ChapterChapter 66
Accounting forAccounting for
Merchandising BusinessesMerchandising Businesses
Accounting, 21st
Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
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1. Distinguish the activities of a service business
from those of a merchandising business.
2. Describe and illustrate 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.
ObjectivesObjectivesObjectivesObjectives
After studying thisAfter studying this
chapter, you shouldchapter, you should
be able to:be able to:
After studying thisAfter studying this
chapter, you shouldchapter, you should
be able to:be able to:

5. Describe the accounting for transportation costs,
sales taxes, and trade discounts.
6. Illustrate the dual nature of merchandising
transactions.
7. Prepare a chart of accounts for a merchandising
business.
8. Describe the accounting cycle for a
merchandising business.
9. Compute the ratio of net sales to assets as a
measure of how effectively a business is using
its assets.
ObjectivesObjectivesObjectivesObjectives

Service Business
Fees earned $XXX
Operating expenses –XXX
Net income $XXX
Nature of BusinessesNature of BusinessesNature of BusinessesNature of Businesses

Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX
Nature of BusinessesNature of BusinessesNature of BusinessesNature of Businesses

Multiple-Step
Income
Statement

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
NetSolutions
Income Statement For the Year Ended
December 31, 2007
ContinuedContinued

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
ContinuedContinued

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

Periodic vs. Perpetual Methods ofPeriodic vs. Perpetual Methods of
AccountingAccounting
Periodic vs. Perpetual Methods ofPeriodic vs. Perpetual Methods of
AccountingAccounting
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

• 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.
Periodic vs. Perpetual Methods ofPeriodic vs. Perpetual Methods of
AccountingAccounting
Periodic vs. Perpetual Methods ofPeriodic vs. Perpetual Methods of
AccountingAccounting
Perpetual Method

Cost of Merchandise PurchasedCost of Merchandise PurchasedCost of Merchandise PurchasedCost of Merchandise Purchased
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

Cost of Merchandise SoldCost of Merchandise SoldCost of Merchandise SoldCost of Merchandise Sold
Merchandise inventory, 1/1/07 $ 59,700
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 62,150
Cost of merchandise sold $525,305

Single-Step Income
Statement for a
Merchandising
Business

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
NetSolutions
Income Statement
For the Year Ended December 31, 2007

Statement of
Owner’s Equity for
a Merchandising
Business

Chris Clark, capital, 1/1/07 $153,800
Net income for year $75,400
Less withdrawals 18,000
Increase in owner’s equity 57,400
Chris Clark, capital, 12/31/07 $211,200
NetSolutions
Statement of Owner’s Equity
For the Year Ended December 31, 2007

Balance Sheet

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
NetSolutions
Balance Sheet
December 31, 2007
ContinuedContinued

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
ContinuedContinued

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

Sales TransactionsSales TransactionsSales TransactionsSales Transactions

JOURNAL
Date Description
Post.
Ref. Dr Cr.
1
2
3
4
PAGE 26
5
Jan. 3 Cash 1 800 00
2007
Sales 1 800 00
To record cash sales.
On January 3, a firm sold $1,800On January 3, a firm sold $1,800
of merchandise for cash.of merchandise for cash.
On January 3, a firm sold $1,800On January 3, a firm sold $1,800
of merchandise for cash.of merchandise for cash.
Cash SalesCash SalesCash SalesCash Sales

Cash SalesCash SalesCash SalesCash Sales
Using a perpetual inventory, the inventoryUsing a perpetual inventory, the inventory
cost of $1,200 must be recorded.cost of $1,200 must be recorded.
Using a perpetual inventory, the inventoryUsing a perpetual inventory, the inventory
cost of $1,200 must be recorded.cost of $1,200 must be recorded.
6
7
8
9
3 Cost of Merchandise Sold 1 200 00
Merchandise Inventory 1 200 00
To record the cost of
merchandise sold.
10

Credit card sales (MasterCard orCredit card sales (MasterCard or
Visa) are recorded as cash sales.Visa) are recorded as cash sales.
Credit card sales (MasterCard orCredit card sales (MasterCard or
Visa) are recorded as cash sales.Visa) are recorded as cash sales.
At the end of the month, $48 wasAt the end of the month, $48 was
sent to cover this service charge.sent to cover this service charge.
At the end of the month, $48 wasAt the end of the month, $48 was
sent to cover this service charge.sent to cover this service charge.
JOURNAL
Date Description
Post.
Ref. Dr Cr.
1
2
3
4
PAGE 28
5
Cash 48 00
Jan. 31 Credit Card Expense 48 00
2007
Cash SalesCash SalesCash SalesCash Sales
To record service charges
on credit card sales for the
month.

Jan. 12 Accounts Receivable—Sims Co. 510 00
Invoice No. 7172.
Sales 510 00
12 Cost of Merchandise Sold 280 00
Merchandise Inventory 280 00
Cost of merchandise sold
on Invoice No. 7172.
Sales on AccountSales on AccountSales on AccountSales on Account
On January 12, a firm sold Sims CompanyOn January 12, a firm sold Sims Company
merchandise on account, $510. The cost ofmerchandise on account, $510. The cost of
the merchandise to the seller was $280.the merchandise to the seller was $280.
On January 12, a firm sold Sims CompanyOn January 12, a firm sold Sims Company
merchandise on account, $510. The cost ofmerchandise on account, $510. The cost of
the merchandise to the seller was $280.the merchandise to the seller was $280.

Sales DiscountsSales DiscountsSales DiscountsSales Discounts
The terms for when payments for
merchandise are to be made are
called credit terms.
The terms for when payments for
merchandise are to be made are
called credit terms.
If buyer is allowed an
amount of time to pay, it is
known as the credit period.
If buyer is allowed an
amount of time to pay, it is
known as the credit period.

If invoice is
paid within
10 days of
invoice date
Sales DiscountsSales DiscountsSales DiscountsSales Discounts
Credit Terms
Invoice for
$1,500
Terms:
2/10, n/30
$1,470 paid (less
2% as a cash
discount)

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

Sales DiscountsSales DiscountsSales DiscountsSales Discounts
On January 21, the firm receives theOn January 21, the firm receives the
amount due from Sims (refer to Slideamount due from Sims (refer to Slide
25), less the 2 percent discount.25), less the 2 percent discount.
On January 21, the firm receives theOn January 21, the firm receives the
amount due from Sims (refer to Slideamount due from Sims (refer to Slide
25), less the 2 percent discount.25), less the 2 percent discount.
Jan. 21 Cash 499 80
Accounts Receivable—Sims Co. 510 00
Sales Discounts 10 20
Collection of Invoice
No. 7172, less discount.

Sales Returns and AllowancesSales Returns and AllowancesSales Returns and AllowancesSales Returns and Allowances
Merchandise that is returned to the
vendor is referred to as a sales return.
Merchandise that is returned to the
vendor is referred to as a sales return.
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.
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.

Jan. 13 Sales Returns and Allowances 225 00
Credit Memo No. 32.
Accounts Receivable—Krier Co. 225 00
13 Merchandise Inventory 140 00
Cost of Merchandise Sold 140 00
Cost of merchandise
returned—Credit Memo 32.
Sales Returns and AllowancesSales Returns and AllowancesSales Returns and AllowancesSales Returns and Allowances
On January 13, issued Credit Memo 32 to KrierOn January 13, issued Credit Memo 32 to Krier
Company for merchandise returned to NetSolutions.Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.Selling price, $225; cost to NetSolutions, $140.
On January 13, issued Credit Memo 32 to KrierOn January 13, issued Credit Memo 32 to Krier
Company for merchandise returned to NetSolutions.Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.Selling price, $225; cost to NetSolutions, $140.

PurchasePurchase
TransactionsTransactions
PurchasePurchase
TransactionsTransactions

Date Description
Post.
Ref. Dr Cr.
1
2
3
4
5
Jan. 3 Merchandise Inventory 2 510 00
2007
Cash 2 510 00
Purchased inventory from
Bowen Co.
Purchase TransactionsPurchase Transactions
On January 13, Purchased merchandiseOn January 13, Purchased merchandise
for cash from Alden Company, $2,510.for cash from Alden Company, $2,510.
On January 13, Purchased merchandiseOn January 13, Purchased merchandise
for cash from Alden Company, $2,510.for cash from Alden Company, $2,510.

What’s the last
day the invoice
can be paid?
What’s the last
day the invoice
can be paid?
Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts
Alpha Technologies
issues an invoice for
$3,000 to
NetSolutions dated
March 12, with terms
2/10, n/30.
Alpha Technologies
issues an invoice for
$3,000 to
NetSolutions dated
March 12, with terms
2/10, n/30.

Invoice period 30
Days in March 31
Date of invoice 12
Remaining days 19
April 11
Let’s do a simple
calculation.
Let’s do a simple
calculation.
The full amount is
due on April 11.
The full amount is
due on April 11.
Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts

We can borrow at an annual interest rate
of 6%. Should we borrow the to pay the
invoice within the discount period?
We can borrow at an annual interest rate
of 6%. Should we borrow the to pay the
invoice within the discount period?
Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts
$60 discount
(2% x
$3,000)?
$60 discount
(2% x
$3,000)?

Discount $60.00
Interest for 20 days
at the rate of 6%
on $2,940 –9.80
Savings from
borrowing $50.20
Let’s see… Interest on
the amount due of $3,000
less the 2 percent…
Let’s see… Interest on
the amount due of $3,000
less the 2 percent…
Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts

Looks like we should take
advantage of the discount even if
we have to borrow the money.
Looks like we should take
advantage of the discount even if
we have to borrow the money.
Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts
Discount $60.00
Interest for 20 days
at the rate of 6%
on $2,940 –9.80
Savings from
borrowing $50.20

JOURNAL
Date Description
Post.
Ref. Dr Cr.
1
2
3
4
PAGE 27
5
On March 12, NetSolutions purchasedOn March 12, NetSolutions purchased
merchandise on account from Alphamerchandise on account from Alpha
Technologies, $3,000.Technologies, $3,000.
On March 12, NetSolutions purchasedOn March 12, NetSolutions purchased
merchandise on account from Alphamerchandise on account from Alpha
Technologies, $3,000.Technologies, $3,000.
Mar. 12 Merchandise Inventory 3 000 00
2007
Accounts Payable—Alpha
Technologies 3 000 00
Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts

JOURNAL
Date Description
Post.
Ref. Dr Cr.
1
2
3
4
PAGE 27
5
If payment is made by March 22 NetSolutionsIf payment is made by March 22 NetSolutions
records the discount as a reduction in cost.records the discount as a reduction in cost.
If payment is made by March 22 NetSolutionsIf payment is made by March 22 NetSolutions
records the discount as a reduction in cost.records the discount as a reduction in cost.
Mar. 22 Accounts Payable—Alpha Technol. 3 000 00
Cash 2 940 00
Merchandise Inventory 60 00
2007
Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts

JOURNAL
Date Description
Post.
Ref. Dr Cr.
1
2
3
4
PAGE 27
5
If NetSolutions does not pay the invoice untilIf NetSolutions does not pay the invoice until
April 11, it would pay the full amount.April 11, it would pay the full amount.
If NetSolutions does not pay the invoice untilIf NetSolutions does not pay the invoice until
April 11, it would pay the full amount.April 11, it would pay the full amount.
Apr. 11 Accounts Payable—Alpha Technol. 3 000 00
Cash 3 000 00
2007
Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts

Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances
A purchases return involves actually
returning merchandise that is
damaged or does not meet the
specifications of the order.
A purchases return involves actually
returning merchandise that is
damaged or does not meet the
specifications of the order.
When the defective or incorrect
merchandise is kept by the buyer and
the vendor makes a price adjustment,
this is a purchases allowance.
When the defective or incorrect
merchandise is kept by the buyer and
the vendor makes a price adjustment,
this is a purchases allowance.

NetSolutions received theNetSolutions received the
delivery from Maximdelivery from Maxim
Systems and determined thatSystems and determined that
$900 of the items were not$900 of the items were not
the merchandise ordered.the merchandise ordered.
DebitDebit memorandummemorandum #18 is#18 is
issued to Maxim Systems.issued to Maxim Systems.
NetSolutions received theNetSolutions received the
delivery from Maximdelivery from Maxim
Systems and determined thatSystems and determined that
$900 of the items were not$900 of the items were not
the merchandise ordered.the merchandise ordered.
DebitDebit memorandummemorandum #18 is#18 is
issued to Maxim Systems.issued to Maxim Systems.
Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances
You sent me the wrong interface
cards. We’ll send a debit
memorandum with the returned items.
You sent me the wrong interface
cards. We’ll send a debit
memorandum with the returned items.

Mar. 7 Accounts Payable—Maxim Systems 900 00
Debit Memo No. 18
Merchandise Inventory 900 00
Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances

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

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

Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances
On May 12, NetSolutions pays the amount due.On May 12, NetSolutions pays the amount due.
May 12 Accounts Payable—Delta Data Links 2 000 00
Paid invoice.
Cash 1 960 00
Merchandise Inventory 40 00
($5,000($5,000 ––
$3,000) x$3,000) x
2%2%
($5,000($5,000 ––
$3,000) x$3,000) x
2%2%

TransportationTransportation
CostsCosts

FOB Shipping PointFOB Shipping PointFOB Shipping PointFOB Shipping Point
Buyer pays freight costs and debits
Merchandise Inventory
Fruit Express
Title passes to buyer as
shipment leaves
shipping point.
Title passes to buyer as
shipment leaves
shipping point.

June 10 Merchandise Inventory 900 00
Purchased merchandise, terms
FOB shipping point.
Accounts Payable—Magna Data 900 00
10 Merchandise Inventory 50 00
Cash 50 00
Paid shipping cost .
On June 10, NetSolutions buys merchandise fromOn June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB shippingMagna Data on account, $900, terms FOB shipping
point and pays the transportation cost of $50.point and pays the transportation cost of $50.
On June 10, NetSolutions buys merchandise fromOn June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB shippingMagna Data on account, $900, terms FOB shipping
point and pays the transportation cost of $50.point and pays the transportation cost of $50.
FOB Shipping PointFOB Shipping PointFOB Shipping PointFOB Shipping Point

FOB DestinationFOB DestinationFOB DestinationFOB Destination
Title passes to buyer
upon arrival at
destination.
Title passes to buyer
upon arrival at
destination.
Seller pays freight costs and debits
Transportation Out
Fruit Express

On June 15, NetSolutions sells merchandise to KranzOn June 15, NetSolutions sells merchandise to Kranz
Company on account, $700, terms FOB destination.Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480.The cost of the merchandise sold is $480.
NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.
On June 15, NetSolutions sells merchandise to KranzOn June 15, NetSolutions sells merchandise to Kranz
Company on account, $700, terms FOB destination.Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480.The cost of the merchandise sold is $480.
NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.
FOB DestinationFOB DestinationFOB DestinationFOB Destination
June 15 Accounts Receivable—Kranz Co. 700 00
Sold merchandise, terms FOB
destination.
Sales 700 00
15 Cost of Merchandise Sold 480 00
Merchandise Inventory 480 00
Cost of sale of Kranz Co .

FOB DestinationFOB DestinationFOB DestinationFOB Destination
June 15 Transportation Out 40 00
Cash 40 00
Paid shipping cost on
merchandise sold.
On June 15, NetSolutions sells merchandise to KranzOn June 15, NetSolutions sells merchandise to Kranz
Company on account, $700, terms FOB destination.Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480.The cost of the merchandise sold is $480.
NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.
On June 15, NetSolutions sells merchandise to KranzOn June 15, NetSolutions sells merchandise to Kranz
Company on account, $700, terms FOB destination.Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480.The cost of the merchandise sold is $480.
NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.

Sales TaxesSales TaxesSales TaxesSales Taxes
On August 12, merchandise is sold onOn August 12, merchandise is sold on
account to Lemon Company, $100. Theaccount to Lemon Company, $100. The
state has a 6% sales tax.state has a 6% sales tax.
On August 12, merchandise is sold onOn August 12, merchandise is sold on
account to Lemon Company, $100. Theaccount to Lemon Company, $100. The
state has a 6% sales tax.state has a 6% sales tax.
Aug. 12 Accounts Receivable—Lemon Co. 106 00
Sales 100 00
Sales Taxes Payable 6 00
Invoice No. 339

Sales TaxesSales TaxesSales TaxesSales Taxes
On September 15, the seller sends in aOn September 15, the seller sends in a
payment of $2,900 to the taxing unit forpayment of $2,900 to the taxing unit for
the August taxes collected.the August taxes collected.
On September 15, the seller sends in aOn September 15, the seller sends in a
payment of $2,900 to the taxing unit forpayment of $2,900 to the taxing unit for
the August taxes collected.the August taxes collected.
Sept.15 Sales Tax Payable 2 900 00
Cash 2 900 00
Payment for sales taxes
collected during August.

Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 1. Scully Company sold merchandise on accountJuly 1. Scully Company sold merchandise on account
to Burton Co., $7,500, terms FOB shipping point, n/45.to Burton Co., $7,500, terms FOB shipping point, n/45.
The cost of the merchandise sold was $4,500.The cost of the merchandise sold was $4,500.
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

Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
Scully Company (Seller)
No entry.
Burton Company (Buyer)
Merchandise Inventory 150
Cash 150
July 2. Burton Company paid transportation charges ofJuly 2. Burton Company paid transportation charges of
$150 on July 1 purchase from Scully Company.$150 on July 1 purchase from Scully Company.

Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 5. Scully Company sold merchandise on accountJuly 5. Scully Company sold merchandise on account
to Burton Co., $5,000, terms FOB shipping point,to Burton Co., $5,000, terms FOB shipping point,
n/30. The cost of the merchandise sold was $3,500.n/30. The cost of the merchandise sold was $3,500.
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

Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 7. Scully Company paid transportation costsJuly 7. Scully Company paid transportation costs
of $of $250250 for delivery of merchandise sold tofor delivery of merchandise sold to
Burton Company on July 5.Burton Company on July 5.
Scully Company (Seller)
Transportation Out 250
Cash 250
Burton Company (Buyer)
No entry.

Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 13. Scully Company issued Burton Company a creditJuly 13. Scully Company issued Burton Company a credit
memorandum for $1,000 of merchandise returned from a July 5memorandum for $1,000 of merchandise returned from a July 5
purchase on account. The cost of the merchandise was $700.purchase on account. The cost of the merchandise was $700.
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

Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 15. Scully Company received paymentJuly 15. Scully Company received payment
from Burton Company for purchase of July 5.from Burton Company for purchase of July 5.
Scully Company (Seller)
Cash 4,000
Accounts Receivable—Burton Co. 4,000
Burton Company (Buyer)
Accounts Payable—Scully Co. 4,000
Cash 4,000

Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 18. Scully Company sold merchandise on account to BurtonJuly 18. Scully Company sold merchandise on account to Burton
Company, $12,000, terms FOB shipping point, 2/10, n/eom. ScullyCompany, $12,000, terms FOB shipping point, 2/10, n/eom. Scully
prepaid transportation costs of $500, which were added to theprepaid transportation costs of $500, which were added to the
invoice. The cost of the merchandise sold was $7,200.invoice. The cost of the merchandise sold was $7,200.
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

Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 18. Scully Company sold merchandise on account to BurtonJuly 18. Scully Company sold merchandise on account to Burton
Company, $12,000, terms FOB shipping point, 2/10, n/eom. ScullyCompany, $12,000, terms FOB shipping point, 2/10, n/eom. Scully
prepaid transportation costs of $500, which were added to theprepaid transportation costs of $500, which were added to the
invoice. The cost of the merchandise sold was $7,200.invoice. The cost of the merchandise sold was $7,200.
Continued (Seller)
Cost of Merchandise Sold 7,200
Merchandise Inventory 7,200
Burton Company (Buyer)

Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
Illustration of Accounting forIllustration of Accounting for
Merchandise TransactionsMerchandise Transactions
July 28. Scully Company received paymentJuly 28. Scully Company received payment
from Burton Company for purchase of Julyfrom Burton Company for purchase of July
18, less discount (2% x $12,000).18, less discount (2% x $12,000).
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

Balance Sheet Accounts
200 Liabilities
210 Accounts Payable
211 Salaries Payable
212 Unearned Rent
215 Notes Payable
300 Owner’s Equity
310 Chris Clark, Capital
311 Chris Clark, Drawing
312 Income Summary
100 Assets
110 Cash
112 Accounts Receivable
115 Merchandise Inventory
116 Office Supplies
117 Prepaid Insurance
120 Land
123 Store Equipment
124 Accumulated Depreciation—
Store Equipment
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
NetSolutions
Chart of Accounts

Income Statement Accounts
600 Other Income
610 Rent Revenue
700 Other Expense
710 Interest Expense
400 Revenues
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
500 Costs and Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense—
Store Equipment
523 Transportation Out
529 Miscellaneous Selling Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Miscellaneous Admin. Expense
NetSolutions
Chart of Accounts

Merchandise InventoryMerchandise Inventory
ShrinkageShrinkage
Merchandise InventoryMerchandise Inventory
ShrinkageShrinkage
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.
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 InventoryMerchandise Inventory
ShrinkageShrinkage
Merchandise InventoryMerchandise Inventory
ShrinkageShrinkage
Dec. 31 Cost of Merchandise Sold 1 800 00
Merchandise Inventory 1 800 00
Adjusting Entry
Inventory records $63,950
Inventory count 62,150
Inventory shortage $ 1,800

Profitability Measures -- Effective Use of AssetsProfitability Measures -- Effective Use of Assets
Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets
Sears Penney
Net sales $41,366,000 $31,846,000
Total assets:
Beginning of year $50,409,000 $19,742,000
End of year $44,317,000 $20,908,000
Average $47,363,000 $20,325,000
Ratio of net sales to assetsRatio of net sales to assets .87 to 1.87 to 1 1.57 to 11.57 to 1
Ratio Use: To assess the effectiveness in the
use of assets to generate sales.
Ratio Use: To assess the effectiveness in the
use of assets to generate sales.

The EndThe End
Chapter 6Chapter 6