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MERCHANDISING ACTIVITIES Chapter 6
Operating Cycle of a Merchandising Company Cash Inventory Accounts Receivable 1. Purchase of merchandise 3. Collection of the receivables 2. Sale of merchandise on account
Comparing Merchandising Activities with Manufacturing Activities Merchandising Company Manufacturing Company Purchase inventory in  ready-to-sell  condition. Manufacture inventory and have a longer and more complex operating cycle.
Retailers and Wholesalers Retailers  sell merchandise directly to the public. Wholesalers  buy merchandise from several different manufacturers and then sell this merchandise to several retailers.
Income Statement of a Merchandising Company Cost of goods sold  represents the expense of goods that are sold to customers. Gross profit  is a useful means of measuring the profitability of sales transactions.
What Accounting Information Does a Merchandising Company Need? Financial Reporting Requirements Daily Business Operating Requirements Special Reporting Requirements ,[object Object],[object Object],[object Object],[object Object],[object Object]
General Ledger Accounts Although  general ledger accounts  provide useful information, they do not provide much of the detailed information needed in the daily business operations. Who owes us money?
Subsidiary Ledgers:  A Source of Needed Details Controlling Account
 
Two Approaches Used in Accounting for Merchandise Transactions Perpetual Inventory System Periodic Inventory System
Perpetual Inventory System The inventory account is continuously updated to reflect items on hand. Let’s look at some entries!
Perpetual Inventory System ,[object Object]
Perpetual Inventory System ,[object Object],10    $30 = $300
Perpetual Inventory System ,[object Object],Cost Retail
Perpetual Inventory System ,[object Object]
Perpetual Inventory System ,[object Object]
The Inventory Subsidiary Ledger At the end of the period, management compares the  physical inventory count  with the inventory ledger to determine  inventory shrinkage .
Taking a Physical 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.
Taking a Physical 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.
Closing Entries in a Perpetual Inventory System ,[object Object],[object Object],[object Object],[object Object],The closing entries are the same!
Next is the periodic inventory system!
Periodic Inventory 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!
Periodic Inventory System ,[object Object],No entry is made to increase Inventory.
Periodic Inventory System ,[object Object],Retail No entry is made to decrease Inventory.
Periodic Inventory System ,[object Object]
Periodic Inventory System ,[object Object]
Computing Cost of Goods Sold in a Periodic Inventory System The accounting records of Party Supply show the following: Inventory, Jan. 1, 2003  $ 14,000 Purchases (during 2003)  130,000 At December 31, 2003, Party Supply counted the merchandise on hand at $12,000. Calculate Party Supply’s cost of goods sold for 2003.
Computing Cost of Goods Sold in a Periodic Inventory System Cost of Goods Sold can be calculated as follows:
Creating Cost of Goods Sold in a Periodic Inventory System Now, Party Supply must create the  Cost of Goods Sold  account.
Creating Cost of Goods Sold in a Periodic Inventory System Now, Party Supply must record the  ending inventory  amount.
Completing the Closing Process ,[object Object],[object Object],[object Object],[object Object],The closing entries are the same!
Comparison of Perpetual and Periodic Inventory Systems Periodic Inventory System Jo’s Dress Shop Perpetual Inventory System Large Department Stores
Modifying an Accounting System Most businesses use  special journals  rather than a general journal to record routine transactions that occur frequently.
Credit Terms and Cash Discounts 2/10, n/30 Read as:  “Two ten, net thirty” When manufacturers and wholesalers sell their products on account, the  credit terms  are stated in the invoice.
Credit Terms and Cash Discounts 2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due  # of Days when Full Amount Is Due
Credit Terms and Cash Discounts Purchases are recorded at their net amounts. Purchase discounts lost  are recorded when payment is made  outside  the discount period. Net  Method
Credit Terms and Cash Discounts ,[object Object],[object Object],[object Object]
Credit Terms and Cash Discounts $4,000    98% = $3,920 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.
Credit Terms and Cash Discounts ,[object Object],[object Object]
Credit Terms and Cash Discounts On July 15, Play Clothes pays the full amount due to Kid’s Clothes.  Prepare the journal entry for Play Clothes.
Credit Terms and Cash Discounts ,[object Object],[object Object]
Credit Terms and Cash Discounts ,[object Object],[object Object],Nonoperating Expense
Recording Purchases at Gross Invoice Price Purchases are recorded at their gross amounts. Purchase discounts taken  are recorded when payment is made  within  the discount period. Gross  Method
Recording Purchases at Gross Invoice Price ,[object Object],[object Object],[object Object]
Recording Purchases at Gross Invoice 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.
Recording Purchases at Gross Invoice Price ,[object Object],[object Object]
Recording Purchases at Gross Invoice Price ,[object Object],[object Object],Reduces Cost of Goods Sold $4,000    98% = $3,920
Recording Purchases at Gross Invoice Price ,[object Object],[object Object]
Recording Purchases at Gross Invoice Price ,[object Object],[object Object]
Returns of Unsatisfactory Merchandise ,[object Object],[object Object]
Returns of Unsatisfactory Merchandise ,[object Object],[object Object],$500    98% = $490
Transportation Costs on Purchases Transportation costs related to the acquisition of assets are part of the  cost of the asset   being acquired.
Now, let’s talk about sales!
Transactions Relating to Sales Credit terms and merchandise returns affect the amount of revenue earned by the  seller .
Sales Returns and Allowances ,[object Object],[object Object]
Sales Returns and Allowances ,[object Object],[object Object]
Sales Returns and Allowances ,[object Object],[object Object],Contra-revenue
[object Object],[object Object],Sales Returns and Allowances
Sales Discounts ,[object Object],[object Object]
Sales Discounts ,[object Object],[object Object]
Sales Discounts ,[object Object],[object Object]
Sales Discounts ,[object Object],[object Object],$4,000    98% = $3,920 Contra-revenue
Sales Discounts ,[object Object],[object Object]
Sales Discounts ,[object Object],[object Object]
Delivery Expenses Delivery costs incurred by sellers are debited to  Delivery Expense , an operating expense.
Accounting for Sales 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    7% tax = $70 sales tax
Evaluating the Performance of a Merchandising Company Net Sales Gross Profit Margins ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
End of Chapter 6

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  • 2. Operating Cycle of a Merchandising Company Cash Inventory Accounts Receivable 1. Purchase of merchandise 3. Collection of the receivables 2. Sale of merchandise on account
  • 3. Comparing Merchandising Activities with Manufacturing Activities Merchandising Company Manufacturing Company Purchase inventory in ready-to-sell condition. Manufacture inventory and have a longer and more complex operating cycle.
  • 4. Retailers and Wholesalers Retailers sell merchandise directly to the public. Wholesalers buy merchandise from several different manufacturers and then sell this merchandise to several retailers.
  • 5. Income Statement of a Merchandising Company Cost of goods sold represents the expense of goods that are sold to customers. Gross profit is a useful means of measuring the profitability of sales transactions.
  • 6.
  • 7. General Ledger Accounts Although general ledger accounts provide useful information, they do not provide much of the detailed information needed in the daily business operations. Who owes us money?
  • 8. Subsidiary Ledgers: A Source of Needed Details Controlling Account
  • 9.  
  • 10. Two Approaches Used in Accounting for Merchandise Transactions Perpetual Inventory System Periodic Inventory System
  • 11. Perpetual Inventory System The inventory account is continuously updated to reflect items on hand. Let’s look at some entries!
  • 12.
  • 13.
  • 14.
  • 15.
  • 16.
  • 17. The Inventory Subsidiary Ledger At the end of the period, management compares the physical inventory count with the inventory ledger to determine inventory shrinkage .
  • 18. Taking a Physical 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.
  • 19. Taking a Physical 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.
  • 20.
  • 21. Next is the periodic inventory system!
  • 22. Periodic Inventory 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!
  • 23.
  • 24.
  • 25.
  • 26.
  • 27. Computing Cost of Goods Sold in a Periodic Inventory System The accounting records of Party Supply show the following: Inventory, Jan. 1, 2003 $ 14,000 Purchases (during 2003) 130,000 At December 31, 2003, Party Supply counted the merchandise on hand at $12,000. Calculate Party Supply’s cost of goods sold for 2003.
  • 28. Computing Cost of Goods Sold in a Periodic Inventory System Cost of Goods Sold can be calculated as follows:
  • 29. Creating Cost of Goods Sold in a Periodic Inventory System Now, Party Supply must create the Cost of Goods Sold account.
  • 30. Creating Cost of Goods Sold in a Periodic Inventory System Now, Party Supply must record the ending inventory amount.
  • 31.
  • 32. Comparison of Perpetual and Periodic Inventory Systems Periodic Inventory System Jo’s Dress Shop Perpetual Inventory System Large Department Stores
  • 33. Modifying an Accounting System Most businesses use special journals rather than a general journal to record routine transactions that occur frequently.
  • 34. Credit Terms and Cash Discounts 2/10, n/30 Read as: “Two ten, net thirty” When manufacturers and wholesalers sell their products on account, the credit terms are stated in the invoice.
  • 35. Credit Terms and Cash Discounts 2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due
  • 36. Credit Terms and Cash Discounts Purchases are recorded at their net amounts. Purchase discounts lost are recorded when payment is made outside the discount period. Net Method
  • 37.
  • 38. Credit Terms and Cash Discounts $4,000  98% = $3,920 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.
  • 39.
  • 40. Credit Terms and Cash Discounts On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes.
  • 41.
  • 42.
  • 43. Recording Purchases at Gross Invoice Price Purchases are recorded at their gross amounts. Purchase discounts taken are recorded when payment is made within the discount period. Gross Method
  • 44.
  • 45. Recording Purchases at Gross Invoice 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.
  • 46.
  • 47.
  • 48.
  • 49.
  • 50.
  • 51.
  • 52. Transportation Costs on Purchases Transportation costs related to the acquisition of assets are part of the cost of the asset being acquired.
  • 53. Now, let’s talk about sales!
  • 54. Transactions Relating to Sales Credit terms and merchandise returns affect the amount of revenue earned by the seller .
  • 55.
  • 56.
  • 57.
  • 58.
  • 59.
  • 60.
  • 61.
  • 62.
  • 63.
  • 64.
  • 65. Delivery Expenses Delivery costs incurred by sellers are debited to Delivery Expense , an operating expense.
  • 66. Accounting for Sales 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  7% tax = $70 sales tax
  • 67.

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