,000
14,000
Purchases
Purchases (during
(during 2003)
2003) 130,000
130,000

At
At December
December 31,
31, 2003,
2003, Party
Party
Supply
Supply counted
counted the
the merchandise
merchandise
on
on hand
hand at
at $12,000.
$12,000.

Calculate Party Supply’s cost of goods sold

McGraw-Hill/Irwin for 2003. © The McGraw-Hill Companies, Inc., 20
 Computing
Computing Cost
Cost of
of Goods
Goods Sold
Sold in
in aa
Periodic
Periodic Inventory
Inventory System
System
Cost of Goods Sold can be
calculated as follows:
Inventory (beginning of the year) $ 14,000
Add: Purchases 130,000
Cost of goods available for sale 144,000
Less: Inventory (end of year) 12,000
Cost of goods sold $ 132,000

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 Creating
Creating Cost
Cost of
of Goods
Goods Sold
Sold in
in aa
Periodic
Periodic Inventory
Inventory System
System
Now, Party Supply must
create the Cost of Goods
Sold account.

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 Creating
Creating Cost
Cost of
of Goods
Goods Sold
Sold in
in aa
Periodic
Periodic Inventory
Inventory System
System
Now, Party Supply must
record the ending inventory
amount.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Completing
Completing the
the Closing
Closing Process
Process
 Close Revenue accounts
(including Sales) to The closing
Income Summary. entries are the
same!
Close Expense accounts
(including Cost of
Goods Sold) to Income
Summary.
 Close Income Summary
account to Retained
Earnings.
Close Dividends to
Retained Earnings. © The McGraw-Hill Companies, Inc., 20
McGraw-Hill/Irwin
 Comparison
Comparison ofof Perpetual
Perpetual and
and
Periodic
Periodic Inventory
Inventory Systems
Systems
Perpetual Inventory Periodic Inventory
System System

Large Department Jo’s Dress Shop

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 Modifying
Modifying an
an Accounting
Accounting System
System
Most businesses use special journals
rather than a general journal to record
routine transactions that occur
frequently.

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 Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
When manufacturers and wholesalers
sell their products on account, the
credit terms are stated in the invoice.

2/10, n/30
Read as: “Two ten, net thirty”
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 Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts

2/10, n/30
Percentage # of Days Otherwise, # of Days
of Discount Discount Is the Full when Full
Available Amount Is Amount Is
Due Due

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 Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
Purchases are
recorded at their
net amounts.
Net Purchase
Method discounts lost
are recorded
when payment is
made outside
the discount
period.
© The McGraw-Hill Companies, Inc., 20
McGraw-Hill/Irwin
 Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin $4,000 
$4,000  98%
98% == © The McGraw-Hill Companies, Inc., 20
 Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
Now, assume that Play Clothes waited until
July 20 to pay the amount due in full to
Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
Now, assume that Play Clothes waited until
July 20 to pay the amount due in full to
Kid’s Clothes.
Prepare the journal entry for Play Clothes.

Nonoperating
NonoperatingExpense
Expense

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 Recording
Recording Purchases
Purchases atat Gross
Gross
Invoice
Invoice Price
Price
Purchases are
recorded at their
gross amounts.
Gross Purchase
Method discounts taken
are recorded
when payment is
made inside the
discount period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 Recording
Recording Purchases
Purchases atat Gross
Gross
Invoice
Invoice Price
Price
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Recording
Recording Purchases
Purchases atat Gross
Gross
Invoice
Invoice Price
Price
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Recording
Recording Purchases
Purchases atat Gross
Gross
Invoice
Invoice Price
Price
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Recording
Recording Purchases
Purchases atat Gross
Gross
Invoice
Invoice Price
Price
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

Reduces
ReducesCost
Costof
Goods
of $4,000 
$4,000  98%
98% ==
GoodsSold
Sold $3,920
$3,920

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Recording
Recording Purchases
Purchases atat Gross
Gross
Invoice
Invoice Price
Price
Now, assume that Play Clothes waited until
July 20 to pay the full amount due to Kid’s
Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Recording
Recording Purchases
Purchases atat Gross
Gross
Invoice
Invoice Price
Price
Now, assume that Play Clothes waited until
July 20 to pay the full amount due to Kid’s
Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Returns
Returns of
of Unsatisfactory
Unsatisfactory
Merchandise
Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The purchase
was originally recorded at net cost.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Returns
Returns of
of Unsatisfactory
Unsatisfactory
Merchandise
Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The purchase
was originally recorded at net cost.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin $500 
$500  98%
98% == $490
$490 © The McGraw-Hill Companies, Inc., 20
 Transportation
Transportation Costs
Costs on
on Purchases
Purchases

Transportation
Transportation costs
costs related
related to
to the
the
acquisition
acquisition ofof assets
assets are
are part
part of
of the
the
cost
cost of
of the
the asset
asset being
being acquired.
acquired.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Now, let’s talk
about sales!

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 Transactions
Transactions Relating
Relating to
to Sales
Sales
Computer Barn
Partial Income Statement
For the Year Ended December 31, 2002
Revenue
Sales $ 912,000
Less: Sales returns and allowances $ 8,000
Sales discounts 4,000 12,000
Net sales $ 900,000

Credit terms and merchandise returns

affect the amount of revenue earned by
the seller.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 Sales
Sales Returns
Returns and
and Allowances
Allowances
On August 2, Kid’s Clothes sold $2,000 of merchandise
to Play Clothes on credit terms 2/10, n/30. Kid’s
Clothes originally paid $1,000 for the merchandise.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Sales
Sales Returns
Returns and
and Allowances
Allowances
On August 2, Kid’s Clothes sold $2,000 of merchandise
to Play Clothes on credit terms 2/10, n/30. Kid’s
Clothes originally paid $1,000 for the merchandise.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Sales
Sales Returns
Returns and
and Allowances
Allowances
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise to Kid’s Clothes from the
August 2 sale. Kid’s Clothes cost for this
merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
Contra-revenue
Contra-revenue

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Sales
Sales Returns
Returns and
and Allowances
Allowances
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise to Kid’s Clothes from the
August 2 sale. Kid’s Clothes cost for this
merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Sales
Sales Discounts
Discounts
On July 6, Kid’s Clothes sold $4,000 of merchandise to
Play Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Sales
Sales Discounts
Discounts
On July 6, Kid’s Clothes sold $4,000 of merchandise to
Play Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Sales
Sales Discounts
Discounts
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes.
Prepare the journal entry for Kid’s Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Sales
Sales Discounts
Discounts
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes.
Prepare the journal entry for Kid’s Clothes.

Contra-revenue
Contra-revenue $4,000 
$4,000  98%
98% ==
$3,920
$3,920

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Sales
Sales Discounts
Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes.
Prepare the journal entry for Kid’s Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Sales
Sales Discounts
Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes.
Prepare the journal entry for Kid’s Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Delivery
Delivery Expenses
Expenses
Delivery
Delivery costs
costs incurred
incurred by
by sellers
sellers are
are
debited
debited to
to Delivery
Delivery Expense,
Expense, anan
operating
operating expense.
expense.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Accounting
Accounting for
for Sales
Sales Taxes
Taxes
Businesses collect sales tax at the point of sale.
Then, they remit the tax to the appropriate
governmental agency at times specified by law.

$1,000 sale 
$1,000 sale  7%
7% tax
tax == $70
$70 sales
sales tax
tax

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Evaluating
Evaluating the
the Performance
Performance of
of aa
Merchandising
Merchandising Company
Company

Gross
Net Sales Profit
Margins

••Trends
Trendsovertime
overtime ••Gross Profit 
GrossProfit Net
Net
Sales
Sales
••Comparable
Comparablestore
storesales
sales
••Overall
Overall Gross
GrossProfit
Profit
••Sales
Salesper
persquare
squarefoot
footof
of Margin
Margin
selling
sellingspace
space
••Gross
GrossProfit
ProfitMargins
Marginsby by
McGraw-Hill/Irwin
Department
Department and
andCompanies, Inc., 20
© The McGraw-Hill
 End
End of
of Chapter
Chapter 66

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20