6

Accounting for Merchandising

Businesses

Student Version
 1

Distinguish between the

activities and financial
statements of service and
merchandising businesses.

6-2
 1

When merchandise is sold, the revenue

is reported as sales, and its cost is
recognized as an expense called cost
of merchandise sold.

6-3
 1

Merchandise on hand (not

sold) at the end of an
accounting period is called
merchandise inventory.

6-4
 1

6-5
 2

Describe and illustrate

the financial statements
of a merchandising
business.

6-6
6-6
 2

Multiple-Step Income Statement

The multiple-step income

statement contains several
sections, subsections, and
subtotals.

6-7
 2

Exhibit 1 Multiple-Step Income Statement

(continued)
6-8
 2

Exhibit 1 Multiple-Step Income Statement (continued)

(continued on Slide 17)

6-9
 2

The buyer may return merchandise

to the seller (a purchase return),
or the buyer may receive a
reduction in the initial price at
which the merchandise was
purchased (a purchase allowance).

6-10
 2

You have seen how sellers may

offer customers sales discounts
for early payment of their bills.
From the buyer’s perspective,
such discounts are referred to as
purchase discounts.

6-11
 2

If merchandise inventory at the

end of the period is determined
by taking a physical count of
inventory on hand, a periodic
inventory system is being used.

6-12
 2

Under the perpetual inventory

system of accounting, the amounts
of inventory available for sale and
sold are continuously (perpetually)
updated in the inventory records.

6-13
 2

Exhibit 2 Cost of Merchandise Sold

6-14
 2

• Selling expenses are incurred directly

in the selling of merchandise.
• Administrative expenses sometimes
called general expenses , are
incurred in the administration or
general operation of the business.

6-15
 2

• Other income is revenue from

sources other than the primary
operating activity of a business.
• Other expense is an expense that
cannot be traced directly to the
normal operations of the business.

6-16
 2

Exhibit 1
Multiple-
Step
Income
Statement
(concluded)

6-17
 2
Exhibit 3 Single-Step Income Statement

6-18
 2

Exhibit 4 Statement of Owner’s Equity

for Merchandising Business

6-19
 2
Exhibit 5 Report Form of Balance Sheet

6-20 (Continued)
 2
Exhibit 5 Report Form of Balance Sheet (continued)

6-21
 3

Describe and illustrate

the accounting for
merchandise
transactions including:

6-22
6-22
 3
Chart of Accounts for NetSolutions
Exhibit 6
Merchandising Business

6-23
 3

Cash Sales
On January 3, NetSolutions sold $1,800 of
merchandise for cash.

6-24
 3

Cash Sales
Using the perpetual inventory system, the cost
of merchandise sold and the decrease in
merchandise inventory are recorded. The cost
of merchandise sold on January 3 is $1,200.

6-25
 3

Credit Card Sales

Sales made to customers using credit cards
are recorded as cash sales. Assume that
NetSolutions paid credit card processing fees
of $48 on January 1.

6-26
 3

Sales on Account
On January 12, NetSolutions sold merchandise
on account for $510. The cost of merchandise
sold was $280.

6-27
 3

Sales Discounts

The terms for when payments for

merchandise are to be made, are called credit
terms. If payment is required on delivery, the
terms are cash or net cash. Otherwise, the
buyer is allowed an amount of time, known
as the credit period, in which to pay.

6-28
 3

Exhibit 8 Credit Terms

6-29
 3

Receipts on Account

On January 22, NetSolutions receives the

amount due, less the 2 percent discount.

$1,500 x .02

6-30
 3

Credit Memorandum
A credit memorandum, often
called a credit memo, authorizes
a credit to (decreases) the
buyer’s account receivable.

6-31
 3

On January 13, issued Credit Memo 32 to Krier

Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.

6-32
 3
Purchase Merchandise
for Cash

*Assumes a perpetual inventory system is used.

6-33
 3
Purchase Merchandise
on Account

*Assumes a perpetual inventory system is used.

We will assume a perpetual inventory

system is used throughout the
chapter. The periodic inventory system
is discussed in Appendix 2.

6-34
 3

Alpha Technologies issues

an invoice for $3,000 to
NetSolutions dated March
12, with terms 2/10, n/30.
NetSolutions pays the
amount due, less the
discount, on March 22.

6-35
 3
3

Discount Taken

6-36
 3

Discount Not Taken

Assume that NetSolutions pays the

invoice on April 11.

6-37
 3

A purchases return involves

actually returning merchandise
that is damaged or does not meet
the specifications of the order.

6-38
 3

When the defective or

incorrect merchandise is
kept by the buyer and
the vendor makes a
price adjustment, that is
a purchases allowance.

6-39
 3

NetSolutions receives the delivery

from Maxim Systems and
determines that $900 of the items
are not the merchandise ordered.
Debit memorandum #18 (also
called a debit memo) is issued to
Maxim Systems.

6-40
 3

NetSolutions records the return of the

merchandise indicated in the debit
memo in Exhibit 10 as follows:

6-41
 3

Price Allowance
On May 2, NetSolutions purchased
$5,000 of merchandise on account from
Delta Data Link, terms 2/10, n/30.

6-42
 3

NetSolutions returned $3,000 of the

merchandise purchased from Delta
Data Link on May 4.

6-43
 3

On May 12, NetSolutions paid for the

purchase of May 2 less the return and
discount.

6-44
 3
On June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB shipping
point and pays the transportation cost of $50.

6-45
 3

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 freight of $40.

6-46
 3

6-47
 3

On June 20, NetSolutions sells

merchandise to Planter Company on
account, $800, terms FOB shipping
point. NetSolutions paid freight of $45,
which was added to the invoice. The
cost of the merchandise sold is $360.

6-48
 3

6-49
 3

Exhibit 11 Freight Terms

6-50
 3
Sales Taxes
On August 12, merchandise is sold on account
to Lemon Company, $100. The state has a 6%
sales tax.

6-51
 3
Sales Taxes
On a regular basis, the seller pays to the taxing
authority (state) the amount of the sales taxes
collected.

6-52
 3

Trade Discounts

When wholesalers offer special

discounts to certain classes of
buyers who order large quantities,
these discounts are called trade
discounts.

6-53
 4

Describe the adjusting

and closing process for
a merchandising
business.

6-54
6-54
 4

Step 1: Closing Entries

Debit each temporary account with a credit balance, such as
Sales, for its balance and credit Income Summary.

6-55
 4
Step 2: Closing Entries
Credit each temporary account with a debit balance, such as an
expense, for the balance and credit Income Summary.

6-56
 4

Step 3: Closing Entries

Debit Income Summary for the amount of its
balance (net income) and credit the owner’s equity
account.

6-57
 4

Step 4: Closing Entries

Debit the owner’s capital account for the balance of
the drawing account and credit the drawing
account.

6-58
 4

NetSolutions’ Income Summary account after the

closing entries have been posted is as follows:

6-59
6-60