Financial Accounting, 5e

Weygandt, Kieso, & Kimmel

Prepared by
Kurt M. Hull, MBA CPA
California State University,
Los Angeles
John Wiley & Sons, Inc.
 CHAPTER 5

ACCOUNTING FOR MERCHANDISING

OPERATIONS
STUDY OBJECTIVES
After studying this chapter, you should understand:

The differences between a service Single & multiple step

company and a merchandiser income statements

Purchase entries—perpetual inventory How to compute gross profit

Revenue entries--perpetual inventory COGS -- periodic inventory

Completing the accounting cycle

 STUDY OBJECTIVE 1

MERCHANDISER VS. SERVICE COMPANY

A merchandiser A service company

buys and sells goods provides a service
to earn a profit. to earn a profit.

Wholesalers/Retailers
-
No COGS
COGS
 INCOME MEASUREMENT
MERCHANDISER

Sales Less
Revenue

Equals

Cost of Gross Less

Goods Sold Profit

Equals

Operating Net
Expenses Income
(Loss)
 OPERATING CYCLE COMPARISON

Service Company

Receive Perform
Cash Cash Services

Accounts
Receivable

Merchandising Company
Receive Buy
Cash Inventory
Cash

Sell Inventory

Accounts Merchandise
Receivable Inventory
 INVENTORY SYSTEMS

PERPETUAL INVENTORY
Inventory purchased Item sold End of period

No entry
Record purchase Record revenue & COGS

PERIODIC INVENTORY
Inventory purchased Item sold End of period

Compute
and record
Record purchase Record revenue only COGS
 STUDY OBJECTIVE 2

PURCHASE ENTRIES – PERPETUAL INVENTORY

MERCHANDISE INVENTORY CASH

Cash
purchase COST COST

A/P
MERCHANDISE INVENTORY
Credit
purchase COST COST

The purchase is normally recorded when the goods are received

Credit purchases are normally supported by a purchase invoice

 STUDY OBJECTIVE 2

PURCHASE ENTRIES – PERPETUAL INVENTORY

GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 4 Merchandise Inventory
Cash Cash
3800
purchase (To record goods purchased and 3800
paid for from Sellers Electronics)

GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
Credit May 4 Merchandise Inventory 3800
purchase Accounts Payable
3 800
(To record goods purchased on
account from Sellers Electronics)
 SHIPPING TERMS – FREE ON BOARD

FOB SHIPPING POINT FOB DESTINATION

Title transfers to buyer at Title transfers to buyer at
sellers shipping dock buyers receiving dock

Buyer pays freight costs Seller pays freight costs

 ACCOUNTING FOR FREIGHT COSTS
PAID BY BUYER

GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 6 Merchandise Inventory 150
Cash 150
(To record payment of freight,
terms FOB shipping point)

Freight costs are part of the cost of inventory purchased.

 ACCOUNTING FOR FREIGHT COSTS
PAID BY SELLER

GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 4 Freight-out (Delivery Expense) 150
Cash 150
(To record payment of freight on
goods sold FOB destination)

Freight costs incurred by the seller are

selling expenses called Freight-out.
 PURCHASE RETURNS AND ALLOWANCES

GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 8 Accounts Payable 300
Merchandise Inventory 300
(To record return of inoperable
goods received from Highpoint
Electronic, DM No. 126)

For purchases returns and allowances, Accounts Payable

is debited and Merchandise Inventory is credited.

Seller Buyer
 PURCHASE DISCOUNTS
PAYMENT WITHIN DISCOUNT PERIOD

Credit terms may permit the buyer to claim a cash discount

for the prompt payment of a balance due.

GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 14 Accounts Payable 3,500
Cash 3,430
Merchandise Inventory 70
(To record payment within
discount period)

If payment is made within the discount period,

Merchandise inventory is credited for the discount taken.
 PURCHASE DISCOUNTS
PAYMENT AFTER DISCOUNT PERIOD

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
June 3 Accounts Payable 3,500
Cash 3,500
(To record payment with no
discount taken)

If payment is made after the discount period, Accounts Payable is

debited and Cash is credited for the full amount.
 STUDY OBJECTIVE 3

REVENUE ENTRIES – PERPETUAL INVENTORY

Revenues are reported when earned in

accordance with the revenue recognition principle.

In a merchandising company,
revenues are earned
when the goods are
transferred from seller to buyer.

All sales should be supported by a

cash register tape or sales invoice.
REVENUE ENTRIES – PERPETUAL INVENTORY

GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 4 Accounts Receivable 3,800
Sales
(To record credit sales to Chelsea
3,800
Video per invoice #731)

4 Cost of Goods Sold 2,400

Merchandise Inventory 2,400
(To record cost of merchandise
sold on invoice #731 to Chelsea
Video)

For cash sales, simply replace the debit

to accounts receivable with a debit to cash.
 SALES RETURNS & ALLOWANCES

SALES RETURN
Customer returns goods to the
seller for credit or a refund.

SALES ALLOWANCE
Seller allows a reduction in selling price.
Goods are not returned.

Seller prepares a CREDIT MEMORANDUM.

 RECORDING
SALES RETURNS & ALLOWANCES
GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 8 Sales Returns and Allowances 300
Accounts Receivable 300
(To record credit granted to
Beyer Video, for returned goods)

8 Merchandise Inventory
140
Cost of Goods Sold 140
(To record cost of goods returned)

Sales Returns and Allowances is a CONTRA-REVENUE account.

It’s normal balance is a DEBIT.
 SALES DISCOUNTS

Seller offers customer a cash discount

for prompt payment of balance due.

Credit terms indicate the discount percent,

Discount period, and final due date.

T E R M S E X P L A N A T I O N
2/10, n/30 A 2% discount may be taken if payment is made
within 10 days of the invoice date.

1/10 EOM A 1% discount is available if payment is made

by the 10th of the next month.
 RECORDING
SALES DISCOUNTS

GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 14 Cash 3,430
Sales Discounts 70
Accounts Receivable 3,500
(To record collection within 2/10,
n/30 discount period from Beyer
Video)

Sales discounts is a CONTRA-REVENUE ACCOUNT.

It’s normal balance is a DEBIT.
COMPLETING THE ACCOUNTING CYCLE
Study Objective 4

After all adjustments have been posted,

closing entries are prepared from the
Income Statement section of the worksheet.

All accounts that affect the determination of

net income are closed to Income Summary.

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
(1)
Dec. 31 Sales 480,000
Income Summary 480,000
(To close income statement
accounts with credit balances).
 CLOSING ENTRIES

Cost of Goods Sold is closed to Income Summary.

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
(2)
Dec. 31 Income Summary
450,000
Sales Returns and Allowances 12,000
Sales Discounts 8,000
Cost of goods sold 316,000
Store Salaries Expense 45,000
Rent Expense 19,000
Freight -out 7,000
Advertising Expense 16,000
Utilities Expense 17,000
Depreciation Expense 8,000
Insurance Expense 2,000
(To close income statement
accounts with debit balances)
 CLOSING ENTRIES

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2002 (3)
Dec. 31 Income Summary
Retained Earnings 30,000
(To close net income to retained 30,000
earnings )

(4)
31 Retained Earnings 15,000
Dividends 15,000
(To close dividends to retained
earnings )

After the closing entries are posted, all temporary accounts have zero
balances, and Retained Earnings has a credit balance of $48000.
 REVIEW QUESTION
CLOSING ENTRIES

Orlaida Company has the following merchandise account balances:

Sales $192,000
Sales Discounts $2,000
Cost of Goods Sold $105,000
Merchandise Inventory $40,000
Prepare entries to record the closing of these items to Income Summary.

Account Debit Credit

Sales $192,000
Sales Discounts $2,000
Cost of Goods Sold $105,000
Income Summary $85,000
 STUDY OBJECTIVE 5
MULTIPLE - STEP INCOME STATEMENT

Illustration 5-6
Computation of Net Sales

Sales revenues
Sales $480,000
Less: Sales returns & allowances $12,000
Sales Discounts 8,000 20,000
Net Sales $460,000
 STUDY OBJECTIVES 5 & 6
MULTIPLE - STEP INCOME STATEMENT

The multiple step income statement arrives at net income in stages.

Sellers Electronix
Income Statement

Net Sales $460,000

Less: Cost of Goods Sold 316,000
Gross Profit $144,000
Operating Expenses 114,000
Net Income $30,000

The multiple step income statement also distinguished between

operating and non-operating activities.
 MULTIPLE - STEP INCOME STATEMENT
NON-OPERATING ACTIVITIES

NON-OPERATING ACTIVITIES

OTHER REVENUES OTHER LOSSES

& GAINS & EXPENSES
Interest revenue Interest expense
Dividend revenue Casualty losses
Rent revenue Loss from employee strikes
Gains on sale of assets Loss on sale of assets
 SINGLE-STEP
INCOME STATEMENT

Sellers Electronix
Income Statement
For the Year Ended December 31, 2006
All data are classified under
Revenues
two categories:
Net sales 1 Revenues $ 460,000
Interest revenue 3,000
Gain on sale of equipment 2 Expenses 600
Total revenues Only one step is required in 463,600
Expenses determining net income or
Cost of goods sold net loss. $ 316,000
Selling expenses 76,000
Administrative expenses 38,000
Interest expense 1,800
Casualty loss from vandalism 200
Total expenses 432,000
Net income $ 31,600
 STUDY OBJECTIVES 7
COST OF GOODS SOLD—PERIODIC INVENTORY
Sellers Electronix
Cost of Goods Sold
For the year ended December 31, 2006

Cost of Goods Sold

Inventory, January 1 $36,000
Purchases $325,000
Less: Purchase returns & allowances $10,400
Purchase discounts 6,800 17,200
Net purchases 307,800
Add: Freight-in 12,200
Cost of Goods Purchased 320,000
Cost of Goods Available for Sale 356,000
Inventory, December 31 40,000
Cost of Goods Sold 316,000
 COPYRIGHT

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 CHAPTER 5
ACCOUNTING FOR MERCHANDISING OPERATIONS