Chapter

McGraw-Hill/Irwin

ACCOUNTING FOR
MERCHANDISING
ACTIVITIES

The McGraw-Hill Companies, Inc.

3.

Cash

of
se se
ha di
rc an
Pu ch
1. er
m

ol
re lec
ce t i
iv on
ab o
le f t
s he

Operating
Operating Cycle
Cycle of
of aa
Merchandising
Merchandising Company
Company

Accounts
Receivable

McGraw-Hill/Irwin

Inventory
2. Sale of merchandise
on account

The McGraw-Hill Companies, Inc.

Comparing
Comparing Merchandising
Merchandising Activities
Activities
with
with Manufacturing
Manufacturing Activities
Activities
Purchase
inventory in
ready-to-sell
condition.

Merchandising
Company
McGraw-Hill/Irwin

Manufacture
inventory and
have a longer
and more
complex
operating cycle

Manufacturing
Company
The McGraw-Hill Companies, Inc.

Retailers
Retailers and
and Wholesalers
Wholesalers

Wholesalers buy
merchandise from
several different
manufacturers and
then sell this
merchandise to
several retailers.
McGraw-Hill/Irwin

Retailers sell
merchandise directly
to the public.
The McGraw-Hill Companies, Inc.

Income
Income Statement
Statement of
of aa
Merchandising
Merchandising Company
Company
Computer Barn
Condensed Income Statement
For the Year Ended December 31, 2002
Revenue from sales
$ 900,000
Less: Cost of goods sold
540,000
Gross profit
$ 360,000
Less: Expenses
270,000
Net income
$ 90,000

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.
The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

What
What Accounting
Accounting Information
Information Does
Does
aa Merchandising
Merchandising Company
Company Need?
Need?
Financial Reporting
Requirements
Daily Business Operating
Requirements
Special Reporting
Requirements
McGraw-Hill/Irwin

Examples
Revenues
Expenses

Customer
Ledgers

Tax Reports

The McGraw-Hill Companies, Inc.

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.

Date
2001
June 1
15

General Ledger
Accounts Receivable
Debit
Credit Balance

McGraw-Hill/Irwin

10,000
3,000

10,000
7,000

Who
Who
owes
owes us
us
money?
money?

The McGraw-Hill Companies, Inc.

Subsidiary
Subsidiary Ledgers:
Ledgers: A
ASource
Source of
of
Needed
Needed Details
Details
Controlling Account

Date
2001
June 1
15

Subsidiary Ledger
Jake Sparks
Debit
Credit
3,000

Date
2001
June 1
15

10,000
3,000

10,000
7,000

Balance
3,000
2,000

1,000
Subsidiary Ledger
Heather Jacobs
Debit
Credit

Balance

2,000

7,000
5,000

Date
2001
June 1
7,000
15
McGraw-Hill/Irwin

General Ledger
Accounts Receivable
Debit
Credit Balance

The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Two
Two Approaches
Approaches Used
Used in
in Accounting
Accounting
for
for Merchandise
Merchandise Transactions
Transactions
Perpetual
Inventory
System

McGraw-Hill/Irwin

Periodic
Inventory
System

The McGraw-Hill Companies, Inc.

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

Lets look
at some
entries!
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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.

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.

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.

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.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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.

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.

Closing
Closing Entries
Entries in
in aa Perpetual
Perpetual
Inventory
Inventory System
System
Close Revenue accounts
(including Sales) to
Income Summary.

Close Expense accounts

The closing
entries are the
same!

(including Cost of
Goods Sold) to Income
Summary.

Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Next is the
periodic
inventory
system!

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

Lets look
at some
entries!
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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.

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.

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.

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.

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 Supplys cost of goods sold

for 2003.
The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin

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)
Add: Purchases
Cost of goods available for sale
Less: Inventory (end of year)
Cost of goods sold
McGraw-Hill/Irwin

$ 14,000
130,000
144,000
12,000
$ 132,000

The McGraw-Hill Companies, Inc.

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.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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.

Completing
Completing the
the Closing
Closing Process
Process
Close Revenue accounts
(including Sales) to
Income Summary.

Close Expense accounts

The closing
entries are the
same!

(including Cost of
Goods Sold) to Income
Summary.

Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Comparison
Comparison of
of Perpetual
Perpetual and
and
Periodic
Periodic Inventory
Inventory Systems
Systems
Perpetual Inventory
System

Periodic Inventory
System

Large Department
McGraw-Hill/IrwinStores

Jos Dress Shop

The McGraw-Hill Companies, Inc.

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.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts

2/10, n/30
Percentage
of Discount

McGraw-Hill/Irwin

# of Days
Discount Is
Available

Otherwise,
the Full
Amount Is
Due

# of Days
when Full
Amount Is
Due

The McGraw-Hill Companies, Inc.

Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
Purchases are
recorded at their
net amounts.

Net
Method

McGraw-Hill/Irwin

Purchase
discounts lost
are recorded
when payment is
made outside
the discount
period.
The McGraw-Hill Companies, Inc.

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 Kids Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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 Kids Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin

$4,000
$4,000 98%
98% == $3,920
$3,920

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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 Kids
Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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 Kids
Clothes.
Prepare the journal entry for Play Clothes.
Nonoperating
NonoperatingExpense
Expense

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Recording
Recording Purchases
Purchases at
at Gross
Gross
Invoice
Invoice Price
Price
Purchases are
recorded at their
gross amounts.

Gross
Method

McGraw-Hill/Irwin

Purchase
discounts taken
are recorded
when payment is
made inside the
discount period.

The McGraw-Hill Companies, Inc.

Recording
Recording Purchases
Purchases at
at 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 Kids Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Recording
Recording Purchases
Purchases at
at 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 Kids Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Recording
Recording Purchases
Purchases at
at Gross
Gross
Invoice
Invoice Price
Price
On July 15, Play Clothes pays the full amount
due to Kids Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Recording
Recording Purchases
Purchases at
at Gross
Gross
Invoice
Invoice Price
Price
On July 15, Play Clothes pays the full amount
due to Kids Clothes.
Prepare the journal entry for Play Clothes.
Reduces
ReducesCost
Costof
of
Goods
GoodsSold
Sold

McGraw-Hill/Irwin

$4,000
$4,000 98%
98% == $3,920
$3,920

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Returns
Returns of
of Unsatisfactory
Unsatisfactory
Merchandise
Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kids
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.

Returns
Returns of
of Unsatisfactory
Unsatisfactory
Merchandise
Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kids
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.

Transportation
Transportation Costs
Costs on
on Purchases
Purchases
Transportation
Transportation costs
costs related
related to
to the
the
acquisition
acquisition of
of 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.

Now, lets talk

about sales!

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

$ 912,000
8,000
4,000

12,000
$ 900,000

Credit terms and merchandise returns

affect the amount of revenue earned by
the seller.
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

Contra-revenue
Contra-revenue

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Sales
Sales Discounts
Discounts
On July 15, Kids Clothes receives the full
amount due from Play Clothes.
Prepare the journal entry for Kids Clothes.
Contra-revenue
Contra-revenue

McGraw-Hill/Irwin

$4,000
$4,000 98%
98% == $3,920
$3,920

The McGraw-Hill Companies, Inc.

Sales
Sales Discounts
Discounts
Now, assume that it wasnt until July 20 that
Kids Clothes received the full amount due
from Play Clothes.
Prepare the journal entry for Kids Clothes.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Sales
Sales Discounts
Discounts
Now, assume that it wasnt until July 20 that
Kids Clothes received the full amount due
from Play Clothes.
Prepare the journal entry for Kids Clothes.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

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

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Evaluating
Evaluating the
the Performance
Performance of
of aa
Merchandising
Merchandising Company
Company
Net Sales

Gross
Profit
Margins

Trends
Trendsovertime
overtime

Gross
Gross Profit
Profit Net
Net Sales
Sales

Comparable
Comparablestore
storesales
sales

Overall
Overall Gross
GrossProfit
Profit
Margin
Margin

Sales
Salesper
persquare
squarefoot
foot of
of
selling
selling space
space
McGraw-Hill/Irwin

Gross
GrossProfit
ProfitMargins
Marginsby
by
Department
Departmentand
and
Products
The McGraw-Hill Companies, Inc.
Products

End
End of
of Chapter
Chapter 66

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.