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Chapter_6 - Chapter 6 Chapter Accounting for Merchandising...

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Unformatted text preview: Chapter 6 Chapter Accounting for Merchandising Accounting Businesses Businesses Intro to Chapter 6 Intro Companies can be thought of in two Companies categories: service and product companies companies In the product company category there are In merchandising and manufacturing merchandising Focus of chapter 6 is on merchandising Focus companies companies But never fear, you will get to focus on But manufacturing companies in BUS 209! manufacturing Intro to Chapter 6 Intro So far, we have focused on the So accounting cycle for the service industry accounting Now we are moving into merchandising Merchandising businesses are involved in Merchandising the buying and selling of merchandising the This causes the need for more definitions This and accounts!! and New Accounts/Definitions New A merchandising business purchases merchandising merchandise to sell to customers. When this merchandise is sold, the revenue is reported as sales. And its cost is recognized as an expense. The expense is called Cost of Merchandise Sold. Sold Revenue from these sales less Cost of Revenue Merchandise Sold is Gross Profit. Gross Merchandise on hand (not sold) at the end of the Merchandise accounting period is called Merchandise Inventory Inventory Operating Cycle Operating Operations of a merchandising business Operations involves the purchase of merchandise for sale (purchasing), the sale of the products to customers (sales), and the receipt of cash from customers (collection). This overall process is referred to as the operating cycle. operating Financial Statements Multiple-Step Income Statement New format As the name suggests, there are many more As steps involved. It contains several sections, subsections, and subtotals subsections, Single-Step Income Statement What we have seen so far. All revenues first, What followed by all expenses followed Financial Statements Financial Sales (or Sales Revenue) is the total amount charged Sales made on credit cards are recorded as cash sales to customers for merchandise sold, including cash sales and sales on account and Sales returns and allowances are granted by the seller by to the customer for damaged or defective merchandise. customer Sales Discounts are granted by the seller to customers Sales for early payment of amounts owed. for Terms for when payments for merchandise are to be made are Terms called credit terms called 2/10, net 30 or 2/10, n/30 2/10, 2/10, Financial Statements Financial Net Sales is determined by subtracting sales returns and allowances and sales discounts from sales. discounts Revenues from sales: Sales ……………….. 100,000 Less Sales returns & allow……2,000 Sales discounts…… 1,000 Sales 1,000 …… Net Sales…………………. Net 3,000 3,000 97,000 Cost of Merchandise Sold Cost Beginning inventory plus cost of Beginning merchandise purchased less ending inventory is the Cost of Merchandise Sold Sold Beginning Inventory plus cost of Beginning merchandise purchased is merchandise merchandise available for sale merchandise Cost of Merchandise Purchased Cost The following impact the Cost of The Merchandise Purchased: Merchandise Purchase returns and allowances Purchase discounts Purchases less these two amounts (above) Purchases equals net purchases equals Still need to think about freight….must add Still freight paid to net purchases to get to cost of merchandise purchased merchandise Cost of Merchandise Purchased Cost Purchases ………………. Less: 100,000 Purchases returns & allowances..5,000 Purchases Purchases discounts……………. 2,000 7,000 2,000 Net Purchases……………………….. 93,000 Net Add freight in 4,000 Add 4,000 Cost of Merchandise Purchased Cost 97,000 97,000 Periodic versus Perpetual Periodic Under the periodic inventory system, the Under inventory records do not show the amount available for sale or the amount sold during the period. Cost of Merchandise Sold is computed at the end of the period by subtracting ending Merchandise Inventory Ending Merchandise Inventory is determined by doing Ending a physical count. physical Previous slide showed how cost of merchandise sold Previous is computed and reported under periodic system is Periodic versus Perpetual Periodic Under the perpetual inventory system, each purchase Under perpetual each and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. As a result, the amounts of merchandise available for sale and sold are perpetually updated. perpetually We will spend the remainder of the class doing the entries under We this method this Periodic will come up again in Chapter 7. In addition, the journal Periodic entries are discussed in the appendix to this chapter entries A physical count is still performed at the end of the period to physical determine inventory shrinkage. If there is a difference between the accounting records and the physical count, it will be recorded as additional cost of merchandise sold (unless abnormal) abnormal) Multi-Step Income Statement Multi-Step Starts with Sales (or Sales Revenue) less Starts Cost of Merchandise sold to get to gross profit. profit. Shows Operating Expense next There are two main categories under this There subsection subsection Selling Expenses Administrative Expenses Multi-Step Income Statement Multi-Step After Income from Operations, Other After Income and Expense is displayed Income Other income is revenue from sources other Other than the primary operating activities of a business business Other Expense is an expense that cannot be Other traced directly to the normal operations of a business business Recording Sales Transactions Recording At the time of sale, there are two main entries Cash Sale Example: Shelly’s Shirts sells Cash merchandise for $300 on January 15. The merchandise cost Shelly $150. merchandise Jan 15 Cash dr. 300 Jan Sales cr. 300 Sales Jan 15 Cost of Merchandise Sold dr. 150 Merchandise Inventory cr. 150 Sales on Account Sales Sales Discounts- the invoice will show the terms Sales of sale. The seller might offer a discount for early payment of amounts owed early 2/10, net 30 The Seller does not know if the buyer will The exercise their right to early payment exercise So the A/R and sales are recorded at the full amount So on the date of sale on If the customer remits payment in time to get the If discount, the seller will use a contra account to sales discount, Sales discounts Example of Sales on Accounts Example Shelly sells $300 of merchandise on account on Shelly Jan 15 with terms of 2/10, net 30. The merchandise sold has a cost of $150. The buyer remits payment on Jan 21. buyer A/R dr. 300 Sales cr. Sales Jan 15 Jan 300 Jan 15 Cost of Merchandise Sold dr. 150 Merchandise Inventory cr. 150 Sales on Account Sales Jan 21 Cash dr. Sales Discounts dr. Sales A/R cr. A/R 294 6 300 300 Sales Returns and Allowances Sales Also requires the use of a contra account Also to sales to The resulting journal depends on whether the The buyer has already paid for the merchandise buyer Must also adjust Merchandise Inventory to Must reflect the returned items reflect Purchase Transactions Purchase Purchases are recorded with a debit to Purchases Merchandise Inventory and a credit to either cash or A/P (depending on whether the purchase is made on account or with cash). Both of these amounts are for the amount on the initial invoice initial If the buyer purchases on account and takes If advantage of a purchase discount, the discount will reduce Merchandise Inventory at the time of payment payment Purchase Transactions Purchase Example: On January 3, Shelly’s Shirts Example: purchases merchandise on account for $1,000 with terms of 2/10, net 30. Shelly’s Shirts pays for the merchandise on January 9. January Jan 3 Merchandise Inventory dr. 1,000 Merchandise Jan A/P A/P cr. dr. 1,000 1,000 980 20 Jan 9 Jan A/P Cash cr. Merchandise Inventory cr. Merchandise Additional Items Additional Purchase Returns and Allowances Freight Sales Tax Trade Discounts Dual nature of merchandise transactionsexcellent chart on page 272 of your excellent textbooks Adjusting Entries and Closing Process Process Adjustments required for inventory Adjustments shrinkage and inventory shortage shrinkage The difference between records and physical The count of inventory count The shortage will result in a journal entry to The Cost of Merchandise Sold (dr.) and Merchandise Inventory (cr.) unless the shortage is abnormal shortage Closing Entries are similar to those in a Closing service business. ...
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